FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark One)

[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the quarterly period ended: April 30, 2000

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: 000-25397

VIRTUAL TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)

|                             |  |                       
|---------------------------- |  | ----------------------
|MINNESOTA                    |  | 41-1639011            
|                            
|                            
|                            
|                            
|(State or other jurisdiction |  | (IRS Employer         
|                            
|                            
|                            
|                            
|of Incorporation)            |  | Identification Number)

6690 Shady Oak Road
Eden Prairie, MN 55344
(Address of Principal Executive Offices)
(612) 259-4700
(Registrants Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such that the registrant was
required to file such reports), and (2) has shorter period been subject to such
filing requirements for the past 90 days.

Yes X  No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of May 31, 2000, the latest practicable date: 38,031,453





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TABLE OF CONTENTS

|                                                          |                                                                                                                |      |    |    |  |  |  | 
|--------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ---- | -- | -- |  |  |  | 
|ITEM                                                      |                                                                                                                | PAGE
|                                                          |                                                                                                                |     
|                                                          | PART I                                                                                                        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | FINANCIAL INFORMATION                                                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|ITEM 1. FINANCIAL STATEMENTS                              |                                                                                                                |      | 3  |   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Condensed Consolidated Balance Sheets at April 30, 2000 (unaudited)
and January 31, 2000                       |      |    | 3  | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Condensed Consolidated Statements of Operations (unaudited) for the three months ended
April 30, 2000 and 1999 |      |    | 4  | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended
April 30, 2000 and 1999 |      |    | 5  | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Notes to Condensed Consolidated Financial Statements (unaudited)                                               |      |    | 6  | 
|                                                         
|                                                         
|                                                         
|                                                         
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | CONDITION AND RESULTS OF OPERATIONS                                                                            |      |    | 11 | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | PART II                                                                                                       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | OTHER INFORMATION                                                                                             
|                                                         
|                                                         
|                                                         
|                                                         
|ITEM 1. LEGAL PROCEEDINGS                                 |                                                                                                                |      | 16 |   
|                                                         
|                                                         
|                                                         
|                                                         
|ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS         |                                                                                                                |      | 16 |   
|                                                         
|                                                         
|                                                         
|                                                         
|ITEM 5. OTHER INFORMATION                                 |                                                                                                                |      | 17 |   
|                                                         
|                                                         
|                                                         
|                                                         
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                  |                                                                                                                |      | 17 |   

2



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PART I  FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                  |                                                                                                                                        |                                            |                      |                                      |            |                |            |                  |            |            |  | 
|------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------------- | ------------------------------------ | ---------- | -------------- | ---------- | ---------------- | ---------- | ---------- |  | 
|                                                  |                                                                                                                                        |                                            |                      |                                      |            | April 30, 2000
|                                                  |                                                                                                                                        |                                            |                      |                                      |            | (Unaudited)    |            | January 31, 2000
|                                                  |                                                                                                                                        |                                            |                      |                                      |            |                |            |                 
|                                                  |                                                                                                                                        |                                            |                      | ASSETS                              
|                                                 
|                                                 
|                                                 
|                                                 
|Current assets:                                  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash                                                                                                                                   |                                            |                      |                                      |            |                | $          | 698,246          |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Marketable securities                                                                                                                  |                                            | $                    | 25,004                               |            |                |            | 185,015          |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accounts receivable, net                                                                                                               |                                            |                      | 8,048,915                            |            |                |            | 12,097,442       |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Inventories, net                                                                                                                       |                                            |                      | 3,715,627                            |            |                |            | 4,677,997        |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Other current assets                                                                                                                   |                                            |                      | 2,727,931                            |            |                |            | 2,603,725        |           
|                                                  |                                                                                                                                        |                                            |                      |                                      |            |                |            |                 
|                                                  |                                                                                                                                        |                                            | Total current assets |                                      |            | 14,517,477     |            |                  |            | 20,262,425 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Furniture and equipment, net                      |                                                                                                                                        |                                            | 1,596,398            |                                      |            |                | 1,326,643  |                 
|                                                 
|                                                 
|                                                 
|                                                 
|Capitalized software development costs, net       |                                                                                                                                        |                                            | 366,819              |                                      |            |                | 323,033    |                 
|                                                 
|                                                 
|                                                 
|                                                 
|Intangibles, net                                  |                                                                                                                                        |                                            | 9,827,367            |                                      |            |                | 10,180,627 |                 
|                                                 
|                                                 
|                                                 
|                                                 
|Other                                             |                                                                                                                                        |                                            | 2,294,346            |                                      |            |                | 2,574,055  |                 
|                                                  |                                                                                                                                        |                                            |                      |                                      |            |                |            |                 
|                                                  | Total assets                                                                                                                           |                                            | $                    | 28,602,407                           |            |                | $          | 34,666,783       |           
|                                                  |                                                                                                                                        |                                            |                      |                                      |            |                |            |                 
|                                                  |                                                                                                                                        |                                            |                      | LIABILITIES AND STOCKHOLDERS EQUITY
|                                                 
|                                                 
|                                                 
|                                                 
|Current liabilities:                             
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Book overdraft                                                                                                                         |                                            | $                    | 116,548                              |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Notes and line of credit, current portion                                                                                              |                                            |                      | 6,701,485                            |            |                | $          | 7,887,907        |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Capital lease obligations, current portion                                                                                             |                                            |                      | 13,330                               |            |                |            | 13,951           |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accounts payable                                                                                                                       |                                            |                      | 10,649,599                           |            |                |            | 15,076,375       |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accrued expenses and other current liabilities                                                                                         |                                            |                      | 4,797,270                            |            |                |            | 3,474,854        |           
|                                                  |                                                                                                                                        |                                            |                      |                                      |            |                |            |                 
|                                                  |                                                                                                                                        | Total current liabilities                  |                      |                                      | 22,278,232 |                |            |                  | 26,453,087 |           
|                                                  |                                                                                                                                        |                                            |                      |                                      |            |                |            |                 
|Capital lease obligations, net of current portion |                                                                                                                                        |                                            | 47,577               |                                      |            |                | 50,519     |                 
|                                                 
|                                                 
|                                                 
|                                                 
|Stockholders equity                             
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Common stock  $.001 par value; 100,000,000 shares
authorized; shares issued and outstanding  36,031,453
and 34,142,403, respectively |                                            |                      | 36,031                               |            |                |            | 34,142           |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Additional paid in capital                                                                                                             |                                            |                      | 47,701,413                           |            |                |            | 44,949,469       |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cumulative translation adjustments                                                                                                     |                                            |                      | (36,979                              | )          |                |            | (3,738           | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Stock subscription receivable                                                                                                          |                                            |                      | (925,000                             | )          |                |            | (925,000         | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accumulated deficit                                                                                                                    |                                            |                      | (40,498,867                          | )          |                |            | (35,891,696      | )         
|                                                  |                                                                                                                                        |                                            |                      |                                      |            |                |            |                 
|                                                  |                                                                                                                                        | Total stockholders equity                 |                      |                                      | 6,276,598  |                |            |                  | 8,163,177  |           
|                                                  |                                                                                                                                        |                                            |                      |                                      |            |                |            |                 
|                                                  |                                                                                                                                        | Total liabilities and stockholders equity |                      | $                                    | 28,602,407 |                |            | $                | 34,666,783 |           
|                                                  |                                                                                                                                        |                                            |                      |                                      |            |                |            |                 

