<PAGE>

                     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, 2002.

                                       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, 2002 were:
$8,058,312.

         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
July 28, 2003, as reported on the Pink Sheets, was approximately $3,196,554.

         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, 797,272,301 shares issued and outstanding as of July 28, 2003.

       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, 2002

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
<S>                                                                                                                 <C>
PART I................................................................................................................1
   ITEM 1.  DESCRIPTION OF BUSINESS...................................................................................1
   ITEM 2.  DESCRIPTION OF PROPERTY..................................................................................17
   ITEM 3.  LEGAL PROCEEDINGS........................................................................................17
   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................................19
PART II..............................................................................................................19
   ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................................19
   ITEM 6.  CONTROLS AND PROCEDURES..................................................................................31
   ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS...............................................31
   ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS........................................................................45
PART III.............................................................................................................46
   ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
   EXCHANGE ACT......................................................................................................46
   ITEM 10. EXECUTIVE COMPENSATION...................................................................................49
   ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........................................55
   ITEM 13. PRINCIPAL ACCOUNTANT FEES AND SERVICES...................................................................57
   ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.........................................................................58
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO..............................................74
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002........................................................................74
FORM OF OFFICER'S CERTIFICATE PURSUANT TO SECTION 302................................................................76
</TABLE>



                                       i
<PAGE>


                                     PART I

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 Computer. 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", "its",  "Vertical" "Vertical Computer" or the "Company" 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 7, "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.

         At December 31, 2002, our independent  auditors' report,  dated May 27,
2003,  includes an explanatory  paragraph related to substantial doubt as to our
ability to continue as a going  concern.  We experienced  significant  operating
loss in 2002  and  2001,  each  quarter  of 2002  and  2001.  Our  cash and cash
equivalents  have not been sufficient to cover our debt  obligations and we have
defaulted most of our notes payable at December 31, 2002 and 2001.

         Management's  current business plan is to concentrate on developing and
marketing  the products of two of its  subsidiaries,  Now  Solutions,  LLC a 60%
owned subsidiary,  and Government Internet Systems, Inc. a 89% owned subsidiary.
The Company  believes that each of these business  units has distinct  marketing
advantages for their niche markets.  The current strategy of Government Internet
Systems is raise  financing  to develop  and market its  products as wells as to
focus its efforts on the government sector by cross-marketing ResponseFlash,  an
emergency  response  communications  web-based system, to the Company's existing
client base of its partners, affiliates, and subsidiaries. Now Solutions, LLC is
a  best-of-breed  human  resources and payroll  software and business  solutions
provider.   Now  Solutions'  new  web  based  software,   emPath  6.2  is  being
aggressively  marketed  in  North  America  and it  intends  to hire  additional
software  programmers to improve the product and to hire additional sales people
to increase market  penetration in the United States.  The Company also plans to
find  national  marketers,  such as Defense  Solutions,  LLC, and  international
resellers such as Infotec in Japan, who can  commercially  exploit the Company's
products in respective niche markets.  By utilizing the strategic  elements each
individual  business  unit offers,  the Company  plans to leverage  each other's
strengths  in their  segments,  as well as to exploit the network of  customers,
vendors,  and support agencies that the Company has built. There is no assurance
that the Company will achieve the expected results.

         The Company also is also seeking the  disbursement of funds  authorized
under Now Solutions' operating agreement as well as finding sources of financing
for Vertical Computer Systems and its  subsidiaries.  Other than the Equity Line
of Credit  discussed  below and a potential  loan from a third party whereby the
lender  might  loan  the  Company  $260,000,  the  Company  does  not  have  any
commitments for funding. The Company's ability to continue as a going concern is
dependent on its ability to raise additional  funds and to establish  profitable
operations.  The  Company's  inability  to raise such  funds will  significantly
jeopardize its ability to continue  operations.  The Company'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. The ability of
the Company to meet these needs is uncertain.

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



                                       1
<PAGE>

         Overview

         The  Company was  incorporated  in the State of Delaware in March 1992.
The Company  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,  the Company  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, the Company  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. The Company acquired all of the stock of Globalfare.com, an
on-line  travel  service,  in May 2000.  Later,  in May 2000,  the Company  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, the Company
launched another bridge, theUSbridge.com.  In October 2000, the Company sold its
wholly owned subsidiary  Externet World, Inc. to two former  shareholders of the
Company.  Also, in October 2000,  First Serve  Entertainment  Pvt. Ltd. became a
global  partner,  and entered  into a joint  venture with the Company to develop
another bridge in India. In September 2002, First Serve  Entertainment and Vijay
Amritraj agreed to terminate their business  relationship  and are proceeding to
formalize a mutually acceptable settlement agreement.  The Company has suspended
further  operations  with  respect to all of its bridges  and joint  partnership
program while it focuses on the launch of its products in the United States.

         In October 2000, the Company  agreed to provide  $250,000 in funding to
TranStar Systems,  Inc. (TranStar),  formerly Apollo Industries,  Inc., a Nevada
corporation,  in exchange for a 30% equity interest.  In April 2003, the Company
and Mike Radlovic  (Radlovic)  entered into an agreement  whereby Radlovic would
purchase the  Company's  interest in TranStar.  Pursuant to the  agreement,  the
Company  transferred  all of its  ownership  representing  3,000,000  shares  of
TranStar common stock to Radlovic. In consideration of the sale, Radlovic issued
a $250,000 note bearing interest at 10% per annum due in April 2007. The note is
secured by 5 million shares of TranStar common stock.  Radlovic is the President
and CEO of TranStar.  In October  2000,  in  consideration  for $25,000 from the
Company,  TranStar agreed to pay a royalty of 2% of all  transaction  fees up to
$275,000 and 1% up to $3,000,000. In June 2002, Apollo Industries,  Inc. changed
is name to  TranStar  Services,  Inc. In April  2003,  the Company and  TranStar
Systems,  Inc.  (TranStar) agreed to amend two $24,000  promissory notes bearing
interest at 10%,  dated  April 19 and May 8, 2001,  a royalty  agreement,  dated
October 14, 2000.  Pursuant to the  agreement,  the due date for the two $24,000
notes was extended to April 5, 2006 in exchange for  increasing the royalty rate
in the royalty  agreement to 3% of any  transaction  fees and any other revenues
generated  in  perpetuity.  The  collateral  to secure the note,  consisting  of
1,000,000  shares  of  TranStar  common  stock,  and  the  underlying   security
agreements  will  remain  in full  force  and  effect.  In  connection  with the
agreement,   TranStar  also  released  and  indemnified  the  Company  from  any
obligations owed to TranStar or any third party.

         During  March  2001,  the Company  entered  into a joint  venture  with
Navicom Co. Ltd. ("Navicom"),  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 the Company's  products and  services.  Navicom and the Company
launched  theKoreaBridge.com  in October  2001but  have held off any  commercial
launch until the Company launches its product in the United States.

         In March 2001, the Company  invested  $1,000,000 to obtain a 60 percent
majority interest in Now Solutions,  LLC ("Now Solutions").  Also in March 2001,
Now Solutions  acquired the Renaissance CS(R) Human Resources and Payroll assets
from Ross Systems, Inc. for $6,100,000 and financed with a $5,500,000 from Coast
Bank.  The  Renaissance  Payroll  System,  which  reaches into small and growing
businesses,  is a human resources software system and used by over 150 companies
in North  America.  In April 2002 the  Company  took  control  of the  Executive
Committee of Now Solutions by appointing the fifth representative.  In May 2002,
arbitration  was  commenced  between  the Company  and Arglen  Acquisitions  LLC
(minority  owner of Now  Solutions)  regarding  change of control and  ownership
percentage. In February 2003 the Company sued Arglen Acquisitions,  Ross Systems
Inc., and Garry Gyselen among others in the state of New York. The Company seeks
damages  and  equitable   relief  arising  out  of  actions  of  the  defendants
constituting breach of contract,  fraud, conspiracy and breach of fiduciary duty
in  connection  with  certain  transactions  entered  into  between Ross and Now
Solutions, Ross and Arglen, Arglen and Now Solutions, Gyselen and Now Solutions,
and VCSY and Arglen.



                                       2
<PAGE>

         In May 2001, the Company 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 technology application created
and owned by Aluizio Cruz.

         In June 2001,  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, the Company and Strategic  Marketing  Alliance agreed to terminate
the Company's interest in WorldBridge in exchange for services to be provided by
Strategic Marketing Alliance through December 31, 2002.

         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  continues  to develop and market its other  "Flash"  based  products -
AffiliateFlash,  ResponseFlash,  and  UniversityFlash.  In April  2003  Vertical
computer entered into a software added reseller agreement with Infotec,  Inc., a
large Japanese systems integrator and outsourcer to market  SiteFlash's  content
management product in Japan.

         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 price,
for sales to any vendor.  In December 2001,  the Company  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 was 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. Discussions
thus far with iNet have not resulted in a resolution of this matter.

         In  October  2002,  the  Company's  wholly  owned   subsidiary,   Emily
Solutions,  Inc., a Nevada  corporation,  changed the name of the Corporation to
Government   Internet  Systems,   Inc.  ("GIS")  by  amending  its  articles  of
incorporation.  The Company will license its  proprietary  technology  to GIS so
that GIS will market and distribute  this  technology to government  entities of
the United  States,  beginning  initially with  ResponseFlash.  In November 2002
Stephen  Rossetti became a director,  chairman and CEO and Victor Weber became a
director,  president,  and treasurer of Government  Internet  Systems,  Inc. The
Company has compensated directors and officers of GIS with ownership interest in
GIS and  executives  with salaries once GIS is funded or has generated  adequate
sales.  In December 2002,  Chuck  Kensicki  became a director of GIS. In January
2003,  Basil Nikas  became a director of GIS.  The  Company  has  refocused  its
efforts  to be a  major  software  developer  in  best of  breed  products  with
subsidiaries specializing in each niche market except for GIS, which will market
the Company products to the United States government sector.

         The Company's software products that are either presently being sold or
in process of being launched are Human Resource Information System (emPath 6.2),
ResponseFlash,  Siteflash,  NewsFlash,  and Emily. Now Solutions is aggressively
marketing  its new web human  resource  payroll  and  information  system in the
United  States and  Canadian  markets.  The Company  intents to market its other
software  products  in  the  United  States  through  agreements  with  national
distributors.  The Company has  maintained its home country  gateway  network of
international  partners including all bridge websites, but has suspended further
development of partners or implementation  until it launches its products in the
United States market.


         Business Divisions

         The  Company's  business  operations  are  broken  into  the  following
divisions:  Now Solutions,  LLC ("Now Solutions"),  Government  Internet Systems
("GIS"),    Vertical   Internet   Solutions   ("VIS"),    EnFacet   ("Enfacet"),
Globalfare.com ("Globalfare"),  Pointmail.com ("Pointmail"),  minority and other
limited interests,  joint ventures,  and strategic  partnerships.  Each of these
divisions is discussed below.



                                       3
<PAGE>

         Now Solutions, LLC

         Now Solutions,  LLC (Now Solutions) is a best-of-breed  human resources
and payroll software and business  solutions  provider.  It has over 150 clients
encompassing  private to  governmental  agencies.  Now  Solutions' new web based
software,  emPath  6.2 is being  aggressively  marketed  in North  America.  Its
typical  customers  employ in  excess of 500  employees.  emPath  6.2  excels in
complex HR and payroll situations which have several different unions,  multiple
state locations, and intricate compensation circumstances.  emPath's competitive
advantage is its speed of implementation,  which increases the customer's return
on investment.

         On February 28, 2001,  the Company  acquired 60% of equity  interest in
Now Solutions,  LLC (Now Solutions), a company that develops and maintains human
resource  software,  in exchange  for $1 million in cash,  which was paid to Now
Solutions,  and warrants to purchase 80,763,943 (including two 25 million shares
of warrants  described in the paragraphs  below) shares of the Company's  common
stock which was granted to Arglen Acquisition, LLC ("Arglen"). Arglen was a deal
maker to facilitate  the entire  transactions  of Now  Solutions,  including the
purchase of software and financing. The warrants have an exercise price of $0.08
per share. One third of these warrants vested immediately, the second third will
vest on the one-year  anniversary of the date the warrants were issued,  and the
last  one-third  will vest on the two-year  anniversary of the date the warrants
were issued. These warrants have been granted but not delivered to Arglen. Based
on the Black Scholes option pricing model, the Company  determined that the fair
value of these  warrants  was  approximately  $798,500  and recorded as goodwill
accordingly.  In  addition,  Arglen and others  received a 40%  interest  in Now
Solutions  as  compensation  for  their  services  rendered  in the  process  of
consummating this transaction.  Consequently,  the Company recognized additional
goodwill of $666,667  based on the valuation of $1 million  accounting  only for
60% equity interest in Now Solutions.

         In March 2001,  Now Solutions  purchased  the rights to Human  Resource
Information Service  Application  Software ("HRIS") and various other assets and
liabilities  relating to HRIS of Ross  Systems,  Inc.  ("Ross") in exchange  for
approximately  $5,100,000  in cash and a  promissory  note of $1 million  due to
Ross. The transaction was recorded under the purchase method of accounting.  The
purchase price was allocated as follows:

<TABLE>
<S>                                    <C>
Total purchase price                   6,100,000
                                  ---------------

Cash acquired                            287,919
Property and equipment acquired          182,900
Other intangible assets                  257,000  Amortizable over a period of five years
Software source code acquired          3,848,972  Amortizable over a period of five years
Liabilities assumed                     (409,419)
                                  ---------------
                                       4,167,372
                                  ---------------
Goodwill                               1,932,628
                                  ===============
</TABLE>


         During 2001,  the goodwill on Now  Solutions'  book was  amortized on a
straight-line  method over a period of five years.  The amortization of goodwill
in Now  Solutions  for the year ended  December  31, 2001 was  $322,104.  On the
consolidated  basis,  the  Company  recorded  a  total  goodwill  of  $3,448,795
($1,932,628  + $666,667 + $798,500  +  $51,000,  which is the  transaction  cost
incurred by the Company) during 2001. The consolidated  amortization of goodwill
in the year ended  December 31, 2001 was  $574,798,  which was  calculated  on a
straight-line basis over a period of five years.

         The  note  payable  to Ross  does  not bear  interest  and has  payment
requirements   of  $250,000  and  $750,000  due  in  February   2002  and  2003,
respectively. Now Solutions offset the $250,000 payment against amounts due from
Ross and claimed an offset of amounts on the unpaid prepaid maintenance fees due
at closing  February  28, 2001  against the $750,000  amount.  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  obtained  proceeds of  $5,500,000  through a note
payable to Coast Business Credit  ("Coast") to finance the purchase of HRIS from
Ross and used the excess  amount for its working  capital.  The note  payable to
Coast bears interest at prime plus one and a half and has an interest rate floor
of 8.5%.  The note payable to Coast will be due the earlier of February  2006 or
if terminated,  by either party,  in accordance with the terms of the agreement.
The lender has the option to demand  full  payment by  February  2004.  The note
calls for monthly installment payments of $91,500 of principal, plus interest.

                                       4
<PAGE>

         In order to facilitate the financing process, the Company 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. In
October  2002,  Coast and Now  Solutions  agreed to amend the Loan and  Security
Agreement, dated February 28, 2001 (the "Loan Agreement"). Also in October 2002,
the Company  and Coast  agreed to amend the Deposit  Account  Pledge  Agreement,
dated February 28, 2001 (the "Pledge  Agreement").  In these  amendments,  Coast
agreed to waive certain defaults under the Loan Agreement and Pledge  Agreement,
including  non-compliance with financial covenants and non-delivery of financial
statements,  and to modify the financial  covenants.  All payments to Coast have
been  made by Now  Solutions.  In  exchange,  the  Company  agreed  to amend the
provisions of the Pledge  Agreement  related to its ability to withdraw  amounts
pledged to Coast as collateral. Under the amended terms of the Pledge Agreement,
the Company withdrew $348,333 from the deposit account,  and commenced receiving
$91,667 per month on October  31,  2002.  Under the amended  terms of the Pledge
Agreement  the Company was entitled to receive the monthly  withdrawal  provided
that: (a) Now Solutions makes the preceding monthly payment on the principal and
(b) Now Solutions is not in default of or has not cured certain  covenants under
the Loan Agreement. Now Solutions is current in its payments as of July 2003.

         In February 2003,  the Company was notified that Southern  Pacific Bank
went into FDIC  receivership.  Coast  Business  Credit  (Coast) is a division of
Southern  Pacific Bank. The FDIC froze $750,000,  which was the remaining amount
of the Company's  deposit account pledged on behalf of Now Solutions on the date
of the notice. Of the remaining $750,000,  the Company received $100,000,  which
is that  portion  which was insured by the FDIC.  The  uninsured  portion of the
remaining balance of the deposit pledge account,  which is $650,000, was applied
to the outstanding  debt of the Coast loan to Now Solutions.  Consequently,  Now
Solutions reduced its loan balance payable to Coast. Accordingly,  Now Solutions
owed to the  Company  the  same  amount  under  the same  terms  of  Coast  loan
agreements.

         According to the terms of the warrant  agreement,  dated March 5, 2001,
between the Company and Arglen, if, during the last 90 trading day period of the
first  year  from  the date  the  issuance  of the  initially  granted  warrants
aforementioned, the per share value of the Company's common 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 at the  exercise  price of $0.08 per  share.  One-third  of these
warrants  vested  immediately,  the  second  third  will  vest on the  one  year
anniversary  of the date the warrants were issued,  and the last  one-third will
vest  on the  two  year  anniversary  of the  date  the  warrants  were  issued.
Furthermore,  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 the
Company's  common  shares,  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 the Company's  common shares at exercise price of $.08 per share and
the warrants  will be  exercisable  for a period of five years from the date the
underlying  stock is registered with the Securities and Exchange  Commission for
resale or an exemption  from  registration  becomes  available and with the same
vesting term. These warrants have been granted but not delivered to Arglen.  The
Company intends to cancel the foregoing  warrants to purchase  80,763,943 shares
of the common stock of the Company as part of its legal action against Arglen

         Pursuant to the terms of the operating  agreement  among the members of
Now  Solutions,  the Company is entitled to receive a management  fee of $50,000
per year,  pro-rata  distributions  of 50% of net  earnings on a taxable  income
basis for federal income tax purpose if cash is available,  and repayment of the
initial  capital  contribution  of $1  million if  certain  conditions  are met.
Pursuant  to the  terms of the  operating  agreement  among the  members  of Now
Solutions,  the  Company's  interest  would have been  reduced to 51% over three
years if Now Solution is not in a default situation regarding the Coast loan and
the employees of Now Solutions had achieved certain performance goals. On August
16, 2001, the Company  received a default notice from Coast.  Consequently,  the
Company  believed that this  reduction of the Company's  equity  interest in Now
Solution had not occurred at December 31, 2002 and 2001.

         The Company is currently involved in a dispute with Arglen Acquisitions
LLC  (Arglen),  a  member  of  Now  Solutions,  LLC,  concerning  the  Company's
subsidiary  Now  Solutions,  LLC. In April 2002 the Company  appointed the fifth
representative  of Now Solutions'  Executive  committee giving Vertical computer
three  representatives.  Also in April 2002, the Company  received a letter from
Arglen  accusing  the  Company  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 (Coast). The letter further stated that
the default has triggered  the  dissolution  of Now  Solutions,  and  authorized
Arglen Acquisitions to acquire the Company's ownership interest in Now Solutions
at a discounted price. In May 2002, the Company demanded arbitration from Arglen
Acquisitions seeking to enforce its rights under the Operating  Agreement.  Also
in May 2002, Arglen Acquisitions filed a Demand for Arbitration and Statement of
Claim against the Company. In its demand,  Arglen Acquisitions  alleged that the
Company was in default of its obligations under the Operating Agreement.  Arglen
also  sought  to  enjoin  the  Company  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



                                       5
<PAGE>

the  Company's  interest in Now  Solutions.  The Company  believes that Arglen's
allegations are without merit. In August 2002, the Company  prevailed on four of
the five motions and remains in control of the executive committee with three of
the five  representatives  on the  committee.  The only  restriction  until  the
outcome of  arbitration is the Company is not allowed to increase its management
fees or any other monies other than for reimbursement for insurance  incurred by
the Company on behalf of Now Solutions  unless the court  approves the Company's
request to have additional monies released that the Company is entitled pursuant
to the operating  agreement.  In July 2003, the Company filed a motion to permit
Now  Solutions,  LLC to  make  certain  distributions  permitted  under  the Now
Solutions' LLC operating agreement to the Company.

         The  Company's  subsidiary,  Now  Solutions,   learned  of  an  alleged
employment  agreement between Now Solutions and Garry Gyselen  ("Gyselen"),  the
suspended Chairman of Now Solutions, whereby Gyselen would be engaged for a term
of 3 years at a salary of $150,000  per annum.  The  agreement  was  executed by
Gyselen,  acting in the  capacity  of Chairman  on behalf of Now  Solutions  and
Gyselen,  signing on his own personal behalf as the executive.  The agreement is
undated.  Now Solutions' corporate legal counsel has informed its management and
its executive committee that the employment  agreement is invalid in their legal
opinion. Gyselen, in his own declaration of the preliminary injunction, declares
that  the  employment  agreement  is  "entirely  inoperative."  Gyselen  has not
provided  Now  Solutions  with any written  acknowledgment  confirming  that the
agreement is null and void.

         In February 2003,  the Company filed a lawsuit and a derivative  action
in New York Supreme Court Case against  defendants Ross Systems,  Inc. ("Ross"),
Arglen  Acquisitions,  LLC ("Arglen"),  James Patrick Tinley,  and Garry Gyselen
("Gyselen").  Vertical filed a derivative action on behalf of its subsidiary Now
Solutions when Arglen, a member of Now Solutions, refused to authorize a lawsuit
against any parties who were alleged to have acted  against the best interest of
Now  Solutions.  The Company seeks damages and equitable  relief  arising out of
actions of the defendants constituting breach of contract, fraud, conspiracy and
breach of fiduciary duty in connection  with certain  transactions  entered into
between  Ross and Now  Solutions,  Ross and  Arglen,  Arglen and Now  Solutions,
Gyselen and Now Solutions,  and VCSY and Arglen. The action concerns offsets Now
Solutions was entitled to per the asset  purchase  agreement from Ross regarding
the HRIS  assets  Now  Solutions  purchased  from Ross in 2001,  an  undisclosed
transaction  between  Ross and Gyselen  around the time of the purchase of these
assets, and the failure of Gyselen to enforce the offset provisions which caused
Coast Business  Credit to declare Now Solutions in default of a loan covenant in
2001 (which has since been cured).

         In conjunction with the Company's lawsuit, Now Solutions is withholding
its payments on the remaining $750,000 note due February 2003 against the unpaid
maintenance  fees and gave notice in February 2003 to Ross Systems,  Inc. (Ross)
of Now Solutions'  claim of offset.  Now Solutions has claimed a total amount of
approximately $3,562,000 to offset against the note. In March 2003, Ross filed a
motion  for  summary  judgment  in lieu of a  complaint  against  the  Company's
subsidiary, Now Solutions, to collect the note payable in the amount of $750,000
issued by Now Solutions in connection with the asset purchase  agreement between
Now Solutions and Ross, plus 10% interest.

         For the twelve  months  ended  December  31, 2002,  Now  Solutions  had
approximately $4,183,069 of net goodwill and other intangible assets.

         Government Internet Systems, Inc.

         The Company's 89% owned subsidiary,  Government Internet Systems,  Inc.
("GIS"),  a Nevada  corporation was formerly Emily  Solutions,  Inc. The Company
will license its  proprietary  technology to GIS to market and  distribute  this
technology to government  entities (excluding state universities and schools) in
the United States,  beginning  initially with ResponseFlash web technology.  GIS
intends to market  ResponseFlash  to the  National  Guard  (through the states),
Federal  Government  departments  and agencies  such as Homeland  Security,  the
Center for Disease Control, the FBI.

         In October 2002, Emily Solutions,  Inc., a Nevada corporation,  changed
its name to  Government  Internet  Systems,  Inc.  by amending  its  articles of
incorporation.  In  November  2002,  Richard  Wade,  Laurent  Tetard,  and  Luiz
Valdetaro  resigned in their  capacities  as  directors,  and also as president,
secretary and treasurer,  respectively,  of Government Internet Systems ("GIS"),
and were  replaced by  directors  Stephen  Rossetti and Victor  Weber,  who also
agreed to become chairman/CEO and president/treasurer, respectively. In December
2002,  Chuck Kensicki became a director.  In January 2003,  Basil Nikas became a
director.  It is contemplated  that GIS will have nine initial  directors.  Each
initial  director will receive 250 shares of GIS from an initial issuance 10,000
shares of GIS.  Independent  funding is being sought for GIS. The  ResponseFlash
installation being installed at the Metropolitan Emergency  Communication Agency
will be transferred to GIS.

         For the twelve  months ended  December 31,  2002,  Government  Internet
Systems  (formerly Emily Solutions,  Inc.) had no assets and no material revenue
or expenses.


                                       6
<PAGE>

         Vertical Internet Solutions, Inc

         Vertical  Internet  Solutions,  Inc.,  a California  corporation,  is a
wholly-owned  subsidiary of the Company formed in May 2000. The Company acquired
the  rights to Emily  Solutions  Web  technology  in  December  1999.  The 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, Linux and several UNIX
platforms.  The Emily  scripting  language  has been enabled to work on Java and
will be launched upon completion of beta testing as part of an XML Java tool kit
and was  developed to be both a  complement  and an  alternative  to Java on the
server side.

         In addition,  the Company 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 the Company,  the Emily XML Enabler Agent
is offered as an optional  product to expedite the  interface at a price of $495
to each vendor.  Vertical Internet Solutions,  Inc., is also marketing SiteFlash
and its progeny,  including UniversityFlash and AffiliateFlash.  SiteFlash is an
affiliation/syndication   web-based  e-business  software  used  by  newspapers,
government  agencies,   universities  and  large  franchises.  Another  product,
developed from Siteflash is NewsFlash,  which is maintained by Vertical's wholly
owned  subsidiary,  Enfacet,  Inc.  NewsFlash  and  SiteFlash are based on award
winning (Crossroads A-List for 2000 and 2001), patent pending technologies.

         For the twelve  months  ended  December  31,  2002,  Vertical  Internet
Solutions had no assets and no material revenue or expenses.


         EnFacet, Inc.

         EnFacet is a software-products  company that marketed SiteFlash,  which
was originally  licensed from a third-party,  Adhesive Software,  Inc. NewsFlash
and SiteFlash are based on award-winning  (Crossroads A-List for 2002 and 2001),
patent-pending  technologies.  Enfacet continues to market and support customers
of NewsFlash,  which was developed from the core SiteFlash product. NewsFlash is
catering to the publishing  industry and  newspapers in particular.  The Company
later  acquired  certain  intellectual  property  assets of Adhesive,  including
Siteflash  and   Newsflash,   from  a  third  party.   The  Company   recognized
approximately  $757,000 of goodwill in connection  with the purchase,  which has
been fully reserved.

         On August 21, 2001, the Company entered into a stock purchase agreement
with  EnFacet to  purchase  100% of  EnFacet,  Inc.  by paying  $30,000 in cash,
incurring transaction expenses of $85,000, assuming liabilities of $642,075, and
issuing  30,000 shares of Series C 4%  Cumulative  Convertible  preferred  stock
valued at $312,000 (each share of the underlying  preferred stock is convertible
into 400 shares of the  Company's  common  stock and 15,000  shares of preferred
stock will be  distributed  among the  employees in EnFacet and the other 15,000
shares will be available for future fund raising purposes), resulting a goodwill
in EnFacet totaling $1,069,075. However, as of December 31, 2002 and 2001, these
30,000 shares of Series C preferred stock were issued but not delivered to these
people and were held under the name of the  Company.  Accordingly,  the $312,000
value of the 30,000  shares of Series C  preferred  stock and the  corresponding
value of goodwill were  eliminated in the process of  consolidation  at December
31, 2002 and 2001.

         In February  2003, the Company and EnFacet,  Inc.,  agreed to amend the
aforementioned stock purchase agreement.  Pursuant to the amendment, the Company
may substitute 400 common shares for each share of Series C preferred  stock (up
to 12,000,000  shares of the Company's common stock) in connection with purchase
of EnFacet,  Inc. The Company may cancel any Series C preferred  stock for which
common stock is substituted or as otherwise specified in the agreement. In April
2003, the Company issued  3,000,000  restrictive  shares of the Company's common
stock to  former  employees  and  consultants  of  EnFacet,  Inc.  per the above
executed stock  agreement.  Accordingly,  the Company  cancelled 7,500 shares of
Series C preferred stock.

         For  the  twelve   months  ended   December   31,  2002,   EnFacet  had
approximately  assets  of  $11,000,  revenue  of  $30,450,  and  a net  loss  of
approximately $742,000, which includes impairment loss of approximately $638,000
of goodwill.




                                       7
<PAGE>

         Globalfare.com

         In May 2000, the Company acquired  Globalfare.com,  Inc.  (Globalfare).
Globalfare is headquartered in Los Angeles,  California.  In light the future of
the travel industry  caused by the terrorist  attacks at the World Trade Center,
the  Company had  suspended  website and travel  fulfillment  operations,  while
Globalfare  formulated a future strategy. In March 2003, Globalfare entered into
a teaming agreement with Picasso Travel to provide airfare fulfillment  services
to  government  employees.   Globalfare.com  continues  to  evaluate  new  joint
marketing options of high quality products and services.

         In April 2003,  Globalfare.com,  Inc. a 100% Subsidiary of the Company,
entered into a services agreement for planning,  booking, and fulfilling leisure
(personal)  travel  conducted in conjunction  with official  travel and personal
travel not in conjunction with official government travel with Zegato Solutions,
Inc. (Zegato).  Pursuant to the terms of the Zegato agreement,  Globalfare, with
its partners, shall provide fulfillment services for all leisure travel services
booked  through  the  Zegato  Services  Concourse,  including  sales  of  travel
packages, as such sales may be made for leisure customers in connection with the
Zegato travel  system.  In connection  with the terms of the  agreement,  Zegato
shall  receive a  commission  on the gross  profit for all sales.  In March 2003
Globalfare  entered into an agreement  with Picasso  Travel,  Inc.  (Picasso) to
provide the fulfillment requirement for the Zegato agreement.  Picasso is one of
the leading  airline  consolidator  (wholesaler) in business since 1979 based in
Los Angeles with offices in NYC, San Francisco,  Chicago, Boston, Washington DC,
Dallas, and Fort Lauderdale. Picasso serves over 12,000 travel agencies all over
the United states with over 120 employees speaking 24 languages.

         For the twelve months ended  December 31, 2002,  Globalfare.com  had no
assets , no revenue and a net loss of $48,548.


         Pointmail.com, Inc.

         In June 2000, the Company acquired  Pointmail.com,  Inc., which owned a
proprietary,  web-based  e-mail  software that  enhances the Company's  existing
"ThePostmaster.Net"  Internet  email  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.  The Company has recently improved the
filtering on the  "ThePostemaster.Net"  by updating the "block sender"  features
and adding a junk mail  blocking  feature  to prevent  spam.  This  software  is
integrated  with the Bridges.  Since the Company  intends to focus its marketing
efforts on its core technology, it has no other plans for "ThePostmaster.Net" at
this time.

         For the twelve  months ended  December 31, 2002,  Pointmail.com  had no
assets, no revenues and a net loss of $82.


         Minority Interests and Other Limited Interests

         iNet Purchasing,  Inc. The Company has a 2.5% minority interest in iNet
Purchasing and had also formed two strategic  partnerships with iNet Purchasing,
neither of which has commenced business operations. 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 Maine and
Idaho have selected iNet's unique technology to meet their statewide procurement
needs. In Texas, iNet established and ran the Texas  e-procurement pilot program
and is currently running the vendor  procurement  program of the state of Texas.
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 can 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.



                                       8
<PAGE>

         In April  2000,  the  Company  entered  into two  joint  ventures  with
iNetPurchasing,  Inc., iNet Government Services, LLC and Vertical iNet LLC. Both
entities  have not  commenced  operations  and the Company  intends to have them
dissolved.  Both joint venture ownerships are held 50% by the Company and 50% by
iNet.  In May 2000,  the  Company  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 the Company based upon iNet's transactional fees.

         In November  2001,  the Company  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,  the
Company 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.

         On December 21, 2001, the Company entered into an option agreement with
iNet Purchasing  ("iNet") to purchase an additional interest in iNet under which
the Company 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 is required to pay $140,000 in four equal
monthly  installments  beginning in December 2001 and grant 3 year stock options
to three iNet executives,  Basil Nikas, Robin Mattern,  and Wayne Savage, in the
amount of  1,500,000,  1,500,000,  and 500,000  shares of the  Company's  common
stock,  respectively.  These stock  options were issued in 2001. At December 31,
2002  the  Company  had paid a total of  $131,282  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 the Company exercised the option
to obtain a majority  interest in iNet by April 2002, the Company is required to
pay to iNet  $860,000 in cash or  marketable  securities  (pending any potential
offsets). The Company would need to raise additional capital in order to pay the
cash portion of the exercise price, which is $860,000.  In addition, in order to
exercise the option,  the Company must issue 70,000 shares of Series C preferred
stock and grant additional  three-year warrants and options, as the case may be,
to purchase an additional 6,000,000 shares of the Company's common stock each to
Nikas and Mattern and 2,000,000  shares of the Company's common stock to Savage,
at a strike  price of $0.025 per shares.  Of these  warrants  and  options,  the
Company issued but did not deliver 1,500,000  warrants each to Mr. Nikas and Mr.
Mattern and  500,000  warrants to Mr.  Savage in January  2002.  The fair market
value of these warrants at the date of grant was $35,713.  In the event that the
Company does not acquire a majority interest in iNet, these options and warrants
will automatically be cancelled. Under the terms of the option, iNet is required
to deliver certain financial and non-financial information. This information was
never  delivered and the Company is holding the warrants  issued in January 2002
until a  resolution  is  reached.  The  Company is seeking an  extension  of the
exercise date to allow iNet to deliver the required information and to allow the
Company  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 to the Company  and vice  versa.  Discussions  thus far with
iNet have not resulted in a resolution of this matter.

         As of December 31, 2002, all of the iNet  investments and advances paid
for royalties  were fully  reserved.  There have been no revenues or expenses in
relation to the investments for the twelve months ended December 31, 2002.

         TranStar, Inc. TranStar, Inc. ("TranStar"), formerly Apollo Industries,
Inc.  ("Apollo"),  is based in Los  Angeles,  California.  TranStar 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 a  large  customer  base.
TranStar 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, the Company  agreed to provide  $250,000 in funding to
TranStar for the enhancement of its smart card technology and development of its
service  business  in exchange  for a 30% equity  interest.  In April 2003,  the
Company and Mike Radlovic  (Radlovic) entered into an agreement whereby Radlovic
would  purchase the Company's  interest in TranStar  Systems,  Inc.  (TranStar).
Pursuant to the agreement,  the Company transferred 3,000,000 shares of TranStar
common  stock to  Radlovic.  In  consideration  of the sale,  Radlovic  issued a
$250,000 note bearing  interest at 10% per annum due in April 2007.  The note is
secured  by 5 million  shares of  TranStar  common  stock  owned and  pledged by
Radlovic. Radlovic is CEO and President of TranStar.

         In  October  2000,  in  consideration  for  $25,000  from the  Company,
TranStar  agreed to pay a royalty of 2% of all  transaction  fees up to $275,000
and 1% up to $3,000,000.  In April 2001, the Company  loaned  TranStar  $24,000,
which  was due in June  2001.  In May  2001,  the  Company  loaned  TranStar  an
additional $24,000 which was due in July 2001. The loans are secured pursuant to
a stock pledge in the amount of 500,000 shares of TranStar common stock for each
of the two  loans.  In April  2003,  the  Company  and  TranStar  Systems,  Inc.
(TranStar) agreed to amend two $24,000 promissory notes bearing



                                       9
<PAGE>

interest at 10%,  dated  April 19 and May 8, 2001,  a royalty  agreement,  dated
October 14, 2000.  Pursuant to the  agreement,  the due date for the two $24,000
notes was extended to April 5, 2006 in exchange for  increasing the royalty rate
in the royalty  agreement to 3% of any  transaction  fees and any other revenues
generated  in  perpetuity.  The  collateral  to secure the note,  consisting  of
1,000,000  shares  of  TranStar  common  stock,  and  the  underlying   security
agreements  will  remain  in full  force  and  affect.  In  connection  with the
agreement,   TranStar  also  indemnified  and  released  the  Company  from  any
obligations  owed to TranStar or any third party.  Radlovic is CEO and President
of TranStar.

         As of December 31, 2002, the investment in notes  receivable and all of
the advances paid to TranStar for royalties have been fully reserved.

         Joint Ventures

         ZAP Quote,  S.A. In March  2000,  the  Company  entered  into two joint
ventures with ZAP Quote, S.A., Brazil's second largest provider of wireless 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 provides  back office  software to many of Brazil's  financial
institutions.

         Both joint  venture  ownerships  are held 50% by the Company and 50% by
ZAP  Quote,  S.A.  The  first  joint  venture  was  converted  into a  Brazilian
corporation  named  Vertical  Zap S.A. in March 2000.  The terms of Vertical Zap
S.A.  required  the Company to provide its  technology  and  products  while ZAP
Quote, S.A. was required to add its expertise and familiarity with the Brazilian
financial and business communities, and to provide the initial financing for the
project.  Vertical  Zap S.A.  developed  and  launched an internet  distribution
gateway as part of the Company's former Global Partners system. Vertical Zap has
currently  suspended  operations  and the  Company  does  not  know if and  when
Vertical Zap will proceed with new business.  The second joint venture, known as
ZAP  Vertical,  has  not  begun  operations  nor has it  been  converted  into a
corporation or other business entity.

         Wireless Learning  Systems,  LLC. In June 2001,  Epsylon  Technologies,
Taurus  Global,  LLC and the  Company  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. Wireless Learning has not commenced operations and the Company has put
Wireless Learning on hold until relevant technology is acquired.

         For the twelve months ended December 31, 2002, 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, 2002.

         Strategic Partnerships

         Infotec, Inc. In April 2003, the Company and Infotec,  Inc., a Japanese
corporation entered into a software reseller agreement whereby Infotec agreed to
market,  distribute,  provide  maintenance and technical  support for Vertical's
SiteFlash software in the territory of Japan and pay Vertical a fee on all sales
and maintenance fees.

         Defense Solutions,  LLC. In November 2002, Government Internet Systems,
a majority  owned  subsidiary  of the Company,  and Defense  Solutions,  L.L.C.,
entered  into an agreement  whereby  Defense  Solutions  agreed to assist in the
marketing  of the its web  based  emergency  response  management  products  and
services  to  federal,  state,  and local  governments  of the United  States in
exchange for one seat on GIS's Board of Directors,  and a fifteen  percent (15%)
commission  on all  contracts  and first year  maintenance  fees (less any third
party  royalties)  from  any  United  State's  government,   non-government,  or
commercial  enterprise or  organization  resulting  from a contact  initiated by
Defense Solutions. In connection with this agreement,  the Company issued 3 year
warrants to purchase  4,000,000 shares of the Company's common stock at a strike
price of $0.0075.



                                       10
<PAGE>

         Business Operations

         The Company's primary business  operations are comprised of: (1) emPath
6.2, our main  administrative  software  product,  a human resources and payroll
system which is marketed by our 60% subsidiary Now Solutions,  (2) Internet core
technologies  and  underlying web  application  software  products,  such as (a)
SiteFlash  and  its  underlying   applications,   which  include  ResponseFlash,
AffiliateFlash,  UniversityFlash, and NewsFlash; and (b) the Emily XML Scripting
Language and its underlying  programs.  In addition,  the Company has additional
software  and  fiber  optics  technologies,  as well  as  minority  and  limited
interests in other software products and companies.