See Notes to Condensed Consolidated Financial Statements (Unaudited).

3



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VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

|                                      |                                  |   |                    |            |   |  |  |  |                |   |            |            |  
|------------------------------------- | -------------------------------- | - | ------------------ | ---------- | - |  |  |  | -------------- | - | ---------- | ---------- | -
|                                      |                                  |   | Three months ended
|                                      |                                  |   |                   
|                                      |                                  |   | April 30, 2000     |            |   |  |  |  | April 30, 1999
|                                      |                                  |   |                    |            |   |  |  |  |               
|NET SALES                             |                                  | $ | 27,324,349         |            |   |  |  |  |                | $ | 17,382,763 |           
|                                     
|                                     
|                                     
|                                     
|COST OF GOODS SOLD                    |                                  |   | 24,960,172         |            |   |  |  |  |                |   | 16,170,002 |           
|                                      |                                  |   |                    |            |   |  |  |  |                |   |            |           
|GROSS MARGIN                          |                                  |   | 2,364,177          |            |   |  |  |  |                |   | 1,212,761  |           
|                                      |                                  |   |                    |            |   |  |  |  |                |   |            |           
|OPERATING EXPENSES                   
|                                     
|                                     
|                                     
|                                     
|                                      | Sales and marketing              |   |                    | 2,299,047  |   |  |  |  |                |   |            | 1,316,802  |  
|                                     
|                                     
|                                     
|                                     
|                                      | General and administrative       |   |                    | 2,480,295  |   |  |  |  |                |   |            | 1,393,165  |  
|                                     
|                                     
|                                     
|                                     
|                                      | Consulting services, stock based |   |                    | 1,446,715  |   |  |  |  |                |   |            | 4,814,372  |  
|                                     
|                                     
|                                     
|                                     
|                                      | Amortization of intangibles      |   |                    | 353,261    |   |  |  |  |                |   |            | 232,826    |  
|                                      |                                  |   |                    |            |   |  |  |  |                |   |            |           
|                                      |                                  |   | 6,579,318          |            |   |  |  |  |                |   | 7,757,165  |           
|                                      |                                  |   |                    |            |   |  |  |  |                |   |            |           
|LOSS FROM OPERATIONS                  |                                  |   | (4,215,141         | )          |   |  |  |  |                |   | (6,544,404 | )         
|                                      |                                  |   |                    |            |   |  |  |  |                |   |            |           
|OTHER INCOME (EXPENSE)                |                                  |   |                    |            |   |  |  |  |                |   |            |           
|                                      | Interest expense, net            |   | (504,282           | )          |   |  |  |  |                |   | (456,028   | )         
|                                     
|                                     
|                                     
|                                     
|                                      | Other income (expense)           |   |                    | 112,252    |   |  |  |  |                |   |            | (52,965    | )
|                                      |                                  |   |                    |            |   |  |  |  |                |   |            |           
|                                      |                                  |   | (392,030           | )          |   |  |  |  |                |   | (508,993   | )         
|                                      |                                  |   |                    |            |   |  |  |  |                |   |            |           
|NET LOSS                              |                                  | $ | (4,607,171         | )          |   |  |  |  |                | $ | (7,053,397 | )         
|                                      |                                  |   |                    |            |   |  |  |  |                |   |            |           
|NET LOSS PER COMMON SHARE  BASIC AND
|                                     
|                                     
|                                     
|                                     
|                                      | DILUTED                          |   | $                  | (.13       | ) |  |  |  |                |   | $          | (.27       | )
|                                     
|                                     
|                                     
|                                     
|WEIGHTED AVERAGE COMMON SHARES       
|                                     
|                                     
|                                     
|                                     
|                                      | OUTSTANDING  BASIC AND DILUTED  |   |                    | 35,329,226 |   |  |  |  |                |   |            | 26,650,512 |  

See Notes to Condensed Consolidated Financial Statements (Unaudited).

4



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VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

|                                                                           |                                                      |                                                |            |                    |            |                |            |            |            |  
|-------------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------- | ---------- | ------------------ | ---------- | -------------- | ---------- | ---------- | ---------- | -
|                                                                           |                                                      |                                                |            | Three months ended
|                                                                           |                                                      |                                                |            |                   
|                                                                           |                                                      |                                                |            | April 30, 2000     |            | April 30, 1999
|                                                                           |                                                      |                                                |            |                    |            |               
|OPERATING ACTIVITIES                                                      
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Net loss                                                                   |                                                      | $                                              | (4,607,171 | )                  |            | $              | (7,053,397 | )         
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Adjustments to reconcile net loss to net cash
used in operating activities
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Stock based compensation and interest expense        |                                                |            | 1,749,366          |            |                |            | 5,210,188  |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Amortization                                         |                                                |            | 353,261            |            |                |            | 232,826    |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Loss on abandonment of capitalized software          |                                                |            | 79,048             |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Depreciation                                         |                                                |            | 133,825            |            |                |            | 27,687     |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Provision for losses on accounts receivable          |                                                |            | 38,014             |            |                |            | 82,341     |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Provision for inventory obsolescence                 |                                                |            | 10,548             |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Gain on sale of marketable securities                |                                                |            | (120,000           | )         
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Changes in operating assets and liabilities:        
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           |                                                      | Accounts receivable, net                       |            |                    | 4,010,513  |                |            |            | (2,517,258 | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           |                                                      | Inventories, net                               |            |                    | 951,822    |                |            |            | 1,505,213  |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           |                                                      | Other current assets                           |            |                    | (10,854    | )              |            |            | (264,106   | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           |                                                      | Deposits                                       |            |                    | (28,365    | )              |            |            | 3,489      |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           |                                                      | Accounts payable                               |            |                    | (4,426,784 | )              |            |            | 367,245    |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           |                                                      | Accrued expenses and other current liabilities |            |                    | 1,322,416  |                |            |            | (610,939   | )
|                                                                           |                                                      |                                                |            |                    |            |                |            |           
|                                                                           | Net cash used in operating activities                |                                                |            | (544,361           | )          |                |            | (3,016,711 | )         
|                                                                           |                                                      |                                                |            |                    |            |                |            |           
|INVESTING ACTIVITIES                                                      
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Purchases of furniture and equipment                 |                                                |            | (526,416           | )          |                |            | (63,299    | )         
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Loan to related party                                |                                                |            |                    |            |                |            | (123,750   | )         
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Proceeds from sale of marketable securities          |                                                |            | 280,011            |           
|                                                                           |                                                      |                                                |            |                    |            |                |            |           
|                                                                           | Net cash used in investing activities                |                                                |            | (246,405           | )          |                |            | (187,049   | )         
|                                                                           |                                                      |                                                |            |                    |            |                |            |           
|FINANCING ACTIVITIES                                                      
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Line of credit borrowings                            |                                                |            | 29,553,025         |            |                |            | 12,674,853 |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Line of credit payments                              |                                                |            | (30,405,838        | )          |                |            | (8,640,287 | )         
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Book overdraft                                       |                                                |            | 116,548            |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Payments on notes payable and convertible debentures |                                                |            | (103,609           | )          |                |            | (3,990,030 | )         
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Payments on capital lease obligations                |                                                |            | (3,563             | )          |                |            | (2,496     | )         
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Repayment of loans from related parties              |                                                |            | (230,000           | )          |                |            | (217,543   | )         
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Loan fees                                            |                                                |            |                    |            |                |            | (209,527   | )         
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Proceeds from options and warrants exercised         |                                                |            | 652,948            |            |                |            | 854,500    |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Proceeds from issuance of common stock               |                                                |            | 566,500            |            |                |            | 2,500,050  |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Common stock offering costs                          |                                                |            | (20,250            | )          |                |            | (275,000   | )         
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Collection of subscription receivable                |                                                |            |                    |            |                |            | 2,676,436  |           
|                                                                           |                                                      |                                                |            |                    |            |                |            |           
|                                                                           | Net cash provided by financing activities            |                                                |            | 125,761            |            |                |            | 5,370,956  |           
|                                                                           |                                                      |                                                |            |                    |            |                |            |           
|                                                                           | Effect of foreign currency on cash                   |                                                |            | (33,241            | )         
|                                                                           |                                                      |                                                |            |                    |            |                |            |           
|NET INCREASE (DECREASE) IN CASH                                            |                                                      |                                                | (698,246   | )                  |            |                | 2,167,196  |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|CASH                                                                      
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Beginning of period                                  |                                                |            | 698,246            |            |                |            | 125,993    |           
|                                                                           |                                                      |                                                |            |                    |            |                |            |           
|                                                                           | End of period                                        |                                                | $          | 0                  |            |                | $          | 2,293,189  |           
|                                                                           |                                                      |                                                |            |                    |            |                |            |           