         Administrative Software

         Now  Solutions,  LLC  -  emPath  6.2  (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 150 customers.  The product suite has a
successful track record in providing solutions to many well-known organizations.
The Company  acquired the human  resources  and payroll  product suite from Ross
Systems through a newly  incorporated  entity called Now Solutions.  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 6.2. The existing  revenue model is based
upon three components:  licensing fees,  professional  consulting services,  and
annual maintenance fees.

         Internet Core Technologies

         SiteFlash

         SiteFlash is an e- business  suite that  provides  content  management,
e-commerce, workflow, as well as layering affiliation/syndication  capabilities.
SiteFlash has both  multi-lingual  and multi-modal  capabilities,  meaning it is
accessible  through  any  output  device,  including  computers,   cell  phones,
blackberry  pagers,  and PDAs.  This core  product  is rooted in  patent-pending
technology  that  layers the web site into  three  distinct  categories  - form,
function and content.  SiteFlash  then allows the  combination  of these objects
from all these categories  arbitrarily - which means that  re-usability of code,
GUI  elements  and  content can be  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 is sold as (i) a software product, where revenues are 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.


         Underlying Applications of SiteFlash

         NewsFlash  -  Publishing.  The  Company  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. The Company'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.
The Company owns all of NewsFlash.

         UniversityFlash  - Higher Education.  UniversityFlash  is a new product
that was  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 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 code. By bringing disparate data together in one place, we
believe



                                       11
<PAGE>

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.  The Company
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. The Company 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 various agencies. 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 within itself as well as between
other agencies and its 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 in the final stages of
implementation  with  the  Metropolitan   Emergency   Communications  Agency  in
Indianapolis and Marion County,  Indiana. The Company owns all of ResponseFlash,
but has granted its subsidiary  Government Internet Systems an exclusive license
to market ResponseFlash to the government sector in the United States.

         Emily XML Toolkit

         The Emily XML Toolkit  consists of the core  internet  technology,  the
Emily XML Scripting  Language  (Emily) and a set of  applications  including the
Emily XML Enabler  Agent.  The patent  application  for the Emily XML  Scripting
Language was published in February 2003.

         Underlying Applications of Emily

         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 technology of the Company
and is the basis for 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 is in beta testing  presently and it
is anticipated to is on the market by January  1,2004.  The Company is currently
developing  further  interfaces  so that Emily can be used with all  programming
languages including Microsoft's "NET" languages.

         Emily XML Enabler Agent.  The XML Enabler Agent is a product  developed
by the  Company  utilizing  the Emily  Scripting  Language  and 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  state  of  Texas
e-procurement.  The solution was developed utilizing Emily broker software.  All
Texas  suppliers  can  purchase  the  Emily  Enabler  Agent to make its  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.  The  Company 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.



                                       12
<PAGE>

         Additional Software and Technologies

         Globalfare.com Inc. - Travel.  Globalfare.com was originally  conceived
to be both an e-commerce and brick and mortar business that sold travel products
on-line  on its  Globalfare.com  web  site  and  through  a  customer  care  and
reservation  center.  In light of continued  difficulties of the travel industry
based upon the attacks of September 11, 2001, the Company  suspended  operations
while it reformulated  its strategy.  In March 2003  Globalfare  entered into an
agreement  with  Picasso  Travel,  Inc.  (Picasso)  to provide  the  fulfillment
requirement  for the Zegato  agreement.  Picasso is one of the  leading  airline
consolidator  (wholesaler)  in  business  since 1079 based in Los  Angeles  with
offices in NYC, San Francisco,  Chicago, Boston, Washington DC, Dallas, and Fort
Lauderdale.  Picasso  serves over  12,000  travel  agencies  all over the United
States with over 120 employees speaking 24 languages.  Globalfare.com  continues
to evaluate new joint marketing options of high quality products and services.

         Globalfare  initially  intended to have on-line  sales to include sales
through  co-branded  sites with  solutions  targeted to assist the travel  agent
industry  and through  the Company  in-country  partners,  corporate  travel and
management  programs,  government  relocation  programs,  and  local  and  state
government sales.

         Fiber Optics. The Company had its patent application  published for the
transmission  of images on fiber  optics  that is  intended  to improve  today's
capacity  of fiber  optics to transmit  images and data in orders of  magnitude.
While this technology is still in theoretical  stage, the patent application was
published in February  2002. In June 2002 the United States Patent and Trademark
Office issued an office action whereby one of the claims was approved. The other
claims are still  pending.  Vertical is in the process of  formulating a plan to
prove the  theory  underlying  the  patent  and  develop  products  based on the
technology.


         Competition

         In general,  the Company 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 the Company's
principal  competitors.  Many of the Company's  competitors  have  substantially
greater financial resources and name recognition than the Company.


         Software/Hardware Vendors

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

         Microsoft's ".NET" initiative will provide software on a per-use rental
basis.  This is the  primary  distribution  model  with which the  Company  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.

         IBM has several  products and services  that compete with the Company'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.



                                       13
<PAGE>

         Hewlett Packard. Hewlett Packard 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.  Hewlett  Packard
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,
Hewlett Packard 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 the  Company  competes
include  Computer  Associates,  Hewlett  Packard,  IBM,  EDS and the  consulting
divisions of the big 4 accounting firms.


         Multinational Corporations

         The Company 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 the Company - Distribution and Products

         SiteFlash  -  General  Content  Management,   e-Commerce  and  Workflow
Products.  SiteFlash's  competition is derived from its  competencies in content
management, e-commerce, and workflow. SiteFlash and its underlying products have
competition  from several  products.  In-house  development is probably the most
common competitor.  PeopleSoft,  PlumTree,  Viador, Sun, Microsoft, BEA Systems,
and IBM  also  have  products  in this  area;  however  their  products  are not
necessarily  fully integrated  portal  solutions.  In many cases, a company will
purchase  a  content  management  system  and use it in  conjunction  with  some
in-house  programming  to accomplish an enterprise  portal.  Such  solutions are
expensive to maintain, and usually lack many features of an integrated solution.

         What sets SiteFlash and its underlying solutions apart is the one major
feature that it has that none of its competitors have:  Dynamic Web Repurposing.
This feature  allows a central web site to be massively  "re-purposed",  or have
massive affiliation.  This feature is not only about the static content of a web
site, but also about its dynamic content, such as e-commerce.  This core feature
of SiteFlash puts it in a unique  position and sets SiteFlash  apart from all of
its competition.

         SiteFlash's competition comes from companies who specialize in one area
of portal  technology.  In the e-commerce arena,  ClearCommerce is a competitor,
whereas in the  workflow  arena,  there are  competing  products  from IBM (with
WebSphere), BEA Systems and Oracle.

         However,  the  Company  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 features give
these products more capabilities than any single  competitor's  product and does
so in one integrated solution. Furthermore,  because SiteFlash is a proprietary,
patent-pending  technology,  its intellectual property is protected.  Taking the
cue from the market,  SiteFlash is now available as a single 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  in the  publishing  industry,  the larger  newspapers  have a choice
between  NewsFlash  and  conventional  content  management  systems  like Quark,
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.



                                       14
<PAGE>

         UniversityFlash - Higher Education. Although the general competitors to
SiteFlash  would probably  compete with  UniversityFlash,  with the exception of
Peoplesoft's  university module for its portal project, the Company is not aware
of any direct competitors to UniversityFlash who have specifically  targeted the
market.  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,  but, in  managements
opinion, none of these companies software provides a comprehensive solution with
the functionality 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,  but,  in  management's  opinion,  none  of  these
companies  software provides a comprehensive  solution with the functionality of
UniversityFlash..

         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,  the Company is not
aware of a commercially available package that replicates this functionality.

         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. The 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 Tool).  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.

         emPath  6.2- Human  Resources  and  Payroll  Software.  Now  Solutions'
competitors include PeopleSoft,  Oracle,  Lawson,  Cyborg and SAP. However,  for
large  corporations,  the software  offered by the competitors is  significantly
more expensive at a minimum cost of over $1 million,  plus additional consulting
fees for customization.

         Now Solutions  believes its product can accommodate the complexities of
the large and multi-dimensional companies without considerable modifications and
the high price point.

         Globalfare.com   Inc-Travel  Services.   Globalfare.com's   competitors
include Travelocity,  Sato Travel, TRW 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 but
provide mostly published fares on-line.

         Bridges  (Commercial   Distribution  Platform).   Competition  for  the
Company'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, the
Company's  approach  is  to  utilize  affiliate  programs  and  in-country  name
recognition of the Company's global partners combined with selective and limited
advertising to attract specific visitors by technology and products.


                                       15
<PAGE>

         Strategic Overview

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

         Although the Company'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  the
Company's  products  and web  services;  (ii)  products  which are suited to the
emerging  governmental  environment that demands the capability for cross-agency
and federal,  state and local interface like  ResponseFlash and Emily; 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 the ResponseFlash technology.

         Through the Company's  subsidiary  Government Internet Systems ("GIS"),
the  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, GISbelieves that it can
cross-market to the Company's existing client base of its partners,  affiliates,
and subsidiaries.


         Proprietary Rights

         The  Company  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.  The Company  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,  the Company moves to protect its trade secrets and other  proprietary
information  through agreements with employees and consultants.  The Company 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. The patent  application for the  transmitting  fiber optics was
published  in  February  2002  and the  patent  application  for the  Emily  XML
Scripting  Language  was  published  in  February  2003.  There  is also  patent
application with respect to SiteFlash. All of these patents are pending approval
at this time.  Although  the Company  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.  The
Company  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 source code.  The Company  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 the Company  conducts
its  operations,  the Company is generally not regulated  other than pursuant to
laws   applicable  to  businesses   in  general  or  to   value-added   services
specifically.  In some  countries,  the  Company  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 the  Company  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.  The Company is



                                       16
<PAGE>

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 July 28,  2003,  the Company  had 45  full-time  employees  and 9
consultants.  This total includes 36 full-time employees at its subsidiary,  Now
Solutions,  of which 29 are employed in the United  States and 7 are employed in
Canada as well as 3  consultants.  The Company is not a party to any  collective
bargaining agreements.


ITEM 2. DESCRIPTION OF PROPERTY

         The  Company's  headquarters  are  currently  located at 6336  Wilshire
Boulevard,  Los Angeles,  California,  and comprise  approximately  4,200 square
feet. Additional premises housing technological  personnel are currently located
at 101 West Sixth Street,  Suites 401-403,  Austin,  Texas,  78701, and comprise
approximately 1,250 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 the Company.

         Two legal  proceedings  were resolved in 2002. The first 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 sought in excess of $18
million in damages based on the alleged increase in value of the stock since the
private placement.  The Company  successfully  prevailed in a motion for summary
judgment and the case has been dismissed in its entirety.

         A second matter,  entitled La 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
the Company 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 the Company has breached an
agreement to pay the disputed sums flowing out of its October 2000 settlement of
litigated  matters with two former  shareholders  of the  Company.  A settlement
agreement  has been  executed and a dismissal was filed in January 2002. As part
of the  settlement  agreement,  the  parties  agreed  that La  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 Externet World,
Inc.



                                       17
<PAGE>

         In  addition,  the  Company is  involved  in the  following  additional
ongoing matters.

         The Company is currently  involved in a dispute  with Arglen  regarding
issues related to Now Solutions.  In April 2002 the Company  appointed the fifth
representative  of Now Solutions'  Executive  committee giving the Company three
representatives.  Also in April 2002, the Company  received a letter from Arglen
accusing  the Company of  defaulting  on its  obligations  under Now  Solutions'
Operating  Agreement  by failing to obtain a waiver of default  from Coast.  The
letter  further  stated that the default has  triggered the  dissolution  of Now
Solutions,  and authorizes Arglen to acquire the Company's ownership interest in
Now  Solutions  at a  discounted  price.  In  May  2002,  the  Company  demanded
arbitration  from  Arglen  seeking to enforce  its  rights  under the  Operating
Agreement. Also in May 2002, Arglen filed a Demand for Arbitration and Statement
of Claim against the Company. In its demand, Arglen alleged that the Company was
in default of its obligations under the Operating Agreement.  Arglen also sought
to enjoin the Company 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 the  Company's  interest in Now  Solutions.  The Company  believes that
Arglen's allegations are without merit. In August, the Company prevailed on four
of the five motions and remains in control of the executive committee with three
of the five  representatives  on the committee.  The only restriction  until the
outcome of  arbitration  is that the  Company is not  allowed  to  increase  its
management fees or any other monies other than for  reimbursement  for insurance
incurred by the Company on behalf of Now  Solutions.  In July 2003,  the Company
filed a motion  to  permit  Now  Solutions,  LLC to make  certain  distributions
permitted under the Now Solutions' LLC operating agreement to the Company.

         The  Company  learned of an alleged  employment  agreement  between Now
Solutions  and  Garry  Gyselen  ("Gyselen"),   the  suspended  Chairman  of  Now
Solutions,  whereby  Gyselen  would be  engaged  for a term of three  years at a
salary of $150,000 per annum.  The agreement was executed by Gyselen,  acting in
the capacity of Chairman on behalf of Now Solutions and Gyselen,  signing on his
own personal behalf as the executive.  The agreement is undated.  Now Solutions'
corporate legal counsel has informed its management and its executive  committee
that the employment agreement is invalid in their legal opinion. Gyselen, in his
own  declaration  of the  preliminary  injunction,  declares that the employment
agreement is "entirely inoperative." Gyselen has not provided Now Solutions with
any written acknowledgment confirming that the agreement is null and void.

         In February 2003,  the Company filed a lawsuit and a derivative  action
in a New York Supreme Court case against defendants Ross Systems, Inc. ("Ross"),
Arglen  Acquisitions,  LLC ("Arglen"),  James Patrick Tinley,  and Garry Gyselen
("Gyselen").  The Company filed a derivative  action on behalf of its subsidiary
Now Solutions when Arglen refused to authorize a lawsuit against any parties who
were  alleged to have acted  against  the best  interest of Now  Solutions.  The
Company  seeks  damages  and  equitable  relief  arising  out of  actions of the
defendants  constituting  breach of contract,  fraud,  conspiracy  and breach of
fiduciary duty in connection with certain transactions entered into between Ross
and Now Solutions;  Ross and Arglen;  Arglen and Now Solutions;  Gyselen and Now
Solutions; and the Company and Arglen. The action concerns offsets of payment on
note payable to Ross by the  maintenance fee charged by Now Solutions to Ross to
which Now Solutions was entitled per the asset  purchase  agreement  between Now
Solutions and Ross  regarding the HRIS assets Now Solutions  purchased from Ross
in 2001, an undisclosed  transaction between Ross and Gyselen around the time of
the purchase of these  assets,  and the failure of Gyselen to enforce the offset
provisions  which  caused  Coast to declare Now  Solutions  in default of a loan
covenant in 2001 (which has since been cured).

         In conjunction with the Company's lawsuit, Now Solutions is withholding
its payments on the remaining $750,000 note due February 2003 against the unpaid
maintenance  fees and gave  notice in  February  2003 to Ross of Now  Solutions'
claim of offset.  Now  Solutions  has  claimed a total  amount of  approximately
$3,562,000 in unpaid maintenance fees to offset against the note. In March 2003,
Ross filed a motion for  summary  judgment  in lieu of a  complaint  against Now
Solutions  to  collect  the note  payable  in the  amount of  $750,000  plus 10%
interest.




                                       18
<PAGE>


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

         No matter was submitted to a vote of security holders during the twelve
months ended December 31, 2002.

                                     PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our common equity is quoted on the Pink Sheets under the symbol "VCSY".
Prior  to  that   date,   the   Company's   common   stock  was  quoted  on  the
Over-The-Counter  Bulletin  Board  ("OTCBB")  under  the  symbol  "VCSY,"  which
commenced  in October  1999.  The  Company's  common  stock  traded on the `pink
sheets'  prior to that date.  The  Company  intends  apply to the NASD to resume
trading on the OTCBB once upon filing its forthcoming 10QSB for the two quarters
ended March 31 and June 30, 2003.

         The  following  is the range of high and low  closing bid prices of our
stock,  for the  periods  indicated  below.  As of July  28,  2003,  there  were
approximately  1,355 holders of record of our common stock. This information was
obtained from the Pink Sheets, LLC.

                                                       High              Low
                                                       ----              ---

       Quarter Ended June 30, 2003                    $0.0510           $0.0030
       Quarter Ended March 31, 2003                   $0.0082           $0.0040

       Quarter Ended December 31, 2002                $0.0095           $0.0044
       Quarter Ended September 30, 2002               $0.0150           $0.0041
       Quarter Ended June 30, 2002                    $0.0130           $0.0023
       Quarter Ended March 31, 2002                   $0.0270           $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.

         The Company paid dividends on outstanding  Series A Preferred Shares in
the  amounts of  $100,000  and $0 in 2001 and 2002,  respectively.  The  Company
presently intends to retain future earnings, if any, to provide funds for use in
the operation and expansion of its businesses. Accordingly, the Company does not
anticipate paying cash dividends on its common stock in the near future.




                                       19
<PAGE>


Unregistered Sales Of Securities

         In January 2001, the Company 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,  the  Company  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,  the  Company  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, the Company 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.

         On February 28, 2001,  the Company  acquired 60% of equity  interest in
Now Solutions,  LLC (Now Solutions), a company that develops and maintains human
resource  software,  in exchange  for $1 million in cash,  which was paid to Now
Solutions,  and warrants to purchase 80,763,943 (including two 25 million shares
of warrants  described in the paragraphs  below) shares of the Company's  common
stock which was granted to Arglen Acquisition, LLC ("Arglen"). Arglen was a deal
maker to facilitate  the entire  transactions  of Now  Solutions,  including the
purchase of software and financing. The warrants have an exercise price of $0.08
per share. One third of these warrants vested immediately, the second third will
vest on the one-year  anniversary of the date the warrants were issued,  and the
last  one-third  will vest on the two-year  anniversary of the date the warrants
were issued. These warrants have been granted but not delivered to Arglen. Based
on the Black Scholes option pricing model, the Company  determined that the fair
value of these  warrants  was  approximately  $798,500  and recorded as goodwill
accordingly.  In  addition,  Arglen and others  received a 40%  interest  in Now
Solutions  as  compensation  for  their  services  rendered  in the  process  of
consummating this transaction.  Consequently,  the Company recognized additional
goodwill of $666,667  based on the valuation of $1 million  accounting  only for
60% equity interest in Now Solutions.

         In March 2001,  Now Solutions  purchased  the rights to Human  Resource
Information Service  Application  Software ("HRIS") and various other assets and
liabilities  relating to HRIS of Ross  Systems,  Inc.  ("Ross") in exchange  for
approximately  $5,100,000  in cash and a  promissory  note of $1 million  due to
Ross. The transaction was recorded under the purchase method of accounting.  The
purchase price was allocated as follows:

<TABLE>
<S>                                                 <C>
Total purchase price                                6,100,000
                                            ------------------

Cash acquired                                         287,919
Property and equipment acquired                       182,900
Other intangible assets                               257,000  Amortizable over a period of five years
Software source code acquired                       3,848,972  Amortizable over a period of five years
Liabilities assumed                                  (409,419)
                                            ------------------
                                                    4,167,372
                                            ------------------
Goodwill                                            1,932,628
                                            ==================
</TABLE>


         During 2001,  the goodwill on Now  Solutions'  book was  amortized on a
straight-line  method over a period of five years.  The amortization of goodwill
in Now  Solutions  for the year ended  December  31, 2001 was  $322,104.  On the
consolidated  basis,  the  Company  recorded  a  total  goodwill  of  $3,448,795
($1,932,628  + $666,667 + $798,500  +  $51,000,  which is the  transaction  cost
incurred by the Company) during 2001. The consolidated  amortization of goodwill
in the year ended  December 31, 2001 was  $574,798,  which was  calculated  on a
straight-line basis over a period of five years.



                                       20
<PAGE>

         The  note  payable  to Ross  does  not bear  interest  and has  payment
requirements   of  $250,000  and  $750,000  due  in  February   2002  and  2003,
respectively. Now Solutions offset the $250,000 payment against amounts due from
Ross and claimed an offset of amounts on the unpaid prepaid maintenance fees due
at closing  February  28, 2001  against the $750,000  amount.  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  obtained  proceeds of  $5,500,000  through a note
payable to Coast Business Credit  ("Coast") to finance the purchase of HRIS from
Ross and used the excess  amount for its working  capital.  The note  payable to
Coast bears interest at prime plus one and a half and has an interest rate floor
of 8.5%.  The note payable to Coast will be due the earlier of February  2006 or
if terminated,  by either party,  in accordance with the terms of the agreement.
The lender has the option to demand  full  payment by  February  2004.  The note
calls for monthly installment payments of $91,500 of principal, plus interest.

         In order to facilitate the financing process, the Company 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. In
October  2002,  Coast and Now  Solutions  agreed to amend the Loan and  Security
Agreement, dated February 28, 2001 (the Loan Agreement").  Also in October 2002,
the Company  and Coast  agreed to amend the Deposit  Account  Pledge  Agreement,
dated February 28, 2001 (the "Pledge  Agreement").  In these  amendments,  Coast
agreed to waive certain defaults under the Loan Agreement and Pledge  Agreement,
including  non-compliance with financial covenants and non-delivery of financial
statements,  and to modify the financial  covenants.  All payments to Coast have
been  made by Now  Solutions.  In  exchange,  the  Company  agreed  to amend the
provisions of the Pledge  Agreement  related to its ability to withdraw  amounts
pledged to Coast as collateral. Under the amended terms of the Pledge Agreement,
the Company withdrew $348,333 from the deposit account,  and commenced receiving
$91,667 per month on October  31,  2002.  Under the amended  terms of the Pledge
Agreement  the Company was entitled to receive the monthly  withdrawal  provided
that: (a) Now Solutions makes the preceding monthly payment on the principal and
(b) Now Solutions is not in default of or has not cured certain  covenants under
the Loan Agreement. Now Solutions is current in its payments as of July 2003.

         In February 2003,  the Company was notified that Southern  Pacific Bank
went into FDIC  receivership.  Coast  Business  Credit  (Coast) is a division of
Southern  Pacific Bank. The FDIC froze $750,000,  which was the remaining amount
of the Company's  deposit account pledged on behalf of Now Solutions on the date
of the notice. Of the remaining $750,000,  the Company received $100,000,  which
is that  portion  which was insured by the FDIC.  The  uninsured  portion of the
remaining balance of the deposit pledge account,  which is $650,000, was applied
to the outstanding  debt of the Coast loan to Now Solutions.  Consequently,  Now
Solutions reduced its loan balance payable to Coast. Accordingly,  Now Solutions
owed to the  Company  the  same  amount  under  the same  terms  of  Coast  loan
agreements.

         According to the terms of the warrant  agreement,  dated March 5, 2001,
between the Company and Arglen, if, during the last 90 trading day period of the
first  year  from  the date  the  issuance  of the  initially  granted  warrants
aforementioned, the per share value of the Company's common 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 at the  exercise  price of $0.08 per  share.  One-third  of these
warrants  vested  immediately,  the  second  third  will  vest on the  one  year
anniversary  of the date the warrants were issued,  and the last  one-third will
vest  on the  two  year  anniversary  of the  date  the  warrants  were  issued.
Furthermore,  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 the
Company's  common  shares,  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 the Company's  common shares at exercise price of $.08 per share and
the warrants  will be  exercisable  for a period of five years from the date the
underlying  stock is registered with the Securities and Exchange  Commission for
resale or an exemption  from  registration  becomes  available and with the same
vesting term. These warrants have been granted but not delivered to Arglen.  The
Company intends to cancel the foregoing  warrants to purchase  80,763,943 shares
of the common stock of the Company as part of its legal action against Arglen

         Pursuant to the terms of the operating  agreement  among the members of
Now  Solutions,  the Company is entitled to receive a management  fee of $50,000
per year,  pro-rata  distributions  of 50% of net  earnings on a taxable  income
basis for federal income tax purpose if cash is available,  and repayment of the
initial  capital  contribution  of $1  million if  certain  conditions  are met.
Pursuant  to the  terms of the  operating  agreement  among the  members  of Now
Solutions,  the  Company's  interest  would have been  reduced to 51% over three
years if Now Solution is not in a default situation regarding the Coast loan and
the employees of Now Solutions had achieved certain performance goals. On August
16, 2001, the Company  received a default notice from Coast.  Consequently,  the
Company  believed that this  reduction of the Company's  equity  interest in Now
Solution had not occurred at December 31, 2002 and 2001.



                                       21
<PAGE>

         In May 2001,  the Company  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, the Company 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,  the Company  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 the
Company.  Steve Gunn was the Chief Financial  Officer of the Company's 60% owned
subsidiary, Now Solutions, LLC.

         In June 2001,  the Company 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,  the Company  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, the Company 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.

         In June 2001, the Company 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,  the  Company  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.  In
September 2002, the Company amended the consulting agreement of Stephen Rossetti
to provide services in the capacity of Executive V.P.  Governmental  Affairs, in
consideration  for 3 year  warrants to purchase  1,000,000  shares of its common
stock at a share price of $0.012,  $30,000 for services  rendered through August
31,  2002,  and $5,000  per month for a period of one year.  The  warrants  were
issued  at a fair  market  value  of  $6,191  (valued  using  the  Black-Scholes
valuation model).

         In July 2001, the Company  entered into two consulting  agreements with
Taurus Global,  LLC and M.S. Farrell & Co., Inc., in which the Company 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.  The Company
also  issued  warrants  to  purchase  500,000  shares  of  common  stock to each
consultant. As of December 31, 2001, the Company 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 the  Company's
common  stock  on the  day of  grant.  As of  December  31,  2001,  the  Company
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 January 2002, the Company
and Taurus  Global LLC agreed to extend a consulting  services  agreement  for 6
months. In consideration of Taurus Global's services,  the Company agreed to 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
warrants were valued at $1,240 and were  expensed  when issued.  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.  During the twelve months ended
December 31, 2002 the Company  accrued  $74,400  relating to the monthly fee. 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,  as the case may be, 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 March 2003, in connection
with a  settlement  agreement  between the Company and M.S.  Farrell  concerning
claims by each party,  the Company  issued a  promissory  note in the  principal
amount of  $23,030  bearing  interest  at a rate of 12% per annum to a member of
M.S.  Farrell.  The note is payable in installment  payments of $2,500 per month
beginning in July 2003 until the principal, and all interest, fees, charges, and
other amounts owing hereunder have been paid in full.



                                       22
<PAGE>

         In August  2001,  the  Company  issued a  $180,000  note,  which is due
February 2002 and bears interest at 12% per annum.  In connection with the note,
the Company issued 500,000  warrants to purchase  shares of its common stock and
pledged  third party  securities  owned by the Company and available for sale as
collateral for the note. The warrants vested immediately 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 note was  amended,  pursuant to which the
amount on the note was  increased to $211,136 and the maturity date was extended
so that the note was payable in August 2002.  In August 2002,  the $211,136 note
along with $25,368 in accrued interest and fees (as amended) was cancelled and a
$236,504  note was  issued  that  bears  interest  at 13% per  annum,  has three
payments  of $7,500 due on October 1,  November  1, and  November  15,  2002 and
monthly  payments  of  $7,500,  beginning  on  December  1, 2002 and  continuing
thereafter until all principal and interest then outstanding  under the note has
been paid. In November and December 2002, the parties  subsequently  amended the
$236,504 note. Pursuant to these amendments,  the Company made a $65,000 payment
in December  2002 and will make  monthly  installment  payments in the amount of
$7,500 each month  beginning in March 2003. In March 2003, the parties agreed to
amend the terms of the note.  Pursuant to the  amendment,  the Company agreed to
pay the interest and expenses of the lender to pay a third party loan secured on
the lender's behalf in lieu of receiving  outstanding  payments from the Company
and the Company agreed to begin making monthly  installment  payments of $7,500,
beginning in June 2003.

         In August  2001,  the  Company  entered  into an Equity  Line of Credit
agreement, whereby up to $10,000,000 worth 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
contained a fee of $392,000  payable in common  stock.  In September  2001,  the
Company  issued  7,142,857  shares of it's the  common  stock of the  Company or
$200,001  (fair  market value of shares  issued) of the fee. In March 2002,  the
Company issued 12,500,000 shares of it's the common stock of the Company for the
remaining  fee in  connection  with the Equity  Line of Credit.  The fair market
value of these shares at the date of issuance was $200,000.  This  agreement was
cancelled and replaced by a new equity line of credit agreement executed between
the parties in April 2003.

         On August 21, 2001, the Company entered into a stock purchase agreement
with  EnFacet to  purchase  100% of  EnFacet,  Inc.  by paying  $30,000 in cash,
incurring transaction expenses of $85,000, assuming liabilities of $642,075, and
issuing  30,000 shares of Series C 4%  Cumulative  Convertible  preferred  stock
valued at $312,000 (each share of the underlying  preferred stock is convertible
into 400 shares of the  Company's  common  stock and at least  15,000  shares of
preferred  stock will be distributed  among the employees in EnFacet and another
15,000 shares will be available for future fund raising purposes.),  resulting a
goodwill in EnFacet totaling  $1,069,075.  However,  as of December 31, 2002 and
2001,  these  30,000  shares of Series C  preferred  stock  were  issued but not
delivered  to  these  people  and  were  held  under  the  name of the  Company.
Accordingly, the $312,000 value of 30,000 shares of Series C preferred stock and
the  corresponding   value  of  goodwill  were  eliminated  in  the  process  of
consolidation  at December 31, 2002 and 2001. In February  2003, the Company and
EnFacet,  Inc.,  agreed to amend the  aforementioned  stock purchase  agreement.
Pursuant to the amendment, the Company may substitute 400 common shares for each
share of Series C  preferred  stock (up to  12,000,000  shares of the  Company's
common  stock) in  connection  with  purchase of EnFacet,  Inc.  The Company may
cancel any Series C preferred  stock for which common stock is substituted or as
otherwise  specified  in the  agreement.  In  April  2003,  the  Company  issued
3,000,000  restrictive  shares of the Company's common stock to former employees
and  consultants  of  EnFacet,  Inc.  per the above  executed  stock  agreement.
Accordingly, the Company cancelled 7,500 shares of Series C preferred stock.

         In  September  2001,  the Company  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 Kensicki,  Leroy Molock,  Aubrey  McAuley,  Vasu Vijay,
Justin Davis, Jacob Stearns, Annette Keith and Allison Enderle.

         In September and October 2001, the Company 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.
The  Company  has  recognized  $66,250 as  interest  expense in  relation to the
beneficial feature conversion of the debentures.  In September 2002, a debenture
of $10,000  principal and $631 interest was converted into  2,278,153  shares of
the Company's common stock. In October and November 2002, $150,000 principal and
$1,341  interest of debentures  were  converted  into  35,611,428  shares of the
Company's common stock. In January 2003,  $105,000  principal of debentures were
converted into 26,992,287 shares of the Company's common stock.





                                       23
<PAGE>

         In November  2001,  the Company  purchased  various  assets of Adhesive
Software,  Inc., including the SiteFlash  technology,  from a third party seller
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.  All unpaid
amounts were due September  2004.  The note is secured by certain  assets of the
Company.  In  April  2002,  the  Company  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 June 2002,
this note was further amended,  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 July 2002, and all remaining $10,000  installments were extended so
that each $10,000  installment would be due and payable on the first day of each
month beginning on October 1, 2002.

         In October 2001,  the Company issued a $100,000 note payable to a third
party lender.  The note required a payment of $46,000 due April 15, 2002 and the
remaining outstanding balance and interest due June 10, 2002 bearing interest at
12% per annum and was  secured by 400,000  shares of common  stock of  eResource
Capital Group and 5,225,000  shares of the Company's common stock that are owned
by Richard Wade. In November 2001,  the Company issued another  $100,000 note to
the same lender.  The note requires a monthly  payment of $7,500  commencing May
2002 and the remaining  outstanding  balance and interest due September 30, 2002
bearing  interest  at 12% per  annum  and  secured  by  5,225,000  shares of the
Company's  common stock that are owned by Richard Wade, the President and CEO of
the  Company.  These two notes  were in  default at  maturity  in 2002.  Through
negotiation with the lender,  the Company issued an $181,584  promissory note to
the lender to replace  the above two old notes.  The new note bears  interest at
12% per annum and is payable as follows:  (i) an initial  installment of $10,000
payable upon  execution;  (ii) monthly payment of $5,000  beginning  November 5,
2002 and (iii)  monthly  payment of  $10,000  beginning  May 15,  2003 until all
amounts under the note have been paid in full. The note is secured by 10,450,000
shares of the Company's common stock that are owned by Mountain  Reservoir Corp.
to  cover  any  shortfall.  Mountain  Reservoir  Corporation  is  a  corporation
controlled  by the W5 Family  Trust.  Mr.  Wade,  the  President  and CEO of the
Company,  is the trustee of the W5 Family Trust.  In January  2002,  the Company
executed an  indemnity  and  reimbursement  agreement  with  Mountain  Reservoir
Corporation  to cover  the  10,450,000  shares  of  stock  pledged  by  Mountain
Reservoir  Corporation.  The  payments  on  the  new  note  are in  default.  In
connection with an amendment to the former  $100,000  notes,  the Company agreed
with the third party lender to register the common shares  underlying the 50,000
shares of Series C Preferred  Stock that were issued to a third party  seller in
connection with the purchase of the SiteFlash technology.  Also in October 2002,
in connection with the  cancellation of two $100,000 notes issued in October and
November  2001, and the issuance of a new note for $181,583 note at 12% interest
per annum,  the Company  agreed to give the third party lender the right to sell
and the Company  agreed to redeem the  underlying  common stock  represented  by
12,500  shares of the 50,000  shares of Class C  Preferred  Stock of the Company
held by the third party  seller of the  SiteFlash,  Inc. at a price of $0.04 per
share,  which shall be exercisable on 10 days notice in March 2003. In the event
the Company did not  purchase  the stock  within 10 days notice of the put,  the
Company Vertical shall issue an additional 2,500 shares of its Class C Preferred
Stock. The Company had the option of redeeming the third party seller's holdings
of common stock of the Company represented by the 50,000 Class C Preferred Stock
of the  Company  at a price of $0.06  per share  ("Call").  In March  2003,  the
parties agreed to amend the $280,000  note.  Pursuant to this amendment in which
the Company and the lender waived any current default,  the note will be payable
$5,000 monthly  payments  beginning in June 2003 which will be raised to $10,000
payments  beginning in January 2004 until  principal and interest have been paid
in full in  exchange  for  increasing  the  interest  rate to 12% which  will be
accrued from the date the note was issued.  In connection  with this  amendment,
the  parties  also  agreed to amend the put and call  agreement  note  issued in
October 2002, whereby the Company issued 1,000,000 shares of its common stock in
lieu of issuing 2500 shares of Vertical's  Class C Preferred  Stock to the third
party  seller,  when the Company did not  purchase the  underlying  common stock
represented  by 12,500  shares of the Class C Preferred  Stock of the Company in
March 2003.

         In  November  2001,  the  Company  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 the Company.

         In December  2001,  the Company  executed an employment  agreement with
Richard Wade to become CEO and  President of the Company.  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.  No payments of Mr. Wade's salary
have been made since January 2002.



                                       24
<PAGE>

         In December  2001,  the  Company  executed a $425,000  note  payable to
Brighton  Opportunity  Fund, LP, a third party. The Company received proceeds of
$300,000 and paid a commitment fee of $125,000. The note accrued interest at 12%
per annum and was due  January  31,  2002.  The note was  secured by  36,303,932
shares of common  stock of the  Company  that were owned by  Mountain  Reservoir
Corporation,  and  15,000,000  shares of common  stock of the Company  that were
owned by Mr.  Valdetaro,  the  Company's  Chief  Technology  Officer  and  Chief
Accounting  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 the Company,  is the trustee of the W5 Family Trust. In
January  2001,  the  Company  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, the Company agreed to reimburse Mountain Reservoir
and Mr.  Valdetaro for any shares sold as collateral to cover the default of any
loan.  On January 31,  2002,  the note was in default.  In September  2002,  the
lender informed the Company that  19,751,000  shares of the collateral were sold
for $254,382,  the remaining  31,552,932  shares were  transferred  to two third
parties,  the debt was  satisfied  as of  April 1,  2002,  and the note has been
cancelled.  Accordingly,  the Company reclassified the note payable to the third
party  including  accrued  interest to the note payable to related  parties.  In
September and October 2002, the Company issued  36,303,932 and 15,000,000 shares
of its common stock to Mountain  Reservoir  Corporation  and Mr. Luiz Valdetaro,
respectively,  in  accordance  with the  executed  indemnity  and  reimbursement
agreements of January 2002.  At the time of issuing  common stock,  the value of
the note payable plus accrued interest was approximately  $450,000.  The Company
reclassified from note payable to related parties to common stock and additional
paid in capital.  In  November  2002,  Mountain  Reservoir  Corporation  and Mr.
Valdetaro assigned any additional rights they had in the stock collateral to the
Company.  The  Company is  currently  pursuing  these  rights with the lender to
obtain a specific  accounting  and a refund of any monies that may be due to the
Company.   The   differential   between  the  value  of  the  stock  issued  for
reimbursement of shares to Mr. Valdetaro and Mr. Wade and the value of the note,
plus accrued  interest,  was accounted for as  forgiveness  of debt. The Company
continues to pursue its rights to obtain a full  accounting  and intends to take
appropriate action to enforce its rights.

         On December 21, 2001, the Company entered into an option agreement with
iNet Purchasing  ("iNet") to purchase an additional interest in iNet under which
the Company 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 is required to pay $140,000 in four equal
monthly  installments  beginning in December 2001 and grant 3 year stock options
to three iNet executives,  Basil Nikas, Robin Mattern,  and Wayne Savage, in the
amount of  1,500,000,  1,500,000,  and 500,000  shares of the  Company's  common
stock,  respectively.  These stock  options were issued in 2001. At December 31,
2002  the  Company  has paid a total of  $131,282  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 the Company exercised the option
to obtain a majority  interest in iNet by April 2002, the Company is required to
pay to iNet  $860,000 in cash or  marketable  securities  (pending any potential
offsets). The Company would need to raise additional capital in order to pay the
cash portion of the exercise price, which is $860,000.  In addition, in order to
exercise the option,  the Company must issue 70,000 shares of Series C preferred
stock and grant additional  three-year warrants and options, as the case may be,
to purchase an additional 6,000,000 shares of the Company's common stock each to
Nikas and Mattern and 2,000,000  shares of the Company's common stock to Savage,
at a strike  price of $0.025 per  share.  Of these  warrants  and  options,  the
Company issued but did not deliver 1,500,000  warrants each to Mr. Nikas and Mr.
Mattern and  500,000  warrants to Mr.  Savage in January  2002.  The fair market
value of these warrants at the date of grant was $35,713.  In the event that the
Company does not acquire a majority interest in iNet, these options and warrants
will automatically be cancelled. Under the terms of the option, iNet is required
to deliver certain financial and non-financial information. This information was
never  delivered and the Company is holding the warrants  issued in January 2002
until a  resolution  is  reached.  The  Company is seeking an  extension  of the
exercise date to allow iNet to deliver the required information and to allow the
Company  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 to the Company  and vice  versa.  Discussions  thus far with
iNet have not resulted in a resolution of this matter.

           In January 2002, the Company and Strategic  Marketing Alliance agreed
to terminate the Company's  interest in WorldBridge in consideration  for credit
on the Company'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  Alliance,  beginning in
February 2002. For the twelve months ended December 31, 2002, the Company issued
warrants to purchase  420,455 shares of common stock.  The fair market value for
these  shares,  as of the  date  of  issuance,  was  $1,103  (valued  using  the
Black-Scholes valuation model).