See Notes to Condensed Consolidated Financial Statements (Unaudited).

5



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VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of Virtual
Technology Corporation as of and for the three months ended April 30, 2000 and
for the three months ended April 30, 1999 reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim period. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted in these interim
statements under the rules and regulations of the Securities and Exchange
Commission (SEC). The condensed financial statements should be read in
conjunction with the financial statements for the fiscal year ended January 31,
2000 and the notes thereto included in Virtual Technology Corporations Form
10-K filed with the Securities and Exchange Commission on May 16, 2000. The
results of operations for the three months ended April 30, 2000 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending January 31, 2001.

The Companys condensed consolidated financial statements have been
prepared assuming 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. However, the Company incurred a net loss of
$28,166,026 and negative cash flows from operations of $5,975,108 during the
fiscal year ended January 31, 2000. For the three months ended April 30, 2000
the Company incurred a net loss of $4,607,171 and negative cash flows from
operations of $544,361. At April 30, 2000, the Company had an accumulated
deficit of $40,498,867, a working capital deficit of $7,760,755 and was in
violation of a covenant contained in its line of credit facility.

The Companys ability to continue as a going concern will be dependent
upon, among other things, managements ability to:



| |  |  | reduce operating costs and/or increase revenues and
operating margins, in order to achieve profitability
and positive operating cash flows;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | obtain additional debt and/or equity financing; and                                                                                        
|
| |  |  | obtain waivers or renegotiate the terms of its existing line of
credit.                                                                    

The Companys management has developed an operating and financing plan to
reduce its operating costs, focus resources on the profitable elements of its
distribution business, renegotiate terms of its line of credit agreement, and
obtain additional debt and/or equity financing.

Management believes that the successful execution of its operating and
financing plan will allow the Company to fund operations and to service its
debts. However, there can be no assurance that the Company will be successful
in improving its operating cash flows or renegotiating terms of its line of
credit, or that additional debt or equity financing will be available to the
Company or that it will be available on terms desirable to management.
Accordingly, there can be no assurance that the Company will continue as a
going concern. These financial statements do not include any adjustments that
might result from the outcome of these uncertainties.

6



---



VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

2. COMPREHENSIVE LOSS

The components of total comprehensive loss are shown below. Comprehensive
loss includes net loss and foreign currency translation adjustments that are
charged or credited to stockholders equity.

Comprehensive loss for the three months ended April 30, 2000 and April 30,
1999 was as follows:

|                                         |  |                |            |                |  |   |            |  
|---------------------------------------- |  | -------------- | ---------- | -------------- |  | - | ---------- | -
|                                         |  | APRIL 30, 2000 |            | APRIL 30, 1999
|                                         |  |                |            |               
|Net Loss                                 |  | $              | (4,607,171 | )              |  | $ | (7,053,397 | )
|                                        
|                                        
|                                        
|                                        
|Foreign currency translation adjustments |  |                | (33,241    | )             
|                                         |  |                |            |                |  |   |            |  
|Comprehensive loss                       |  | $              | (4,640,412 | )              |  | $ | (7,053,397 | )
|                                         |  |                |            |                |  |   |            |  

3. NET LOSS PER COMMON SHARE

Basic and diluted net loss per common share is computed by dividing net
loss by the weighted average number of common and common equivalent shares
outstanding during the period. The Companys common equivalent shares are those
that result from dilutive common stock options, warrants, and convertible debt.
The calculation of diluted net loss per common share for the three month
periods ended April 30, 2000 and 1999 exclude 13,224,202 and 6,954,852
equivalent shares, respectively, because their effect would be antidilutive.

4. LEGAL PROCEEDINGS

Discussion of legal matters is incorporated by reference from Part II,
Item I of this Form 10-Q Legal Proceedings and should be considered an
integral part of these Condensed Consolidated Financial Statements.