                                       25
<PAGE>


         In January 2002,  the Company  executed an indemnity and  reimbursement
agreement 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 each for a principal  amount of $100,000.  These notes were
cancelled and replaced with a $181,584  promissory note which the Company issued
in October  2002,  at 12%  interest per annum.  Mountain  Reservoir  Corp.  is a
corporation  controlled by the W5 Family Trust,  of which Mr. Wade is a trustee.
Mr. Wade is President, CEO, and a Director 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  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.
Mountain Reservoir Corp. is a corporation  controlled by the W5 Family Trust, of
which Mr. Wade is a trustee.  Mr. Wade is President,  CEO, and a Director of the
Company.  In September  2002,  the lender  informed the Company that  19,751,000
shares of the collateral were sold for $254,382, the remaining 31,552,932 shares
were  transferred  to two third  parties,  the debt was satisfied as of April 1,
2002,  and the note has been  cancelled.  In September  2002, the Company issued
5,774,704  shares of common stock to Luiz  Valdetaro  and  13,976,296  shares of
common stock to Mountain Reservoir  Corporation.  The combined 19,751,000 common
shares of the Company Stock had a fair market value of $118,000 on September 23,
2002, the date of issuance. In October 2002, the Company issued 9,225,296 shares
of common stock to Luiz Valdetaro,  the Chief  Technology  Officer and the Chief
Accounting  Officer of the  Company,  and  22,327,630  shares of common stock to
Mountain  Reservoir  Corporation.  These shares were issued in  connection  with
indemnity  and  reimbursement   agreements  between  the  Company  and  Mountain
Reservoir  Corporation  and Mr.  Valdetaro,  respectively in connection with the
$425,000  note issued in December  2001,  whereby  the Company  would  reimburse
Mountain  Reservoir  Corporation and Mr. Valdetaro with the respective number of
shares of the Company  stock equal to any shares sold as collateral to cover the
default of any loan.  With the  issuance  of these  shares,  Mountain  Reservoir
Corporation and Mr.  Valdetaro have received their full  reimbursement of shares
in the amounts they  initially  pledged on behalf of the Company,  or 36,303,932
and  15,000,000  shares,  respectively.  In November  2002,  Mountain  Reservoir
Corporation  and Mr.  Valdetaro  assigned any additional  rights they had in the
stock collateral to the Company.  The Company is currently pursuing these rights
with the lender to obtain a specific  accounting and a refund of any monies that
may be due to the  Company.  The  differential  between  the  value of the stock
issued for  reimbursement  of shares to Mr. Valdetaro and Mr. Wade and the value
of the note,  plus accrued  interest,  was accounted for as forgiveness of debt.
The  Company  continues  to pursue  its rights to obtain a full  accounting  and
intends to take appropriate action to enforce its rights.

         In March 2002, the Company 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.  In April  2003,  $40,000  principal  of  debentures  were
converted  into  10,245,900   shares  of  the  Company's  common  stock.   These
conversions were in connection with $100,000 in debentures issued by the Company
to third  party  holders  in March  2002.  The  holders  of the  debentures  are
third-party individuals.

         For the three months ended March 31, 2002, the Company issued 1,167,857
warrants to purchase shares of its common stock to one marketing  consultant for
services. The fair market value of these warrants at the date of issuance $3,132
(valued using the Black-Scholes valuation model).

         For the three months ended June 30, 2002, the Company  issued  warrants
to two consultants to purchase a total of 1,500,000  shares of common stock at a
strike price of $0.005. The fair value of these warrants at the date of issuance
of these grants of warrants was $3,565(valued using the Black-Scholes  valuation
model).

         In June  2002,  the  Company  issued a  $50,000  note to a third  party
lender, which is due January 2003 and bears no interest.  In connection with the
note, the Company issued three year warrants to purchase 1,200,000 shares of its
common stock at a price of $0.003 per share. The warrants vested immediately and
are  exercisable  for three years from issuance.  The fair value of the warrants
was $2,291 (valued using the Black-Scholes  valuation  model).  The Company also
pledged a limited  interest in a deposit  account on behalf of Now  Solutions in
the event the Company  defaults on the loan. In March 2003, the parties  entered
into an amendment,  whereby the parties agreed that to accrue interest beginning
in October 2002 at a rate of twelve  percent  (12%) per annum.  The parties also
agreed  that the  Company  would make  monthly  payments  of  accrued  interests
beginning in April 2003 and an additional  principal payment of $5,000 beginning
in July 2003.

         In June  2002,  the  Company  issued a  $50,000  note to a third  party
lender,  which pears  interest of 12%,  which is due January 2003. In connection
with the note,  the Company  issued  three year  warrants to purchase  1,500,000
shares of its



                                       26
<PAGE>

common stock at a price of $0.004 per share. The warrants vested immediately and
are  exercisable  for three years from  issuance.  The fair market  value of the
warrants  was $3,818  (valued  using the  Black-Scholes  valuation  model).  The
Company  also pledged a limited  interest in a deposit  account on behalf of Now
Solutions  in the event the  Company  defaults on the loan.  In March 2003,  the
parties agreed to amend the terms of the notes.  Pursuant to the amendment,  the
Company  agreed to pay accrued  interest in the amount of $4,200 for the $50,000
note and $1170 for a $25,000  note issued in August  2002 and  monthly  interest
payments  for all  accrued  interest  for both notes  thereafter  shall be made.
Beginning in July 2003,  the above  interest  payments  shall be replaced with a
monthly  installment  payment of $5,000.00,  with the initial  payments  applied
first to the $25,000 note and then to the $50,000 note.

         In June 2002, the Company issued 3 year warrants to purchase  3,000,000
shares of its common stock to two employees at an average share price of $0.012.
The fair market value of these warrants on the date of issuance of each grant is
$3,565 (valued using the Black-Scholes valuation model).

         In July  1,  2002,  the  Company  entered  into a  two-year  employment
agreement with Aubrey  McAuley,  whereby  McAuley would provide  services in the
capacity of Executive VP, Product Development and Sales Support. McAuley will be
paid an annual salary of $120,000 and a bonus as  determined in accordance  with
the agreement. In addition, the agreement contains certain performing incentives
whereby  McAuley can earn 7,500 shares of Series "C" preferred stock of the pool
of 30,000  shares  of  Series  "C"  preferred  stock,  which  were  reserved  in
connection  with the  purchase of Company's  subsidiary,  Enfacet,  Inc..  These
shares of Series "C" preferred  stock may be converted into 3,000,000  shares of
Company's  common  stock.  The Company is required  to register  the  underlying
shares of common stock.  In the event the  employment  agreement is  terminated,
then  McAuley  may  convert  his  employment   agreement  into  a  subcontractor
agreement.  As of April 15,  2003,  management's  opinion  is that the shares of
7,500 Series "C" preferred stock have not been earned and accordingly the shares
have not been issued.

         In July 2002, the Company retained the services of Equitilink,  Inc. to
provide  investor  relations  services.  As  compensation,  the  Company  issued
5,000,000 shares of Company's common stock with the Rule 144 restrictive  legend
with a fair market value of $23,500  (valued using the  Black-Scholes  valuation
model).

         In August  2002,  the  Company  issued a $25,000  note to a third party
lender,  which was due in August 2002 and bears  interest at a rate of 12%.  The
note is secured by  10,000,000  shares of common  stock of the  Company  that is
owned by Mountain Reservoir Corporation,  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 the Company Systems, is the trustee of
the W5 Family  Trust.  The  Company  made a $12,500  payment on the note and the
parties  had agreed to extend the  maturity  date for the  remaining  balance to
December  2002.  In March  2003,  the  parties  agreed to amend the terms of the
notes. Pursuant to the amendment,  the Company agreed to pay accrued interest in
the amount of $4,200 for the  $50,000  note and $1170 for the  $25,000  note and
monthly  interest  payments for all accrued  interest for both Notes  thereafter
shall be made.  Beginning in July 2003,  the above  interest  payments  shall be
replaced with a monthly installment payment of $5,000, with the initial payments
applied first to the $25,000 Note and then to the $50,000 note.

         In August 2002, the Company retained a consultant to provide investment
services on behalf of the Company. Upon execution of the agreement,  the Company
issued  warrants to purchase  500,000 shares of common stock at a share price of
$0.015, which expire in August 2005, and vest immediately. The fair market value
of the  warrant  issued was $5,467  (valued  using the  Black-Scholes  valuation
model).  The consultant is also entitled to 2.5% of any cash funds raised and in
the event the consultant raises  $1,500,000,  the Company will issue warrants to
purchase 2.0 million shares of common stock, based on 90% of the average closing
price  for the five  previous  trading  days  prior to the  closing  date of the
transaction.

         In August  2002,  the Company  agreed with a third party lender to loan
the Company $60,000.  The lender has currently  loaned the Company $31,859.  The
Company had initially intended to issue warrants to purchase 6 million shares of
the  Company's  common stock at a strike price of $0.005 per share in connection
with funding the total  amount of the loan.  The lender has not fully funded the
loan and the parties are  negotiating  the terms of the loan. In April 2003, the
Company issued  3,000,000 shares of common stock of the Company to the lender in
anticipation of finalizing the terms of the loan made by the lender. In December
2002,  the Company  issued a third party 3 year  warrants to purchase  2,500,000
shares of the Company's  common stock at an exercise  price of $0.005 to a third
party contractor in consideration of for consulting services.  The warrants were
issued  at a fair  market  value of  $18,501  (valued  using  the  Black-Scholes
valuation model).

         In  August  2002,  the  Company  issued an  $8,000  note,  which is due
February  2003 and bears  interest at a rate of 10% in exchange  for a loan with
the same amount from Mr. Luiz Valdetaro,  the Chief  Technology  Officer and the
Chief  Accounting  Officer of the  Company.  In  connection  with the note,  the
Company issued 3 year warrants to purchase  1,000,000 shares of its common stock
at a price of $0.005 per share. The warrants vested  immediately and were issued
at a fair  market



                                       27
<PAGE>

value of $9,316 (valued using the Black-Scholes  valuation  model).  The Company
also  pledged a limited  interest in a deposit  account in the event the Company
defaults on the loan. This note has been paid at December 31, 2002.

         In  September  2002,  the  Company  issued 3 year  warrants to purchase
1,750,000  shares of common stock of the Company at a strike price of $0.006 per
shares to two consultants in connection with accounting services provided to the
Company.  The fair market value of the warrants issued was $13,845 (valued using
the Black-Scholes valuation model).

         In September  2002, the Company issued a promissory  note in the amount
of $13,000 to a third party lender  bearing  interest at 8% due in October 2002,
and  warrants to  purchase  250,000  shares of common  stock of the Company at a
strike  price of $0.008 per share in  consideration  for a loan in the amount of
$12,500 with a commitment fee of $500. In connection  with the loan, the Company
also issued  warrants to purchase  250,000 shares of common stock of the Company
at a strike  price of $0.008 per share to a third party as a finder's  fee.  The
warrants  were  issued  at a fair  market  value of  $7,531  (valued  using  the
Black-Scholes valuation model). This note has been paid in full.

         In September 2002, Equitilink, LLC whom the Company retained to provide
its investor  relations  services,  purchased  3,000,000 shares of the Company's
common stock for a total of $17,100 at the fair market value price of $0.005 per
share. The shares are subject to the Rule 144 Restriction.

         In November 2002, in connection  with an agreement  between  Government
Internet Systems, Inc.  ("GIS")(formally Emily Solutions,  Inc.), a wholly-owned
subsidiary  of the  Company,  and Defense  Solutions,  L.L.C.,  whereby  Defense
Solutions  agreed  to  assist in the  marketing  of the its web based  emergency
response  management  products  and  services  to  federal,   state,  and  local
governments  of the United  States in  exchange  for one seat on GIS's  Board of
Directors, and a 15% commission on all contracts and first year maintenance fees
(less  any  third  party   royalties)   from  any  United  State's   government,
non-government or commercial enterprise or organization resulting from a contact
initiated by Defense  Solutions,  the Company issued 3 year warrants to purchase
4,000,000 shares of the Company's common stock at a strike price of $0.0075. The
warrants  were  issued  at a fair  market  value of  $14,064  (valued  using the
Black-Scholes valuation model).

         In December  2002,  the Company  issued a $65,000 note to Victor Weber,
which bears  interest  at 13% per annum.  The note is due in March 2003 and also
provides that the minimum accrued interest payments will be no less than $2,500.
In December 2002, the Company issued a promissory  note in the amount of $45,000
from Victor Weber in consideration of a loan for the same amount. The note bears
interest at a rate of 13% per annum and is due in January  2003.  In  connection
with the loans and in consideration of financial consulting services rendered on
the Company's  behalf,  the Company also issued  2,000,000 shares of the Company
common stock with the Rule 144 restrictive legend to Weber. The stock was issued
in February  2003 with a fair market  value of $11,890.  In March 2003,  the due
date for payment of principal and interest for each of the notes was extended to
July 1, 2003 in  exchange  for  accrued  interest  payments.  In July 2003,  the
Company and Victor Weber amended the terms of certain loans made by Weber to the
Company in the aggregate amount of $150,000.  Pursuant to their agreement, Weber
cancelled two notes,  each with a principal amount of $65,000 and $45,000 issued
in December 2002 as well as outstanding  debt and Vertical issued two promissory
notes in the amounts of $100,000 and $40,000. The $100,000 promissory note bears
interest at 13% per annum and is payable in monthly  accrued  interest  payments
beginning  August 1, 2003,  and a final  payment of all  principal and remaining
interest by March 31, 2004.  The $40,000  promissory  note bears interest at 13%
per annum and is payable in monthly  installment  payments  beginning  August 1,
2003, and consisting of an $8,000 principal payment plus the interest accrued in
the previous  month. In  consideration  of the loans made to the Company and for
services rendered on behalf of the Company,  Vertical paid a $250 commitment fee
to Weber and issued  8,000,000  shares of common  stock of the Company to Weber.
The stock is subject to Rule 144 restrictions. Weber is a Director and President
of Government Internet Systems,  Inc., a subsidiary of the Company. Mr. Weber is
President and Director of Government Internet Systems,  Inc, a subsidiary of the
Company.

         In December  2002,  the Company  issued 3 year  warrants to purchase to
6,600,000  shares of common stock at an exercise  price of $0.010 per share to 6
employees.  The warrants vest in equal amounts per month over a one-year period.
The stock was  issued  with a fair  market  value of $25,664  (valued  using the
Black-Scholes valuation model).

         In December 2002, 3 year stock options to purchase 18,200,000 shares of
common  stock of the  Company to  employees  and various  consultants  issued in
December  1999 expired and the rights to purchase any shares under those options
terminated.

         In December 2002, the Company extended the term for one additional year
of stock options to purchase 12,000,000 shares of common stock of the Company to
2 employees and 3 consultants at an average exercise price of $0.021 per share.



                                       28
<PAGE>

         In December  2002,  the Company issued a third party 3 year warrants to
purchase  250,000  shares of the Company's  common stock at an exercise price of
$0.01 in exchange for  guaranteeing  the financing  for two liability  insurance
policies  issued.  The  warrants  were issued at a fair  market  value of $1,033
(valued using the Black-Scholes valuation model).

         In  December  2002,  the  Company,  acting as the sole  shareholder  of
Government Internet Systems, Inc. ("GIS"), a subsidiary of the Company, retained
the  services of Victor  Weber as a Director of GIS for 250 shares of the 25,000
shares of the outstanding  common stock of GIS,  subject to a buyback  agreement
between the Company and the director.  The value of these shares is nominal.  In
addition,  the Company issued 5 year warrants to purchase  250,000 shares of the
Company's  common  stock  at an  exercise  price of  $0.01  in  connection  with
retaining  this  director.  The  warrants  were issued at a fair market value of
$629.32 (valued using the Black-Scholes valuation model).

         Also in December 2002, the Company's  subsidiary,  Government  Internet
Systems,  Inc. (GIS) retained Victor Weber as the President and Secretary of GIS
for 500 shares of the 25,000  shares of  outstanding  common  stock of GIS.  The
value of these shares is nominal.  In connection  with retaining  Victor Weber's
services,  the Company also issued 5 year warrants to purchase  1,000,000 shares
of the  Company's  common  stock at an  exercise  price of $0.01 per share.  The
warrants  were  issued  at a fair  market  value of  $2,517  (valued  using  the
Black-Scholes  valuation  model).  In the event that GIS achieves  certain sales
targets or receives $2.5 million in financing,  Weber has the option to become a
salaried employee for 2 years at an annual salary of $200,000.

         In December  2002, the Company,  acting as the majority  shareholder of
Government Internet Systems, Inc. ("GIS"), a subsidiary of the Company, retained
the  services  of Stephen  Rossetti  as a Director  of GIS for 250 shares of the
25,000  shares of the  outstanding  common  stock of GIS,  subject  to a buyback
agreement  between the Company and the  director.  The value of these  shares is
nominal.  In addition,  the Company  issued 5 year warrants to purchase  250,000
shares of the  common  stock of the  Company  at an  exercise  price of $0.01 in
connection  with  retaining  this  director.  The warrants were issued at a fair
market value of $1,242.25 (valued using the Black-Scholes valuation model).

         Also in December 2002, the Company's  subsidiary,  Government  Internet
Systems,  Inc. (GIS) retained  Stephen  Rossetti as Chief Executive  Officer and
Chairman of GIS for 1000 shares of the 25,000 shares of the  outstanding  common
stock of GIS,  subject  to a  buyback  agreement  between  the  Company  and the
executive.  The value of these shares is nominal. In the event that GIS achieves
certain sales  targets or receives  $2.5 million in financing,  Rossetti has the
option  to  become a  salaried  employee  for 2 years  at an  annual  salary  of
$250,000.

         In December  2002, the Company,  acting as the majority  shareholder of
Government Internet Systems, Inc. ("GIS"), a subsidiary of the Company, retained
the services of Chuck Kensicki as a Director of GIS for 250 shares of the 25,000
shares of the outstanding  common stock of GIS,  subject to a buyback  agreement
between the Company and the director.  The value of these shares is nominal.  In
addition,  the Company issued 5 year warrants to purchase  250,000 shares of the
Company's  common  stock  at an  exercise  price of  $0.01  in  connection  with
retaining  this  director.  The  warrants  were issued at a fair market value of
$1,672 (valued using the Black-Scholes valuation model).

         In December  2002,  the Company issued a third party 5 year warrants to
purchase  250,000  shares of the Company's  common stock at an exercise price of
$0.01 to order to retain the party as a director of Government Internet Systems,
Inc., a subsidiary of the Company. Since the parties have not fully executed the
agreements to retain the  director,  Vertical has not delivered the warrants and
is awaiting execution of the agreements. In the event the parties do not execute
the agreements,  Vertical intends to cancel the warrants.  The warrants,  at the
time  of  issuance,  had a  fair  market  value  of  $1,672  (valued  using  the
Black-Scholes valuation model).

         In January 2003, the Company's subsidiary, Government Internet Systems,
Inc.  (GIS)  retained  David  Kinney to serve  CTO.  The  Company  issued 5 year
warrants to purchase 500,000 shares of the Company's common stock at an exercise
price of $0.01 in connection with retaining this executive. The warrants, at the
time  of  issuance,  had a  fair  market  value  of  $2,441  (valued  using  the
Black-Scholes  valuation  model).  In the event that GIS achieves  certain sales
targets or receives $2.5 million in financing, Kinney has the option to become a
salaried employee for 2 years at an annual salary of $125,000.

         In February 2003, the Company and its wholly owned subsidiary, Enfacet,
Inc., agreed to amend the stock purchase  agreement.  Pursuant to the amendment,
the Company may  substitute  400 common shares for each share of VCSY  Preferred
"C" Stock (up to 12,000,000  shares of Vertical common stock) in connection with
purchase of Enfacet,  Inc.  Vertical may cancel any VCSY Preferred "C" Stock for
which common stock is substituted or as otherwise specified in the agreement. In
April 2003, the Company issued  3,000,000  shares of common stock of the Company
with the Rule 144  restrictive  legend to former  employees and  consultants  of
Enfacet,  Inc. for services.  These  3,000,000  shares were issued in connection
with this  agreement  and the Company  cancelled  7500 shares of  Preferred  "C"
Stock.



                                       29
<PAGE>

         In March 2003,  the  Company,  acting as the  majority  shareholder  of
Government Internet Systems, Inc. ("GIS"), a subsidiary of the Company, retained
the services of Thomas  Beeson as a Director of GIS for 250 shares of the 25,000
shares of the outstanding  common stock of GIS,  subject to a buyback  agreement
between the Company and the director.  The value of these shares is nominal.  In
addition,  the Company issued 5 year warrants to purchase  250,000 shares of the
Company's  common  stock  at an  exercise  price of  $0.01  in  connection  with
retaining this director. The warrants were issued at a fair market value of $645
(valued using the Black-Scholes valuation model).

         In April 2003, the Company issued 5 year warrants to purchase 5,000,000
shares of common  stock of the Company at an exercise  price of $0.010 per share
to  Wolman,  Babbitt,  & King for  legal  services  rendered  to  Vertical.  The
warrants,  at the time of issuance,  had a fair market value of $15,009  (valued
using the Black-Scholes valuation model).

         In April 2003, the Company and Mike Radlovic (Radlovic) entered into an
agreement  whereby  Radlovic would  purchase the Company's  interest in TranStar
Systems, Inc. (TranStar),  formerly Apollo Industries, Inc. In October 2000, the
Company had agreed to provide  $250,000 in funding to TranStar in exchange for a
30% equity interest.  Pursuant to the agreement,  the Company transferred all of
its  ownership  representing  3,000,000  shares  of  TranStar  common  stock  to
Radlovic.  In consideration of the sale, Radlovic issued a $250,000 note bearing
interest  at 10% per annum due in April  2007.  The note is secured by 5 million
shares of TranStar common stock. Radlovic is the President and CEO of TranStar.

         In April 2003, the Company and TranStar Systems, Inc. (TranStar) agreed
to amend two $24,000  promissory  notes bearing  interest at 10%, dated April 19
and May 8,  2001,  and a royalty  agreement,  dated  October  14,  2000  whereby
TranStar  had  agreed  to pay a  royalty  of 2% of all  transaction  fees  up to
$275,000 and 1% up to $3,000,000.  Pursuant to the  agreement,  the due date for
the two $24,000  notes was extended to April 5, 2006 in exchange for  increasing
the royalty rate in the royalty  agreement to 3% of any transaction fees and any
other  revenues  generated in  perpetuity.  The  collateral  to secure the note,
consisting  of 1,000,000  shares of TranStar  common stock,  and the  underlying
security  agreements  remain in full force and effect.  In  connection  with the
agreement,   TranStar  also  released  and  indemnified  the  Company  from  any
obligations owed to TranStar or any third party.

         In April 2003, the Company issued 1,100,000 shares of common stock to a
third party  consultant and extended 750,000 options and 750,000 warrants issued
in November  2001 at an exercise  price of $0.025 per share for an  additional 1
year in connection with consulting services.

         In April 2003,  the Equity  Line of Credit  agreement  entered  into in
August 2001 was cancelled and a new Equity Line of Credit Agreement was executed
between  the  Company  and  Cornell  Capital  Partners,   L.P.,  whereby  up  to
$10,000,000  worth of the Company's  common stock may be  purchased.  The shares
must be  registered  before the sale,  and the shares can be purchased at 99% of
the lowest  closing bid price  during the 5 days  trading days after the Company
requests an advance,  but not less than the minimum  advance price per share set
by the Company and provide in the notice requesting an advance.  The Equity Line
of Credit Agreement contains a commitment fee of $190,000,  payable in cash or a
convertible  debenture  to be issued to Cornell and a placement  fee of $10,000,
payable to the third party  placement  agent.  The debenture may be redeemed for
100% of the any  portion of the  principal  that has not been  converted  by the
holder as of the date of the notice of redemption.  The debenture  provides that
after 180 days the holder may convert any  portion of the  principal  at 100% of
the lowest closing bid price 5 days prior to conversion.

         In April 2003, the Company issued  $200,000 of convertible  debentures.
The debt accrues  interest at 5% per annum and is due April 2008. The holder may
convert the debenture into shares of common stock at either $0.03 or 80 % of the
lowest closing bid price for the 5 trading days prior to the  conversion.  As of
August 1, 2003 no conversions have taken place.

         In May 2003,  the  Company  issued  two  promissory  notes,  each for a
principal  amount of $17,500,  bearing no interest to two third party lenders in
consideration of two loans in the aggregate amount of $30,000. The notes are due
in June 2003.  Vertical  has  pledged  distributions  of funds owed to it by its
subsidiary  Now Solutions  toward  payment of the loan.  In connection  with the
notes the Company  paid a  commitment  fee of $2,500 each note and issued 5 year
warrants  to  purchase  250,000  shares of  common  stock of the  Company  at an
exercise price of $0.0075 per share to each lender.  The warrants were issued at
a fair market value of $2,440 (valued using the Black-Scholes  valuation model).
In connection with these loans, Vertical also issued 5 year warrants to purchase
250,000  shares of common  stock of the Company at an exercise  price of $0.0075
per share to a third party consultant. The warrants were issued at a fair market
value of $1,220 (valued using the Black-Scholes valuation model).



                                       30
<PAGE>

         In June 2003, the Company retained the services of Equitilink,  Inc. to
provide  investor  relations  services.  As  compensation,  the  Company  issued
15,000,000 shares of Company's common stock with the Rule 144 restrictive legend
with a fair market value of $60,000.

         In June 2003,  the  Company and a third party  lender  entered  into an
agreement whereby the Company was loaned $90,000. In exchange the Company issued
a $90,000  note bearing  interests  at 10%, and due March 31, 2004.  The Company
pledged a limited interest in $90,000 of a $650,000 note issued by Now Solutions
to the Company to secure the loan. In addition,  if the lender loans the Company
an additional $260,000 by August 8 2003, then the parties agreed that the lender
shall  receive  from  the  Company  a  $50,000  commitment  fee,  which  will be
incorporated into a promissory note with a principal of $310,000,  due March 31,
2004,  and  bearing  interest  at a rate of 10% per annum,  5 year  warrants  to
purchase  10,000,000  shares of common stock of the Company at an exercise price
of $0.01 per share, and 15,000 shares of Series "C" preferred  convertible stock
of the  Company.  If the  lender  loans the  Company  $260,000,  then the pledge
agreement  shall be  cancelled  and the Company will assign all of its rights in
the $650,000 note issued by Now to the Company.  In connection  with the $90,000
loan,  the lender  waived the  default of a $350,000  note  issued by EnFacet in
August 2001, a 100% subsidiary of the Company, and extended the maturity date of
this note to March 31, 2004. In exchange the Company increased the interest rate
of the $350,000 note from 8% to 10% beginning July 1, 2003.

         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 the Company of shares of
its common stock to financially sophisticated individuals who are fully aware of
the Company's activities,  as well as its business and financial condition,  and
who  acquired  said  securities  for  investment  purposes  and  understood  the
ramifications of same.


ITEM 6.  CONTROLS AND PROCEDURES

Based on their evaluation of the  effectiveness  of our disclosure  controls and
procedures within 90 days of the filing date of this report, our Chief Executive
Officer and Chief Accounting Officer have concluded that our disclosure controls
and  procedures  are  effective for  gathering,  analyzing  and  disclosing  the
information  we  are  required  to  disclose  in our  reports  filed  under  the
Securities and Exchange Act of 1934. There have not been significant  changes in
our controls or in other factors that could significantly  affect these controls
subsequent to the evaluation date.


ITEM 7.  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 the Company 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

         The Company is a  multinational  provider of  administrative  software,
internet core technologies, and derivative software application products through
its distribution network. The Company's main administrative  software product is
emPath 6.2,  which is  developed  and  distributed  by Now  Solutions,  LLC, the
Company's  subsidiary.  The Company's primary internet core technologies include
SiteFlash and the Emily XML Scripting  Language,  which can be used to build web
services.  The Company attempts to acquire and operate companies whose products,
in the Company'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.   The  Company's  ownership  interest  is  typically  a
controlling  interest.  The Company's  business  model  combines  complementary,
integrated  software products,  internet core technologies,  and a multinational
distribution  system of partners,  in order to create a distribution matrix that
we believe is capable of penetrating multiple sectors through cross promotion.



                                       31
<PAGE>

         The Company's current products address the following market segments:

<TABLE>
<CAPTION>
MARKET                                        PRODUCT             OWNERSHIP            VERTICAL COMPUTER %
------                                        -------             ---------            -------------------
<S>                                           <C>                 <C>                  <C>
Human Resources and Payroll                   emPath 6.2          Now Solutions                60.00%
Government Sector- Emergency Response         ResponseFlash       Vertical Computer            89.00%
Publishing Content                            NewsFlash           Vertical Computer           100.00%
Higher Education                              UniversityFlash     Vertical Computer           100.00%
Franchises/Independent Agent                  AffiliateFlash      Vertical Computer           100.00%
Database connect XML                          Emily Agent         Vertical Computer           100.00%
Emily XML Scripting Language                  Emily               Vertical Computer           100.00%
Travel                                        Globalfare          Vertical Computer           100.00%  *
Public Sector e-Procurement Service           PublicBuy.net       InetPurchasing                 2.5%  *
Smart Cards                                   TranStar Smartcard  TranStar                       0.0%
</TABLE>

* Vertical  Computer is also  entitled to receive  royalties on sales of certain
iNet Purchasing products and smart cards by TranStar.


         Administrative Software

         The Company's primary administrative software technology is emPath 6.2,
a human resources/payroll software, which is developed,  marketed and maintained
by its subsidiary,  Now Solutions,  LLC. The Company's  administrative  software
programs are web-enabled, meaning that they can be accessed on the Internet, and
exploratory  analysis is being done to develop an application  service  provider
application  for  emPath  6.2.  The  Company  believes  that its  administrative
software  services provide upfront cost savings and  productivity  increases for
everyday operations with competitive set-up charges and implementation times. In
most cases, the administrative software will retain their historic client-server
based  customers  even though an  internet-based  product has been developed for
those customers and new customers.

         Other administrative services the Company either owns, has an ownership
interest,  or derives royalties from include  e-procurement  (iNet  Purchasing),
scheduling,   travel  management   (Globalfare.com,   Inc.),  and  other  common
functions.


         Internet Core Technologies

         Internet core technologies  provide the software  foundation to support
internet-based  platforms for the delivery of individual  software products that
can be sold  independently  or combined with another  software product and rapid
deployment  of all  software  products  throughout  the  Company's  distribution
system.  The Company  acquired its internet core  technologies  and continues to
develop  specialized  software  applications that the Company can utilize in new
products.

         The  Company's  primary core  internet  technology  is  SiteFlash.  The
SiteFlash technology utilizes XML and publishes on the web, enabling the user to
build and efficiently operate websites with the unique ability to separate form,
function,  and content on the Web. SiteFlash uses this advanced  component-based
structure to separate,  parse, and store the various components of even the most
complex web pages, which permits these components to be named, organized,  filed
and  eventually  redeployed  onto the web  pages of a  website.  Once all of the
components of the web page are converted into "objects," they can be grouped, as
required by the user, into the three main types of web page components: content,
form and  function.  Content  consists  of text,  pictures or  multimedia.  Form
includes graphics and web site colors, layout and design. Function refers to the
activities  performed by or actions  executed on the website.  In this way, each
element of a web site created using SiteFlash is interchangeable  with any other
similar  element,  and these  elements  may be  grouped  together  in almost any
combination to create customized web pages and web sites. This unique ability is
patent-pending and has many applications in the web arena.

         The Company  offers  SiteFlash as a  stand-alone  product and also as a
technology  platform for products  targeted at specific  vertical  markets.  The
SiteFlash technology focuses on content management, e-commerce, and workflow and
has led to the development of four  additional  software  application  products:
ResponseFlash, NewsFlash, UniversityFlash, and AffiliateFlash.  ResponseFlash is
currently  being  implemented  with the  Metropolitan  Emergency  Communications
Agency  in  Indianapolis  and  Marion  County,  Indiana.  NewsFlash  is  used by
newspapers (e.g., La Opinion), UniversityFlash is being used in higher education
(e.g.,  California  State  Fullerton  University),  and  SiteFlash  is  used  by
consulting   organizations  for



                                       32
<PAGE>

resale  (e.g.,  Infotec  in  Japan).  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.
Initially,  Government  Internet  Systems,  a majority  owned  subsidiary of the
Company,  will  focus in  marketing  ResponseFlash(TM),  a web  based  emergency
communication  system, in the homeland  security area to all government  sectors
excluding the public education (i.e., schools, colleges, and universities).

         The second core Internet  technology the Company's has developed 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  undergoing  it's a final
beta-testing  phase,  in preparation  for release in the second quarter of 2003.
Utilizing Emily, the Company 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  as the
inventor  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, of his authorship.


Results of Operations


Year Ended December 31, 2002 Compared To Year Ended December 31, 2001

         Total  Revenues.  The  Company  had  total  revenues  of  approximately
$8,058,000  and  $4,156,000  in the  years  ended  December  31,  2002 and 2001,
respectively.  The  increase in total  revenue was  approximately  $3.9  million
representing  94%  increase  compared  to the  total  revenue  in  2001.  Of the
$8,058,000  in 2002 and  $4,156,000  in 2001,  $7.9  million  and $4.0  million,
respectively,  related to the business operations of Now Solutions, a subsidiary
in which the Company owns a 60% interest.  The Company acquired the 60% interest
in Now Solutions in February 2001.

         The total revenues primarily consist of software  licenses,  consulting
and maintenance fees. The revenue from license and maintenance in 2002 increased
by approximately  $4 million  compared to the same type of revenue  generated in
2001,  representing  approximately  180%  increase,  due to a full 12  months of
operation and  maintenance  revenues for 2002 as compared to 2001,  and sales of
its new product,  Empath 6.2. Software  development revenue in 2002 decreased by
approximately  $477,000 compared the same type of revenue in 2001,  representing
approximately  90%  decrease,  due to the fact that Now Solution  received  less
orders  for  software  development.  Consulting  revenue  in 2002  increased  by
approximately   $160,000   compared  to  the  same  type  of  revenue  in  2001,
representing  approximately 12% increase,  due to the regular increase in client
base. Other revenue in 2002 increased by approximately  $181,000 compared to the
same type revenue in 2001, representing  approximately 184% increase, due to the
new business obtained by Now Solutions and the Company's California operation.

         Selling,  General and Administrative Expenses. The Company had selling,
general  and   administrative   expenses  of   approximately   $10,387,000   and
approximately  $13,297,000  in the  years  ended  December  31,  2002 and  2001,
respectively. The total operating expenses in 2002 decreased by approximately $3
million compared to the operating expenses in 2001,  representing  approximately
23% decrease.  Of the $10,387,000 in 2002 and $13,297,000 in 2001, Now Solutions
accounted for $6.5 million and $5.4 million, respectively.

The $3 million of  decrease  was  primarily  attributable  to  decreases  in the
following  expenses:  a  decrease  in  goodwill  amortization  of  approximately
$575,000 (the Company stopped goodwill amortization since January 1, 2002) which
incurred in 2001; a decrease in the  provision of $1.1 million  against  certain
investments in the Company's  books incurred in 2001,  decrease in attorney fees
of approximately  $790,000  primarily related to less activities  regarding fund
raising,  patents and trademarks and settlements of lawsuits in 2002, a decrease
of  $200,000  financing  costs which were  incurred  in 2001,  and a decrease of
approximately $1.29 million in consulting and investor  relationship expenses in
2002.  In the  meantime,  the



                                       33
<PAGE>

Company incurred a goodwill impairment loss of approximately $638,000, a loss of
approximately  $42,000 on disposal of fixed assets, and other expense categories
of   approximately   275,000,   all  of  which  offset  the  total  decrease  by
approximately $955,000 in 2002.

         Operating  Loss.  The Company had an  operating  loss of  approximately
$2,229,000  and  $9,140,000  in the  years  ended  December  31,  2002 and 2001,
respectively.  The  operating  loss  decreased  by  approximately  $6.9  million
compared to the operating loss in 2001, representing a decrease of approximately
76%. The decrease was primarily  attributable  to the combination of an increase
in revenue  of $3.9  million  and a decrease  in the  operating  expenses  by $3
million.  The  major  factor  in the  decrease  in  operating  loss in 2002  was
attributed  to the operating  profit  position in Now  Solutions.  Now Solutions
generated  total  revenue of  approximately  $7.9  million  and total  operating
expenses of  approximately  $6.5  million,  resulting in an operating  profit of
approximately  $1.4 million  compared to the operating  loss of $1.36 million in
2001 with ten months of operation,  representing a turn around of  approximately
203%.  However,  the  operating  profit  was  offset  by the  operating  loss of
approximately $3.63 million in the Company's California operation.

         Interest Expense.  The Company had an interest expense of approximately
$626,000  and  $724,000  for  the  years  ended  December  31,  2002  and  2001,
respectively.  Interest  expense  decreased in 2002 by $73,000,  representing  a
decrease of approximately 10%, compared to the same type of expense in 2001. The
decrease was primarily  related to the reduction in long and short term of debts
due mainly to the  reduction  of a $425,000  note in 2002 by issuing  51,303,932
shares of common stock and  conversion of convertible  debt by $160,000.  Of the
total  interest  expense of $626,000 in 2002 and $724,000 in 2001, Now Solutions
accounted  for  approximately  $431,000  for the both years.  As of December 31,
2002,  the total  outstanding  notes  payable at Now  Solutions  were reduced by
approximately  $1.2 million compared to the outstanding notes payable balance as
of December 31, 2001.

         Minority  Interest.  The minority  interest as of December 31, 2002 was
approximately  $299,000  compared to $0 of minority  interest as of December 31,
2001. The change was due to a 40% shared loss of approximately $667,000 incurred
for the year  December 31, 2001 (which offset the initial  minority  interest of
approximately  $667,000 when the acquisition  transaction took place in February
2001.) whereas a 40% shared net income of  approximately  $299,000 (after making
up the loss presumed by the Company in 2001)  incurred  attributable  to the net
income position of Now Solutions in 2002.

         Net Loss. The Company had a net loss of $3.23 million and $9.03 million
for the years ended December 31, 2002 and 2001,  respectively.  Net loss in 2002
decreased  by   approximately   $5.8   million,   representing   a  decrease  of
approximately  64%.. The decrease of $5.8 million was primarily  attributable to
the  combination  of an increase in revenue by  approximately  $3.9  million,  a
decrease in $3.0 million in operating expenses, an increase in other expenses by
approximately  $92,000,  an  increase  in  minority  interest  by  approximately
$966,000, and an increase in income tax expense of $44,000.

         Dividends  Applicable to Preferred  Stock.  The Company 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 Series A were
approximately  $400,000 and  $489,000 for the years ended  December 31, 2002 and
2001,  respectively.  The Company also has  outstanding  Series C 4% convertible
cumulated  preferred stock that accrues dividends at a rate of 4% on a quarterly
basis.  The  dividends  applicable to Series C were  approximately  $200,000 and
$25,000 for the years ended December 31, 2002 and 2001, respectively.

         Net Loss Available to Common  Stockholders.  The Company had a net loss
attributed to common stockholders of $3.8 million and $9.5 million for the years
ended December 31, 2002 and 2001,  respectively.  Net loss  attributed to common
stockholders decreased by approximately $5.7 million, representing a decrease of
approximately 61%, compared to the net loss attributed to common stockholders in
2001.

         Net Loss Per Share.  The  Company had a net loss per share of $0.01 and
$0.02 for the years ended December 31, 2002 and 2001, respectively. The net loss
for 2002 decreased by $0.01,  representing  a 50% decrease,  compared to the net
loss per share for 2001.  The  decrease  was due to the net loss  attributed  to
common  stockholders which decreased and the weighted average shares outstanding
which increased  compared to the net loss attributed to common  stockholders and
weighted average shares outstanding in 2001

Financial Condition, Liquidity, Capital Resources And Recent Developments

         Net  cash  generated  from  operating  activities  for the  year  ended
December  31,  2002 was  approximately  $459,000.  This  positive  cash flow was
primarily  related to a net loss of $3.324  million  adjusted by total  non-cash
items of approximately  $2.319 million (including  depreciation and amortization
of  approximately  $1.3  million,  the  largest  item),  an increase in accounts
receivable  of  approximately  $1.108  million and an increase in related  party
receivable of  approximately



                                       34
<PAGE>

$113,000,  offset by increases in all liabilities items of approximately  $2.364
million and a decrease in other receivable of approximately 321,000.

         Net cash used in investing  activities  for the year ended December 31,
2001 was approximately  $6,000, which consisted of the purchase of equipment and
software of approximately  $87,000 and proceeds from selling marketable security
of approximately $81,000, resulting net cash outflow of approximately $6,000.