5. COMMITMENTS AND CONTINGENCIES

The Company has an agreement with a consultant. Under the terms of the
agreement, if certain performance measures are met the consultant is entitled
to a bonus consisting of warrants to purchase 100,000 shares of the Companys
common stock for three years at an exercise price of $1.00 per share. As of
April 30, 2000 no compensation expense has been recorded related to the bonus
because management does not consider it probable that the performance measures
will be met.

In October 1999, the Company entered into a three-year E-Commerce
Agreement with Lycos, Inc. for comprehensive Internet marketing activities,
including co-branding of a Company website on the Lycos network. Under the
agreement, the Company has paid Lycos $1,125,000 and is obligated to pay an
additional $5,875,000 in fiscal 2001, $5,000,000 in fiscal 2002 and $2,500,000
in fiscal 2003. The Company has included all amounts due for services provided
in the financial statements as of January 31, 2000 and April 30, 2000 and for
the three months ended April 30, 2000. The Company  has suspended payments on the agreement.
On May 19, 2000, Lycos formally terminated the agreement and
threatened to seek payment of all sums due under the agreement,
together with the costs of collection, including attorneys fees.

7



---



VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

In March 1999, the Company entered into a nine-month agreement with Cnet,
Inc. to provide advertising and lead generating services through links to the
Companys website. Under the agreement, the Company agreed to pay a base
monthly fee plus additional fees based upon traffic to the Companys website.
The Company has included all amounts due for services that were to be provided
in the financial statements as of January 31, 2000 and April 30, 2000 and for
the three months ended April 30, 2000. The Company suspended payments to Cnet
in October 1999 because of dissatisfaction with the services provided. In
December 1999, Cnet initiated a lawsuit seeking to recover approximately
$1,600,000 plus interest and costs for services rendered through October 31,
1999. In May 2000, Cnet amended its lawsuit to recover an additional $500,000
for lost revenue in the months of November and December 1999.
The Company believes it has adequately provided for any amount that
may be due as a result of this action.

We are attempting to settle
the above disputes, but cannot assure that we will do so on acceptable
terms, or at all.

In December 1999 the Company entered into an agreement with a shareholder
(the Lender) who extended a $300,000 letter of credit (the Letter of
Credit) for three years on behalf of the Company in order to satisfy a
lessors requirement for entering into a lease. In exchange, the Company gave
the holder of the Letter of Credit an option to purchase 100,000 shares of the
Companys Common Stock at an exercise price of $1.68 per share. Contingent
upon the Letter of Credit being drawn upon, the Company has agreed to pay the
Lender interest on the drawn funds at the prime rate of interest (as reported
in the Wall Street Journal), plus 4%. In addition, in the event funds are
drawn against the Letter of Credit, the Company will issue the Lender an
additional warrant to purchase 10,000 shares of the Companys Common Stock at a
price equal to the high closing bid price on the date of any such first draw
against the Letter of Credit. Further and again contingent on a draw against
the Letter of Credit, the Company has granted the Lender an option to convert
all or part of the outstanding principal and interest thereby owing into shares
of the Companys Common Stock at a price equal to a 25% discount from the high
closing bid price of the Company's Common Stock as reported on the OTC Bulletin Board on the date
that the Lender gave written notice to the Company of the Lenders intent to
effect such a conversion. In the event that the Company is unable to secure
additional financing, it is highly likely that the lessor will draw on the
Letter of Credit.

6. OPERATING SEGMENTS AND RELATED INFORMATION

The Company operates in two segments, retail sales and distribution sales
to retail and wholesale outlets. The increase in net sales and cost of goods
sold between periods is primarily due to the acquisition of Tech Squared, Inc.
in December 1999.

|                                |  |        |           |              |  |                                   |            |       |  |   |   |  |  |   |            | 
|------------------------------- |  | ------ | --------- | ------------ |  | --------------------------------- | ---------- | ----- |  | - | - |  |  | - | ---------- | 
|                                |  |        |           |              |  | AS OF AND FOR THE                
|                                |  |        |           |              |  | THREE MONTHS ENDED APRIL 30, 2000
|                                |  |        |           |              |  |                                  
|                                |  | RETAIL |           | DISTRIBUTION |  | CORPORATE                         |            | TOTAL
|                                |  |        |           |              |  |                                   |            |      
|Net sales to external customers |  | $      | 8,383,612 |              |  | $                                 | 18,940,737 |       |  | $ |  |  |  | $ | 27,324,349 | 
|                               
|                               
|                               
|                               
|Cost of goods sold              |  |        | 7,339,764 |              |  |                                   | 17,620,408 |       |  |   |   |  |  |   | 24,960,172 | 
|                                |  |        |           |              |  |                                   |            |       |  |   |   |  |  |   |            | 
|Gross profit                    |  | $      | 1,043,848 |              |  | $                                 | 1,320,329  |       |  | $ |  |  |  | $ | 2,364,177  | 
|                                |  |        |           |              |  |                                   |            |       |  |   |   |  |  |   |            | 