         Net cash used in financing  activities  for the year ended December 31,
2002 was approximately  $352,000,  consisting primarily of proceeds from issuing
notes  payable of  approximately  $805,000,  issuing  common  stock of  $15,000,
issuing convertible  debentures of $100,000,  and the release of restricted cash
of approximately  $1.216 million and offset by an increase in restricted cash of
$650,000 and repayments of note payable of approximately $1.838 million.

         The  total  change  in cash and  cash  equivalents  for the year  ended
December  31,  2002 was  approximately  $100,600,  representing  an  increase of
approximately 102% compared to the negative cash change of approximately  $4.753
million for the year ended December 31, 2001.

         Since 1999, the Company has been entirely dependent on external cash to
support its  operations.  In the past three years,  the Company has financed its
operations through the sale of securities, including common and preferred stock,
convertible debts, and notes payable.

         At December 31, 2002,  the Company had  cash-on-hand  of  approximately
$946,000,  which  incorporates  Now  Solutions'  cash-on-hand  of  approximately
$945,000.  As of June 30, 2003, the Company had  cash-on-hand  of  approximately
$1,878,265,  which  incorporates  Now Solutions'  cash-on-hand of  approximately
$1,859,971.  This cash-on-hand is not available to fund the Company's operations
due to a court order  obtained by Arglen and bank  covenants.  In July 2003, the
Company  filed  a  motion  to  permit  Now   Solutions,   LLC  to  make  certain
distributions  permitted under the Now Solutions' LLC operating agreement to the
Company.

         Since  December 31, 2002,  the Company has received  gross  proceeds of
$200,000 from the sale of convertible debentures. As of the date of this filing,
the  Company  believes  that it had  sufficient  funds  available  to  fund  its
operations for one month. Thereafter,  the Company will need to raise additional
funds through selling securities or obtaining loans. The Company's  inability to
raise  such  funds  will  significantly   jeopardize  its  ability  to  continue
operations.  The  Company'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.  The Company's  monthly cost of operations is
approximately  $135,000  (excluding  the  operations  of  Now  Solutions,   LLC)
consisting of salaries,  rent, and  professional  fees (legal,  accounting,  and
investor relations).  In addition to the monthly operating cost, the Company has
principal  and  interest  payments due on notes  payable.  Below are the minimum
principal  payments  on notes  payable  of the  Company,  including  the year of
payment:

                                      Amount (including      Amount (excluding
      Year ending December 31,            Now Solutions          Now Solutions)
      ------------------------      --------------------- ---------------------
      2003                                   $ 2,801,882             $ 965,174
      2004                                     2,625,648               145,110
      2005                                       123,875               123,875
      Total                                  $ 5,551,405           $ 1,234,159

The Company does not have sufficient funds available to meet these  obligations.
The Company will need to raise  significant  funds to meet these  obligations or
secure the  release  of funds that is  entitled  to receive  from Now  Solutions
pursuant  to the  operating  agreement  and  pending  approval  of the  court in
connection with its arbitration with Arglen  Acquisitions  (minority  partner of
Now  Solutions).  Other than the  Equity  Line of Credit  discussed  below and a
potential  loan from a third  party  whereby  the lender  might loan the Company
$260,000,  the Company does not have any commitments for funding.  The Company's
independent  accountants  have issued a going  concern  opinion in its financial
statements that raise  substantial doubt about the Company's ability to continue
as a going concern.  This going concern  opinion was issued due to the Company's
significant  recurring  operating  losses,  the  substantial  funds  used in its
operations and the need to raise additional  funds to meet its obligations.  The
Company's  ability to continue as a going concern is dependent on its ability to
raise additional funds and to establish profitable operations.



                                       35
<PAGE>

         In April  2003,  a new Equity  Line of Credit  Agreement  was  executed
between  the  Company  and  Cornell  Capital  Partners,   L.P.,  whereby  up  to
$10,000,000  worth of the Company's common stock may be purchased.  Prior to the
execution of the Equity Line of Credit  Agreement,  the Company  terminated  the
previous Equity Line of Credit  Agreement.  The shares must be registered before
the sale, and the shares can be purchased at 99% of the lowest closing bid price
during the 5 trading  days after the Company  requests an advance,  but not less
than the minimum advance price per share set by the Company.  The Equity Line of
Credit  Agreement  contains a commitment  fee of $190,000,  payable in cash or a
convertible  debenture  to be issued to Cornell and a placement  fee of $10,000,
payable to the third party  placement  agent.  The debenture may be redeemed for
100% of the any  portion of the  principal  that had not been  converted  by the
holder as of the date of the notice of redemption.  The debenture  provides that
after 180 days,  the holder may convert any portion of the  principal at 100% of
the lowest closing bid price 5 days prior to conversion.

         In April 2003, the Company issued  $200,000 of convertible  debentures.
The debt accrues interest at 5% per annum and is due April 2008. As of August 1,
2003 no conversions have taken place.

         In  connection  with the  purchase  of the Human  Resource  Information
Application  Software  assets  of  Ross  Systems,   Inc.,  Now  Solutions  ("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. In February 2002, Now Solutions is withholding
its payments on the remaining $750,000 note due February 2003 against the unpaid
maintenance  fees and gave notice in February 2003 to Ross Systems,  Inc. (Ross)
of Now Solutions'  claim of offset.  Now Solutions has claimed a total amount of
approximately $3,562,000 to offset against the note. In March 2003, Ross filed a
motion  for  summary  judgment  in lieu of a  complaint  against  the  Company's
subsidiary,  Now Solutions to collect the note payable in the amount of $750,000
issued by Now Solutions in connection with the asset purchase  agreement between
Now Solutions and Ross, plus 10% interest.

         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.
The lender has the option to demand full payment by February 2004.

         The Company 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.  In October  2002,  Now  Solutions and its lender,
Coast Business Credit ("Coast") agreed to amend the Loan and Security Agreement,
dated  February  28,  2001 (the "Loan  Agreement").  Also in October  2002,  the
Company and the Lender  agreed to amend the Deposit  Account  Pledge  Agreement,
dated  February  28, 2001 (the "Pledge  Agreement").  In these  amendments,  the
lender  agreed  to  waive  certain  defaults  by Now  Solutions  under  the Loan
Agreement  and  Pledge  Agreement,   including   non-compliance  with  financial
covenants and non-delivery of financial statements,  and to modify the financial
covenants. In exchange, the Company agreed to amend the provisions of the Pledge
Agreement  related to its ability to withdraw  amounts  pledged to the lender as
collateral.  Under the amended  terms of the Pledge  Agreement,  the company was
entitled to withdraw  $383,333 from the deposit account,  plus $91,667 per month
commencing  in October  2002,  provided  that:  (a) Now  Solutions  has made the
preceding  monthly  payment on the  principal  and (b) Now  Solutions  is not in
default  of or has not cured  certain  covenants  under the Loan  Agreement.  In
February  2003,  the Company was notified that  Southern  Pacific Bank went into
FDIC receivership. Coast Business Credit is a division of Southern Pacific Bank.
The FDIC froze $750,000, which was the remaining amount of the Company's deposit
account  pledged on behalf of Now  Solutions  on the date of the notice.  Of the
remaining $750,000,  the Company received $100,000,  which is that portion which
was insured by the FDIC. The uninsured  portion of the remaining  balance of the
deposit pledge account,  which is $650,000,  was applied to the outstanding debt
of the Coast loan to Now  Solutions  to reduce  the  monthly  interest  and loan
balance.  The  remaining  $650,000  will be in the form of a note  issued by Now
Solutions  to the Company at interest  paid monthly at a rate equal to the Coast
loan  interest  rate and  principal  due on  December  31,  2004,  or earlier if
practicable under the terms of the loan from Coast and approved by the executive
committee.

         The Company is currently involved in a dispute with Arglen Acquisitions
LLC  (Arglen),  a  member  of  Now  Solutions,  LLC,  concerning  the  Company's
subsidiary  Now  Solutions.  In  April  2002 the  Company  appointed  the  fifth
representative  of Now Solutions'  Executive  committee giving Vertical computer
three  representatives.  Also in April 2002, the Company  received a letter from
Arglen  accusing  the  Company  of  defaulting  on  its  obligations  under  Now
Solutions' Operating Agreement by failing to obtain a waiver of default from Now
Solutions'  lender,  Coast.  The letter  further  stated  that the  default  has
triggered the dissolution of Now Solutions,  and authorized Arglen  Acquisitions
to acquire the  Company's  ownership  interest in



                                       36
<PAGE>

Now  Solutions  at a  discounted  price.  In  May  2002,  the  Company  demanded
arbitration  from Arglen  Acquisitions  seeking to enforce its rights  under the
Operating  Agreement.  Also in May 2002, Arglen  Acquisitions filed a Demand for
Arbitration  and Statement of Claim against the Company.  In its demand,  Arglen
Acquisitions  alleged that the Company was in default of its  obligations  under
the  Operating  Agreement.  Arglen  also  sought  to  enjoin  the  Company  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 the Company's interest
in Now Solutions.  The Company  believes that Arglen's  allegations  are without
merit.  In August  2002,  the Company  prevailed on four of the five motions and
remains  in  control  of  the  executive   committee  with  three  of  the  five
representatives  on the  committee.  The only  restriction  until the outcome of
arbitration is the Company is not allowed to increase its management fees or any
other monies other than for reimbursement for insurance  incurred by the Company
on behalf of Now Solutions  unless the court  approves the Company's  request to
have  additional  monies  released that the Company is entitled  pursuant to the
operating  agreement.  In July 2003,  the  Company  filed a motion to permit Now
Solutions,  LLC to make certain distributions permitted under the Now Solutions'
LLC operating agreement to the Company.

         In February 2003,  the Company filed a lawsuit and a derivative  action
in New York Supreme Court Case against  defendants Ross Systems,  Inc. ("Ross"),
Arglen  Acquisitions,  LLC ("Arglen"),  James Patrick Tinley,  and Garry Gyselen
("Gyselen"). Vertical filed a derivative action on behalf of its subsidiary, Now
Solutions,  when  Arglen,  a member of Now  Solutions,  refused to  authorize  a
lawsuit  against  any parties  who were  alleged to have acted  against the best
interest of Now  Solutions.  The Company  seeks  damages  and  equitable  relief
arising out of actions of the defendants constituting breach of contract, fraud,
conspiracy and breach of fiduciary duty in connection with certain  transactions
entered  into between Ross and Now  Solutions;  Ross and Arglen,  Arglen and Now
Solutions,  Gyselen and Now Solutions,  and VCSY and Arglen. The action concerns
offsets Now Solutions was entitled to per the asset purchase agreement from Ross
regarding  the HRIS  assets  Now  Solutions  purchased  from  Ross in  2001,  an
undisclosed transaction between Ross and Gyselen around the time of the purchase
of these  assets,  and the failure of Gyselen to enforce  the offset  provisions
which caused Coast Business Credit to declare Now Solutions in default of a loan
covenant in 2001 (which has since been cured).


Critical Accounting Policies

Use of Estimates

         The  preparation of financial  statements in conformity with accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of  financial  statements  and the  reported  amounts  of  revenue  and
expenses  during the  reporting  period.  Among the more  significant  estimates
included in these financial  statements are the estimated allowance for doubtful
accounts receivable and the deferred income tax asset allowance.  Actual results
could materially differ from those estimates.

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. During 2002 and
2001 no software development costs were capitalized.

Impairment of Long-Lived Assets

         Effective January 1, 2002, the Company began applying the provisions of
Statement  of  Financial  Accounting  Standard  No.  144,  "Accounting  for  the
Impairment or Disposal of  Long-Lived  Assets"  ("SFAS No.  144").  SFAS No. 144
requires that  long-lived  assets be reviewed for impairment  whenever events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be recoverable through the estimated  undiscounted cash flows expected to result
from  the  use  and  eventual  disposition  of the  assets.  Whenever  any  such
impairment exists, an impairment loss will be recognized for the amount by which
the carrying value exceeds the fair value.  During 2002, the Company  determined
that there was  approximately  $638,000 of  impairment  in  goodwill,  which was
located in Enfacet, Inc.

Revenue Recognition

         Service  revenue  generated from  professional  consulting and training
services are  recognized  as the services are  performed.  Maintenance  revenue,
including revenues bundled with original software product license revenues,  are
deferred and  recognized  over the related  contract  period,  generally  twelve
moths. The Company's  revenue  recognition  policies are designed to comply with
American Institute of Certified Public  Accountants  Statement of Position 97-2,
"Software  Revenue  Recognition"  (SOP 97-2) and with Emerging Issues Task Force
Issued No 00-21,  "Revenue  Arrangement  with Multiple  Deliverables."  Deferred
revenue on maintenance  contracts represent cash received in advance or accounts
receivable from system and service  consulting  sales,  which is recognized over
the life of the contact.

                                       37
<PAGE>

         In  accordance  with SEC Staff  Accounting  Bulletin  No. 101  "Revenue
Recognition  in  Financial  Statements",  the Company  recognizes  revenue  from
license of computer software  "up-front"  provide that a non-cancelable  license
agreement  has been signed,  the software  and related  documentation  have been
shipped,  there are no material  uncertainties  regarding  customer  acceptance,
collection of resulting receivable is deemed probable,  and no significant other
vendor obligation exist.

Stock-Based Compensation

         The Company has adopted the intrinsic  value method of  accounting  for
employee  stock  options as  permitted  by  Statement  of  Financial  Accounting
Standards No. 123, "Accounting for Stock-based  Compensation" (SFAS No. 123) and
discloses  the pro  forma  effect  on net loss and loss per share as if the fair
value based method had been applied.  For equity  instruments,  including  stock
options,  issued to non-employees,  the fair value of the equity  instruments or
the  fair  value  of the  consideration  received,  whichever  is  more  readily
determinable,  is used to determine the value of services or goods  received and
the corresponding charge to operations.

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".

New Accounting Pronouncements

Goodwill and Other Intangible Assets

         Effective  January 1, 2002, the Company adopted  Statement of Financial
Accounting  Standards  No. 142  Goodwill and Other  Intangible  Assets (SFAS No.
142). Under SFAS No. 142,  goodwill and indefinite life intangible assets are no
longer amortized but will be reviewed annually, or more frequently if impairment
indicators arise, for impairment.  The Company  discontinued the amortization of
its goodwill balances  effective January 1, 2002. In accordance with the testing
requirements  provided under SFAS No. 142, the Company determined that there was
no impairment on goodwill during the year ended December 31, 2002.

         In  accordance  with SFAS No. 142,  prior period  amortization  was not
restated. A reconciliation of reported net income to net income adjusted for the
exclusion of  amortization  of goodwill and indefinite  life  intangible  assets
follows:

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                              -----------------------------------
                                                                                   2002                2001
                                                                              ----------------     --------------
<S>                                                                           <C>                  <C>
Reported net loss, applicable to common stockholders                          $   (3,924,210)      $ (9,546,607)
Add back: Goodwill amortization                                                             -           574,798,
                                                                              ----------------     --------------
Adjusted net loss                                                                 (3,924,210)        (8,971,809)

Basic and diluted weighted average number of common shares outstanding            625,499,641        585,745,815

Basic and diluted loss per share                                              $        (0.01)      $      (0.02)

Adjusted basic and diluted loss earnings per share                            $        (0.01)      $      (0.02)
                                                                              ----------------     --------------
</TABLE>




                                       38
<PAGE>

Adoption of SFAS No. 145

         In  April  2002,  FASB  issued   Statement  No.  145  (SFAS  No.  145),
"Rescission of FASB  Statements  No. 4, 44, and 64,  Amendment of FASB Statement
No. 13, and  Technical  Corrections"  effective on or after May 15,  2002.  This
Statement  rescinds SFAS No. 4 and an amendment of that Statement,  and SFAS No.
64. This Statement also rescinds SFAS No. 44. This Statement amends SFAS No. 13,
to eliminate an inconsistency  between the required accounting for certain lease
modifications  that have  economic  effects  that are similar to  sale-leaseback
transactions.   This  Statement   also  amends  other   existing   authoritative
pronouncements  to make  various  technical  corrections,  clarify  meanings  or
describe their applicability under changed conditions.  The adoption of SFAS No.
145 did not have a  material  effect  on the  Company's  financial  position  or
results of operations.

Adoption of SFAS No. 148

         In  December  2002,  FASB  issued  Statement  No.  148 (SFAS No.  148),
"Accounting  for  Stock-Based  Compensation  -- Transition  and Disclosure -- an
amendment  of FASB  Statement  No.  123."  SFAS No.  148  amends  SFAS No.  123,
"Accounting for Stock-Based  Compensation,"  to provide  alternative  methods of
transition  for a voluntary  change to the fair value based method of accounting
for  stock-based  employee  compensation.  In addition,  SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee  compensation and the effect of the method used on reported
results. SFAS No 148 is effective for the Company's financial statements for the
year ending after  December 15, 2002.  As permitted by SFAS No. 148, the Company
has elected to retain the intrinsic  value method of accounting for  stock-based
awards granted to employees.  Accordingly,  the adoption of SFAS No. 148 did not
have a  material  effect on the  Company's  financial  position  or  results  of
operations.

         New Accounting Announcements Not Adopted Yet

         In June  2001,  Financial  Accounting  Standards  Board  (FASB)  issued
Statement No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations,"
effective for fiscal years beginning after June 15, 2002. The Statement requires
entities  to  record  the fair  value  of a  liability  for an asset  retirement
obligation  in the  period  in  which it is  incurred.  When  the  liability  is
initially  recorded,  the entity  capitalizes a cost by increasing  the carrying
amount of the related  long-lived asset. Over time, the liability is accreted to
its present value each period,  and the capitalized cost is depreciated over the
useful life of the related asset.  Upon  settlement of the liability,  an entity
either settles the  obligation for its recorded  amount or incurs a gain or loss
upon settlement. The adoption of SFAS No. 143 is not expected to have a material
effect on the Company's financial position or results of operations.

         In June 2002, FASB issued Statement No. 146 (SFAS No. 146), "Accounting
for Costs Associated with Exit or Disposal Activities," effective for activities
that are initiated after December 31, 2002, with early  application  encouraged.
This Statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other  Costs to Exit an  Activity  (including  Certain  Costs  Incurred in a
Restructuring)." The adoption of SFAS No. 146 is not expected to have a material
effect on the Company's financial position or results of operations.

         In May 2003, FASB issued Statement No. 150 (SFAS No. 150),  "Accounting
for Certain  Instruments with  Characteristics  of Both Liabilities and Equity."
SFAS No. 150  establishes  standards on the  classification  and  measurement of
financial  instruments with characteristics of both liabilities and equity. SFAS
No. 150 will be effective  for  financial  instruments  entered into or modified
after May 31,  2003.  The Company is in the process of  assessing  the effect of
SFAS No. 150 and does not expect  the  implementation  of SFAS No. 150 to have a
material effect on its financial statements.

         In November  2002,  FASB issued  Interpretation  No. 45 ("FIN No. 45"),
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees  of  Indebtedness  of  Others."  FIN No. 45  expands on the
accounting  guidance of Statements No. 5, 57, and 107 and  incorporates  without
change the provisions of FASB  Interpretation No. 34, which is being superseded.
FIN No. 45 will  affect  leasing  transactions  involving  residual  guarantees,
vendor and manufacturer guarantees, and tax and environmental  indemnities.  All
such  guarantees  will  need  to be  disclosed  in the  notes  to the  financial
statements  starting  with the  period  ending  after  December  15,  2002.  For
guarantees issued after December 31, 2002, the fair value of the obligation must
be reported on the balance sheet.  Existing guarantees will be grandfathered and
will not be recognized  on the balance  sheet.  The Company  believes that there
will be no impact on our financial position and results of operations due to the
application of FIN No. 45.




                                       39
<PAGE>

         In January 2003, FASB issued FASB  Interpretation  No. 46 (FIN No. 46),
"Consolidation of Variable  Interest  Entities," an interpretation of Accounting
Research  Bulletin  No.  51,  "Consolidated  Financial  Statements."  FIN No. 46
explains  how to  identify  variable  interest  entities  and how an  enterprise
assesses its interest in a variable entity to decide whether to consolidate that
entity. FIN No. 46 requires existing  unconsolidated  variable interest entities
to be  consolidated  by  their  primary  beneficiaries  if the  entities  do not
effectively  disperse  risks among  parties  involved.  FIN No. 46 is  effective
immediately  for variable  interest  entities  after  January 31,  2003,  and to
variable  interest  entities in which an enterprise  obtained an interest  after
that  date.  FIN No. 46  applies  in the first  fiscal  year or  interim  period
beginning  after  June 15,  2003,  to  variable  interest  entities  in which an
enterprise  holds a variable  interest that it acquired before February 1, 2003.
The  adoption  of FIN No. 46 is not  expected  to have a material  effect on the
Company's financial position and result of operations.


Factors  Affecting  the  Company'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, 2002
and 2001, we had net losses  applicable to common  shareholders  of $(3,924,210)
and $(9,546,607),  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.




                                       40
<PAGE>

         We May Not Collect the $650,000  Pledged  Cash That Was  Converted to a
         Note Receivable in 2003 from Now Solutions,  Our 60% Owned  Subsidiary,
         Now  Solutions,  Nor Receive  Distributions  We Are Entitled To Receive
         Pursuant To The Operating Agreement of Now Solutions.  Vertical May Not
         Recover  These  Monies From Now  Solutions.  The Failure To Receive The
         Monies  From Our  Subsidiary  May  Jeopardize  Our  Ability To Continue
         Operations 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 $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.
The lender has the option to demand full payment by February  2004.  The Company
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. In February 2003,  the Company was notified that Southern  Pacific Bank
went into FDIC  receivership.  Coast  Business  Credit  (Coast) is a division of
Southern  Pacific Bank. The FDIC froze $750,000,  which was the remaining amount
of the Company's  deposit account pledged on behalf of Now Solutions on the date
of the notice. Of the remaining $750,000,  the Company received $100,000,  which
is that  portion  which was insured by the FDIC.  The  uninsured  portion of the
remaining balance of the deposit pledge account,  which is $650,000, was applied
to the outstanding debt of the Coast loan to Now Solutions to reduce the monthly
interest and loan balance.  The remaining $650,000 will be in the form of a note
issued by Now  Solutions to the Company at interest paid monthly at a rate equal
to the Coast loan  interest  rate and  principal  due on December 31,  2004,  or
earlier if  practicable  under the terms of the loan from Coast and  approved by
the executive committee.

         Pursuant to the operating agreement, the Company is entitled to receive
certain distributions and reimbursements from Now Solutions.  However,  pursuant
to a preliminary  injunction  in connection  with  Vertical's  arbitration  with
Arglen Acquisitions, LLC (the minority owner of Now Solutions),  Vertical is not
allowed to  increase  its  management  fees or any other  monies  other than for
reimbursement  for insurance  incurred by the Company on behalf of Now Solutions
until the outcome of  arbitration  is the Company  unless the court approves the
Company's  request  to have  additional  monies  released  that the  Company  is
entitled pursuant to the operating agreement.  In July 2003, the Company filed a
motion to permit Now  Solutions,  LLC to make  certain  distributions  permitted
under the Now  Solutions' LLC operating  agreement to the Company.  Vertical may
not recover these monies.


         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

         The Company has funding that is expected to be  sufficient  to fund its
present operations for one month. After one month, the Company's  operations may
need to be curtailed or suspended if  additional  funding is not  received.  The
Company,  however, will need significant additional funding in order to complete
its business plan  objectives.  Accordingly,  the Company 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  the Company will raise
sufficient  capital to execute its business  plan. In the event that the Company
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,  2002 Were Not  Sufficient  To  Satisfy  Our  Current
         Liabilities On That Date

         We  had a  working  capital  deficit  of  approximately  $6,000,000  at
December 31, 2002, which means that our current liabilities exceeded our current
assets by approximately $6,000,000.  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



                                       41
<PAGE>

         capital deficit means that our current assets on December 31, 2002 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, 2002.  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 demands for Now Solutions' emPath product;

         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;

         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.


         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
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;



                                       42
<PAGE>

         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.


         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;



                                       43
<PAGE>

         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.


         The  Company's  Operating  Expenses  May  Increase  And The Company 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.

         The  Company's  ability to continue as a going  concern is dependent on
         its  ability  to raise  additional  funds and to  establish  profitable
         operations.

         The accompanying  consolidated financial statements for the years ended
December 31, 2002 and 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, 2002, the Company had
stockholders'   deficit  of  $2.9  million  and  negative   working  capital  of
approximately $6 million (although it includes deferred revenue of approximately
$2.6  million)  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.

         Management  of the Company is  continuing  its efforts to secure  funds
through  equity  and/or  debt  instruments  for its  operations,  expansion  and
possible   acquisitions,   mergers,   joint  ventures,   and/or  other  business
combinations.  In April 2003,  the Equity Line of Credit  Agreement  executed in
August  2001 was  cancelled  and the Company  entered  into a new Equity Line of
Credit Agreement with Cornell Capital  Partners,  L.P. Under this new agreement,
the Company may issue and sell to Cornell  Capital  Partners  common stock for a
total purchase price of up to $10 million. In accordance with the new agreement,
the Company  will be entitled  to  commence  drawing  down on the equity line of
credit upon the effectiveness of a Registration Statement registering the shares
to be issued under this new agreement.  The Company will require additional fund
for its  operations  and pay  down  its  liabilities,  as  well as  finance  its
expansion plans consistent with the Company's  anticipated changes in operations
and infrastructure.  However, there can be no assurance that the Company will be
able to secure  additional fund and that if such fund is available,  whether the
terms or  conditions  would be acceptable to the Company and whether the Company
will be able to turn into a profitable  position and generate positive operating
cash flow. The consolidated  financial  statements contain no adjustment for the
outcome of this uncertainty.

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




                                       44
<PAGE>

Item 8. Consolidated Financial Statements

                Vertical Computer Systems, Inc. and Subsidiaries


                                    Contents


Report of Independent Certified Public Accountants.........................F-2

Consolidated Financial Statements:
Consolidated Balance Sheets................................................F-3
Consolidated Statements of Operations and Other Comprehensive Loss.........F-5
Consolidated Statements of Stockholders' Equity............................F-6
Consolidated Statements of Cash Flows......................................F-10

Notes to Consolidated Financial Statements.................................F-12






                                      F-1
<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  sheets  of  Vertical
Computer Systems,  Inc. and Subsidiaries as of December 31, 2002 and 2001and the
related  consolidated  statements of operations  and other  comprehensive  loss,
stockholders'  deficit  and cash  flows for each of the two years in the  period
ended  December  31,  2002.  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, 2002 and 2001 and the results
of their operations and cash flows for each of the two years in the period ended
December 31, 2002 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, 2002, the Company had negative working capital of
approximately  $6 million,  a  stockholders'  deficit of $2.9  million,  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
May 27, 2003






                                      F-2
<PAGE>

Item 8. Consolidated Financial Statements

                Vertical Computer Systems, Inc. and Subsidiaries
          Consolidated Balance Sheets as of December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                                  December 31,    December 31,
Assets                                                                               2002             2001
                                                                                  -----------      -----------
Current Assets
<S>                                                                               <C>              <C>
              Cash                                                                $   946,035      $   845,459
              Pledged Cash  (note 3)                                                  650,000
                                                                                  -----------      -----------
              Restricted cash  (note 3)                                               284,357        1,500,000
              Securities available for sale                                             2,812          176,000
              Accounts receivable, net of allowance for bad debts of
              $129,252 and $73,650                                                  2,058,306        1,041,601
              Other receivable (note 9)                                                98,505          419,489
              Employee receivables                                                    158,264           44,887
              Deferred tax asset - current portion (note 11)                           70,000               --
              Prepaid expenses and other assets                                        76,855           77,884
                                                                                  -----------      -----------

Total Current Assets                                                              $ 4,345,134      $ 4,105,320

Property and equipment, net of accumulated depreciation  (note 7)                     367,858          514,143
Goodwill and other intangibles, net  (note 6)                                       6,002,683        7,724,618
Deferred tax asset - long-term  (note 11)                                             366,000               --
Deposits and other                                                                      4,000           20,506
                                                                                  -----------      -----------
Total Assets                                                                      $11,085,675      $12,364,587
                                                                                  ===========      ===========

Liabilities, Convertible Preferred Stock and Stockholder's Equity/ (Deficit)

Current liabilities
              Accounts payable and accrued liabilities (note 8)                   $ 3,416,026      $ 1,925,893
              Deferred revenue                                                      2,568,840        2,243,375
              Payables to officers
                                                                                       50,464
              Accrued income taxes (note 11)                                          480,000
              Accrued dividends                                                     1,113,712          513,712
              Current portion-notes payable (note 10)                               2,650,971        5,908,662
                                                                                  -----------      -----------

Total current liabilities                                                         $10,280,013      $10,591,642

              Convertible debt (note 10)                                              205,000          265,000
              Note payable, net of discount and current portion (note 10)           3,001,712        1,305,000
                                                                                  -----------      -----------
Total liabilities                                                                 $13,486,725      $12,161,642
</TABLE>



See accompanying notes to the consolidated financial statements.



                                      F-3
<PAGE>





                Vertical Computer Systems, Inc. and Subsidiaries
           Consolidated Balance Sheet as of December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                                             December 31,       December 31,
                                                                                                 2002               2001
                                                                                             ------------       ------------
Series B 10% Convertible Preferred stock; $0.001 Par Value; 375,000
<S>                                                                                          <C>                <C>
              Shares authorized; 7,200 shares issued and outstanding                               45,000             45,000

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

Minority interest                                                                                 299,283                 --

Stockholders' Equity/(Deficit)

Common Stock; $.00001 par value; 1,000,000,000 shares authorized
              726,884,934 issued and outstanding                                                    7,270              6,153

              Series A 4% Convertible Cumulative Preferred stock; $0.001 par value;
              250,000 shares authorized;
              50,000 shares issued and outstanding (note 13)                                           50                 50

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

Series C 4%  Convertible  Preferred  stock; $100.00 par value; 200,000
              shares authorized; 80,000 shares issued
              50,000 shares outstanding                                                           350,000            350,000

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

              Subscription Receivable                                                                  --             (2,000)

              Additional paid-in-capital                                                       25,687,963         24,670,149

              Accumulated deficit                                                             (28,946,867)       (25,022,657)
                                                                                             ------------       ------------

Total Stockholders' equity/(deficit)                                                           (2,901,583)             1,695

Total liabilities and stockholders' equity/(deficit)                                         $ 11,085,675       $ 12,364,587
                                                                                             ============       ============
</TABLE>



See accompanying notes to the consolidated financial statements



                                      F-4
<PAGE>


                Vertical Computer Systems, Inc. and Subsidiaries
       Consolidated Statements of Operations and Other Comprehensive Loss
                 For the Years Ended December 31, 2002 and 2001


<TABLE>
<CAPTION>
                                                                     For the Years ended December 31,
                                                                         2002                2001
                                                                     -------------       -------------
Revenues
<S>                                                                  <C>                 <C>
           Licensing and maintenance (note 2)                        $   6,277,364       $   2,239,736
           Software Development                                             50,200             527,034
           Consulting Services                                           1,450,690           1,290,719
           Other                                                           280,058              98,599
                                                                     -------------       -------------

Total Revenues                                                           8,058,312           4,156,088

Selling, general and administrative expenses                            10,386,788          13,296,508
                                                                     -------------       -------------

Operating loss                                                          (2,328,476)         (9,140,420)
                                                                     -------------       -------------

Interest income                                                             36,543             164,347
Interest expense                                                          (650,507)           (724,489)
Other expenses                                                             (38,487)                 --

Net loss before minority interest and income taxes                      (2,980,927)         (9,700,562)
                                                                     -------------       -------------

Provision for income taxes (note 11)                                        44,000                  --

Net loss before minority interest                                       (3,024,927)         (9,700,562)
                                                                     -------------       -------------

Minority Interest in (income) loss of subsidiary                          (299,283)            667,667

Net loss                                                                (3,324,210)         (9,032,895)
                                                                     -------------       -------------

Dividend applicable to preferred stock                                    (600,000)           (513,712)

Net loss applicable to common stockholders'                          $  (3,924,210)      $  (9,546,607)
                                                                     =============       =============

Basic and diluted loss per share  (note 2)                           $       (0.01)      $       (0.02)
                                                                     =============       =============

Basic and diluted weighted average of common shares outstanding        625,499,641         585,745,315
                                                                     =============       =============

Comprehensive loss and its components consist of the following:
           Net loss                                                  $  (3,324,210)      $  (9,032,895)
           Unrealized loss on securities available for sale                     --            (420,000)
           Comprehensive loss                                        $  (3,324,210)      $  (9,452,895)
                                                                     =============       =============
</TABLE>


See accompanying notes to the consolidated financial statements



                                      F-5
<PAGE>


                Vertical Computer Systems, Inc. and Subsidiaries
                 Consolidated Statements of Stockholders' Equity
                 For the Years Ended December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                                                                           Note
                                               Common Stock       Series A Preferred Stock   Series C Preferred Stock   Receivable
                                        ------------------------  ------------------------  --------------------------   Due From
                                          Shares        Amount       Shares      Amount        Shares        Amount     Shareholder
                                        -----------  -----------  -----------  -----------  -----------     ----------  -----------
<S>                                     <C>          <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
  (note 13)                                      --           --           --           --           --             --        --
Issuance of shares for the equity line
 with Cornell Capital, L.P. (note 12)     7,142,857           72           --           --           --             --        --
Issuance of common stock shares
  For professional services (note 12)    35,341,058          354           --           --           --             --        --
Preferred stock dividends (note 12)              --           --           --           --           --             --        --
Issuance of series C preferred 4%
     Cumulative convertible stock,
   Par value $100 for the acquisition
  of intellectual property (note 12)             --                                              50,000        350,000
Non-employee compensation expense
  for stock options issued (note 13)             --           --           --           --           --             --        --
Beneficial conversion feature on 6%
  Convertible debentures issued
  (note12)                                       --           --           --           --           --             --        --
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  $     --
                                        ===========  ===========  ===========  ===========  ===========     ==========  ===========
</TABLE>


See accompanying notes to the consolidated financial statements



                                      F-6
<PAGE>



                Vertical Computer Systems, Inc. and Subsidiaries
                 Consolidated Statements of Stockholders' Equity
                 For the Years Ended December 31, 2002 and 2001

<TABLE>
<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 (note 13)               --          798,500              --               --          798,500
Issuance of shares for the equity line
with Cornell Capital, L.P. (note 12)                                199,928                                           200,000
Issuance of shares of common stock
   for professional services (note 12)                  --          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 (note12)                    --               --              --               --          350,000
Non-employee compensation expense
    for stock options issued (note 13)                  --          207,907              --               --          207,907
Beneficial conversion feature on 6%
   Convertible debentures issued (note 12)              --           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
                                              ============     ============    ============     ============     ============
</TABLE>


See accompanying notes to the consolidated financial statements



                                      F-7
<PAGE>


                Vertical Computer Systems, Inc. and Subsidiaries
                 Consolidated Statements of Stockholders' Equity
                 For the Years Ended December 31, 2002 and 2001
<TABLE>
<CAPTION>
                                                                                                                            Note
                                                                                                                           Payable
                                               Common Stock               Series A                Series C                   To
                                          Shares          Amount           Shares     Amount       Shares      Amount     Officers
                                        -----------    -----------         ------     ------       ------    -----------    -----
<S>                                     <C>            <C>                 <C>        <C>          <C>       <C>            <C>
Balance, December 31, 2001              615,191,422    $     6,153         50,000     $   50       50,000    $   350,000    $   0
                                        ===========    ===========         ======     ======       ======    ===========    =====

Shares issued for financing fee
     to Cornell Capital (note 12)        12,500,000            125

Proceeds from sales of Officers
     common stock  collateralizing a
     note payable, to be repaid by
     issuing replacement shares
     (notes 5 and 12)                                                                                                      450,000

Issuance of replacement shares of
     common stock to Officers to
     reimburse for note
     payable (notes 5 and 12)            51,303,932            513                                                        (450,000)

Proceeds from sales of common
     stock to Equitilink (Note 12)        3,000,000             30


Conversion of debentures
(notes 10 and 12)                        37,889,580            379

Issuance of common stock for
     for investor relations
     (notes 10 and 12)                    5,000,000             50

Shares issued for financing fee
     on Weber note payable
     (notes 5, 10 and 12)                 2,000,000             20

Preferred stock dividends (note 12)

Issuance of warrants for
     Consultants, officers
     and directors of GIS
     (Notes 13 and 16)

Issuance of warrants for
     consulting services (note 13)

Issuance of warrants for
     iNet option agreement (notes 3
     and 13)

Issuance of warrants for
     with notes payable
     (notes 5, 10, and 13)

Issuance of warrants for
     employee retention (note 13)

Write-off Subscriptions Receivable
     (note 13)

Beneficial conversion feature
     from convertible
     debentures

Comprehensive Loss:
     Net loss

                                        -----------    -----------         ------     ------       ------    -----------    --------
Balance, December 31, 2002              726,884,934    $     7,270         50,000     $   50       50,000    $   350,000    $   0.00
                                        ===========    ===========         ======     ======       ======    ===========    ========
</TABLE>


See accompanying notes to the consolidated financial statements


                                      F-8
<PAGE>
                Vertical Computer Systems, Inc. and Subsidiaries
                 Consolidated Statements of Stockholders' Equity
                 For the Years Ended December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                               Accumulated
                                                              Additional       Other
                                             Subscription     Paid-in          Comprehensive   Accumulated
                                             Receivable       Capital          Income          Deficit          Total
                                             ------------     ------------     ------------    ------------     ------------
<S>                                          <C>              <C>              <C>             <C>              <C>
Balance, December 31, 2001                   $     (2,000)    $ 24,670,149     $          0    $(25,022,657)    $      1,695
                                             ============     ============     ============    ============     ============
Shares issued for financing fee
   to Cornell Capital (note 12)                                    199,875                                           200,000

Proceeds from sales of Officers
   common stock  collateralizing a
   note payable, to be repaid by
   issuing replacement shares
   (notes 5 and 12)                                                                                                  450,000

Issuance of replacement shares of
   common stock to Officers to
   reimburse for note
   payable (notes 5 and 12)                                        449,487                                                --

Proceeds from sales of common
   stock to Equitilink (note 12)                                    17,070                                            17,100


Conversion of debentures
(note 10 and 12)                                                   161,616                                           161,995

Issuance of common stock for
   for investor relations
   (notes 10 and 12)                                                23,450                                            23,500

Shares issued for financing fee
   on Weber note payable (notes
   5, 10, and 12)                                                   11,980                                            12,000

Preferred stock dividends (note 12)                                                                (600,000)        (600,000)


Issuance of warrants for                                            23,467                                            23,467
   Consultants, officers,
   and Directors of GIS
   (notes 13 and 16)

Issuance of warrants for                                            42,419                                            42,419
   consulting services (note 13)

Issuance of warrants for                                            35,712                                            35,712
   iNet option agreement (notes 3 and 13)

Issuance of warrants for                                            13,640                                            13,640
   with notes payable
   (notes 5 and 10)

Issuance of warrants for                                            16,098                                            16,098
   employee retention (note 12)

Beneficial conversion
features from convertible
   debentures                                                       25,000                                            25,000

Write-off Subscriptions
Receivable (note 13)                                2,000                                                             (2,000)

Comprehensive Loss:
   Net loss                                                                                      (3,324,210)      (3,324,210)
                                             ------------       ----------     ------------    ------------     ------------
Balance, December 31, 2002                   $          0       $25,687963     $          0    $(28,946,867)    $ (2,901,583)
                                             ============       ==========     ============    ============     ============
</TABLE>


See accompanying notes to the consolidated financial statements



                                      F-9
<PAGE>




                Vertical Computer Systems, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
               Increases (Decreases) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                                                             For the years ended December 31,
                                                                                   2002            2001
                                                                               -----------     -----------

Cash flows from operating activities
<S>                                                                            <C>             <C>
       Net loss                                                                $(3,324,210)    $(9,032,895)
                                                                               -----------     -----------
Adjustments to reconcile net loss to net cash Used in operating activities:
       Minority interest in net loss of Subsidiary                                 299,283        (667,667)
       Depreciation and amortization (note 2)                                    1,314,736       1,534,775
       Amortization of note discount                                                67,751              --
       Compensation due issuing options/warrants                                   132,025         207,907
       Expense paid by issuing shares of common                                    237,600         772,950
       stock
       Non-cash interest                                                            24,895          66,250
       Bad debt expense                                                             55,602          92,295
       Change in provision in investment                                          (150,000)        900,984
       Loss on disposal of equipment                                                41,943              --
       Write off of goodwill                                                       638,388              --
       Deferred tax assets                                                        (430,000)             --
       Loss on disposal of marketable securities                                    91,922         124,000

       Changes in operating assets and liabilities:

       Accounts receivable                                                      (1,108,150)     (1,118,623)
       Other receivable                                                            320,984         (24,588)
       Receivable from employees                                                  (113,377)        (23,257)
       Royalties Receivable                                                             --          20,000
       Prepaid expense                                                               1,021         (36,035)
       Deposits                                                                     16,507          48,557
       Accounts payable and accrued liabilities                                  1,540,598       1,395,728
       Deferred Revenue                                                            325,465       2,243,375
       Accrued income taxes                                                        480,000              --
                                                                               -----------     -----------

Net cash provided by (used in) operating
activities:                                                                    $   456,990     $(3,496,244)
                                                                               ===========     ===========

Cash flow from investing activities:

       Proceeds from selling marketable security                                    81,266              --
       Purchase of equipment                                                       (87,424)       (219,400)
       Cash paid for purchasing software division                                       --      (5,046,690)
                                                                               -----------     -----------

Net cash used in investing activities                                          $    (6,158)    $(5,266,090)
                                                                               ===========     ===========
</TABLE>


See accompanying notes to the consolidated financial statements



                                      F-10
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
               Increases (Decreases) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                                         For the years ended December 31,
                                                           ---------------------------
                                                              2002            2001
                                                           -----------     -----------

Cash flow from financing activities:
<S>                                                           <C>           <C>
       Pledge of cash deposit for bank loan                   (650,000)     (1,500,000)
       Proceeds from release of restricted cash              1,215,643         506,420
       Proceeds from issuance of convertible debentures        100,000         265,000
       Repayment on notes payable                           (1,533,000)       (972,939)
       Proceeds from issuance of notes payable                 500,000       5,810,500
       Payment of cash dividends                                    --        (100,000)
       Proceeds from sale of common stock                       17,100              --
                                                           -----------     -----------

Net cash provided by (used in) financing activities        $  (350,257)    $ 4,008,981
                                                           ===========     ===========

Net increase (decrease) in cash and cash equivalents,          100,576      (4,753,353)
Cash and cash equivalents, beginning of period                 845,459       5,598,812
Cash and cash equivalents, end of period                   $   946,035     $   845,459
                                                           ===========     ===========
</TABLE>


See accompanying notes to the consolidated financial statements



                                      F-11
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 1.  Organization and Basis of Presentation

Vertical Computer Systems,  Inc. ("the Company") was incorporated under the laws
of State of Delaware in April 1993. The Company is a  multinational  provider of
administrative  software services,  internet core  technologies,  and derivative
software  application  products through its distribution  network. The Company's
business model combines  complementary,  integrated software products,  internet
core technologies, and a multinational distribution system of partners, in order
to create a distribution matrix that is capable of penetrating  multiple sectors
through cross  selling its products and  services.  The Company is operating one
business segment.

The consolidated  financial  statements  include the accounts of the Company and
its wholly subsidiaries,  Enfacet, Inc. ("ENF" inactive),  Globalfare.com,  Inc.
("GFI" inactive),  Pointmail.com,  Inc. ("PMI" inactive),  Scientific Fuel, Inc.
("SFI" inactive),  "Vertical Internet Solutions ("VIS" inactive),  its 60% owned
subsidiary, Now Solutions, Inc. ("Now Solutions"),  and its 89% owned subsidiary
Government  Internet Systems,  Inc. ("GIS" a newly established entity with minor
activities).  To  date,  the  Company  has  generated  revenues  primarily  from
consulting  fees and maintenance  agreements  from Now Solutions,  its 60% owned
subsidiary.


Going Concern Uncertainty

The accompanying  consolidated financial statements for the years ended December
31, 2002 and 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, 2002, the Company had  stockholders'
deficit of $2.9 million and negative working capital of approximately $6 million
(although it includes  deferred revenue of  approximately  $2.6 million) 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.

Management  of the Company is  continuing  its efforts to secure  funds  through
equity  and/or debt  instruments  for its  operations,  expansion  and  possible
acquisitions,  mergers, joint ventures,  and/or other business combinations.  In
April  2003,  the Equity  Line of Credit  Agreement  executed in August 2001 was
cancelled  and the Company  entered  into a new Equity Line of Credit  Agreement
with Cornell Capital  Partners,  L.P. Under this new agreement,  the Company may
issue and sell to Cornell  Capital  Partners  common stock for a total  purchase
price of up to $10.0 million. In accordance with the new agreement,  the Company
will be entitled to commence  drawing down on the equity line of credit upon the
effectiveness  of a Registration  Statement  registering the shares to be issued
under this new  agreement.  The Company  will  require  additional  fund for its
operations and pay down its liabilities,  as well as finance its expansion plans
consistent   with  the  Company's   anticipated   changes  in   operations   and
infrastructure. However, there can be no assurance that the Company will be able
to secure additional fund and that if such fund is available,  whether the terms
or conditions would be acceptable to the Company and whether the Company will be
able to turn into a profitable  position and generate  positive  operating  cash
flow.  The  consolidated  financial  statements  contain no  adjustment  for the
outcome of this uncertainty.

Furthermore,  the Company is exploring  certain  opportunities  with a number of
companies to  participate  in 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.



                                      F-12
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 2.  Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents

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

Revenue Recognition

Service revenue generated from professional consulting and training services are
recognized  as  the  services  are  performed.  Maintenance  revenue,  including
revenues bundled with original software product license  revenues,  are deferred
and recognized over the related  contract  period,  generally  twelve moths. The
Company's  revenue  recognition  policies are  designed to comply with  American
Institute of Certified Public Accountants  Statement of Position 97-2, "Software
Revenue  Recognition"  (SOP 97-2) and with Emerging  Issues Task Force Issued No
00-21, "Revenue Arrangement with Multiple Deliverables."

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

In accordance with SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial  Statements",  the Company recognizes revenue from license of computer
software  "up-front"  provide that a non-cancelable  license  agreement has been
signed, the software and related  documentation have been shipped,  there are no
material  uncertainties  regarding customer acceptance,  collection of resulting
receivable is deemed probable, and no significant other vendor obligation exist.

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.

Property and Equipment

Property and equipment are stated at cost.  Depreciation  is computed  primarily
utilizing the  straight-line  method over the estimated  economic life of one to
fifteen years.  Maintenance,  repairs and minor renewals are charged directly to
expenses as incurred.  Additions  and  betterment  to property and equipment are
capitalized.  When  assets are  disposed  of, the related  cost and  accumulated
depreciation  thereon are removed from the accounts  and any  resulting  gain or
loss is included in the statement of income.

Impairment of Long-Lived Assets

Effective  January 1,  2002,  the  Company  began  applying  the  provisions  of
Statement  of  Financial  Accounting  Standard  No.  144,  "Accounting  for  the
Impairment or Disposal of  Long-Lived  Assets"  ("SFAS No.  144").  SFAS No. 144
requires that  long-lived  assets be reviewed for impairment  whenever events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be recoverable through the estimated  undiscounted cash flows expected to result
from  the  use  and  eventual  disposition  of the  assets.  Whenever  any  such
impairment exists, an impairment loss will be recognized for the amount by which
the carrying value exceeds the fair value.  During 2002, the Company  determined
that there was  approximately  $638,000 of  impairment  in  goodwill,  which was
located in Enfacet, Inc.

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 total  estimated  revenues  by the
product,  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.  During 2002 and 2001, no costs were
capitalized.



                                      F-13
<PAGE>


                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 2.  Summary of Significant Accounting Policies (continued)

Stock-based Compensation

The Company has adopted the intrinsic  value method of  accounting  for employee
stock  options as permitted by Statement of Financial  Accounting  Standards No.
123, "Accounting for Stock-based  Compensation" (SFAS No. 123) and discloses the
pro  forma  effect  on net loss and loss per  share as if the fair  value  based
method had been applied. For equity instruments, including stock options, issued
to non-employees,  the fair value of the equity instruments or the fair value of
the consideration received,  whichever is more readily determinable,  is used to
determine the value of services or goods received and the  corresponding  charge
to operations.

The following table  illustrates the effect on net loss and loss per share as if
the Company had applied the fair value recognition  provision of SFAS No. 123 to
stock-based employee compensation.

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, 2002 and 2001 would have been  increased  to the pro forma  amounts
presented:

<TABLE>
<CAPTION>
                                                                                 2002            2001
                                                                             -----------     -----------
<S>                                                                          <C>             <C>
Net loss: as reported                                                        $(3,924,210)    $(9,546,607)
    Add: total stock based employee compensation expense determined under
fair value method for all awards                                                 277,217         251,553

    Pro forma
                                                                             $(4,201,427)    $(9,708,160)

Basic and diluted loss per common share
                                                                             $     (0.01)    $     (0.02)
Pro forma
                                                                             $     (0.01)    $     (0.02)
</TABLE>

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.


                                      F-14
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 2.  Summary of Significant Accounting Policies (continued)

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  reflect 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, 2002 and 2001, the Company had 337,816,472
and  241,162,775  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.

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 note
payable to shareholder cannot be estimated due to its related party nature.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
financial statements and the reported amounts of revenue and expenses during the
reporting  period.  Among  the  more  significant  estimates  included  in these
financial   statements  are  the  estimated   allowance  for  doubtful  accounts
receivable  and the deferred  income tax asset  allowance.  Actual results could
materially differ from those estimates.

Advertising and Tradeshow Costs

The Company expenses advertising and tradeshow costs when incurred.  Advertising
and  tradeshow  costs  for the year  ended  December  31,  2002  and  2001  were
approximately $222,000 and $110,000, respectively.

Cash Reimbursements

The Company records  reimbursement by its customers for out-of-pocket expense as
part of consulting  and other services  revenue in accordance  with the Emerging
Issues  Task  Force  Issue  No  01-14  "Income  Statement   Characterization  of
Reimbursements Received for Out of Pocket Expense Incurred."

New Accounting Pronouncements

Goodwill and Other Intangible Assets

Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards  No. 142 Goodwill and Other  Intangible  Assets (SFAS No. 142).  Under
SFAS No. 142,  goodwill  and  indefinite  life  intangible  assets are no longer
amortized  but will be  reviewed  annually,  or more  frequently  if  impairment
indicators arise, for impairment.  The Company  discontinued the amortization of
its goodwill balances  effective January 1, 2002. In accordance with the testing
requirements  provided under SFAS No. 142, the Company determined that there was
no impairment on goodwill during the year ended December 31, 2002.



                                      F-15
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 2.  Summary of Significant Accounting Policies (continued)

In accordance with SFAS No. 142, prior period  amortization was not restated.  A
reconciliation  of reported net income to net income  adjusted for the exclusion
of amortization of goodwill and indefinite life intangible assets follows:

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                          -------------------------------
                                                                              2002              2001
                                                                          -------------     -------------
<S>                                                                       <C>               <C>
Reported net loss, applicable to common stockholders                      $  (3,924,210)    $  (9,546,607)
Add back: Goodwill amortization                                                      --          574,798,
                                                                          -------------     -------------
Adjusted net loss                                                            (3,924,210)       (8,971,809)

Basic and diluted weighted average number of common shares outstanding      625,499,641       585,745,815


Basic and diluted loss per share                                          $       (0.01)    $       (0.02)


Adjusted basic and diluted loss earnings per share                        $       (0.01)    $       (0.02)
                                                                          =============     =============
</TABLE>


Adoption of SFAS No. 145

In April 2002, FASB issued Statement No. 145 (SFAS No. 145), "Rescission of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections"  effective on or after May 15, 2002.  This Statement  rescinds SFAS
No. 4 and an amendment of that  Statement,  and SFAS No. 64. This Statement also
rescinds  SFAS No.  44.  This  Statement  amends  SFAS No. 13, to  eliminate  an
inconsistency  between the required  accounting for certain lease  modifications
that have economic effects that are similar to sale-leaseback transactions. This
Statement  also  amends  other  existing  authoritative  pronouncements  to make
various technical corrections,  clarify meanings or describe their applicability
under changed  conditions.  The adoption of SFAS No. 145 did not have a material
effect on the Company's financial position or results of operations.

Adoption of SFAS No. 148

In December 2002, FASB issued Statement No. 148 (SFAS No. 148),  "Accounting for
Stock-Based  Compensation  -- Transition  and Disclosure -- an amendment of FASB
Statement  No.  123."  SFAS  No.  148  amends  SFAS  No.  123,  "Accounting  for
Stock-Based  Compensation," to provide  alternative  methods of transition for a
voluntary  change to the fair value based method of accounting  for  stock-based
employee  compensation.   In  addition,  SFAS  No.  148  amends  the  disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim  financial  statements  about the method of accounting  for  stock-based
employee  compensation  and the effect of the method used on  reported  results.
SFAS No 148 is effective for the  Company's  financial  statements  for the year
ending after  December  15, 2002.  As permitted by SFAS No. 148, the Company has
elected to retain the  intrinsic  value  method of  accounting  for  stock-based
awards granted to employees.  Accordingly,  the adoption of SFAS No. 148 did not
have a  material  effect on the  Company's  financial  position  or  results  of
operations.

New Accounting Announcements Not Adopted Yet

In June 2001,  Financial  Accounting Standards Board (FASB) issued Statement No.
143 (SFAS No. 143), "Accounting for Asset Retirement Obligations," effective for
fiscal years beginning after June 15, 2002. The Statement  requires  entities to
record the fair value of a liability for an asset  retirement  obligation in the
period in which it is incurred.  When the liability is initially  recorded,  the
entity  capitalizes  a cost by  increasing  the  carrying  amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period,  and the  capitalized  cost is  depreciated  over the useful life of the
related asset.  Upon  settlement of the liability,  an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement. The
adoption  of SFAS No.  143 is not  expected  to have a  material  effect  on the
Company's financial position or results of operations.




                                      F-16
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 2.  Summary of Significant Accounting Policies (continued)

In June 2002,  FASB issued  Statement  No. 146 (SFAS No. 146),  "Accounting  for
Costs  Associated  with Exit or Disposal  Activities,"  effective for activities
that are initiated after December 31, 2002, with early  application  encouraged.
This Statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other  Costs to Exit an  Activity  (including  Certain  Costs  Incurred in a
Restructuring)." The adoption of SFAS No. 146 is not expected to have a material
effect on the Company's financial position or results of operations.

In May 2003,  FASB issued  Statement  No. 150 (SFAS No.  150),  "Accounting  for
Certain  Instruments with  Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards on the classification and measurement of financial
instruments with  characteristics  of both liabilities and equity.  SFAS No. 150
will be effective for financial  instruments  entered into or modified after May
31, 2003.  The Company is in the process of assessing the effect of SFAS No. 150
and does not expect the implementation of SFAS No. 150 to have a material effect
on its financial statements.

In November 2002, FASB issued Interpretation No. 45 ("FIN No. 45"), "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of Others."  FIN No. 45 expands on the  accounting
guidance of Statements  No. 5, 57, and 107 and  incorporates  without change the
provisions of FASB Interpretation No. 34, which is being superseded.  FIN No. 45
will affect  leasing  transactions  involving  residual  guarantees,  vendor and
manufacturer  guarantees,  and  tax  and  environmental  indemnities.  All  such
guarantees  will need to be disclosed in the notes to the  financial  statements
starting with the period ending after December 15, 2002.  For guarantees  issued
after December 31, 2002,  the fair value of the  obligation  must be reported on
the balance sheet.  Existing  guarantees will be  grandfathered  and will not be
recognized  on the balance  sheet.  The Company  believes  that there will be no
impact  on  our  financial  position  and  results  of  operations  due  to  the
application of FIN No. 45.

In  January  2003,  FASB  issued  FASB  Interpretation  No.  46  (FIN  No.  46),
"Consolidation of Variable  Interest  Entities," an interpretation of Accounting
Research  Bulletin  No.  51,  "Consolidated  Financial  Statements."  FIN No. 46
explains  how to  identify  variable  interest  entities  and how an  enterprise
assesses its interest in a variable entity to decide whether to consolidate that
entity. FIN No. 46 requires existing  unconsolidated  variable interest entities
to be  consolidated  by  their  primary  beneficiaries  if the  entities  do not
effectively  disperse  risks among  parties  involved.  FIN No. 46 is  effective
immediately  for variable  interest  entities  after  January 31,  2003,  and to
variable  interest  entities in which an enterprise  obtained an interest  after
that  date.  FIN No. 46  applies  in the first  fiscal  year or  interim  period
beginning  after  June 15,  2003,  to  variable  interest  entities  in which an
enterprise  holds a variable  interest that it acquired before February 1, 2003.
The  adoption  of FIN No. 46 is not  expected  to have a material  effect on the
Company's financial position and result of operations.

Reclassifications

Certain  reclassifications  have  been  made  to  the  prior  year  consolidated
financial statements to conform to the 2002 presentation.

Note 3.  Acquisition Transactions

Acquiring  Equity  Interest  in Now  Solutions  and  Assets  Acquisition  by Now
Solutions

On  February  28,  2001,  the  Company  acquired  60% of equity  interest in Now
Solutions,  LLC (Now  Solutions),  a company that develops and  maintains  human
resource  software,  in exchange  for $1 million in cash,  which was paid to Now
Solutions,  and warrants to purchase 80,763,943 (including two 25 million shares
of warrants  described in the paragraphs  below) shares of the Company's  common
stock which was granted to Arglen Acquisition, LLC ("Arglen"). Arglen was a deal
maker to facilitate  the entire  transactions  of Now  Solutions,  including the
purchase of software and financing. The warrants have an exercise price of $0.08
per share. One third of these warrants vested immediately, the second third will
vest on the one-year  anniversary of the date the warrants were issued,  and the
last  one-third  will vest on the two-year  anniversary of the date the warrants
were issued. These warrants have been granted but not delivered to Arglen. Based
on the Black Scholes option pricing model, the Company  determined that the fair
value of these  warrants  was  approximately  $798,500  and recorded as goodwill
accordingly.  In  addition,  Arglen and others  received a 40%  interest  in Now
Solutions  as  compensation  for  their  services  rendered  in the  process  of
consummating this transaction.  Consequently,  the Company recognized additional
goodwill of $666,667  based on the valuation of $1 million  accounting  only for
60% equity interest in Now Solutions.



                                      F-17
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 3.  Acquisition Transactions (continued)

In March 2001, Now Solutions purchased the rights to Human Resource  Information
Service  Application  Software ("HRIS") and various other assets and liabilities
relating to HRIS of Ross Systems,  Inc.  ("Ross") in exchange for  approximately
$5,100,000  in  cash  and a  promissory  note of $1  million  due to  Ross.  The
transaction was recorded under the purchase  method of accounting.  The purchase
price was allocated as follows:

<TABLE>
<S>                                         <C>
Total purchase price                                6,100,000
                                            ------------------
Cash acquired                                         287,919
Property and equipment acquired                       182,900
Other intangible assets                               257,000  Amortizable over a period of five years
Software source code acquired                       3,848,972  Amortizable over a period of five years
Liabilities assumed                                 (409,419)
                                            ------------------
                                                    4,167,372
                                            ------------------
Goodwill                                            1,932,628
                                            ==================
</TABLE>


During  2001,  the  goodwill  on  Now   Solutions'   book  was  amortized  on  a
straight-line  method over a period of five years.  The amortization of goodwill
in Now  Solutions  for the year ended  December  31, 2001 was  $322,104.  On the
consolidated  basis,  the  Company  recorded  a  total  goodwill  of  $3,448,795
($1,932,628  + $666,667 + $798,500  +  $51,000,  which is the  transaction  cost
incurred by the Company) during 2001. The consolidated  amortization of goodwill
in the year ended  December 31, 2001 was  $574,798,  which was  calculated  on a
straight-line  basis over a period of five years.  The note payable to Ross does
not bear interest and has payment  requirements  of $250,000 and $750,000 due in
February 2002 and 2003, respectively.  Now Solutions offset the $250,000 payment
against  amounts  due from Ross and  claimed  an offset of amounts on the unpaid
prepaid  maintenance  fees due at closing February 28, 2001 against the $750,000
amount. 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  obtained  proceeds  of
$5,500,000  through a note payable to Coast Business Credit ("Coast") to finance
the  purchase  of HRIS  from Ross and used the  excess  amount  for its  working
capital.  The note payable to Coast bears  interest at prime plus one and a half
and has an interest  rate floor of 8.5%.  The note  payable to Coast will be due
the earlier of February 2006 or if  terminated,  by either party,  in accordance
with the terms of the  agreement.  The  lender  has the  option  to demand  full
payment by  February  2004.  The note calls for monthly  installment  payment of
$91,500 of principal, plus interest.

In order to  facilitate  the financing  process,  the Company 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. In
October  2002,  Coast and Now  Solutions  agreed to amend the Loan and  Security
Agreement, dated February 28, 2001 (the "Loan Agreement"). Also in October 2002,
the Company  and Coast  agreed to amend the Deposit  Account  Pledge  Agreement,
dated February 28, 2001 (the "Pledge  Agreement").  In these  amendments,  Coast
agreed to waive certain defaults under the Loan Agreement and Pledge  Agreement,
including  non-compliance with financial covenants and non-delivery of financial
statements,  and to modify the financial  covenants.  All payments to Coast have
been  made by Now  Solutions.  In  exchange,  the  Company  agreed  to amend the
provisions of the Pledge  Agreement  related to its ability to withdraw  amounts
pledged to Coast as collateral. Under the amended terms of the Pledge Agreement,
the Company withdrew $348,333 from the deposit account,  and commenced receiving
$91,667 per month on October  31,  2002.  Under the amended  terms of the Pledge
Agreement  the Company was entitled to receive the monthly  withdrawal  provided
that: (a) Now Solutions makes the preceding monthly payment on the principal and
(b) Now Solutions is not in default of or has not cured certain  covenants under
the Loan  Agreement.  Now  Solutions  is current in its payments as of July 2003
(unaudited).

In February 2003, the Company was notified that Southern  Pacific Bank went into
FDIC  receivership.  Coast  Business  Credit  (Coast) is a division  of Southern
Pacific Bank.  The FDIC froze  $750,000,  which was the remaining  amount of the
Company's  deposit account pledged on behalf of Now Solutions on the date of the
notice. Of the remaining $750,000, the Company received $100,000,  which is that
portion which was insured by the FDIC.  The  uninsured  portion of the remaining
balance of the deposit  pledge  account,  which is $650,000,  was applied to the
outstanding debt of the Coast loan to Now Solutions. Consequently, Now Solutions
reduced its loan balance  payable to Coast.  Accordingly,  Now Solutions owed to
the Company the same amount under the same terms of Coast loan agreements.



                                      F-18
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 3.  Acquisition Transactions (continued)

According to the terms of the warrant  agreement,  dated March 5, 2001,  between
the Company and Arglen,  if,  during the last 90 trading day period of the first
year  from  the  date  the   issuance   of  the   initially   granted   warrants
aforementioned, the per share value of the Company's common 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 at the  exercise  price of $0.08 per  share.  One-third  of these
warrants  vested  immediately,  the  second  third  will  vest on the  one  year
anniversary  of the date the warrants were issued,  and the last  one-third will
vest  on the  two  year  anniversary  of the  date  the  warrants  were  issued.
Furthermore,  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 the
Company's  common  shares,  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 the Company's common shares at exercise price of $0.08 per share and
the warrants  will be  exercisable  for a period of five years from the date the
underlying  stock is registered with the Securities and Exchange  Commission for
resale or an exemption  from  registration  becomes  available and with the same
vesting term. These warrants have been granted but not delivered to Arglen.  The
Company intends to cancel the foregoing  warrants to purchase  80,763,943 shares
of the common stock of the Company as part of its legal action against Arglen

Pursuant  to the  terms of the  operating  agreement  among the  members  of Now
Solutions,  the Company is entitled to receive a  management  fee of $50,000 per
year,  pro-rata  distributions  of 50% of net earnings on a taxable income basis
for  federal  income tax  purpose if cash is  available,  and  repayment  of the
initial  capital  contribution  of $1  million if  certain  conditions  are met.
Pursuant  to the  terms of the  operating  agreement  among the  members  of Now
Solutions,  the  Company's  interest  would have been  reduced to 51% over three
years if Now Solution is not in a default situation regarding the Coast loan and
the employees of Now Solutions had achieved certain performance goals. On August
16, 2001, the Company  received a default notice from Coast.  Consequently,  the
Company  believed that this  reduction of the Company's  equity  interest in Now
Solution had not happened at December 31, 2002 and 2001.


Acquisition of EnFacet

On August 21, 2001,  the Company  entered into a stock  purchase  agreement with
EnFacet to purchase 100% of EnFacet,  Inc. by paying $30,000 in cash,  incurring
transaction expenses of $85,000,  assuming liabilities of $642,075,  and issuing
30,000 shares of Series C 4% Cumulative  Convertible  preferred  stock valued at
$312,000 (each share of the underlying  preferred stock is convertible  into 400
shares of the  Company's  common stock and at least  15,000  shares of preferred
stock will be  distributed  among the  employees  in EnFacet and another  15,000
shares  will be  available  for future  fund  raising  purposes.),  resulting  a
goodwill in EnFacet totaling  $1,069,075.  However,  as of December 31, 2002 and
2001,  these  30,000  shares of Series C  preferred  stock  were  issued but not
delivered  to  these  people  and  were  held  under  the  name of the  Company.
Accordingly, the $312,000 value of 30,000 shares of Series C preferred stock and
the  corresponding   value  of  goodwill  were  eliminated  in  the  process  of
consolidation at December 31, 2002 and 2001.

In  February  2003,  the  Company  and  EnFacet,   Inc.,  agreed  to  amend  the
aforementioned stock purchase agreement.  Pursuant to the amendment, the Company
may substitute 400 common shares for each share of Series C preferred  stock (up
to 12,000,000  shares of the Company's common stock) in connection with purchase
of EnFacet,  Inc. The Company may cancel any Series C preferred  stock for which
common stock is substituted or as otherwise specified in the agreement. In April
2003, the Company issued  3,000,000  restrictive  shares of the Company's common
stock to  former  employees  and  consultants  of  EnFacet,  Inc.  per the above
executed stock  agreement.  Accordingly,  the Company  cancelled 7,500 shares of
Series C preferred stock.

Note 4.  Investments

During 2000, the Company paid $440,000 to acquire 2.5% in iNet Purchasing,  Inc.
("iNet").  The Company  accounted  for the  investment  under the cost method of
accounting. In addition, the Company paid $100,000 to receive a royalty of 1% on
all iNet sales up to  $500,000  and 0.5% on all sales  thereafter.  The  royalty
period is twenty years and all payments are to be made on a quarterly basis. The
Company has not received any royalty payments after investment and advances.  At
December 31, 2002 and 2001, the Company provided valuation allowance of $540,000
against these investment and advances. Furthermore, the Company invested $91,983
in iNet  Government  Services and $46,300 in iNet, LLC for software



                                      F-19
<PAGE>


                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


development  purpose in 2001.  These  investments  were not  successful  and the
Company recorded full reserve of totaling $138,283 against these two investments
at December 31, 2002 and 2001.

In June 2001, the Company 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, the Company
agreed to reduce its interest in  WorldBridge  from 51% to 49%. In January 2002,
the Company and Strategic  Marketing  Alliance agreed to terminate the Company's
interest in  WorldBridge  in exchange  for  services to be provided by Strategic
Marketing Alliance through December 31, 2002.

During 2000, the Company made approximately  $115,900  investments in four joint
ventures,  which the  Company  intended  to assist in  development  of  software
products.  The Company  owns 50% of all the joint  ventures and accounts for the
investments  under the equity method of  accounting.  At December 31, 2000,  the
Company  made full  reserve  against  the  carrying  value of all joint  venture
investments as these joint ventures were still in the developmental  stages, had
not generated 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 eResource Capital Group ("RCG"),  formerly  Flightserv.com,  Inc. At December
31, 2001, the Company believed that the value of $300,000 was permanent declined
to $176,000 (the fair value at December 31, 2001) and transferred the unrealized
loss of $420,000  into  realized  loss in 2001.  During  2002,  the Company sold
766,733  RCG shares for  $81,266 and  recorded a realized  loss of $91,922.  The
remaining  33,267 RCG shares were adjusted into 4,610 shares for the 7-1 reverse
stock  split by RCG in 2002.  The  value of 4,610  shares  represented  the fair
market value of $2,812 at December 31, 2002  because the Company  believed  that
the decline in the value of marketable securities was permanent

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 accounted 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 2001,  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,  2001,  due to the
uncertainty  regarding  the recovery of the royalty,  the Company  wrote off the
$25,000.  In 2001, the Company 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 advances to
Apollo at December 31, 2002 and 2001.

Note 5.  Related Party Transactions

During the years ended  December  31, 2002 and 2001,  the Company  paid  Parker,
Mills & Patel LLP ("PMP"),  its general legal counsel,  approximately $4,000 and
$133,371 in exchange for  consideration  for legal  services  rendered.  William
Mills,  a partner at PMP, is also a director of the Company.  The Company issued
2,621,622  shares of common  stock in July 2001 and  1,560,000  shares of common
stock in November 2001 with an aggregate  value of $121,000 to William  Mills, a
director of the  Company,  of Parker,  Mills & Patel LLP for partial  payment of
legal services.  The 2,612,622  shares and 1,560,000  shares were pursuant to an
S-8 registration statement filed on November 8, 2001.

During 2001, PMP made advances of  approximately  $30,000 to third party venders
on behalf of the Company.  In exchange,  PMP received a 6%  promissory  note due
January 2002 and three-year  warrants to purchase 300,000 shares of common stock
at a purchase price of $0.014 per share.  The warrants vested upon issuance.  At
December 31, 2002, the outstanding balance under of $23,974 was in default.

In  September  2001,  the Company  issued a note in the amount of $28,190 to Mr.
Luiz Valdetaro,  bearing interest at 10%, unsecured,  principal and interest due
on demand in  consideration  of a loan in the same amount.  Mr. Valdetaro is the
Chief  Technology  Officer  and Chief  Accounting  Officer of the  Company.  The
balance outstanding at December 31, 2002 was $21,039.

In December  2001,  the  Company  executed a $425,000  note  payable to Brighton
Opportunity  Fund, LP, a third party. The Company 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
the Company's  common stock that were owned by Mountain  Reservoir  Corporation,
and 15,000,000  shares that are owned by Mr. Luiz  Valdetaro,  Chief  Technology
Officer and Chief Accounting  Officer of the Company,  to cover any shortfall in
the event of default.  Mountain  Reservoir



                                      F-20
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Corp.  is a  corporation  controlled  by the W5  Family  Trust.  Mr.  Wade,  the
President  and CEO of the  Company,  is the trustee of the W5 Family  Trust.  In
January  2001,  the  Company  executed  separate   indemnity  and  reimbursement
agreements with Mountain  Reservoir  Corporation and Mr. Luiz Valdetaro to cover
their pledges of 36,303,932 and 15,000,000 shares of common stock, respectively.
Pursuant to these agreements, the Company agreed to reimburse Mountain Reservoir
and Mr. Luiz Valdetaro for any shares sold as collateral to cover the default of
any loan. On January 31, 2002, the note was in default.  The lender  disposed of
19,751,000  shares of the above  totaling  51,303,932  shares for  $254,382.  In
September  2002, the lender  informed the Company that the remaining  31,552,932
shares  were  transferred  to  these  two  third  parties  and that the debt was
satisfied  as of  April  1,  2002.  Consequently,  the  note  payable  has  been
cancelled.  Accordingly,  the Company reclassified the note payable to the third
party  including  accrued  interest to the note payable to officers as these two
officers loaned their shares of common stock to the Company.

In September and October 2002,  the Company  issued  36,303,932  and  15,000,000
shares of its  common  stock to  Mountain  Reservoir  Corporation  and Mr.  Luiz
Valdetaro,   respectively,   in  accordance  with  the  executed  indemnity  and
reimbursement  agreements. At the time of issuing common stock, the value of the
note payable  plus accrued  interest  was  approximately  $450,000.  The Company
reclassified  from note payable to officers to common stock and additional  paid
in capital.  In  November  2002,  Mountain  Reservoir  Corporation  and Mr. Luiz
Valdetaro assigned their rights to obtain the necessary  accounting  information
from these two third parties to the Company.  The Company is currently  pursuing
these rights with the lender to obtain a specific accounting and a refund of any
monies that may be due to the Company.

On August 7, 2002,  the Company  issued a $25,000 note to a third party  lender,
bearing  interest  at 12% per  annum  and due on August  16,  2002.  The note is
secured by  10,000,000  shares of the  Company's  common stock that are owned by
Mountain Reservoir Corporation,  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 the  Company,  is the trustee of the W5 Family
Trust. The Company made payment of approximately  $12,500 on the $25,000 note in
2002 and was in a delinquent  position at December 31, 2002.  In June 2002,  the
Company issued another $50,000 note to the same lender,  bearing interest at 12%
per annum and due in  January  2003.  The  second  note is  secured  by  limited
interest in the Company's deposit pledge account on the behalf of Now Solutions.
In March 2003, the parties entered into an amendment for both notes. Pursuant to
the  amendment,  the  Company  agreed to pay  accrued  interest in the amount of
$1,170 for the $25,000 note and $4,200 for the $50,000 note and monthly interest
payments for both notes in April,  May,  and June 2003.  Beginning in July 2003,
the above interest  payments shall be replaced with a monthly payment of $5,000,
which will be applied  first to the $25,000  note and then to the $50,000  note.
The mature date for the $50,000  note  payable was  extended to June 1, 2004 and
the mature date for the $25,000 note was extended to July 1, 2005.

In August 2002,  the Company  issued an $8,000 note,  which is due February 2003
and bears  interest at a rate of 10% in exchange for a loan with the same amount
from Mr. Luiz Valdetaro,  Chief Technology  Officer and Chief Accounting Officer
of the Company.  In  connection  with the note,  the Company  issued  three-year
warrants to purchase  1,000,000  shares of its common stock at a price of $0.005
per share.  The warrants  vested  immediately  and valued at $9,316 based on the
Black-Scholes  stock option  pricing  model.  The Company also pledged a limited
interest  up to the  unpaid  amounts  due under  the note in a  pledged  deposit
account in the event the Company  defaults on the loan.  This note has been paid
at December 31, 2002.

In October  2001,  the Company  issued a $100,000  note payable to a third party
lender. The note required a payment of $46,000 on April 15, 2002 and the reaming
outstanding  balance and interest due on June 10, 2002.  The note bears interest
at 12% per annum and was secured by 400,000  shares of common stock of eResource
Capital Group and 5,225,000  shares of the Company's common stock that are owned
by Richard Wade. In November 2001,  the Company  issued another  $100,000 to the
same lender.  The note requires a monthly payment of $7,500  commencing May 2002
and the  remaining  outstanding  balance and interest due on September 30, 2002.
The note bears interest at 12% per annum and secured by 5,225,000  shares of the
Company's  common stock that are owned by Richard Wade, the President and CEO of
the  Company.  These two notes  were in  default at  maturity  in 2002.  Through
negotiation with the lender,  the Company issued an $181,584  promissory note to
the  lender  to  replace  the  above  two old  notes  by  consolidating  the two
outstanding  balances.  The new note  bears  interest  at 12% per  annum  and is
payable  as  follows:  (i)  an  initial  installment  of  $10,000  payable  upon
execution;  (ii) monthly payment of $5,000 beginning  November 5, 2002 and (iii)
monthly  payment of $10,000  beginning  May 15, 2003 until all amounts under the
note have been paid in full.  The note is  secured by  10,450,000  shares of the
Company's  common stock that are owned by Mountain  Reservoir Corp. to cover any
shortfall.  Mountain Reservoir Corporation is a corporation controlled by the W5
Family Trust. Mr. Wade, the President and CEO of the Company,  is the trustee of
the W5 Family  Trust.  In January  2002,  the Company  executed an indemnity and
reimbursement  agreement  with  Mountain  Reservoir  Corporation  to  cover  the
10,450,000  shares  of stock  pledged  by  Mountain  Reservoir  Corporation.  At
December  31,  2002,  the new note of  $181,584  was in  default  due to  missed
payments.



                                      F-21
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

In December 2002, the Company issued a $65,000 promissory note payable to Victor
Weber, who is President and Director of Government Internet Systems, Inc, an 89%
owned subsidiary of the Company, which bears interest at 13% per annum. The note
is due in March  2003 and  also  provides  that  the  minimum  accrued  interest
payments  will be no less than  $2,500 at the time the note is paid in full.  In
December 2002, the Company issued  another  $45,000  promissory  note payable to
Victor  Weber in exchange for cash  proceeds of the same amount.  The note bears
interest at a rate of 13% per annum and is due in January  2003.  In  connection
with the loans and in consideration of financial consulting services rendered on
the Company's  behalf,  the Company also issued to Weber 2,000,000 shares of the
Company's common stock valued at $12,000 on the issuing date. In March 2003, the
due date for  payment  of  principal  and  interest  for each of the  notes  was
extended to July 1, 2003.

For the year ended  December  31,  2002,  the Company  borrowed an  aggregate of
$49,085 from Richard Wade, the Company's  President and Chief Executive  Officer
of the Company. Mr. Wade is also a director of the Company.

Note 6.  Goodwill and Other Intangible Assets

Goodwill  and  other  intangible  assets  disclosed  under the  following  table
included the goodwill and other  intangible  assets on our 60% owned  subsidiary
and those on the Company's book:

                                              December 31,    December 31,
                                                 2002             2001
                                              -----------     -----------
Goodwill                                      $ 3,448,795     $ 4,087,083
Accumulated amortization                         (574,798)       (574,798)
Net                                             2,873,997       3,512,285

Purchased software source code                  4,753,972       4,753,972
Other amortizable intangible assets               269,358         236,858
Accumulated amortization                       (1,894,644)       (778,497)
                                              -----------     -----------
Net                                             3,128,686       4,212,333
                                              ===========     ===========
Total goodwill and other intangible assets    $ 6,002,683     $ 7,724,618


Goodwill  amortization for the year ended December 31, 2001 was $574,798 and was
stopped  as of  January 1, 2002.  Amortization  of other  intangible  assets was
$1,116,147  and  $778,497  for the  years  ended  December  31,  2002 and  2001,
respectively.

Note 7.  Property and Equipment

Property and equipment consist of the following:

                                 December 31,  December 31,
                                    2002          2001
                                 ---------     ---------
Equipment                        $ 677,518     $ 645,265
Leasehold improvements              73,849        73,849
Furniture and fixtures              34,624        32,126
                                 ---------     ---------
Total                              785,991       751,240

Less accumulated depreciation     (418,133)     (237,097)
                                 ---------     ---------
                                   367,858     $ 514,143
                                 =========     =========

Depreciation  expense for the year ended  December 31, 2002 and 2001 was 198,600
and $181,490, respectively.