|                                |  |        |           |              |  |                                   |            |       |  |   |   |  |  |   |            | 
|------------------------------- |  | ------ | --------- | ------------ |  | --------------------------------- | ---------- | ----- |  | - | - |  |  | - | ---------- | 
|                                |  |        |           |              |  | AS OF AND FOR THE                
|                                |  |        |           |              |  | THREE MONTHS ENDED APRIL 30, 1999
|                                |  |        |           |              |  |                                  
|                                |  | RETAIL |           | DISTRIBUTION |  | CORPORATE                         |            | TOTAL
|                                |  |        |           |              |  |                                   |            |      
|Net sales to external customers |  | $      | 1,878,780 |              |  | $                                 | 15,503,983 |       |  | $ |  |  |  | $ | 17,382,763 | 
|                               
|                               
|                               
|                               
|Cost of goods sold              |  |        | 1,826,475 |              |  |                                   | 14,343,527 |       |  |   |   |  |  |   | 16,170,002 | 
|                                |  |        |           |              |  |                                   |            |       |  |   |   |  |  |   |            | 
|Gross profit                    |  | $      | 52,305    |              |  | $                                 | 1,160,456  |       |  | $ |  |  |  | $ | 1,212,761  | 
|                                |  |        |           |              |  |                                   |            |       |  |   |   |  |  |   |            | 

8



---



VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

7. SUBSEQUENT EVENTS

In May 2000, The Company:



| |  | Issued 2,000,000 shares of its Common Stock to one accredited investor who
is also a director of the Company for $500,000 cash.                                                                                                                                                   
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Granted warrants to purchase 2,900,000 shares of its Common Stock at an
exercise price of $.50 to six investors, three of whom are directors of the
Company and two of whom are officers and directors, as a penalty for failure
to register certain securities on a timely basis.
| 
| |  | Granted warrants to purchase 500,000 shares of its Common Stock for $.70
per share, to a consulting firm in consideration for investor relations
services performed.                                                                                                              
| 
| |  | Granted warrants to purchase 7,500 shares of its Common Stock for $.70
per share, to a consultant in consideration for services performed.                                                                                                                                        
| 
| |  | Granted options to purchase 118,750 shares of its Common Stock for $.70
per share, to five employees pursuant to the Companys 1999 Incentive
Compensation Plan.                                                                                                                  
| 
| |  | Granted warrants to purchase 250,000 shares of its Common Stock for
$1.00 per share, to one accredited investor and one entity in connection with
a Private Placement.                                                                                                            
| 
| |  | Granted warrants to purchase 75,758 shares of its Common Stock for $1.00
per share, to one entity as an offering cost in connection with a Private
Placement.                                                                                                                     
| 
| |  | Granted warrants to purchase 1,000,000 shares of its Common Stock for
$.50 per share, to one entity in consideration for consulting services.                                                                                                                                     

In June 2000, the Company
granted options to purchase 1,325,000 shares of
its Common Stock for $.50 per share, to four individuals, two of whom are
officers and directors, one of whom is an officer, and one of whom is a
director of the Company.

On June 14, 2000, the Company entered into an agreement to borrow
$1,000,000 from CoronaViking Group, LLC ("Corona"). Under the terms of the agreement, the Company
has agreed to repay Corona this principal amount, with interest at a rate of
10% per annum, by September 12, 2000, subject to the Companys right to extend
the promissory note through December 12, 2000. If the note is not repaid on
time, the Company has agreed to issue Corona 100,000 shares of its Common
Stock for each of the first three months, and 400,000 shares for each of the
following nine months, that the Company is in default. For one year after any
default, Corona may convert the amount outstanding on the note into shares of
Common Stock at a conversion price equal to the lower of one-half of the Common
Stock market price or $.25 per share, subject to particular adjustments.
Corona automatically must convert the note into Common Stock if a
registration statement is filed under the Securities Act of 1933, as amended,
and declared effective, and the Companys Common Stock trades at over $.50 per
share for ten consecutive trading days.

In addition the Company has agreed to file a registration statement for
Corona by December 31, 2000 and to seek its effectiveness with the U.S.
Securities and Exchange Commission within 90 days of the filing date. If the
Company fails to timely file the registration statement or obtain registration,
then the Company is obligated to issue Corona an additional 100,000 shares of
Common Stock for each of the first three months, and an additional 400,000
shares for each of the following nine months, that the Company is in default of
this filing provision.

To induce Corona to enter into this arrangement, the Company has agreed
to issue Corona a five-year warrant to purchase 500,000 shares of its Common
Stock at an exercise price of $.25 per share, subject to particular
adjustments. Further, the Company also agreed to repurchase 300,000 shares of
Common Stock from affiliates of Graybox, a limited liability company
that previously arranged financing for the Company, and to pay Graybox
a $250,000 finders fee
for the transaction.

9



---



The aggregate effect of these
option and warrant grants will include charges
to operations of approximately $1.6 million in the second quarter of fiscal 2001.