                                      F-22
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 8. Accounts Payable and Accrued Expenses

Accounts payable and accrued liabilities consist of the following:

                      December 31,  December 31,
                          2002          2001
                       ----------    ----------
Accounts payable       $1,493,561     1,263,257
Accrued payroll           844,292       165,701
Accrued liabilities     1,078,173       496,935
                       ----------    ----------
Total                  $3,416,026     1,925,893
                       ==========     =========

Note 9.  Other Receivable

Other  receivable  of  $98,505  and  $419,489  at  December  31,  2002  and 2001
represented the amounts due from Ross Systems,  Inc.  ("Ross") for Now Solutions
customer  prepayments on maintenance  contracts for the period subsequent to the
acquisition.  Now  Solutions  and Ross  reached a mutual  agreement  to offset a
$250,000  note  payable  due to Ross in 2002  against  the other  receivable  of
$419,489  due from  Ross at the end of  2001.  In  addition,  Now  Solutions  is
withholding  payment on its $750,000 (the  remaining  note payable to Ross until
the resolution of the  derivative  lawsuit filed by the Company on behalf of Now
Solutions  and the  resolution of Ross' motion (filed in March 2003) for summary
judgment in lieu of a complaint  against Now  Solutions  to collect the $750,000
could be reached.

Note 10. Notes payable and convertible debt

<TABLE>
<CAPTION>
                                                                                       December 31,     December 31,
                                                                                           2002             2001
                                                                                     ----------------- ----------------
<S>                                                                                  <C>                <C>

Note payable to Coast issued by Now Solutions in principal of $5,500,000 bearing
interest at prime (4.25% and 4.75% at December 31, 2002 and 2001) plus 1.5% with
a minimum  interest of 8.5% per annum,  monthly  payment of $91,500 of principal
plus interest,  due February 2004. The note is secured with all of the assets of
Now Solutions, LLC and a $1,500,000 security deposit by the Company to guarantee
the first 36 payments of the loan and is subject to various loan  covenants.  At
December  31,  2002 and 2001,  Now  Solutions  was in  compliance  with the loan
covenants. Also see Note 3 for subsequent event.                                          $ 3,578,538        4,676,819

Note payable to Ross issued by Now  Solutions in the amount of  $1,000,000.  The
note is unsecured and non-interest  bearing. The note was recorded at a discount
(which will be  amortized  over the life of the note),  payments of $250,000 and
$750,000 to be due in February 2002 and 2003, respectively.  If a payment is not
received  within  three  days  from the due date,  the note  will  begin to bear
interest at 10% per annum. In 2002 Now Solutions offset $250,000 payment through
its receivable  from Ross (See Notes 3 and 9) in terms of the agreement  between
Now Solutions and Ross. See also Note 15,  litigation,  for subsequent event. At
December 31, 2002 and 2001, the unamortized discount was $11,291 and $79,042,
respectively.                                                                                 738,709          920,958

Note  payable in the amount of $27,558 to a law firm, a related  party,  bearing
interest at 6% per annum, unsecured, principal and interest due at January 2002.
The note is delinquent.                                                                        23,974           27,558

Note payable in the amount of $28,190 to Mr. Luiz  Valdetaro,  an officer of the
Company,  bearing interest at 10% per annum,  unsecured,  principal and interest
due
on demand.                                                                                     21,039           28,190

Note payable in the amount of $31,859 to a third party lender,  bearing interest
at an amount to be negotiated, principal and interest due on demand.                           31,859               --
</TABLE>


                                      F-23
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


<TABLE>
<S>                                                                                            <C>
Note payable in the amount of $12,000 to a third party, payable upon demand.                   12,000               --

Note  payable in the amount of  $425,000,  to  Brighton  Opportunity  Fund,  LP,
bearing interest at 12% per annum, secured by 51,303,932 shares of the Company's
common stock that were owned by two related parties, with principal and interest
due at maturity on January 31, 2002.  The  outstanding  balance of $425,000 plus
accrued  interest  was  settled  through   disposing  the  collateral  in  2002.
Consequently, the note was canceled in 2002.  See note 5 for more details.                         --          425,000

Note  payable  to a third  party  lender  in the  amount of a  $239,004  bearing
interest at 13% per annum and unsecured, with a $65,000 payment made in December
2002,  commencing with monthly  payment of $75,00  beginning in March 2003. This
note was issued in 2002 to replace the note of $211,137 issued in August 2001 to
a third party lender, bearing interest at 12% per annum. In March 2003, the note
was amended that the Company agreed to pay the interest and expenses responsible
by the lender for a third party loan secured on the lender's  behalf  instead of
paying to the lender and the Company agreed to begin making  monthly  payment of
$7,500, beginning on June 1, 2003.                                                            167,141          211,137

Note  payable  in the  amount of $50,000  to a third  party  lender,  bearing no
interest,  secured by a limited interest in the Company's deposit pledge account
on behalf of Now  Solutions,  due in January  2003.  In March 2003,  the parties
entered  into an  amendment,  whereby  the  parties  agreed to  accrue  interest
beginning  in October  2002 at 12% per annum.  The parties  also agreed that the
Company would make monthly payments of accrued interests beginning in April 2003
and monthly  principal  payment of $5,000  beginning in July 2003. In connection
with the note,  the Company  issued  three-year  warrants to purchase  1,200,000
shares of its common  stock at a price of $0.003 per  share.  The  Company is in
default subsequent to April 1, 2003.                                                           47,180               --

Note payable in the amount of $50,000 to a third party lender,  bearing interest
at the rate of 12% per annum,  secured by a limited  interest  in the  Company's
deposit pledge account on behalf of Now Solutions, due in January 2003. In March
2003, the parties  entered into an amendment,  whereby the parties agreed to pay
accrued  interest  in the  amount  of $4,200  for this  note and to  extend  the
maturity  date to June 1,  2004.  Beginning  in July  2003,  the above  interest
payments shall be replaced with a monthly  installment  payment of $5,000,  with
the initial  payments  applied first to the $25,000 note (issued below) and then
to the $50,000  note.  In  connection  with the  amendment,  the Company  issued
three-year  warrants to purchase 1,500,000 shares of its common stock at a price
of $0.004 per share. The Company is in default subsequent to April 1, 2003.                    50,000               --

Note payable in the amount of $25,000 to a third party lender,  bearing interest
at 12% per annum,  secured by 10,000,000  shares of the  Company's  common stock
that are owned by Mountain Reservoir Corporation, controlled by W5 Family Trust,
of which Richard Wade (CEO of the Company) is trustee,  due in December 2002. In
March 2003,  the parties  entered into an amendment.  Pursuant to the amendment,
the  Company  agreed to pay  accrued  interest  in the amount of $1,170 for this
$25,000  note.  Beginning in July 2003,  the above  interest  payments  shall be
replaced with monthly payments of $5,000 with the initial payments applied first
to the $25,000 note and then to the $50,000 (the above) note issued. The Company
is in default subsequent to April 1, 2003.                                                     12,583               --
</TABLE>


                                      F-24
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

<TABLE>
<S>                                                                                          <C>                <C>
Note payable to a third party lender in the amount of $280,000, bearing interest
at 4% per annum, secured by SiteFlash  technology owned by the Company,  payable
with  monthly  principal  payment of $5,000  commencing  in May 2002 and monthly
principal of $10,000  commencing  in August 2002 and the  remaining  outstanding
principal and interest is due September 1, 2004. In June 2002, this payment term
under the note was amended so that monthly  principal  payment of $5,000 due the
first day of each  month,  beginning  in July 1,  2002,  and  monthly  principal
payment of $10,000 due the first day of each month beginning on October 1, 2002.
In  connection  with the  amendment,  the Company  agreed to register the common
shares underlying the 50,000 shares of Series C preferred stock that were issued
to a third party in connection  with the purchase of the  SiteFlash  technology.
The note was in default subsequent to June 1, 2002.                                           252,626          280,000

Note payable in the amount of $181,584  issued to a third party  lender  bearing
interest at 12% per annum,  payable as follows:  (i) an initial  installment  of
$10,000  payable  upon  execution;  (ii)  monthly  payment  of $5,000  beginning
November 5, 2002 and (iii) monthly $10,000 payment  beginning May 15, 2003 until
all  amounts  under  the note have been  paid in full.  The note is  secured  by
10,450,000  shares of the  Company's  common  stock  that are owned by  Mountain
Reservoir  Corp. to cover any  shortfall.  Mountain  Reservoir  Corporation is a
corporation  controlled by the W5 Family Trust.  Mr. Wade, the President and CEO
of the Company,  is the trustee of the W5 Family Trust.  This note was issued to
replace two notes  being  previously  issued;  each had  outstanding  balance of
$100,000 at December 31, 2001. The note was in default subsequent to June 1, 2002.            163,034          200,000

Note payable in the amount of $65,000 to Victor Weber,  bearing  interest at 13%
per annum, unsecured,  due in March 2003, and requiring that the minimum accrued
interest  payments will be no less than $2,500.  Weber is a Director,  President
and Treasurer of the Company's newly established subsidiary: Government Internet
Systems, Inc., a Nevada corporation. In March 2003, the due date for payment of
principal and interest on the note was extended to July 1, 2003.                               65,000               --

Note payable in the amount of $45,000 to Victor Weber,  bearing  interest at 13%
per annum,  unsecured,  with  principal and interest due in March 2003, and also
provides that the minimum accrued interest payments will be no less than $2,500.
The note is due in January 2003. Weber is a Director, President and Treasurer of
the Company's newly established subsidiary: Government Internet Systems, Inc., a
Nevada corporation. In March 2003, the due date for payment of principal and
interest on the note was extended to July 1, 2003.                                             45,000               --

Note  payable in the  amount of  $350,000  issued by  EnFacet  to a third  party
lender,  bearing  interest at 8% per annum,  unsecured,  and due on February 28,
2003. Enfacet is in default subsequent to December 31, 2002.                                  350,000          350,000


Note payable in the amount of $10,000 issued by EnFacet to a third party lender,
bearing interest at 8% per annum, unsecured, with principal and interest due on
June 1, 2002.  Enfacet is in default subsequent to December 31, 2002.                          10,000           10,000
</TABLE>



                                      F-25
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

<TABLE>
<S>                                                                                     <C>            <C>
Note payable in the amount of $84,000 issued by EnFacet to a third party lender,
date June 1, 2001, bearing interest at 8% per annum,  unsecured,  with principal
and  interest  due on June 1, 2002.  Enfacet was in default at December  31,
2002. In March 2003,  both parties  entered into an  amendment.  Pursuant to the
amendment,  the due  date  was  extended  to  March  17,  2004 in  exchange  for
increasing  the interest  rate from 8% to 12% at which  interest will be accrued
from the date the note was  issued.  In  addition,  EnFacet  shall make  monthly
payments  of  $1,000  commencing  in  April  2003.  Enfacet is in  default
subsequent to June 1, 2003.
                                                                                               84,000           84,000
                                                                                     ----------------- ----------------

                   Total notes payable                                                     $5,652,683       $7,213,662
                   Less: current maturities, net of discount                              (2,650,971)      (5,908,662)
                                                                                     ----------------- ----------------

                   Long-Term portion of notes payable                                      $3,001,712       $1,305,000
                                                                                     ----------------- ----------------
</TABLE>


The minimum  principal  payments,  excluding the discount of $11,291 required in
excess of one year at December 31, 2002, are as follows:

    Year ending December 31,                       Amount
                                          ----------------
    2003                                      $ 2,650,971
    2004                                        2,776,559
    2005                                          123,875
    2006                                           56,986
    2007                                           44,292
                                          ----------------
    Total                                     $ 5,652,683


Convertible Debentures

<TABLE>
<CAPTION>
                                                                                         December 31,        December 31,
                                                                                             2002               2001
                                                                                       ------------------  ----------------
<S>                                                                                    <C>                 <C>
Convertible  debentures  dated  September 11, 2001,  bearing  interest at 6% per
annum,  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  three  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.  In January
2003, the remaining $50,000 of principal was converted into 12,853,470 shares of
the Company's common stock.                                                                    $ 50,000        $ 125,000

Convertible debentures dated October 5, 2001, bearing interest at 6 % per annum,
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 three  lowest  closing
bid prices 20 days prior to 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.  In January 2003,  the remaining  $55,000 of
principal was converted into 14,138,817 shares of the Company's common stock.                    55,000          140,000

Convertible  debentures dated April 1, 2002, bearing interest at 5%, 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 lowest  closing  bid price 5 days
prior to the  conversion.  The  debenture  is  convertible  at the option of the
holder at any time after purchase. Principal and interest are due at maturity on
October 5, 2006.  As of December 31, 2002,  there were no  conversions  of these
debentures.  In April 2003,  $40,000  principal were  converted into  10,245,900
shares of the Company's common stock.                                                           100,000               --

Total convertible debentures                                                                  $ 205,000        $ 265,000
                                                                                              =========        =========
</TABLE>



                                      F-26
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 11.  Income Taxes

From  inception to September  30, 2001,  Now  Solutions was treated as a limited
liability  company and was not subject to federal or state income taxes. The tax
attributes  for federal and state income tax purposes are passed  through to the
members of Now  Solutions.  Consequently,  Now Solutions is subject to a minimum
franchise  tax and fees,  which are not  material.  As of October  1, 2001,  Now
Solutions  made an election  to be treated as a  corporation  for tax  purposes.
However,  the  majority  member of Now  Solutions  did not  authorize  to do so.
Therefore,  there  will be a  uncertainty  whether  or not  this  election  will
ultimately be considered  valid.  Since Now Solution obtained approval from IRS,
accordingly,  Now Solutions  makes provision for income taxes in accordance with
Statement of Financial  Standards No. 109,  "Accounting for Income Taxes" ("SFAS
No.  109")  as if it files  as a  corporation  for tax  purposes.  SFAS No.  109
requires  a company  to use the asset and  liability  method of  accounting  for
income  taxes.  Using the  liability  method  requires  an  entity to  recognize
deferred tax liabilities and assets.  Deferred income taxes are recognized based
on the  differences  between the tax bases of assets and  liabilities  and their
reported  amounts in the financial  statements,  which will result in taxable or
deductible amounts in future years.  Further, the effects of enacted tax laws or
rate  changes are  included as part of deferred  tax expenses or benefits in the
period that covers the enactment date. A valuation allowance is recognized if it
is more likely than not that some portion,  or all of, a deferred tax asset will
not be realized.  The following  table  presents the income (loss) before income
taxes as of December 31, 2002 and 2001.

<TABLE>
<CAPTION>
                                                                               Years Ended December 31,
                                                                           12/31/02             12/31/01
                                                                     ------------------------------------------
<S>                                                                  <C>                    <C>
Income (Loss) before income taxes in Vertical                                 (3,890,926)          (7,916,104)
Income (Loss) before income taxes in Now Solutions                               909,999           (1,784,458)
                                                                     ------------------------------------------
                                                                              (2,980,927)          (9,700,562)
                                                                     ==========================================

The  following  table  presents  the income tax  provision  for the years  ended
December 31, 2002 and 2001 (on pro forma basis).

                                                                             Years Ended December 31,
                                                                            12/31/02             12/31/01
                                                                     ------------------------------------------
                                                                                                 Pro Forma
Current
Federal:
   Vertical Computer                                                                     --                 --
   Now Solutions (from audited F/S)                                                 393,000                 --
State:
   Vertical Computer                                                                     --                 --
   Now Solutions (from audited F/S)                                                  87,000                 --
                                                                     ------------------------------------------
                                                                                    480,000                 --
                                                                     ------------------------------------------
Deferred expense (benefit)
   Vertical Computer                                                                    --                  --
   Now Solutions (from audited F/S)                                               (436,000)                 --
                                                                     ------------------------------------------
                                                                                  (436,000)                 --
                                                                     ------------------------------------------

Total income tax provision                                                           44,000                 --
                                                                     ==========================================
</TABLE>


                                      F-27
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


The following table presents the rate reconciliation  between the statutory rate
and the effective rate.

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                                            12/31/02            12/31/01
                                                                     -----------------------------------------
                                                                                                Pro Forma
<S>                                                                   <C>                       <C>
Expected statutory rate                                                              -34.0%            -34.0%
Change in valuation allowance                                                          4.8%             22.9%

Income tax from a subsidiary which filed a separate return                            16.1%                --
Change in valuation allowance in a subsidiary which filed
   a separate return                                                                  14.6%             11.1%
Other                                                                                    --                --
                                                                     -----------------------------------------
                                                                                       1.5%              0.0%
                                                                     =========================================
</TABLE>


Temporary  difference  between the financial  statement  carrying amount and tax
bases of assets and liabilities  that give rise to deferred tax assets relate to
the following:

<TABLE>
<CAPTION>
December 31                                                                 2002                   2001
                                                                     ------------------------------------------
                                                                                                Pro Forma
<S>                                                                            <C>                   <C>
Net operating loss carryforward                                                3,599,000             3,238,000
Accrued vacation and allowance for doubtful accounts                                  --                62,000
Deferred salary                                                                  336,000                    --
Source development code                                                          337,000                    --
Other                                                                            410,000               440,000
                                                                     --------------------   -------------------
                                                                               4,682,000             3,740,000
                                                                     --------------------   -------------------

Valuation allowance                                                          (4,246,000)           (3,740,000)

Net deferred tax assets                                                          436,000                    --
                                                                     ====================   ===================
</TABLE>


At December 31, 2002,  the Company  (Vertical  only) had available net operating
loss carryforwards of approximately $9 million for federal tax purposes and $4.6
million for state tax purposes, which expire in varying amounts through 2022 and
2007,  respectively.  At December  31,  2001,  the Company  (Vertical  only) had
available net operating loss  carryforwards  of  approximately  $7.8 million for
federal tax purposes and $3.9  million for state tax  purposes,  which expire in
varying amounts through 2021 and 2006, respectively. However, the utilization of
net  operating  loss  carryforwards  may be subject to  certain  limitations  as
prescribed by Section 382 of the Internal Revenue Code.

Without considering Now Solutions' operation,  the Company's operations generate
permanent  and  temporary  differences  arising  from  non  deductible  expense,
depreciation, amortization, accrued liabilities and reserves for certain assets.
The Company  has  deferred  tax assets of  approximately  $3.6  million and $3.1
million at December 31, 2002 and 2001, respectively, relating principally to tax
effects of net operating loss carryforwards.  In assessing the recoverability of
deferred  tax assets,  management  considers  whether it is more likely than not
that the assets will be  realized.  The  ultimate  realization  of deferred  tax
assets is dependent  upon the  generation  of future  taxable  income during the
periods in which  those  temporary  differences  become  deductible.  Management
considers the projected  future  taxable  income and tax planning  strategies in
making this  assessment.  Based upon the level of  historical  taxable  loss and
projections for future taxable income over the periods in which the deferred tax
items are  recognizable for tax reporting  purposes,  it is more likely than not
that the Company will not realize the benefits of these  differences at December
31, 2002 and 2001. As such,  management  has recorded a valuation  allowance for
deferred tax assets at December 31, 2002 and 2001.



                                      F-28
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 12.  Stockholders' Equity

2001

Common Stock

In August 2001, the Company entered into an Equity Line of Credit agreement with
Cornell Capital  Partners,  LP (Cornell)  whereby up to $10,000,000 worth of the
Company's  common stock may be issued for  proceeds.  Under the agreement of the
equity line of credit, the shares must be registered before the issuance 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  commitment  fee of  $400,000
payable by issuing shares of the Company's common stock in two installments.  In
September  2001, the Company issued  7,142,857  shares of common stock valued at
$200,000 for the first  installment  payment,  which is equal to the fair market
value of the shares on the dates of issuance.

During  2001,  the  Company  issued  35,341,058  shares of its 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.

During  2001,  the  Company  issued  6%  convertible  debentures  for a total of
$265,000.  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  debentures  are
convertible at the option of the holder,  any time after  purchase.  The Company
recognized  $66,250 as interest  expense in relation to the  beneficial  feature
conversion of the debentures.

Preferred Stock

During 2001, the Company paid cash dividends of $100,000 to the  stockholders of
Series A preferred stock. In addition, the Company had accrued dividends payable
of $513,712 to the  stockholders  of Series A and C preferred  stock at December
31, 2001.

During August 2001, the Company issued 30,000 shares of Series C preferred stock
with par value of $100 per share, 4% of cumulated dividend, convertible into 400
shares of the  Company's  common  stock by each  share of  Series  C,  valued at
$312,000 in  connection  with the  acquitting  100%  interest in EnFacet.  These
shares,  which  were  held in  EnFacet's  name  by the  Company,  had  not  been
distributed to the employees of EnFacet and were held by the Company at December
31, 2002 and 2001.  Accordingly,  the value of these  shares was  eliminated  in
consolidation.

During  November  2001,  the Company  issued 50,000 shares of Series C preferred
stock with par value of $100 per share,  4% of cumulated  dividend,  convertible
into 400 shares of the Company's  common stock by each share of Series C, valued
at $350,000 in connection with the acquisition of the SiteFlash software. Series
C 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  July 1, 2001.  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.  No
dividends were paid in 2001.


2002

Common Stock

During 2002, the Company issued 12,500,000 shares of its common stock to Cornell
Capital  valued at  approximately  $199,875  complying  the  second  installment
aforementioned,  which is equal to the fair  market  value of the  shares on the
dates of issuance.

In 2002, the Company issued a total of 51,303,932  shares of its common stock to
related  parties to replace the shares  owned by officers  and were  disposed by
lender  to  collect  $450,000  owed by the  Company  in  connection  with a note
payable,  which is equal to the fair market  value of the shares on the dates of
issuance. See details in Note 5.

In November  2002, the Company  issued  3,000,000  shares of its common stock at
$0.057 per share for net proceeds of $17,100.



                                      F-29
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


In 2002, a total of 37,889,580  shares of the Company's common stock were issued
upon conversion in connection with the aforementioned  $265,000 in 6% debentures
issued in 2001. At December 31, 2002,  $160,000 of principal had been  converted
into the Company's common stock.

During July 2002,  the Company issued  5,000,000  shares of its common stock for
investor relation services rendered by Equitilink,  LLC valued at $23,500, which
is equal to the fair market value of the shares on the dates of issuance.

During  December 2002, the Company issued  2,000,000  shares of its common stock
valued at $11,980  (which is equal to the fair market value of the shares on the
dates of  issuance.)  to Victor  Weber,  a directors and executive of Government
Internet Systems, Inc, an 89% owned subsidiary of the Company.

Preferred Stock

During 2002, the Company paid no cash dividends to the  stockholders of Series A
and Series C preferred  stock.  During 2002, the Company had accrued $600,000 of
dividends payable to the stockholders of Series A and Series C preferred stock.

 The Company recorded  approximately $25,000 of beneficial conversion feature as
deemed  interest as a result of issuing  convertible  debentures  of $100,000 in
2002.

Note 13.  Stock Options and Warrants

In  December  1999,  the Company  established  a stock  option plan  whereby the
Company may grant both  Incentive  Stock Options  (within the meaning of Section
422 and the Internal Revenue Code of 1986) and non-statutory  Options. Under the
stock option plan,  the Company  could issue up to 50,000,000  shares  (adjusted
post stock split), In January 2002, the Company amended the stock option plan to
provide  for an  additional  10,000,000  shares,  for an  aggregate  maximum  of
60,000,000  options to acquire  shares of the common stock of the Company  under
its the stock  option  plan.  The  Company  intends to register  the  additional
options to acquire the  10,000,000  shares of common stock of the Company in its
forthcoming  SB-2.  Most options  issued are  non-assignable,  non-transferable,
vested on the date of grant,  and  usually  expire  three years from the date of
grant.

2001

During 2001, the Company granted warrants to purchase an aggregate of 80,763,943
shares of the  Company's  common stock to Arglen for its efforts to bring in the
transaction to acquire 60% interest in Now Solutions.  These warrants was valued
at $798,500 based on Black-Scholes  option pricing model. The Company intends to
cancel the foregoing warrants as part of its legal action with Arglen.

During 2001, the Company granted three-year stock warrants to purchase aggregate
22,700,000 shares of common stock at an exercise price of ranging from $0.012 to
$0.10 per share to eight  employees.  Of the  22,700,000  warrants,  20  million
warrants  are vested in equal  amounts per month over a three-year  period.  The
remaining  2,700,000  warrants  were  vested  immediately.  These  warrants  are
non-assignable  and  non-transferable.  The Company did not record any  employee
stock  compensation  by  adopting  APB.  No. 26 whereas  the fair value of these
warrants on the grant date was $232,996  based on  Black-Scholes  option pricing
model.

During  2001,  the Company  granted  warrants to purchase  aggregate  22,723,456
shares of common  stock with  exercise  price  ranging  from $0.012 to $ 0.30 to
individuals  for  services  provided.  These  warrants  are  non-assignable  and
non-transferable,  were  exercisable  over a three to five year  period from the
date of  grant,  and vest in  immediately.  The  Company  recorded  $193,885  as
non-cash and  non-employee  stock  compensation  based on  Black-Scholes  option
pricing model.

During 2001, the Company granted three-year  warrants to purchase 500,000 shares
of common  stock  with  exercise  price of $0.028  per share to a lender.  These
warrants are non-assignable and  non-transferable  and vested  immediately.  The
Company recorded $3,763 as deemed interest expense based on Black-Scholes option
pricing model.

During 2001, the Company granted three-year  incentive stock options to purchase
aggregate  7,590,000 shares of common stock at an exercise price of ranging from
$0.014 to $0.086 per share to 22 employees and 8  consultants.  These  incentive
stock options were vested  immediately.  The Company did not record any employee
stock  compensation  by  adopting  APB.  No. 25 whereas  the fair value of these
warrants on the grant date was $14,948  based on  Black-Scholes  option  pricing
model.



                                      F-30
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

During 2001, the Company granted three-year  incentive stock options to purchase
aggregate  3,500,000  shares of common stock at an exercise  price of ranging at
$0.01 per share to three  outsiders of iNet.  These incentive stock options were
vested immediately.  The Company recorded non-cash stock compensation expense of
$9,406 on the grant date based on Black-Scholes option pricing model.

During 2001,  the Company  granted  three-year  non-statutory  stock  options to
purchase  aggregate  1,500,000  shares of common  stock at an exercise  price of
ranging  from  $0.041 to $0.086 per share to five  outsiders  for their  service
provided. These non-statutory stock options were vested immediately. The Company
recorded non-cash stock compensation  expense of $853 on the grant date based on
Black-Scholes option pricing model.


2002

During 2002, the Company granted warrants to purchase 8,688,312 shares of common
stock with  exercise  price  ranging  from $0.005 to $ 0.03 to  individuals  for
services provided.  These warrants 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 2002 and 2003, as applicable.  The Company recorded
$42,419 as non-cash and non-employee  stock  compensation based on Black-Scholes
option pricing model.

During 2002, the Company granted  warrants to purchase an aggregate of 6,250,000
shares of common stock with exercise price ranging from $0.0075 to $0.010 to the
people providing  services to Government  Internet Systems,  Inc., the Company's
89% owned subsidiary.  These warrants are non-assignable  and  non-transferable,
are  exercisable  over a three to five year period  from the date of grant,  and
vest  immediately.  The Company recorded stock  compensation  expense of $23,467
based on the Black-Scholes option-pricing model.

During 2002, the Company granted,  but did not deliver three-year  warrants with
an exercise price of $0.025 to purchase 1,500,000 shares each to Basil Nikas and
Robin Mattern and 500,000  shares to Wayne Savage in January 2002.  The warrants
were issued in  connection  with an option  agreement  whereby the Company could
acquire a 56% ownership interest in iNet. Mr. Nikas, Mr. Mattern, and Mr. Savage
are  executives of iNet.  The fair market value of these warrants at the date of
grant was $35,712 based on the Black-Scholes  option-pricing model. In the event
that the Company does not acquire a majority  interest in iNet,  these  warrants
will automatically be cancelled. Under the terms of the option, iNet is required
to deliver certain financial and non-financial information. This information was
never delivered and the Company is holding the warrants  granted in January 2002
until a resolution is reached.

During  2002,  the Company  granted  three year  warrants to purchase  3,700,000
shares of common stock at an exercise price of ranging from $0.003 to $0.015 per
share to third party lenders in connection  with securing funds of an aggregated
amount of  $112,500  through  issuing  notes  payable  to these  lenders.  These
warrants  vested  upon  issuance.  The  Company  recorded  $13,640  based on the
Black-Scholes option-pricing model.

In June and August 2002,  the Company  granted  three-year  warrants to purchase
4,000,000  shares of its common  stock to three  employees  at an average  share
price of $0.010.  These warrants are  non-assignable and  non-transferable.  The
Company  recorded stock  compensation  expense of $16,098 based on Black-Scholes
option pricing model.

In December 2002, the Company granted  three-year  stock warrants to purchase to
6,600,000 shares of common stock at an exercise price of $0.010 per share to six
employees.  The warrants vest in equal amounts per month over a one-year period.
These  warrants are  non-assignable  and  non-transferable.  The Company did not
record any employee stock  compensation by adopting APB. No. 26 whereas the fair
value of these  warrants  on the grant date was $25,664  based on  Black-Scholes
option pricing model.

During 2002,  the Company wrote off a  subscription  receivable of $2,000 due in
relation to warrants that were expired.




                                      F-31
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Option and warrant activities in 2001 and 2002 were summarized is as follows:

<TABLE>
<CAPTION>
                                                                            Non-                                 Weighted
                                                       Incentive          Statutory                              Average
                                                         Stock              Stock                                Exercise
                                                        Options            Options            Warrants            Price
                                                   ------------------  ----------------   -----------------  -----------------
<S>                                                <C>                 <C>                <C>                <C>
Outstanding at 01/01/01                                    5,700,000        28,300,000           2,628,787   $          0.233

Options/Warrants granted with an exercise
   price of $0.01 to $0.11 per share                      11,090,000         1,500,000         126,687,399              0.082
Options/Warrants exercised                                        --                --                  --
Options/Warrants expired                                          --                --           (250,000)              0.160
                                                   ------------------  ----------------   -----------------  -----------------
Outstanding at 12/31/01                                   16,790,000        29,800,000         129,066,186(1)           0.113
                                                   ==================  ================   =================  =================
Options/Warrants granted with an exercise
   price of $0.003 to $0.11 per share                             --                --          32,738,312              0.006
Options/Warrants exercised                                        --                --                  --                 --

Options/Warrants expired                                 (3,200,000)      (15,000,000)                  --              0.025
                                                   ------------------  ----------------   -----------------  -----------------
Outstanding at 12/31/02                                   13,590,000        14,800,000         161,804,498   $          0.103
                                                   ==================  ================   =================  =================
</TABLE>


(1) The Company  intends to cancel  warrants to  purchase  80,763,943  shares of
common stock to Arglen  Acquisitions  (LLC) in connection  with Now Solutions as
part of its legal action with Arglen.


Information relating to stock  options/warrants at December 31, 2002, summarized
by exercise price, is as follows:

<TABLE>
<CAPTION>
                                                               Outstanding                               Exercisable
                                              -----------------------------------------------   ------------------------------
                                                             Weighted Average                         Weighted Average
                                              -----------------------------------------------
                                                                  Life           Exercise                          Exercise
Exercise Price Per Share                         Shares         (Months)           Price           Shares           Price
                                              --------------   ------------    --------------   -------------    -------------
Incentive Stock Options:
<S>                                           <C>              <C>            <C>               <C>            <C>
         $0.01 - $0.09                           13,115,000          19.82    $        0.025       13,115,000  $        0.025
         $0.10 - $0.47                              475,000           6.93    $        0.466          475,000  $        0.466
                                               -------------   ------------     -------------   --------------   -------------
                                                 13,590,000          19.39    $        0.040       13,590,000  $        0.040
                                               -------------   ------------     -------------   --------------   -------------

Non-statutory Stock Options:
         $0.01 - $0.10                            3,500,000          13.28    $        0.033        3,500,000  $        0.033
         $0.11 - $1.25                           11,300,000           9.45    $        0.600       11,300,000  $        0.600
                                               -------------   ------------     -------------   --------------   -------------
                                                 14,800,000          10.36    $        0.047       14,800,000  $        0.047
                                               -------------   ------------     -------------   --------------   -------------

Warrants (1)
               $0.003 - $0.100                  133,505,757          18.90    $        0.057       81,584,443  $        0.043
               $0.101 - $0.350                   28,298,741          32.73             0.162       14,965,498           0.217
                                               -------------   ------------     -------------   --------------   -------------
                                                161,804,498          21.32    $        0.076       96,549,851  $        0.070
                                               -------------   ------------     -------------   --------------   -------------
</TABLE>


         (1) The  Company  intends to cancel  warrants  to  purchase  80,763,943
shares of common stock to Arglen  Acquisitions,  (LLC,  in  connection  with Now
Solutions as part of its legal action with Arglen.


                                      F-32
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

The range of assumptions  used in the Black Scholes option pricing model in 2002
and 2001 were as follows:

                                 December 31,
                                 ---------------------------------------------
                                 2002                     2001
                                 -------------------      --------------------

Discount rate - bond yield rate  4.00                %    4.00                 %
Volatility                       83 - 187            %    51 - 85              %
Expected life                    1.5 to 2.0 years         1.5 - 2.0 years
Expected dividend yield          -                        -


Note 14.  Supplemental Disclosure of Cash Flow Information

Supplemental  cash flow  information  for the years ended  December 31, 2002 and
2001 are as follows:
                                                      December 31,
                                               -------------------------
                                                 2002             2001
                                               --------         --------
                Cash paid for interest         $402,353         $342,326
                                               --------         --------

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

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                          ------------------------------------
                                                                                               2002                 2001
                                                                                          ----------------     ---------------
<S>                                                                                       <C>                  <C>
Series A cumulative stock dividends                                                       $       400,000      $      488,712
Series C cumulative stock dividends                                                               200,000              25,000
Replacement of 51,303,932 shares of common stock to officers for call of
collateralization on delinquent note payable                                                      450,000                  --
Conversion of debentures to 37,889,580 shares of common stock                                     161,616                  --
Issuance of warrants to officers and directors of GIS                                              23,467                  --
Issuance of warrants for consulting services                                                       42,419                  --
Issuance of warrants for iNet option agreement                                                     35,712                  --
Issuance of warrants with notes payable                                                            13,640                  --
Issuance of warrants for employee retention                                                        16,098                  --
Issuance of 2,000,000 shares of common stock for fees on notes payable                             12,000                  --
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 12,500,000 and 7,142,857 shares of the Company's common stock
for the equity line of credit with Cornell Capital                                                200,000             200,000
Issuance of 8,000,000 shares in 2002 and 35,341,058 shares in 2001 of the Company's
common stock for professional services                                                             46,100             572,950
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
Beneficial Conversion on 6% convertible debentures issued                                          25,000              66,250
</TABLE>


                                      F-33
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


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, 2002 are as follows:

   Year ending December 31,                              Amount
   ---------------------------------------------------------------
            2003                                      $  250,300
            2004                                         114,235
            Total                                     $  364,535
   ===============================================================

Rental expense for the years ended December 31, 2002 and 2001 was  approximately
$305,932 and $321,673, respectively.


Commitments Related to Now Solutions

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
earn-out 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.

The  Company  has an  operation  agreement  with Now  Solutions  under which Now
Solutions  agreed to pay the Company an annual  management  fee of $50,000.  The
management fees are payable on a monthly basis.  Now Solutions shall  distribute
50% of the taxable income on a quarterly basis to its members according to their
ownership.  Additionally,  once Now  Solutions'  initial bank financing is fully
paid down,  Now  Solutions  shall pay back the  initial  capital  infusion of $1
million to the Company by paying $50,000 per month for twenty months.


Royalties

On December 16, 1999, the Company  acquired the software rights to Emily, an XML
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, 2002 and 2001,
respectively.


Employment Contracts

In December 2001, the Company executed an employment agreement with Richard Wade
pursuant to which Mr. Wade serves as Chief  Executive  Officer and  President of
the  Company,  under  which Mr.  Wade will  receive  an  annual  base  salary of
$300,000,  and the issuance of five-year warrants to purchase  20,000,000 shares
of the  Company's  common  stock at an  exercise  price of $0.10  per  share and
five-year warrants to purchase 600,000 shares of the Company's common stock. The


                                      F-34
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


warrants  vest over a 36 month period in equal  amounts on a monthly  basis from
the date of issuance.  Mr. Wade is also entitled to an annual bonus from a bonus
pool  for  executives  equal  to 5% of the  Company'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 the  Company  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 the Company during the years 1999 and 2000. Mr. Wade has deferred
his compensation (which was fully accrued) since January 1, 2002.

In  January  2000,  the  Company  executed  an  employment  agreement  with Luiz
Valdetaro  pursuant to which Mr. Valdetaro serves as Chief Technology Officer of
the Company.  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 the  Company'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.  This
agreement  expired on December 31, 2002. Mr. Valdetaro has deferred  $135,000 of
his salary in 2002, and all of his salary to date in 2003.

In July 2002,  the Company  entered into a two-year  employment  agreement  with
Aubrey  McAuley,  whereby  McAuley  would  provide  services in the  capacity of
Executive VP, Product  Development  and Sales  Support.  McAuley will be paid an
annual  salary of $120,000  and a bonus as  determined  in  accordance  with the
agreement.  In addition,  the agreement contains certain  performing  incentives
whereby McAuley can earn 7,500 shares of Series C preferred stock of the pool of
30,000  shares of Series C preferred  stock,  which were  reserved in connection
with the purchase of Company's subsidiary,  EnFacet, Inc. These shares of Series
C preferred  stock may be converted  into 3,000,000  shares of Company's  common
stock.  The  Company is required to  register  the  underlying  shares of common
stock.  In the event the employment  agreement is  terminated,  then McAuley may
convert his employment agreement into a subcontractor agreement. As of September
30,  2002,  management's  opinion is that the shares of 7,500 Series C preferred
stock have not been earned and accordingly the shares have not been issued.


Litigation

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 the Company.


Two legal  proceedings were resolved in 2002. The first 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 sought in excess of $18 million in
damages  based on the  alleged  increase in value of the stock since the private
placement.  The Company successfully  prevailed in a motion for summary judgment
and the case has been dismissed in its entirety.

A second matter,  entitled La 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 the Company
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 the  Company  has  breached an
agreement to pay the disputed sums flowing out of its October 2000 settlement of
litigated  matters with two former  shareholders  of the  Company.  A settlement
agreement  has been  executed and a dismissal was filed in January 2002. As part
of the  settlement  agreement,  the  parties  agreed  that La  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 Externet World,
Inc.  At  December  31,  2002,  $400,000  has been  paid to La  Societe  and the
remaining amounts were distributed pursuant to the settlement agreement.



                                      F-35
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


In addition, we are involved in the following additional ongoing matters.

The Company is  currently  involved in a dispute  with Arglen  regarding  issues
related  to Now  Solutions.  In  April  2002 the  Company  appointed  the  fifth
representative  of Now Solutions'  Executive  committee giving the Company three
representatives.  Also in April 2002, the Company  received a letter from Arglen
accusing  the Company of  defaulting  on its  obligations  under Now  Solutions'
Operating  Agreement  by failing to obtain a waiver of default  from Coast.  The
letter  further  stated that the default has  triggered the  dissolution  of Now
Solutions,  and authorizes Arglen to acquire the Company's ownership interest in
Now  Solutions  at a  discounted  price.  In  May  2002,  the  Company  demanded
arbitration  from  Arglen  seeking to enforce  its  rights  under the  Operating
Agreement. Also in May 2002, Arglen filed a Demand for Arbitration and Statement
of Claim against the Company. In its demand, Arglen alleged that the Company was
in default of its obligations under the Operating Agreement.  Arglen also sought
to enjoin the Company 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 the Company's interest in Now Solutions.  The Company believes Arglen's
allegations are without merit. In August 2002, the Company  prevailed on four of
the five motions and remains in control of the executive committee with three of
the five  representatives  on the  committee.  The only  restriction  until  the
outcome of  arbitration  is that the  Company is not  allowed  to  increase  its
management fees or any other monies other than for  reimbursement  for insurance
incurred by the Company on behalf of Now  Solutions.  In July 2003,  the Company
filed a motion  to  permit  Now  Solutions,  LLC to make  certain  distributions
permitted under the Now Solutions' LLC operating agreement to the Company.