On June 9, 2000, the Company entered into a non-binding letter of intent
to merge with BuyItNow, Incorporated, an Internet retailer affiliated with
Clear Channel Communications, Inc., Emmis Communications, Inc., NBC
Interactive, Inc., Star Media, Inc and e4L, Inc. (BIN). BINs web site
features a large selection of brand name products and unique specialty items,
including computer hardware and software. In the transaction, the Company
proposes to issue to the stockholders of BIN, in exchange for all of the
outstanding BIN capital stock, shares of a new class of its convertible
preferred stock that will represent 79% of the economic value and voting power
of the Company's outstanding Common Stock (assuming exercise and conversion of all
outstanding options, warrants and other rights to acquire its Common Stock
having exercise prices in excess of the current market price). The transaction
is subject to due diligence investigation and board approval, receipt of an
independent appraisal and negotiation of a definitive agreement. There is no
assurance the transaction will be consummated.

10



---



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE COMPANYS UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS REPORT AND RISK FACTORS INCLUDED IN THE
COMPANYS FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 2000. EXCEPT FOR THE
HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS REPORT CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH
AS STATEMENTS OF THE COMPANYS PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS,
AS PERMITTED AND COVERED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT.
THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE CURRENT EXPECTATIONS OF THE
COMPANY, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THIS INFORMATION. THE
CAUTIONARY STATEMENTS MADE IN THIS REPORT SHOULD BE READ AS BEING APPLICABLE TO
ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS REPORT.
THE COMPANYS ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE.

Overview

Historically, we have been an e-commerce provider of high performance
computer hardware, software and peripheral products to computer end-users and
to wholesale and retail customers throughout the United States and Canada. We
have been operating in two primary business segments in the computer products
industry: sales to end user businesses and consumers through our netdirect.com
website and dtpdirect.com direct marketing business, and sales to wholesale and
retail outlets through our GTI wholesale distribution business. Contingent on
financing, we intend to transition our business away from dependence on our
netdirect.com operations and toward our Community Techmart division. However,
we anticipate that our newly proposed business combination with BuyItNow,
Incorporated described below may affect our plans for our Community Techmart
operations.

GTI, historically our largest business in terms of revenue, is a
distributor of computer peripheral equipment to wholesale and retail outlets
throughout the United States and Canada. GTI specializes in high performance
computer equipment, computer integrated systems design and the assembly and
sale of complete computer systems. GTI purchases products from more than 40
manufacturers of computer related products, maintains a stocking inventory of
approximately 1,600 products and acts as a fulfillment business for our
end-user businesses. We acquired the assets of GTI from Herold Marketing
Associates, Inc. in January 1999 and accounted for the acquisition using the
purchase method of accounting.

Our dtpdirect.com division is a national business-to-business direct
marketer of computer hardware and software products primarily for users of
Apple Macintosh® personal computers. We acquired the division
upon our purchase of the operating assets of Tech Squared Inc. in December
1999. We also accounted for this acquisition using the purchase method of
accounting.

Netdirect.com is our website through which we offer computer-related
products. During fiscal 2000, we planned to build a loyal customer base by
attracting new customers through online advertising, competitive pricing and
free shipping. The results of this strategy were disappointing. Although we
were able to build significant revenue and customer base, our margins, net of
advertising costs, were too low to sustain a business. As a result, in May
2000, we restructured our netdirect.com business unit and outsourced the
website hosting, order processing, credit card processing, and order
fulfillment. The restructuring, along with changes to our other businesses,
resulted in a downsizing of our workforce by approximately 20
employees. This restructuring resulted in no significant severance or
incremental cost.  This was part of an overall strategy that included personnel reductions, wage
deferrals, reduction in advertising and promotion and other cost reduction
measures to reduce our cash usage rate. Contingent on new financing and the
effect of our newly proposed business combination with BuyItNow, Incorporated,
we intend to refocus our online efforts on our Community Techmart division, a
proprietary, web-based, integrated front-and back-office system designed to
integrate order fulfillment, merchant authorization, warehousing and financial
systems for our clients. Because we did not make our first significant
installation of our Techmart solution until April 2000, we have limited data
available to gauge the success of the Techmart business model and cannot assure
its success.

All of our businesses recognize revenue upon shipment of the physical
product to the customer and we record revenue net of estimated returns. We
report the amount payable to our suppliers as cost of goods sold. We
historically have maintained a supply of inventory that allows us to meet our
customers delivery demands in a timely manner. However, our recent cash
shortfall has increasingly made this difficult and we are losing sales as a
result of our failure to timely deliver, or cause delivery of, products to our
customers. In particular, two of our major vendors, Ingram Micro and Tech
Data, have discontinued shipment of products for us.

We have incurred significant losses during the past several years. As
discussed further below, our ability to continue as a going concern is
dependent on our ability to reduce our cash expenditures and raise substantial
additional funds.