The Company learned of an alleged employment agreement between Now Solutions and
Garry Gyselen  ("Gyselen"),  the suspended  Chairman of Now  Solutions,  whereby
Gyselen  would be engaged for a term of three years at a salary of $150,000  per
annum. The agreement was executed by Gyselen, acting in the capacity of Chairman
on behalf of Now  Solutions and Gyselen,  signing on his own personal  behalf as
the executive.  The agreement is undated. Now Solutions' corporate legal counsel
has informed its  management  and its executive  committee  that the  employment
agreement is invalid in their legal opinion.  Gyselen, in his own declaration of
the preliminary injunction,  declares that the employment agreement is "entirely
inoperative."   Gyselen  has  not  provided  Now  Solutions   with  any  written
acknowledgment confirming that the agreement is null and void.

In February  2003,  the Company  filed a lawsuit and a derivative  action in New
York Supreme Court Case against defendants Ross Systems,  Inc. ("Ross"),  Arglen
Acquisitions,   LLC  ("Arglen"),   James  Patrick  Tinley,   and  Garry  Gyselen
("Gyselen").  The Company filed a derivative  action on behalf of its subsidiary
Now Solutions when Arglen refused to authorize a lawsuit against any parties who
were  alleged  to  have  acted  against  the  best  interest  of Now  Solutions.
Plaintiffs  seek  damages  and  equitable  relief  arising out of actions of the
defendants  constituting  breach of contract,  fraud,  conspiracy  and breach of
fiduciary duty in connection with certain transactions entered into between Ross
and Now Solutions;  Ross and Arglen;  Arglen and Now Solutions;  Gyselen and Now
Solutions; and the Company and Arglen. The action concerns offsets of payment on
note payable to Ross by the  maintenance fee charged by Now Solutions to Ross to
which Now Solutions was entitled per the asset  purchase  agreement  between Now
Solutions and Ross  regarding the HRIS assets Now Solutions  purchased from Ross
in 2001, an undisclosed  transaction between Ross and Gyselen around the time of
the purchase of these  assets,  and the failure of Gyselen to enforce the offset
provisions  which  caused  Coast to declare Now  Solutions  in default of a loan
covenant in 2001 (which has since been cured).

In conjunction  with the Company's  lawsuit,  Now Solutions is  withholding  its
payments on the  remaining  $750,000  note due February  2003 against the unpaid
maintenance  fees and gave  notice in  February  2003 to Ross of Now  Solutions'
claim of offset.  Now  Solutions  has  claimed a total  amount of  approximately
$3,562,000 to offset  against the note.  In March 2003,  Ross filed a motion for
summary  judgment in lieu of a complaint  against Now  Solutions  to collect the
note payable in the amount of $750,000 plus 10% interest.


                                      F-36
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

On December 21, 2001,  the Company  entered into an option  agreement  with iNet
Purchasing  ("iNet") to purchase an additional  interest in iNet under which the
Company 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 is  required  to pay  $140,000 in four equal
monthly  installments  beginning  in December  2001 and grant  three-year  stock
options to three iNet executives,  Basil Nikas, Robin Mattern, and Wayne Savage,
in the amount of  1,500,000,  1,500,000,  and  500,000  shares of the  Company's
common stock, respectively. These stock options were issued in 2001. At December
31,  2002 the  Company  has paid a total of  $131,282  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 the Company exercised the option
to obtain a majority  interest in iNet by April 2002, the Company is required to
pay to iNet  $860,000 in cash or  marketable  securities  (pending any potential
offsets). The Company would need to raise additional capital in order to pay the
cash portion of the exercise price, which is $860,000.  In addition, in order to
exercise the option,  the Company must issue 70,000 shares of Series C preferred
stock and grant additional  three-year warrants and options, as the case may be,
to purchase an additional 6,000,000 shares of the Company's common stock each to
Nikas and Mattern and 2,000,000  shares of the Company's common stock to Savage,
at a strike  price of $0.025 per  share.  Of these  warrants  and  options,  the
Company issued but did not deliver 1,500,000  warrants each to Mr. Nikas and Mr.
Mattern and  500,000  warrants to Mr.  Savage in January  2002.  The fair market
value of these warrants at the date of grant was $35,713.  In the event that the
Company does not acquire a majority interest in iNet, these options and warrants
will automatically be cancelled. Under the terms of the option, iNet is required
to deliver certain financial and non-financial information. This information was
never  delivered and the Company is holding the warrants  issued in January 2002
until a  resolution  is  reached.  The  Company is seeking an  extension  of the
exercise date to allow iNet to deliver the required information and to allow the
Company  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 to the Company  and vice  versa.  Discussions  thus far with
iNet have not resulted in a resolution of this matter.

Note 16.  Subsequent Events

In January 2003, the Company's  subsidiary,  Government  Internet Systems,  Inc.
(GIS) retained David Kinney to serve CTO. The Company issued five-year  warrants
to purchase 500,000 shares of the Company's common stock at an exercise price of
$0.01 in  connection  with  retaining  this  executive.  In the  event  that GIS
achieves certain sales targets or receives $2.5 million in financing, Kinney has
the option to become a salaried  employee  for two years at an annual  salary of
$125,000.  The  warrants,  at the time of  issuance,  had a fair market value of
$2,441 based on Black-Scholes option pricing model).

In January 2003, the Company issued a $10,365  promissory note bearing  interest
at 10% per annum to a consultant of the Company's subsidiary, EnFacet, Inc., for
past services rendered. The note is payable in monthly $1,000 installments.

In March 2003, in connection with a settlement agreement between the Company and
M.S. Farrell concerning claims by each party over a consulting agreement entered
into between the parties in July 2001, the Company  issued a promissory  note in
the principal amount of $23,030 bearing interest at 12% per annum to a member of
M.S.  Farrell.  The note is payable in installment  payments of $2,500 per month
beginning in July 2003 until the principal, and all interest, fees, charges, and
other amounts owing hereunder have been paid in full.

In January 2003, the Company issued a $10,365  promissory note bearing  interest
at 10% per annum to a consultant of the Company's subsidiary, EnFacet, Inc., for
past services rendered. The note is payable in monthly $1,000 installments.

In March 2003, in connection with a settlement agreement between the Company and
M.S. Farrell concerning claims by each party over a consulting agreement entered
into between the parties in July 2001, the Company  issued a promissory  note in
the principal amount of $23,030 bearing interest at 12% per annum to a member of
M.S.  Farrell.  The note is payable in installment  payments of $2,500 per month
beginning in July 2003 until the principal, and all interest, fees, charges, and
other amounts owing hereunder have been paid in full.

In March 2003, the parties  amended the $280,000 note issued in November 2001 in
connection  with the  purchase of the  SiteFlash  technology  assets of Adhesive
Software.  Pursuant to the  amendment in which waived any current  default,  the
note will be payable $5,000 monthly  payments  beginning in June 2003 which will
be raised to $10,000 payments beginning in January 2004 (until all principal and
interest have been paid in full) in exchange for increasing the interest rate to
12% which will be accrued from the date the note was issued.  In connection with
this amendment, the parties also agreed to amend the put and call agreement note
issued in October  2002,  whereby the  Company  issued  1,000,000  shares of its
common stock in lieu



                                      F-37
<PAGE>

of issuing  2,500 shares of the Company's  Class C preferred  stock to Paradigm,
when the Company did not purchase the  underlying  common stock  represented  by
12,500 shares of the Company's Class C Preferred Stock in March 2003.

In April 2003,  Globalfare.com,  Inc. a 100% Subsidiary of the Company,  entered
into a services agreement with Zegato Solutions,  Inc.  ("Zegato") for planning,
booking,  and fulfilling leisure (personal) travel conducted in conjunction with
official travel and personal travel not in conjunction with official  government
travel.  Pursuant  to the  terms  of the  agreement,  Globalfare.com,  with  its
partners,  shall provide  fulfillment  services for all leisure travel  services
booked through the Zegato Services Concourse, including sales of Picasso Travel,
Inc.  travel  packages,  as such  sales  may be made for  leisure  customers  in
connection  with the Zegato travel system.  In connection  with the terms of the
agreement, Zegato shall receive a commission on the gross profit for all sales.

In April 2003 the Company and Infotec,  Inc. a Japanese corporation entered into
a software reseller agreement whereby Infotec shall market, distribute,  provide
maintenance and technical support for the Company's  SiteFlash  software product
in the territory of Japan.

In April  2003,  the Company  issued  five-year  warrants to purchase  5,000,000
shares of common  stock of the Company at an exercise  price of $0.010 per share
to Wolman,  Babbitt, & King for legal services rendered to the Company. The fair
value of  warrants at the time of issuance  was $15,009  based on  Black-Scholes
option pricing model.

In  April  2003,  the  Company  and Mike  Radlovic  (Radlovic)  entered  into an
agreement  whereby  Radlovic would  purchase the Company's  interest in TranStar
Systems, Inc. (TranStar),  formerly Apollo Industries, Inc. In October 2000, the
Company had agreed to provide  $250,000 in funding to TranStar in exchange for a
30% equity interest.  Pursuant to the agreement,  the Company transferred all of
its  ownership  representing  3,000,000  shares  of  TranStar  common  stock  to
Radlovic.  In consideration of the sale, Radlovic issued a $250,000 note bearing
interest  at 10% per annum due in April  2007.  The note is secured by 5 million
shares of TranStar common stock. Radlovic is the President and CEO of TranStar.

In April 2003, the Company and TranStar Systems, Inc. (TranStar) agreed to amend
two $24,000  promissory notes bearing interest at 10%, dated April 19 and May 8,
2001,  and a royalty  agreement,  dated  October 14, 2000  whereby  TranStar had
agreed to pay a royalty of 2% of all  transaction  fees up to $275,000 and 1% up
to $3,000,000. Pursuant to the agreement, the due date for the two $24,000 notes
was extended to April 5, 2006 in exchange for increasing the royalty rate in the
royalty agreement to 3% of any transaction fees and any other revenues generated
in perpetuity. The collateral to secure the note, consisting of 1,000,000 shares
of TranStar common stock, and the underlying  security agreements remain in full
force and effect.  In connection with the agreement,  TranStar also released and
indemnified  the  Company  from any  obligations  owed to  TranStar or any third
party.

In April  2003,  the  Company  and Mike  Radlovic  ("Radlovic")  entered  into a
marketing  agreement whereby Radlovic will refer leads to the Company to certain
retail chain outlets  stores and  restaurants  for the Company's  AffiliateFlash
product in exchange for commissions on sales.

In April 2003, the Company issued a $25,000  promissory note bearing interest at
10% per annum to a consultant of the Company's subsidiary,  EnFacet,  Inc., to a
third  party  consultant  for past  services  rendered.  The note is  payable in
monthly  $1,000  installments  beginning  in May 2003 which will be increased to
$2,000 beginning in October 2003.

In April 2003,  the Company issued  1,100,000  shares of common stock to a third
party  consultant and extended  750,000  options and 750,000  warrants issued in
November  2001 at an  exercise  price of  $0.025  per share for one more year in
connection with consulting services.

In April 2003, the Equity Line of Credit  agreement  entered into in August 2001
was cancelled and a new Equity Line of Credit Agreement was executed between the
Company and Cornell Capital  Partners,  L.P.,  whereby  $10,000,000 worth of the
Company's  common stock may be purchased.  The shares must be registered  before
the sale, and the shares can be purchased at 99% of the lowest closing bid price
during the 5 days  trading days after the Company  requests an advance,  but not
less than the minimum  advance price per share set by the Company and provide in
the notice requesting an advance. The Equity Line of Credit Agreement contains a
commitment  fee of $190,000,  payable in cash or a  convertible  debenture to be
issued to Cornell  and a placement  fee of  $10,000,  payable to the third party
placement  agent.  The  debenture may be redeemed for 100% of the any portion of
the  principal  that has not been  converted by the holder as of the date of the
notice of redemption.  The debenture provides that after 180 days the holder may
convert any portion of the  principal at 100% of the lowest  closing bid price 5
days prior to conversion.



                                      F-38
<PAGE>

                Vertical Computer Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

In April 2003, the Company issued $200,000 of convertible  debentures.  The debt
accrues  interest at 5% per annum and is due April 2008.  The  debenture  may be
redeemed  for 120% of the  principal  plus  interest  for up to 120  days  after
purchase.  After 120 days have passed from the date of purchase,  the holder may
convert the debenture into shares of common stock at either $0.03 or 80 % of the
lowest closing bid price for the five trading days prior to the  conversion.  As
of June 26, 2003 no conversions have taken place.

In May 2003,  the  Company  issued two  promissory  notes,  each for a principal
amount  of  $17,500,   bearing  no  interest  to  two  third  party  lenders  in
consideration of two loans in the aggregate amount of $30,000. The notes are due
in June 2003.  Vertical  has  pledged  distributions  of funds owed to it by its
subsidiary  Now Solutions  toward  payment of the loan.  In connection  with the
notes the Company paid a commitment fee of $2,500 each note and issued five-year
warrants to purchase 250,000 shares of the Company's common stock at an exercise
price of $0.0075 per share to each lender.  The fair value of warrants issued at
the grant  date was $2,440  based on  Black-Scholes  option  pricing  model.  In
connection  with these  loans,  the Company  also issued  five-year  warrants to
purchase  250,000  shares of the company's  common stock at an exercise price of
$0.0075 per share to a third party consultant. The fair value of warrants issued
at the grant date was $1,220 based on Black-Scholes option pricing model.

The following disclosures are not audited:

In June 2003, the Company  retained the services of Equitilink,  Inc. to provide
investor  relations  services.  As compensation,  The Company issued  15,000,000
shares of  Company's  common stock with the Rule 144  restrictive  legend with a
fair market value of $60,000.

In June 2003,  the Company and a third party  lender  entered  into an agreement
whereby the Company was loaned $90,000. In exchange the Company issued a $90,000
note bearing  interests at 10%,  and due March 31, 2004.  The Company  pledged a
limited  interest in $90,000 of a $650,000  note issued by Now  Solutions to the
Company to secure the loan.  In  addition,  if the lender  loans the  Company an
additional  $260,000 by August 8, 2003,  then the parties agreed that the lender
shall  receive  from  the  Company  a  $50,000  commitment  fee,  which  will be
incorporated into a promissory note with a principal of $310,000,  due March 31,
2004,  and  bearing  interest  at a rate of 10% per annum,  5 year  warrants  to
purchase  10,000,000  shares of common stock of the Company at an exercise price
of $0.01 per share, and 15,000 shares of Series "C" preferred  convertible stock
of the  Company.  If the  lender  loans the  Company  $260,000,  then the pledge
agreement  shall be  cancelled  and the Company will assign all of its rights in
the $650,000 note issued by Now to the Company.  In connection  with the $90,000
loan,  the lender  waived the  default of a $350,000  note  issued by EnFacet in
August 2001, a 100% subsidiary of the Company, and extended the maturity date of
this note to March 31, 2004. In exchange the Company increased the interest rate
of the $350,000 note from 8% to 10% beginning July 1, 2003.

In July 2003,  the Company and Victor Weber  amended the terms of certain  loans
made by Weber to the Company in the  aggregate  amount of $150,000.  Pursuant to
their  agreement,  Weber  cancelled two notes,  each with a principal  amount of
$65,000 and $45,000  issued in December 2002 and Vertical  issued two promissory
notes in the amounts of $100,000 and $40,000. The $100,000 promissory note bears
interest at 13% per annum and is payable in monthly  accrued  interest  payments
beginning  August 1, 2003,  and a final  payment of all  principal and remaining
interest by March 31, 2004.  The $40,000  promissory  note bears interest at 13%
per annum and is payable in monthly  installment  payments  beginning  August 1,
2003, and consisting of an $8,000 principal payment plus the interest accrued in
the previous  month. In  consideration  of the loans made to the Company and for
services rendered on behalf of the Company,  Vertical paid a $250 commitment fee
to Weber and issued  8,000,000  shares of common  stock of the Company to Weber.
The stock is subject to Rule 144  restrictions.  Victor  Weber is a Director and
President of Government Internet Systems, Inc., a subsidiary of the Company.

Note 17.  Concentration of Risk

During  fiscal  2002,  98%  of the  Company's  net  sales  were  made  up of Now
Solutions'  client  base.  Now  Solutions  had two  clients  who  accounted  for
approximately  $8.7%% of its total  revenues.  During fiscal 2001, Now Solutions
had one client who accounted for  approximately  5.6% of its total revenues.  At
December  31,2002,  Now  Solutions  had a single  customer  that  accounted  for
approximately 10% of its total accounts receivable.

                                      F-39
<PAGE>



                                    PART III


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

         The Company's present directors and executive officers are as follows:

 Name                    Age     Position
 ----                    ---     --------
 Richard S. Wade         59      President, Chief Executive Officer and Director
 William K. Mills        45      Secretary and Director

Richard S. Wade, Age 59, President, Director

         Richard S. Wade is  President  of the  Company  and has been a director
since October 1999. Before coming to Externet World, Inc. in mid-1999,  and then
transitioning to what is now the Company 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 45, 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 has also served on the boards of the
Didi Hirsch Dental Health Foundation,  the 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.

         The Company'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

      Section  16(a)  of the  Securities  Exchange  Act  of  1934  requires  the
Company's  officers  and  directors,  and  persons who own more than ten percent
(10%) of a registered class of the Company's  equity  securities to file reports
of  ownership  and  changes  in  ownership  with  the  Securities  and  Exchange
Commission  ("SEC").  Officers,  directors  and greater  than ten



                                       46
<PAGE>

percent  (10%)  stockholders  are  required  by SEC  regulations  to furnish the
Company with copies of all Section 16(a) forms they file.

      To the best of the  Company's  knowledge,  based  solely  on review of the
copies of such forms furnished to it, or written  representations  that no other
forms  were  required,  the  Company  believes  that all  Section  16(a)  filing
requirements applicable to its officers,  directors and greater than ten percent
(10%) stockholders were complied with during 2002 with the following  exception:
Richard  wade did not timely file Changes in  Beneficial  Ownership on Form 4 or
his Form 5. With  respect to any former  directors,  officers,  and ten  percent
(10%)  stockholders  of the Company,  the Company does not have any knowledge of
any known failures to comply with the filing requirements of Section 16(a).

Significant Employees


         Luiz  Valdetaro,  Age  44,  Chief  Technology  Officer  and  the  Chief
Accounting 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,  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  and EDS, after  System/One was acquired by EDS. 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.


         Aubrey  McAuley,  Age 39,  Executive VP, Product  Development And Sales
Support

         Mr.  McAuley  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 17 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  52,  Executive  V.P.  Government  Affairs;
         Chairman and CEO, Government Internet Systems, Inc.

         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 the Company. 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.




                                       47
<PAGE>

         Laurent Tetard, Age 33, Director Of Operations

         Mr. Tetard joined the Company  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, LLC

         Marianne M. Franklin, Age 43, President and CEO

         Marianne M.  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.

         Kent Orgain, Age 52, Vice-President Of Development

         Mr.  Orgain  joined  Ross  Systems in 1993.  From 1989 to 1993,  he was
Application  Maintenance  Manager for Tesseract  Corporation,  a human resources
management  software  vendor.  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 came from Ross Systems,  where he was director of product development
for human resources and payroll product.  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.

         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 44, 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 had joined Ross Systems, Inc. in January 1994 as a Senior
Consultant/Project Manager in the Human Resources/Payroll  Professional Services
department.  In 1998 she  became  responsible  for the  pre-sales  organization.
During  her  tenure,  she has  assisted  in  expanding  the  client  base in her
territory by 200%.

         Former Executives of Now Solutions

         Stephen Gunn, was the Chief  Financial  Officer at Now  Solutions.  Mr.
Gunn's services on behalf of Now Solutions terminated in June 2003.




                                       48
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

         The  following  table  shows  all  the  cash  compensation  paid by the
Company,  as well as certain  other  compensation  paid or  accrued,  during the
fiscal  years ended  December  31, 2002,  2001 and 2000 to the  Company's  three
highest paid executive officers, who were employed by the Company as of December
31, 2002. 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.  Except
as set forth below, 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>
Richard Wade,(1)          2002    $300,000(1)       --         --             --     20,600,000(1)        --            --
President and Chief       2001    $162,500          --         --             --        250,000(1)        --            --
Executive Officer         2000    $145,000          --         --             --                --        --            --

Luiz Valdetaro, (2)       2002    $150,000          --         --             --         1,000,000        --            --
Chief Technology          2001    $150,000
Officer                   2000    $145,000          --         --             --                --        --            --

Aubrey McAuley (3         2002    $120,000          --         --             --                --        --            --
Executive V.P., Product   2001          --          --         --             --                --        --            --
Development & Sales       2000          --          --         --             --                --        --            --
Support

Laurent Tetard (4)        2002    $105,000          --         --              -         1,500,000        --            --
Director of Operations    2001     $85,000          --         --              -           500,000        --            --
                          2000     $48,000          --         --              -         1,000,000        --            --

James Salz (5)            2002    $100,000          --         --              -         5,000,000        --            --
Corporate Counsel         2001     $17,500          --         --              -           200,000        --            --
                          2000          --          --         --              -                --        --            --
</TABLE>


         No stock options were exercised by the named executive  officers during
the fiscal year ended December 31, 2000, 2001 or 2002.

(1)      Mr.  Wade  deferred  $300,000  of his salary in 2002.  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 vesting in equal monthly  amounts over
         a 36 month  period.  Mr. Wade also serves as a Director of the Company.
         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.  Valdetaro  deferred  $137,500 of his salary in 2002. Mr. Valdetaro
         was also granted 3 year  warrants to purchase  1,000,000  shares of the
         Company's  Common  Stock at an  exercise  price of $0.005  per share in
         connection with a loan he made to the Company.

(3)      Mr. McAuley's salary was raised in July 2002 to $120,000 pursuant to an
         employment agreement. Mr. McAuley has deferred payment of $92,500.


(4)      Mr.  Tetard has deferred  payment of $65,625 of his salary in 2002.  In
         December  2000,  Mr.  Tetard  was  issued  stock  options  to  purchase
         1,000,000  shares of common  stock of the Company.  These  options were
         extended in December 2002 for 1 year and will expire in December 2003.


(5)      Mr. Salz has deferred payment of $58,333 of his salary in 2002.





                                       49
<PAGE>

The  table  below  shows  information  regarding  options  granted  to the named
officers in 2002:

<TABLE>
<CAPTION>
                                                    OPTIONS/SAR GRANT TABLE
---------------------------------------------------------------------------------------------------------------------------------
                      No. of         % Total
                    Securities     Options/SARs                                                                         Vesting
                    Underlying      Granted to                               Extended                       Option       from
                   Options/SARs     Employees     Exercise or   Expiration     Post     Strike    Grant      Price      Grant
Name                 Granted        in 2002(1)     Base Price      Date        Split     Price     Date    Extension     Date
----                 -------        ----------     ----------      ----        -----     -----     ----    ---------     ----
                       (#)              (%)      ($ Per Share)
                     -------        ----------     ----------
Luiz
<S>                <C>                  <C>           <C>        <C>   <C>   <C>         <C>     <C>   <C>      <C>
Valdetaro(2)       1,000,000            9.4%          $0.005     08/20/05    1,000,000   $0.005  08/20/02       5,000  Immediate


Laurent
Tetard(3)          1,500,000           14.1%          $0.010     12/02/06    1,500,000    $0.01  12/02/02     $15,000   1 year


James Salz         2,500,000           47.2%          $0.012     06/21/05    2,500,000   $0.012  06/21/02     $30,000  Immediate
                   2,500,000                          $0.010     12/02/06    2,500,000   $0.010  12/02/02     $25,000   1 year
</TABLE>

(1)      The Company issued a total of 10,600,000  stock options and warrants in
         2002 to  employees  of the  Company,  which does not include  9,688,312
         warrants  issued to  consultants  of the  Company  nor does it  include
         2,000,000  warrants  issued to directors  and  executives of Government
         Internet Systems, Inc., the Company's 89% owned subsidiary .


(2)      Mr. Valdetaro was granted 1,000,000 warrants in consideration of a loan
         he made to the Company in August 2002.


(3)      Mr. Tetard's  options to purchase  1,000,000  shares of common stock of
         the Company were extended for an additional  year in December 2002. The
         options expire in December 2003.


The below table shows  information  aggregate options held by the named officers
at the end of 2002.

                       YEAR-END OPTION VALUES (2001-2002)

<TABLE>
<CAPTION>
                             No. of Securities Underlying
                                 Options/SARs Granted         Value of Unexercised in-the-Money
                              As Of Fiscal Year End 2002     Options at Fiscal Year End 2002 (1)
                             ----------------------------      --------------------------------
       Name                  Exercisable    Unexercisable      Exercisable        Unexercisable
       ----                  -----------    -------------      -----------        -------------
<S>                              <C>            <C>
       Richard Wade (2)          7,938,889      12,911,111                 --                  --


       Luiz Valdetaro            1,000,000              --


       Laurent Tetard(3)         1,500,000       1,500,000                 --                 --


       Jim Salz                  2,700,000       2,500,000                 --                 --
</TABLE>



(1)      Based on Share Price of $0.0086 on December 31, 2002.


(2)      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 Stock  Options and Warrants
         that vest in equal amounts each over a 36 months period.  Mr. Wade also
         serves as a Director of the Company.  As a Director,  he is entitled to
         options to purchase up to 250,000 shares of common stock of the Company
         at a strike price of $0.086 that expire 3 years after the date of grant
         or on February 5, 2004. These warrants have vested.


(3)      In  December  2000,  Mr.  Tetard was issued  stock  options to purchase
         1,000,000  shares of common stock of the Company.  Theses warrants were
         extended in December 2002 for 1 year and will expire in December 2003.




                                       50
<PAGE>

Stock Option Plan.

         In December 1999,  the Company  established a stock option plan whereby
the  Company  may grant both  Incentive  Stock  Options  (within  the meaning of
Section 422 and the Internal  Revenue Code of 1986) and  non-statutory  Options.
Under the stock option plan,  the Company  could issue up to  50,000,000  shares
(adjusted  post stock  split),  In January 2002,  the Company  amended the stock
option plan to provide for an  additional  10,000,000  shares,  for an aggregate
maximum  of  60,000,000  options to  acquire  shares of the common  stock of the
Company  under its the stock  option plan.  The Company  intends to register the
additional  options  to acquire  the  10,000,000  shares of common  stock of the
Company  in its  forthcoming  SB-2.  Most  options  issued  are  non-assignable,
non-transferable,  vested on the date of grant,  and usually  expire three years
from the date of grant.


2001

         During 2001, the Company  granted  warrants to purchase an aggregate of
80,763,943  shares of the  Company's  common  stock to Arglen for its efforts to
bring in the  transaction  to  acquire  60%  interest  in Now  Solutions.  These
warrants was valued at $798,500 based on Black-Scholes option pricing model. The
Company  intends to cancel the  foregoing  warrants as part of its legal  action
with Arglen.

         During 2001, the Company granted  three-year stock warrants to purchase
aggregate 22,700,000 shares of common stock at an exercise price of ranging from
$0.012 to $0.10 per share to eight  employees.  Of the 22,700,000  warrants,  20
million warrants are vested in equal amounts per month over a three-year period.
The remaining  2,700,000  warrants were vested  immediately.  These warrants are
non-assignable  and  non-transferable.  The Company did not record any  employee
stock  compensation  by  adopting  APB.  No. 26 whereas  the fair value of these
warrants on the grant date was $232,996  based on  Black-Scholes  option pricing
model.

         During  2001,  the  Company  granted  warrants  to  purchase  aggregate
22,723,456  shares of common stock with exercise  price ranging from $0.012 to $
0.30 to individuals for services provided. These warrants are non-assignable and
non-transferable,  were  exercisable  over a three to five year  period from the
date of  grant,  and vest in  immediately.  The  Company  recorded  $193,885  as
non-cash and  non-employee  stock  compensation  based on  Black-Scholes  option
pricing model.

         During  2001,  the  Company  granted  three-year  warrants  to purchase
500,000  shares of common  stock  with  exercise  price of $0.028 per share to a
lender.  These  warrants  are  non-assignable  and  non-transferable  and vested
immediately.  The Company  recorded $3,763 as deemed  interest  expense based on
Black-Scholes option pricing model.

         During 2001, the Company granted three-year  incentive stock options to
purchase  aggregate  7,590,000  shares of common  stock at an exercise  price of
ranging from $0.014 to $0.086 per share to 22 employees and 8 consultants. These
incentive stock options were vested immediately.  The Company did not record any
employee  stock  compensation  by adopting APB. No. 25 whereas the fair value of
these  warrants  on the grant date was  $14,948  based on  Black-Scholes  option
pricing model.

         During 2001, the Company granted three-year  incentive stock options to
purchase  aggregate  3,500,000  shares of common  stock at an exercise  price of
ranging at $0.01 per share to three  outsiders of iNet.  These  incentive  stock
options  were  vested   immediately.   The  Company   recorded   non-cash  stock
compensation  expense of $9,406 on the grant date based on Black-Scholes  option
pricing model.

         During 2001, the Company granted three-year non-statutory stock options
to purchase  aggregate  1,500,000 shares of common stock at an exercise price of
ranging  from  $0.041 to $0.086 per share to five  outsiders  for their  service
provided. These non-statutory stock options were vested immediately. The Company
recorded non-cash stock compensation  expense of $853 on the grant date based on
Black-Scholes option pricing model.

2002

         During 2002, the Company granted warrants to purchase  8,688,312 shares
of common stock with exercise price ranging from $0.005 to $ 0.03 to individuals
for services provided.  These warrants 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 2002 and 2003, as  applicable.  The Company
recorded  $42,419 as  non-cash  and  non-employee  stock  compensation  based on
Black-Scholes option pricing model.
         During 2002, the Company  granted  warrants to purchase an aggregate of
6,250,000  shares of common stock with  exercise  price  ranging from $0.0075 to
$0.010 to the people providing  services to Government  Internet Systems,  Inc.,
the  Company's  89% owned  subsidiary.  These  warrants are  non-assignable  and
non-transferable, are exercisable over a three to five year period from the date
of grant, and vest immediately.  The Company recorded stock compensation expense
of $23,467 based on the Black-Scholes option-pricing model.



                                       51
<PAGE>

         During  2002,  the  Company  granted,  but did not  deliver  three-year
warrants with an exercise price of $0.025 to purchase  1,500,000  shares each to
Basil  Nikas and Robin  Mattern and  500,000  shares to Wayne  Savage in January
2002. The warrants were issued in connection  with an option  agreement  whereby
the Company  could  acquire a 56% ownership  interest in iNet.  Mr.  Nikas,  Mr.
Mattern,  and Mr. Savage are  executives of iNet. The fair market value of these
warrants  at  the  date  of  grant  was  $35,712  based  on  the   Black-Scholes
option-pricing  model. In the event that the Company does not acquire a majority
interest in iNet,  these  warrants will  automatically  be cancelled.  Under the
terms  of the  option,  iNet  is  required  to  deliver  certain  financial  and
non-financial information.  This information was never delivered and the Company
is holding the warrants granted in January 2002 until a resolution is reached.

         During  2002,  the  Company  granted  three year  warrants  to purchase
3,700,000  shares of common stock at an exercise price of ranging from $0.003 to
$0.015 per share to third party lenders in connection  with securing funds of an
aggregated  amount of $112,500  through  issuing notes payable to these lenders.
These warrants vested upon issuance.  The Company  recorded $13,640 based on the
Black-Scholes option-pricing model.

         In June and August 2002,  the Company  granted  three-year  warrants to
purchase  4,000,000  shares of its common stock to three employees at an average
share price of $0.010.  These warrants are non-assignable and  non-transferable.
The  Company   recorded   stock   compensation   expense  of  $16,098  based  on
Black-Scholes option pricing model.

         In December  2002,  the Company  granted  three-year  stock warrants to
purchase to 6,600,000  shares of common stock at an exercise price of $0.010 per
share to six  employees.  The  warrants  vest in equal  amounts per month over a
one-year period.  These warrants are  non-assignable and  non-transferable.  The
Company did not record any employee stock  compensation  by adopting APB. No. 26
whereas the fair value of these  warrants on the grant date was $25,664 based on
Black-Scholes option pricing model.

         During 2002, the Company wrote off a subscription  receivable of $2,000
due in relation to warrants that were expired.

Option and warrant activities in 2001 and 2002 were summarized is as follows:

<TABLE>
<CAPTION>
                                                                            Non-                                 Weighted
                                                       Incentive          Statutory                              Average
                                                         Stock              Stock                                Exercise
                                                        Options            Options            Warrants            Price
                                                   ------------------  ----------------   -----------------  -----------------
<S>                                                        <C>              <C>                  <C>
Outstanding at 01/01/01                                    5,700,000        28,300,000           2,628,787$             0.233

Options/Warrants granted with an exercise
   price of $0.01 to $0.11 per share                      11,090,000         1,500,000         126,687,399              0.082
Options/Warrants exercised                                         -                 -                   -
Options/Warrants expired                                           -                 -           (250,000)              0.160

                                                   ------------------  ----------------   -----------------  -----------------
Outstanding at 12/31/01                                   16,790,000        29,800,000         129,066,186(1)           0.113
                                                   ==================  ================   =================  =================

Options/Warrants granted with an exercise
   price of $0.003 to $0.11 per share                              -                 -          32,738,312              0.006
Options/Warrants exercised                                         -                 -                   -                  -

Options/Warrants expired                                 (3,200,000)      (15,000,000)                   -              0.025

                                                                                                             -----------------
                                                   ------------------  ----------------   -----------------
Outstanding at 12/31/02                                   13,590,000        14,800,000         161,804,498   $          0.103
                                                   ==================  ================   =================  =================
</TABLE>



                                       52
<PAGE>

         (1) The  Company  intends to cancel  warrants  to  purchase  80,763,943
shares  of common  stock to Arglen  Acquisitions  (LLC) in  connection  with Now
Solutions as part of its legal action with Arglen. Information relating to stock
options/warrants  at December  31, 2002,  summarized  by exercise  price,  is as
follows:

<TABLE>
<CAPTION>
                                                               Outstanding                               Exercisable
                                              -----------------------------------------------   ------------------------------
                                                             Weighted Average                         Weighted Average
                                              -----------------------------------------------
                                                                  Life           Exercise                          Exercise
Exercise Price Per Share                         Shares         (Months)           Price           Shares            Price
                                              --------------   ------------    --------------   -------------    -------------

Incentive Stock Options:
<S>                                              <C>                 <C>      <C>                  <C>         <C>
         $0.01 - $0.09                           13,115,000          19.82    $        0.025       13,115,000  $        0.025
         $0.10 - $0.47                              475,000           6.93    $        0.466          475,000  $        0.466
                                               -------------   ------------     -------------   --------------   -------------
                                                 13,590,000          19.39    $        0.040       13,590,000  $        0.040
                                               -------------   ------------     -------------   --------------   -------------

Non-statutory Stock Options:
         $0.01 - $0.10                            3,500,000          13.28    $        0.033        3,500,000  $        0.033
         $0.11 - $1.25                           11,300,000           9.45    $        0.600       11,300,000  $        0.600
                                               -------------   ------------     -------------   --------------   -------------
                                                 14,800,000          10.36    $        0.047       14,800,000  $        0.047
                                               -------------   ------------     -------------   --------------   -------------

Warrants (1)
               $0.003 - $0.100                  133,505,757          18.90    $        0.057       81,584,443  $        0.043
               $0.101 - $0.350                   28,298,741          32.73             0.162       14,965,498           0.217
                                               -------------   ------------     -------------   --------------   -------------
                                                161,804,498          21.32    $        0.076       96,549,851  $        0.070
                                               -------------   ------------     -------------   --------------   -------------
</TABLE>


         (1) The  Company  intends to cancel  warrants  to  purchase  80,763,943
shares of common stock to Arglen  Acquisitions,  (LLC,  in  connection  with Now
Solutions as part of its legal action with Arglen.


         The range of assumptions used in the Black Scholes option pricing model
in 2002 and 2001 were as follows:

                                   December 31,
                                   ---------------------------------------------
                                   2002                     2001
                                   -------------------      --------------------

Discount rate - bond yield rate    4.00                %    4.00            %
Volatility                         83 - 187            %    51 - 85         %
Expected life                      1.5 to 2.0 years         1.5 - 2.0 years
Expected dividend yield            --                       --


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 the Company 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 the Company.

         Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors,  officers and controlling  persons of
the  Company  pursuant  to the  foregoing,  or  otherwise,  the Company 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.



                                       53
<PAGE>

Employment Agreements

         In December  2001,  the Company  executed an employment  agreement with
Richard Wade  pursuant to which Mr. Wade serves as Chief  Executive  Officer and
President of the Company under which 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  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 the Company'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 the Company 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 the Company during the years 1999 and 2000.
Mr. Wade has deferred his  compensation  (which was fully accrued) since January
1, 2002.

         In January 2000, the Company executed an employment agreement with Luiz
Valdetaro pursuant to which Mr. Valdetaro serves as the Chief Technology Officer
and the Chief  Accounting  Officer of the Company.  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  the  Company'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.  Mr.  Valdetaro has deferred
$137,500  of his  2002  salary  and all of his  salary  to date  in  2003.  This
agreement expired December 31, 2002.

         In July 2002, the Company entered into a two-year employment  agreement
with Aubrey McAuley,  whereby McAuley would provide  services in the capacity of
Executive VP, Product  Development  and Sales  Support.  McAuley will be paid an
annual  salary of $120,000  and a bonus as  determined  in  accordance  with the
agreement.  In addition,  the agreement contains certain  performing  incentives
whereby  McAuley can earn 7,500 shares of Series "C" preferred stock of the pool
of 30,000  shares  of  Series  "C"  preferred  stock,  which  were  reserved  in
connection with the purchase of Company's subsidiary, Enfacet, Inc. These shares
of  Series  "C"  preferred  stock  may be  converted  into  3,000,000  shares of
Company's  common  stock.  the Company is required  to register  the  underlying
shares of common stock.  In the event the  employment  agreement is  terminated,
then  McAuley  may  convert  his  employment   agreement  into  a  subcontractor
agreement.  As of September 30, 2002, management's opinion is that the shares of
7,500 Series "C" preferred stock have not been earned and accordingly the shares
have not been issued.





                                       54
<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 July 28, 2003, 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   797,272,301shares   of  common  stock
outstanding  as of July 28,  2003,  together  with  options,  warrants  or other
securities convertible or exchangeable by the beneficial owner(s) into shares of
common stock within 60 days of July 28, 2002.

<TABLE>
<CAPTION>
                                                                  Shares
                                                             of Common Stock         Percent
   Name and Address of Beneficial Owner(1)                  Beneficially Owned       of Class
   ---------------------------------------                  ------------------       --------
<S>                                                            <C>
   William K. Mills                                            4,583,000(2)                *
   Richard Wade                                              137,075,500(3)            17.19%
   Total Directors and Officers (Two People)                 141,658,500               17.77%
</TABLE>


*        Means less than 1%.


(1)      Unless otherwise indicated, the address of each director and officer is
         c/o Vertical Computer Systems,  Inc., 6336 Wilshire Blvd., Los Angeles,
         CA 90048.


(2)      Includes  options to purchase up to 250,000  shares of common  stock of
         the Company  that expire 3 years after the date of grant or on April 9,
         2004 and 33,000 shares of Common Stock  beneficially  owned through Mr.
         Mill's law firm, Parker, Mills, & Patel, LLP.


(3)      Includes options to purchase up to 20,600,000 shares of common stock of
         the Company for  services as CEO and  President  and 250,000  shares of
         common  stock of the  Company  that  expire 3 years  after  the date of
         grant.  Also includes  101,370,050  shares owned by Mountain  Reservoir
         Corp.  ("MRC"),  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.  MRC pledged  10,450,000
         common stock of the Company  shares as  collateral  on a $181,000  note
         issued in October 2002. In December 2002, MRC pledged 36,303,932 shares
         of common stock of the Company in  connection  with a $425,000  note as
         collateral on the note. This collateral was pledged in conjunction with
         15,000,000  shares of the common  stock of the  Company  pledged by Mr.
         Luiz Valdetaro,  the Chief Technology  Officer and the Chief Accounting
         Officer of the  Company.  In January  2002,  the  Company  executed  an
         indemnity  and   reimbursement   agreements  with  Mountain   Reservoir
         Corporation  to cover both of the above  pledges by MRC. .  Pursuant to
         the pledges  made by MRC, the Company  agreed to reimburse  MRC for any
         shares sold as  collateral to cover the default of any loan. On January
         31, 2002,  the $425,000 note was in default and the  36,303,932  shares
         were transferred to the lender.  In September 2002, the lender informed
         the Company  that  19,751,000  shares of the  collateral  were sold for
         $254,382, the remaining 31,552,932 shares were transferred to two third
         parties,  the debt was satisfied as of April 1, 2002, and that the note
         had been  cancelled.  Accordingly,  the Company  reclassified  the note
         payable  to the third  party  including  accrued  interest  to the note
         payable to related parties.  In September and October 2002, the Company
         issued  36,303,932 and 15,000,000 shares of its common stock to MRC and
         Mr. Luiz  Valdetaro,  respectively,  in  accordance  with the  executed
         indemnity and reimbursement  agreements of January 2002. At the time of
         issuing  common  stock,  the  value of the note  payable  plus  accrued
         interest was approximately $450,000. The Company reclassified from note
         payable  to  related  parties to common  stock and  additional  paid in
         capital.   In  November  2002,  MRC  and  Mr.  Valdetaro  assigned  any
         additional rights they had in the stock collateral to the Company.  The
         Company is currently  pursuing these rights with the lender to obtain a
         specific  accounting  and a refund of any monies that may be due to the
         Company.  The  differential  between the value of the stock  issued for
         reimbursement  of  shares to  Mountain  Reservoir  Corporation  and Mr.
         Valdetaro  and the  value  of the  note,  plus  accrued  interest,  was
         accounted for as forgiveness  of debt. The Company  continues to pursue
         its rights to obtain a full accounting and intends to take  appropriate
         action to enforce its rights.



ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         During the years ended  December  31, 2002 and 2001,  the Company  paid
Parker,  Mills & Patel LLP ("PMP"),  its general  legal  counsel,  approximately
$4,000 and $133,371 in exchange for consideration  for legal services  rendered.
William Mills, a partner at PMP, is also a director of the Company.  The Company
issued  2,621,622  shares of common stock in July 2001 and  1,560,000  shares of
common  stock in November  2001 with an  aggregate  value of $121,000 to William
Mills,  a director  of the  Company,  of Parker,  Mills & Patel LLP for  partial
payment of legal  services.  The  2,612,622  shares and  1,560,000  shares  were
pursuant to an S-8 registration statement filed on November 8, 2001.

         During 2001, PMP made advances of approximately  $30,000 to third party
venders 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.  The warrants vested upon issuance.  At
December 31, 2002, the outstanding



                                       55
<PAGE>

balance under of $23,974 was in default. In September 2001, the Company issued a
note in the amount of $28,190 to Mr. Luiz  Valdetaro,  bearing  interest at 10%,
unsecured,  principal and interest due on demand in  consideration  of a loan in
the same amount.  Mr.  Valdetaro is the Chief  Technology  Officer and the Chief
Accounting Officer of the Company.

         In October 2001,  the Company issued a $100,000 note payable to a third
party  lender.  The note required a payment of $46,000 on April 15, 2002 and the
reaming  outstanding  balance and interest due on June 10, 2002.  The note bears
interest at 12% per annum and was secured by 400,000  shares of common  stock of
eResource  Capital Group and 5,225,000 shares of the Company's common stock that
are owned by Richard Wade. In November 2001, the Company issued another $100,000
to the same lender. The note requires a monthly payment of $7,500 commencing May
2002 and the  remaining  outstanding  balance and interest due on September  30,
2002. The note bears  interest at 12% per annum and secured by 5,225,000  shares
of the Company's  common stock that are owned by Richard Wade, the President and
CEO of the Company. These two notes were in default at maturity in 2002. Through
negotiation with the lender,  the Company issued an $181,584  promissory note to
the  lender  to  replace  the  above  two old  notes  by  consolidating  the two
outstanding  balances.  The new note  bears  interest  at 12% per  annum  and is
payable  as  follows:  (i)  an  initial  installment  of  $10,000  payable  upon
execution;  (ii) monthly payment of $5,000 beginning  November 5, 2002 and (iii)
monthly  payment of $10,000  beginning  May 15, 2003 until all amounts under the
note have been paid in full.  The note is  secured by  10,450,000  shares of the
Company's  common stock that are owned by Mountain  Reservoir Corp. to cover any
shortfall.  Mountain Reservoir Corporation is a corporation controlled by the W5
Family Trust. Mr. Wade, the President and CEO of the Company,  is the trustee of
the W5 Family  Trust.  In January  2002,  the Company  executed an indemnity and
reimbursement  agreement  with  Mountain  Reservoir  Corporation  to  cover  the
10,450,000  shares  of stock  pledged  by  Mountain  Reservoir  Corporation.  At
December  31,  2002,  the new note of  $181,584  was in  default  due to  missed
payments.

         In December  2001,  the  Company  executed a $425,000  note  payable to
Brighton  Opportunity  Fund, LP, a third party. The Company 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 the Company's common stock that were owned by Mountain Reservoir Corporation,
and 15,000,000  shares that are owned by Mr. Luiz  Valdetaro,  Chief  Technology
Officer and Chief Accounting  Officer of the Company,  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 the Company,  is the
trustee of the W5 Family Trust. In January 2001, the Company  executed  separate
indemnity and reimbursement  agreements with Mountain Reservoir  Corporation and
Mr. Luiz Valdetaro to cover their pledges of 36,303,932 and 15,000,000 shares of
common stock, respectively.  Pursuant to these agreements, the Company agreed to
reimburse  Mountain  Reservoir  and Mr.  Luiz  Valdetaro  for any shares sold as
collateral to cover the default of any loan.  On January 31, 2002,  the note was
in default.  The lender  disposed of  19,751,000  shares of the above,  totaling
51,303,932  shares,  for $254,382.  In September  2002, the lender  informed the
Company that the remaining 31,552,932 shares were transferred to these two third
parties and that the debt was satisfied as of April 1, 2002.  Consequently,  the
note payable has been cancelled.  Accordingly, the Company reclassified the note
payable to the third party  including  accrued  interest to the note  payable to
officers  as these two  officers  loaned  their  shares  of common  stock to the
Company.

         In  September  and October  2002,  the Company  issued  36,303,932  and
15,000,000 shares of its common stock to Mountain Reservoir  Corporation and Mr.
Luiz  Valdetaro,  respectively,  in accordance  with the executed  indemnity and
reimbursement  agreements. At the time of issuing common stock, the value of the
note payable  plus accrued  interest  was  approximately  $450,000.  The Company
reclassified  from note payable to officers to common stock and additional  paid
in capital.  In  November  2002,  Mountain  Reservoir  Corporation  and Mr. Luiz
Valdetaro assigned their rights to obtain the necessary  accounting  information
from these two third parties to the Company.  The Company is currently  pursuing
these rights with the lender to obtain a specific accounting and a refund of any
monies that may be due to the Company.

         On August 7, 2002,  the Company  issued a $25,000 note to a third party
lender,  bearing  interest at 12% per annum and due on August 16, 2002. The note
is secured by 10,000,000  shares of the Company's common stock that are owned by
Mountain Reservoir Corporation,  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 the  Company,  is the trustee of the W5 Family
Trust. The Company made payment of approximately  $12,500 on the $25,000 note in
2002 and was in a delinquent  position at December 31, 2002.  In June 2002,  the
Company issued another $50,000 note to the same lender,  bearing interest at 12%
per annum and due in  January  2003.  The  second  note is  secured  by  limited
interest in the Company's deposit pledge account on the behalf of Now Solutions.
In March 2003, the parties entered into an amendment for both notes. Pursuant to
the  amendment,  the  Company  agreed to pay  accrued  interest in the amount of
$1,170 for the $25,000 note and $4,200 for the $50,000 note and monthly interest
payments for both notes in April,  May,  and June 2003.  Beginning in July 2003,
the above interest  payments shall be replaced with a monthly payment of $5,000,
which will be applied  first to the $25,000  note and then to the $50,000  note.
The mature date for the $50,000  note  payable was  extended to June 1, 2004 and
the mature date for the $25,000 note was extended to July 1, 2005.



                                       56
<PAGE>

         In  August  2002,  the  Company  issued an  $8,000  note,  which is due
February  2003 and bears  interest at a rate of 10% in exchange  for a loan with
the same amount  from Mr. Luiz  Valdetaro,  Chief  Technology  Officer and Chief
Accounting  Officer of the Company.  In  connection  with the note,  the Company
issued three-year warrants to purchase 1,000,000 shares of its common stock at a
price of $0.005 per share. The warrants vested  immediately and valued at $9,316
based on the Black-Scholes  stock option pricing model. The Company also pledged
a limited  interest  up to the  unpaid  amounts  due under the note in a pledged
deposit  account in the event the Company  defaults  on the loan.  This note has
been paid at December 31, 2002.

         In December 2002, the Company issued a $65,000  promissory note payable
to Victor Weber, who is President and Director of Government  Internet  Systems,
Inc, an 89% owned  subsidiary  of the Company,  which bears  interest at 13% per
annum.  The note is due in March 2003 and also provides that the minimum accrued
interest  payments  will be no less than  $2,500 at the time the note is paid in
full. In December  2002,  the Company issued  another  $45,000  promissory  note
payable to Victor  Weber in exchange for cash  proceeds of the same amount.  The
note bears  interest at a rate of 13% per annum and is due in January  2003.  In
connection with the loans and in consideration of financial  consulting services
rendered on the  Company's  behalf,  the Company also issued to Weber  2,000,000
shares of the  Company's  common stock valued at $12,000 on the issuing date. In
March 2003,  the due date for payment of principal  and interest for each of the
notes was extended to July 1, 2003.  In July 2003,  the Company and Victor Weber
amended the terms of certain loans made by Weber to the Company in the aggregate
amount of $150,000. Pursuant to their agreement, Weber cancelled two notes, each
with a  principal  amount of $65,000 and  $45,000  issued in  December  2002 and
Vertical issued two promissory notes in the amounts of $100,000 and $40,000. The
$100,000  promissory  note  bears  interest  at 13% per annum and is  payable in
monthly accrued interest payments  beginning August 1, 2003, and a final payment
of all  principal  and  remaining  interest  by  March  31,  2004.  The  $40,000
promissory  note  bears  interest  at 13% per annum and is  payable  in  monthly
installment  payments  beginning  August 1, 2003,  and  consisting  of an $8,000
principal   payment  plus  the  interest  accrued  in  the  previous  month.  In
consideration  of the loans made to the  Company  and for  services  rendered on
behalf of the Company,  Vertical paid a $250  commitment fee to Weber and issued
8,000,000  shares of common stock of the Company to Weber.  The stock is subject
to Rule 144  restrictions.  Weber is a  Director  and  President  of  Government
Internet Systems, Inc., a subsidiary of the Company.

         For the year ended 31,  2002,  the  Company  borrowed an  aggregate  of
$49,085 from Richard Wade, the Company's  President and Chief Executive  Officer
of the Company. Mr. Wade is also a director of the Company.

         In April 2003, the Company and Mike Radlovic (Radlovic) entered into an
agreement  whereby  Radlovic would  purchase the Company's  interest in TranStar
Systems, Inc. (TranStar),  formerly Apollo Industries, Inc. In October 2000, the
Company had agreed to provide  $250,000 in funding to TranStar in exchange for a
30% equity interest.  Pursuant to the agreement,  the Company transferred all of
its  ownership  representing  3,000,000  shares  of  TranStar  common  stock  to
Radlovic.  In consideration of the sale, Radlovic issued a $250,000 note bearing
interest  at 10% per annum due in April  2007.  The note is secured by 5 million
shares of TranStar common stock.  Radlovic is the President and CEO of TranStar.
Radlovic is CEO and President of TranStar.

         In April 2003, the Company and TranStar Systems, Inc. (TranStar) agreed
to amend two $24,000  promissory  notes bearing  interest at 10%, dated April 19
and May 8,  2001,  and a royalty  agreement,  dated  October  14,  2000  whereby
TranStar  had  agreed  to pay a  royalty  of 2% of all  transaction  fees  up to
$275,000 and 1% up to $3,000,000.  Pursuant to the  agreement,  the due date for
the two $24,000  notes was extended to April 5, 2006 in exchange for  increasing
the royalty rate in the royalty  agreement to 3% of any transaction fees and any
other  revenues  generated in  perpetuity.  The  collateral  to secure the note,
consisting  of 1,000,000  shares of TranStar  common stock,  and the  underlying
security  agreements  remain in full force and effect.  In  connection  with the
agreement,   TranStar  also  released  and  indemnified  the  Company  from  any
obligations owed to TranStar or any third party.


ITEM 13.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

         Audit  Fees.  The  aggregate  fees  billed  for  professional  services
rendered  was  $116,310  and  $117,995  for the  audit of the  Company's  annual
financial statements for the fiscal years ended 2002 and 2001, respectively, and
the reviews of the financial  statements  included in the Company's Forms 10-QSB
for those fiscal years.

         Tax Fees.  The  aggregate  fees  billed in each of the last two  fiscal
years for  professional  services  rendered by the principal  accountant for tax
advice and tax planning  were $37,820 and $10,760,  for the years ended 2002 and
2001, respectively.



                                       57
<PAGE>

         All Other Fees. Other than the services  described above, the aggregate
fees billed for services  rendered by the principal  accountant was $ 0 and $ 0,
respectively, for the fiscal years ended 2002 and 2001.


ITEM 14.  EXHIBITS  AND  REPORTS  ON FORM 8-K AND  EVALUATION  OF  CONTROLS  AND
          PROCEDURES

         (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 Company'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 Company'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 Company'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 Company'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 Company'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 Company'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 Company's Form 10-KSB/A filed on May 17,
                      Systems, Inc.)                                                   2001

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


                                       58
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                                  Location
-----------           -----------                                                  --------
<S>                   <C>                                                          <C>
3.8                   Certificate of Designation of 4% Cumulative Redeemable       Attached herewith
                      Series C Preferred Stock

4.2                   Incentive Stock Option Agreement between the Company         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 the Company         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 the Company         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 the Company         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 the             Incorporated by reference to Exhibit 4.6 to
                      Company 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 the Company         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 the             Incorporated by reference to Exhibit 4.8 to
                      Company 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 the             Incorporated by reference to Exhibit 4.9 to
                      Company 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 the             Incorporated by referenced to Exhibit 4.10 to
                      Company 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 the             Incorporated by reference to Exhibit 4.11 to
                      Company 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 the Company         Incorporated by reference to Exhibit 4.12 to
                      an 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 the Company         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 the Company         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
</TABLE>



                                       59
<PAGE>


<TABLE>
<CAPTION>
Exhibit No.           Description                                                   Location
-----------           -----------                                                   --------
<S>                   <C>                                                           <C>
4.15                  Incentive Stock Option Agreement between the Company          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

4.16                  Incentive Stock Option Agreement between the Company          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 the Company          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 the Company          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 the Company          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 the Company          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 the Company          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 the Company          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 the Company          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 the Company          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 the Company          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 the Company          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 the              Incorporated by reference to Exhibit 4.27 to
                      Company 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 the              Incorporated by reference to Exhibit 4.28 to
                      Company and William Mills dated February 5, 2001              the Company's Registration Statement on Form
                                                                                    S-8 filed on July 13, 2001
</TABLE>
                                       60
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                                Location
-----------           -----------                                                --------
<S>                   <C>                                                        <C>
4.29                  Incentive Stock Option Agreement between the Company       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 the           Incorporated by reference to Exhibit 4.30 to
                      Company and Terry Washburn dated February 5, 2001          the Company's Registration Statement on Form
                                                                                 S-8 filed on July 13, 2001

4.31                  Non-Statutory Stock Option Agreement between the           Incorporated by reference to Exhibit 4.31 to
                      Company 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 the           Incorporated by reference to Exhibit 4.32 to
                      Company 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 the Company       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 the Company       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 the Company       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 the Company       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 the Company       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 the Company       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 the Company       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 the Company       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 the Company       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 the Company       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
</TABLE>


                                       61
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                                  Location
-----------           -----------                                                  --------
<S>                   <C>                                                          <C>
4.43                  Incentive Stock Option Agreement between the Company         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 the Company 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

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

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

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

4.52                  Warrant Agreement between the Company 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 the Company 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 the Company 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 Company'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 Company's Form 10-KSB/A filed on May 17,
                                                                                   2001
</TABLE>



                                       62
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                                   Location
-----------           -----------                                                   --------
<S>                   <C>                                                           <C>
10.3                  Marketing Agreement between the Company and                   Incorporated by reference to Exhibit 10.3 to
                      Entertainment Marketing Group                                 the Company'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 Company's Form 10-KSB/A filed on May 17,
                                                                                    2001

10.5                  Agreement between the Company 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 the Company 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 the Company 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 the Company 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 the Company 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 the Company 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 the Company 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 Company                      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 Company

10.14                 Certificate of Designation of Vertical Computer, 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
                                                                                    19, 2001

                      (b) Berche Stock Pledge Agreement dated August 13, 2001


                      (c) Berche Warrants dated August 13, 2001
</TABLE>



                                       63
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                                  Location
-----------           -----------                                                  --------
<S>                   <C>                                                          <C>
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

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

10.25                 Agreement between the Company 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 the Company 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 the Company 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 the Company 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 the Company 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
</TABLE>


                                       64
<PAGE>


<TABLE>
<CAPTION>
Exhibit No.           Description                                                    Location
-----------           -----------                                                    --------
<S>                   <C>                                                            <C>
10.30                 Agreement between the Company 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 the Company 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 the Company 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

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

10.37                 Agreement between the Company 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 the Company 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 the Company 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 Company and M.S. Farrell & Co., Inc.         Incorporated by reference to Exhibit 10.21 to
                      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             Incorporated by reference to Exhibit 10.40 to
                      2001, between the Company and Cornell Capital                  the Company's Form 10-KSB A filed on May 20,
                      Partners, L.P.                                                 2002

10.42                 Registration Rights Agreement dated as of August 2001          Incorporated by reference to Exhibit 10.42 to
                      between the Company and the buyers identified therein.         the Company's Form 10-KSB A filed on May 20,
                                                                                     2002

10.43                 Escrow Agreement dated as of August 2001 among the             Incorporated by reference to Exhibit 10.43 to
                      Company, Yorkville Advisors Management, LLC and First          the Company's Form 10-KSB A filed on May 20,
                      Union National Bank.                                           2002
</TABLE>


                                       65
<PAGE>


<TABLE>
<CAPTION>
Exhibit No.      Description                                                       Location
-----------      -----------                                                       --------
<S>              <C>                                                               <C>
10.44            Form of Debenture                                                 Incorporated by reference to Exhibit 10.44 to
                                                                                   the Company's Form 10-KSB A filed on May 20,
                                                                                   2002

10.45            Securities Purchase Agreement dated as of August 2001             Incorporated by reference to Exhibit 10.45 to
                 among between the Company and the buyers identified               the Company's Form 10-KSB A filed on May 20,
                 therein                                                           2002

10.46            Consulting Agreement dated as of August 2001 between              Incorporated  by reference to Exhibit 10.46 to
                 the Company and Yorkville Advisors Management,  LLC               the Company's Form 10-KSB A filed on May 20, 2002

10.47            Placement Agent Agreement dated as of August 2001                 Incorporated by reference to Exhibit 10.47 to
                 among the Company, Westrock Advisors, Inc. and Cornell            the Company's Form 10-KSB A filed on May 20,
                 Capital Partners, L.P.                                            2002

10.48            Registration Rights Agreement dated as of August 2001             Incorporated by reference to Exhibit 10.48 to
                 between the Company and Cornell Capital Partners, L.P.            the Company's Form 10-KSB A filed on May 20,
                                                                                   2002

10.49            Escrow Agreement dated as of August 2001 among the                Incorporated by reference to Exhibit 10.49 to
                 Company, Cornell Capital Partners, L.P., Butler                   the Company's Form 10-KSB A filed on May 20,
                 Gonzalez LLP and First Union National Bank.                       2002

10.50            Warrant dated as of November 2001 given by the Company            Incorporated by reference to Exhibit 10.50 to
                 to Parker, Mills & Patel, LLP                                     the Company's Form 10-KSB A filed on May 20,
                                                                                   2002

10.51            Promissory Note dated as of November 2001 given by the            Incorporated by reference to Exhibit 10.51 to
                 Company to Parker, Mills & Patel, LLP                             the Company's Form 10-KSB A filed on May 20,
                                                                                   2002

10.52            Promissory Note dated as of December 2001 given by the            Incorporated by reference to Exhibit 10.52 to
                 Company to Brighton Opportunity Fund, LP                          the Company's Form 10-KSB A filed on May 20,
                                                                                   2002

10.53            Bridge loan dated as of December 2001 given by the                Incorporated by reference to Exhibit 10.53 to
                 Company to Brighton Opportunity Fund, LP                          the Company's Form 10-KSB A filed on May 20,
                                                                                   2002

10.54            Option Agreement dated as of December 2001 given by               Incorporated by reference to Exhibit 10.54 to
                 the Company to iNetPurchasing, Inc.                               the Company's Form 10-KSB A filed on May 20,
                                                                                   2002

10.55            Stock Pledge Agreement dated as of December 2001 given            Incorporated by reference to Exhibit 10.55 to
                 by Mountain Reservoir Corp. to Brighton Opportunity               the Company's Form 10-KSB A filed on May 20,
                 Fund, LP                                                          2002

10.56            Option Agreement dated as of December 2001 given by               Incorporated by reference to Exhibit 10.56 to
                 the Company to Basil Nikas                                        the Company's Form 10-KSB A filed on May 20,
                                                                                   2002

10.57            Option Agreement dated as of December 2001 given by               Incorporated by reference to Exhibit 10.57 to
                 the Company to Robin Mattern                                      the Company's Form 10-KSB A filed on May 20,
                                                                                   2002
</TABLE>


                                       66
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                              Location
-----------           -----------                                              --------
<S>                   <C>                                                      <C>
10.58                 Option Agreement dated as of December 2001 given by      Incorporated by reference to Exhibit 10.58 to
                      the Company to Wayne Savage                              the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.59                 Consulting Agreement dated as of January 2002 between    Incorporated by reference to Exhibit 10.59 to
                      the Company and Taurus Global, LLC                       the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.60                 Reimbursement and Indemnity Agreement dated as of        Incorporated by reference to Exhibit 10.60 to
                      January 2002 between the Company and Luiz Claudio        the Company's Form 10-KSB A filed on May 20,
                      Valdetaro Galvao e Mello                                 2002

10.61                 Stock Pledge Agreement dated as of December 2001 given   Incorporated by reference to Exhibit 10.61 to
                      by Luiz Claudio Valdetaro Galvao e Mello to Brighton     the Company's Form 10-KSB A filed on May 20,
                      Opportunity Fund, LP                                     2002

10.62                 Amendment Agreement dated as of January 2002 between     Incorporated by reference to Exhibit 10.62 to
                      the Company and Strategic Media Alliance                 the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.63                 Memorandum of Agreement dated as of January 2002         Incorporated by reference to Exhibit 10.63 to
                      between the Company and Strategic Media Alliance         the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.64                 Service Agreement dated as of October 31, 2001 between   Incorporated by reference to Exhibit 10.64 to
                      the Company and a third party                            the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.65                 Promissory Note Agreement as of October 31, 2001         Incorporated by reference to Exhibit 10.65 to
                      between the Company and Paradigm Sales, Inc.             the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.66                 Asset Pledge Agreement as of October 31, 2001 between    Incorporated by reference to Exhibit 10.66 to
                      the Company and a third party                            the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.67                 Letter Agreement as of October 31, 2001 between the      Incorporated by reference to Exhibit 10.67 to
                      Company and a third party                                the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.68                 Promissory Note Agreement as of October 31, 2001         Incorporated by reference to Exhibit 10.68 to
                      between the Company and a third party lender             the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.69                 Stock Pledge Agreement as of October 31, 2001 between    Incorporated by reference to Exhibit 10.69 to
                      the Company and a third party lender                     the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.70                 Stock Pledge Letter Agreement as of October 31, 2001     Incorporated by reference to Exhibit 10.70 to
                      between the Company and a third party lender             the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.71                 Promissory Note Agreement as of November 7, 2001         Incorporated by reference to Exhibit 10.71 to
                      between the Company and a third party lender             the Company's Form 10-KSB A filed on May 20,
                                                                               2002
</TABLE>



                                       67
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                                   Location
-----------           -----------                                                   --------
<S>                   <C>                                                           <C>
10.72                 Employment Agreement as of December 1, 2001 between           Incorporated by reference to Exhibit 10.72 to
                      the Company and Richard Wade                                  the Company's Form 10-KSB A filed on May 20,
                                                                                    2002

10.73                 Warrant Agreement as of December 19, 2001 between the         Incorporated by reference to Exhibit 10.73 to
                      Company and Richard Wade                                      the Company's Form 10-KSB A filed on May 20,
                                                                                    2002

10.74                 Warrant Agreement as of December 19, 2001 between the         Incorporated by reference to Exhibit 10.74 to
                      Company and Richard Wade                                      the Company's Form 10-KSB A filed on May 20,
                                                                                    2002

10.75                 Reimbursement and Indemnity Agreement as of January           Incorporated by reference to Exhibit 10.75 to
                      15, 2002 between the Company and Luiz Claudio                 the Company's Form 10-KSB A filed on May 20,
                      Valdetaro Galvao e Mello                                      2002

10.76                 Reimbursement and Indemnity Agreement as of January           Incorporated by reference to Exhibit 10.76 to
                      15, 2002 between the Company and Mountain Reservoir           the Company's Form 10-KSB A filed on May 20,
                      Corporation                                                   2002

10.77                 Reimbursement and Indemnity Agreement as of January           Incorporated by reference to Exhibit 10.77 to
                      15, 2002 between the Company and Mountain Reservoir           the Company's Form 10-KSB A filed on May 20,
                      Corporation                                                   2002

10.78                 Reimbursement and Indemnity Agreement as of January           Incorporated by reference to Exhibit 10.78 to
                      15, 2002 between the Company and Mountain Reservoir           the Company's Form 10-KSB A filed on May 20,
                      Corporation                                                   2002

10.79                 Letter Amendment Agreement as of April 5, 2002 between        Incorporated by reference to Exhibit 10.79 to
                      the Company and a third party lender                          the Company's Form 10-KSB A filed on May 20,
                                                                                    2002

10.80                 Letter Amendment Agreement as of April 12, 2002               Incorporated by reference to Exhibit 10.80 to
                      between the Company and third party lender                    the Company's Form 10-KSB A filed on May 20,
                                                                                    2002

10.81                 Asset Purchase Agreement dated November 14, 2001              Incorporated by reference to Exhibit 10.81 to
                      between the Company and Paradigm Sales, Inc.                  the Company's Form 10-KSB A filed on May 20,
                                                                                    2002

10.82                 (a) Promissory Note, dated June 3, 2002, between the          Incorporated by reference to Exhibit 10.82 to
                      Company and a third party lender                              the Company's Form 10-QSB filed on June 24,
                                                                                    2002

                      (b) Pledge  Agreement,  dated June 3,  2002,  between
                      the Company and a third party lender


                      (c) Warrants,  dated June 3, 2002, between the Company and
                      a third party lender
</TABLE>



                                       68
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.      Description                                                 Location
-----------      -----------                                                 --------
<S>              <C>                                                         <C>
10.83            (a) Promissory Note, dated June 24, 2002, between the       Incorporated by reference to Exhibit 10.83 to
                 Company and a third party lender                            the Company's Form 10-QSB filed on September
                                                                             25, 2002

                 (b) Pledge  Agreement,  dated June 24,  2002,  between
                 the Company and a third party lender


                 (c) Warrants dated June 24, 2002,  between the Company
                 and a third party lender

10.84            Second Amendment of Services Documents and Note,            Incorporated by reference to Exhibit 10.84 to
                 between a third party lender and the Company, dated         the Company's Form 10-QSB filed on September
                 June 25, 2003                                               25, 2002

10.85            Employment Agreement, dated July 1, 2002, between the       Incorporated by reference to Exhibit 10.85 to
                 Company and Aubrey McAuley                                  the Company's Form 10-QSB filed on September
                                                                             25, 2002

10.86            Equitilink Services Agreement, dated July 10, 2002,         Incorporated by reference to Exhibit 10.86 to
                 between the Company and Equitilink                          the Company's Form 10-QSB filed on September
                                                                             25, 2002

10.87            (a) Promissory Note, dated August 7, 2002, between the      Incorporated by reference to Exhibit 10.87 to
                 Company and a third party lender                            the Company's Form 10-QSB filed on September
                                                                             25, 2002

                 (b) Pledge  Agreement,  dated August 7, 2002,  between
                 the Company and a third party lender

10.88            Agency Services Agreement dated, August 9, 2002,            Incorporated by reference to Exhibit 10.88 to
                 between the Company and a third party                       the Company's Form 10-QSB filed on September
                                                                             25, 2002

10.89            (a) Valdetaro Promissory Note, dated August 20, 2002,       Incorporated by reference to Exhibit 10.89 to
                 between the Company and Valdetaro                           the Company's Form 10-QSB filed on September
                                                                             25, 2002

                 (b) Valdetaro Stock Pledge Agreement, dated August 20,
                 2002, between the Company and Valdetaro


                 (c) Valdetaro Warrants, dated August 20, 2002, between
                 the Company and Valdetaro

10.90            Amendment to Consulting Agreement, dated                    Incorporated by reference to Exhibit 10.90 to
                 July 13, 2001, by and between the Company and Rossetti      the Company's Form 10-QSB filed on September
                                                                             25, 2002

                 Amendment Number Two to Deposit Account Pledge              Incorporated  by reference to Exhibit  10.91 to
                 Agreement, dated October 16, 2002, between the Company      the Company's Form 8-K filed on October 23,
10.91            and Coast Business Credit                                   2002

10.92            Stock Purchase Agreement, dated September 24, 2002,         Incorporated by reference to Exhibit 10.92 to
                 between the Company and Equitilink, LLC                     the Company's Form 10-QSB filed on December
                                                                             11, 2002
</TABLE>



                                       69
<PAGE>


<TABLE>
<CAPTION>
Exhibit No.           Description                                                 Location
-----------           -----------                                                 --------
<S>                   <C>                                                         <C>
10.93                 (a) Term Sheet, dated October 17, 2002, between the         Incorporated by reference to Exhibit 10.93 to
                      Company and a third party lender                            the Company's Form 10-QSB filed on December
                                                                                  11, 2002

                      (b) Promissory Note,  dated October 17, 2002,  between the
                      Company and a third party lender


                      (c)  Stock  Pledge  Agreement,  dated  October  17,  2002,
                      between the Company and a third party lender


                      (d)  Put and  Call  Agreement,  dated  October  17,  2002,
                      between the Company and a third party lender

10.94                 Services Agreement, dated November 15, 2002 between         Incorporated by reference to Exhibit 10.94 to
                      Defense Solutions, LLC, and the Company's subsidiary,       the Company's Form 10-QSB filed on December
                      Government Internet Systems, Inc.                           11, 2002

10.95                 Weber Promissory Note, dated December 5, 2002, between      Incorporated by reference to Exhibit 10.95 to
                      the Company and Victor Weber                                the Company's Form 10-QSB filed on December
                                                                                  11, 2002

10.96                 Warrants (FORM)                                             Attached herewith

10.97                 (a) Weber Promissory Note, dated December 20, 2002,         Attached herewith
                      between the Company and Victor Weber


                      (b) Service and loan  Agreement,  dated December 20, 2002,
                      between the Company and Victor Weber

10.98                 (a) Form of Director Agreement of Company's                 Attached herewith
                      subsidiary, Government Internet Systems, Inc. (GIS)
                      Director Agreement, between GIS and director


                      (b) Form of  Warrants  in  connection  with  GIS  Director
                      Agreement between the Company's  Subsidiary,  GIS, and GIS
                      director

10.99                 (a) Executive Agreement, dated December 19, 2002,           Attached herewith
                      between the Company's Subsidiary, GIS, and Victor Weber


                      (b)  Warrants  dated  December  19,  2002 issued to Victor
                      Weber

10.100                Executive Agreement, dated December 26, 2002, between       Attached herewith
                      the Company's Subsidiary, GIS, and Stephen Rossetti

10.101                (a) Executive Agreement, dated January 8, 2003,             Attached herewith
                      between the Company's Subsidiary, GIS, and David Kinney
</TABLE>



                                       70
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                                   Location
-----------           -----------                                                   --------
<S>                   <C>                                                           <C>
                      (b) Warrants, dated January 8, 2003 issued to David Kinney
                      in  connection  with  Executive   Agreement   between  the
                      Company's Subsidiary, GIS, and David Kinney

10.102                (a) Amendment to Stock Purchase Agreement, dated              Attached herewith
                      February 1, 2003, between the Company and Enfacet.
                      $200,000  Purchase  of  Convertible  Debentures,  dated
10.103                April 14, between the Company and third party buyers.         Attached herewith

                      (a)  Securities   Purchase   Agreement  (for  $200,000  of
                      Convertible Debentures)


                      (b) Form of Debenture


                      (c) Registration Rights Agreement

10.104                Equity Line of Credit  Agreement,  dated  April 14,  2003,
                      Attached  herewith between the Company and Cornell Capital
                      Partners, L.P.


                      (a) Equity Line of Credit Agreement,


                      (b) Registration Rights Agreement


                      (c) Compensation Debenture

10.105                (a) Services agreement, dated April 10, 2003, between         Attached herewith
                      the Company and Vasu Vijay


                      (b) Promissory note,  dated April 10, 2003,  issued by the
                      Company to Vasu Vijay


                      (c) Consulting Agreement, dated April 14 2003, between the
                      Company and Vasu Vijay .

10.106                Stock Sale Agreement, dated April 11, 2003, between           Attached herewith
                      the Company and Mike Radlovic


                      (a) Stock Sale Agreement,


                      (b) Stock Pledge Agreement


                      (c) Promissory Note

10.107                Amendment Agreement, dated April 11, 2003, between            Attached herewith
                      TranStar Systems, Inc. and the Company,

10.108                Loan Agreement, between the Company and a third party         Attached herewith
                      lender, dated May 9, 2002


                      (a) Term Sheet


                      (b) Promissory Note


                      (c) Warrants
</TABLE>


                                       71
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                              Location
-----------           -----------                                              --------
<S>                   <C>                                                      <C>
10.109                Loan Agreement, between the Company and a third party      Attached herewith
                      lender, dated May 9, 2002

                      (a) Term Sheet

                      (b) Promissory Note


21.1                  Subsidiaries of the Company                                Attached herewith
</TABLE>



          (b)      Reports on Form 8-K:


                   On October 23, 2002,  the Company  filed a report on Form 8-K
                   for an amendment to Loan and Security  Agreement  between the
                   Company's subsidiary,  Now Solutions, LLC, and Coast Business
                   Credit and  amendment  to deposit  account  pledge  agreement
                   between the Company and Coast Business Credit.

                   On December 3, 2002,  the Company  filed a report on Form 8-K
                   for an amendment to the articles of  incorporation  to change
                   name of the Company's  subsidiary,  Emily Solutions,  Inc. to
                   Government  Internet  Solutions  and the  appointment  of new
                   directors and officers with respect to this entity.


Evaluation of Adequate Financial Personnel and Controls

Due to financial  constraints the Company had been operating without a permanent
Chief  Financial  Officer and with limited  accounting  and financial  reporting
personnel.  Due to the absence of qualified accounting employees the Company has
suffered  inefficiencies  in closing its books and in preparing its consolidated
financial statements and other reporting matters. In 2003, Now Solutions engaged
a consulting firm to analyze and make  recommendations  for  improvements on its
internal  controls and financial  functions.  That firm already proposed certain
recommendations  to  improve  the  internal  controls  and  financial  reporting
matters. Once these recommendations are implemented, the Company intends to hire
this  consulting  firm to further  improve  internal  controls on a company-wide
basis and hire a permanent Chief Financial Officer.



                                       72
<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 August 5, 2003.



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



                                      By: /s/ Luiz Valdetaro
                                          ------------------------------
                                          Luiz Valdetaro
                                          Chief Accounting Officer

                                      DIRECTORS:


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


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




                                       73
<PAGE>

     CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO


                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection  with the Annual Report of Vertical  Computer  Systems,  Inc. (the
"Company")  on Form 10-KSB for the period ended  December 31, 2002 as filed with
the Securities and Exchange  Commission on the date hereof (the "Report"),  each
of the undersigned,  in the capacities and on the dates indicated below,  hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:

1. The Report fully complies with the  requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

2. The  information  contained in the Report  fairly  presents,  in all material
respects, the financial condition and results of operation of the Company.


Date: August 5, 2003

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

                                        By: /s/ Luiz Valdetaro
                                            ------------------------------
                                            Luiz Valdetaro
                                            Chief Accounting Officer





                                       74
<PAGE>

                          FORM OF OFFICER'S CERTIFICATE
                             PURSUANT TO SECTION 302

         I, Richard Wade, Chief Executive  Officer of Vertical Computer Systems,
Inc., certify that:

          1. I have  reviewed  this  annual  report on Form  10-KSB of  Vertical
Computer Systems, Inc.;

         2. Based on my  knowledge,  this  annual  report  does not  contain any
untrue  statement of a material fact or omit to state a material fact  necessary
in order to make the statements made, in light of the circumstances  under which
such  statements were made, not misleading with respect to the period covered by
this annual report;

         3. Based on my knowledge, the financial statements, and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
issuer as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rule 13a-14 and 15d-14) for the registrant and have:

                  a. Designed such disclosure  controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this annual report is being prepared;

                  b. Evaluated the effectiveness of the registrant's  disclosure
controls and  procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date");

                  c. Presented in this annual report our  conclusions  about the
effectiveness of the disclosure  controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The  registrant's  other  certifying  officers and I have disclosed,
based on our most recent  evaluation,  to the  registrant's  auditors and to the
audit committee of the  registrant's  board of directors (or persons  performing
the equivalent functions):

         a. All significant  deficiencies in the design or operation of internal
controls,  which  could  adversely  affect the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

         b. Any fraud,  whether or not  material,  that  involves  management or
other  employees  who  have a  significant  role  in the  registrant's  internal
controls; and

         6. The registrant's  other certifying  officers and I have indicated in
this annual  report  whether or not there were  significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.



August 5, 2003            /s/ Richard Wade
                          ----------------------
                          Richard Wade
                          President and Chief Executive Officer





                                       75
<PAGE>


                          FORM OF OFFICER'S CERTIFICATE
                             PURSUANT TO SECTION 302

         I, Luiz  Valdetaro,  Chief  Accounting  Officer  of  Vertical  Computer
Systems, Inc., certify that:

          1. I have  reviewed  this  annual  report on Form  10-KSB of  Vertical
Computer Systems, Inc.;

         2. Based on my  knowledge,  this  annual  report  does not  contain any
untrue  statement of a material fact or omit to state a material fact  necessary
in order to make the statements made, in light of the circumstances  under which
such  statements were made, not misleading with respect to the period covered by
this annual report;

         3. Based on my knowledge, the financial statements, and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
issuer as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rule 13a-14 and 15d-14) for the registrant and have:

                  a. Designed such disclosure  controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this annual report is being prepared;

                  b. Evaluated the effectiveness of the registrant's  disclosure
controls and  procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date");

                  c. Presented in this annual report our  conclusions  about the
effectiveness of the disclosure  controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The  registrant's  other  certifying  officers and I have disclosed,
based on our most recent  evaluation,  to the  registrant's  auditors and to the
audit committee of the  registrant's  board of directors (or persons  performing
the equivalent functions):

         a. All significant  deficiencies in the design or operation of internal
controls,  which  could  adversely  affect the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

         b. Any fraud,  whether or not  material,  that  involves  management or
other  employees  who  have a  significant  role  in the  registrant's  internal
controls; and

         6. The registrant's  other certifying  officers and I have indicated in
this annual  report  whether or not there were  significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.



August 5, 2003                              By: /s/ Luiz Valdetaro
                                                --------------------------
                                                Luiz Valdetaro
                                                Chief Accounting Officer