11



---



Results of Operations

The following table sets forth statement of operations data for the
periods indicated as a percentage of net sales:

|                                       |                        |  |                              |      |      |  |       |      |  
|-------------------------------------- | ---------------------- |  | ---------------------------- | ---- | ---- |  | ----- | ---- | -
|                                       |                        |  | Three Months Ended April 30,
|                                       |                        |  |                             
|                                       |                        |  | 2000                         |      | 1999
|                                       |                        |  |                              |      |     
|Net sales                              |                        |  | 100.0                        | %    |      |  | 100.0 | %   
|                                      
|                                      
|                                      
|                                      
|Cost of goods sold                     |                        |  | 91.3                         |      |      |  | 93.0  |     
|                                       |                        |  |                              |      |      |  |       |     
|Gross profit                           |                        |  | 8.7                          |      |      |  | 7.0   |     
|                                      
|                                      
|                                      
|                                      
|Operating expenses
Sales and marketing |                        |  | 8.4                          |      |      |  | 7.6   |     
|                                      
|                                      
|                                      
|                                      
|General and administrative             |                        |  | 9.1                          |      |      |  | 8.0   |     
|                                      
|                                      
|                                      
|                                      
|Consulting services, stock based       |                        |  | 5.3                          |      |      |  | 27.7  |     
|                                      
|                                      
|                                      
|                                      
|Amortization of intangibles            |                        |  | 1.3                          |      |      |  | 1.4   |     
|                                       |                        |  |                              |      |      |  |       |     
|                                       |                        |  | 24.1                         |      |      |  | 44.7  |     
|                                      
|                                      
|                                      
|                                      
|Loss from operations                   |                        |  | (15.4                        | )    |      |  | (37.7 | )   
|                                      
|                                      
|                                      
|                                      
|Other income (expense):               
|                                      
|                                      
|                                      
|                                      
|                                       | Interest expense (net) |  |                              | (1.9 | )    |  |       | (2.6 | )
|                                      
|                                      
|                                      
|                                      
|                                       | Other income (expense) |  |                              | .4   |      |  |       | (.3  | )
|                                       |                        |  |                              |      |      |  |       |     
|                                       |                        |  | (1.5                         | )    |      |  | (2.9  | )   
|                                       |                        |  |                              |      |      |  |       |     
|Net loss                               |                        |  | (16.9                        | )%   |      |  | (40.6 | )%  
|                                       |                        |  |                              |      |      |  |       |     

Three Months Ended April 30, 2000 as Compared to the Three Months Ended
April 30, 1999

Net sales. Our net sales increased to $27.3 million for the quarter ended
April 30, 2000, from $17.4 million for the quarter ended April 30, 1999,
reflecting an increase of $9.9 million or 56.9%. Our sales increase
represented a $3.5 million increase for our GTI division (distribution sales),
and a $6.4 million increase for our dtpdirect.com division (catalog retail).
The GTI increase was the result of growth in our distribution business and $
2.5 million of additional sales that resulted from our Tech Squared
acquisition. We acquired Tech Squared as of November 30, 1999 and therefore
did not report net sales from dtpdirect.com prior to that date.

Cost of goods sold. Cost of goods sold during the quarter ended April 30,
2000 was $25.0 million, or 91.3% of net sales, reflecting an increase of $8.8
million or 54.3%. The cost of goods sold increase includes a $3.3 million
increase for our GTI division (distribution sales) and a $5.5 million increase
for our dtpdirect.com division. The GTI division increase was primarily due to
increased distribution sales that resulted from our Tech Squared acquisition.
We did not reflect any cost of goods sold from dtpdirect.com prior to our
acquisition of those assets. Our gross margin was 8.7% of net sales for the
three months ended April 30, 2000 as compared to 7.0% of net sales for three
months ended April 30, 1999. This increase primarily reflects the effect of our
acquisition of Tech Squared, which generated a gross margin of 12.8% for the
three months ended April 30, 2000.

Operating expenses. Our sales and marketing expenses increased to $2.3
million during the three months ended April 30, 2000 from $1.3 million for the
three months ended April 30, 1999. The primary components of the increase were
increased advertising and promotion expenditures of $478,000 and increased
sales and marketing personnel expenses of $390,000. The increase in
advertising and promotion expenditures was due principally to our October 1999
Lycos contract. We substantially reduced our netdirect.com operations in May
2000 and Lycos terminated our agreement on May 19, 2000. We therefore do not
expect to pay any additional amounts to Lycos. Nevertheless, Lycos has
threatened to commence suit and seek damages up to approximately $15 million,
the full value of our contract. We cannot assure that they will not commence
this lawsuit. As a percentage of net sales, sales and marketing expenses were
8.4% for the three months ended April 30, 2000, as compared to 7.6% for the
three months ended April 30, 1999.

12



---



General and administrative expenses increased to $2.5 million for the
three months ended April 30, 2000 from $1.4 million for the three months ended
April 30, 1999. The increase is primarily due to an increase in personnel
expenses of $487,000. This increase reflects the expanded size of our
operations resulting primarily from our December 1999 acquisition of Tech
Squared. As a percentage of net sales, general and administrative expenses
were 9.1% for the three months ended April 30, 2000, as compared to 8.0% for
the three months ended April 30, 1999.

For the three months ended April 30, 2000, we incurred $1.4 million of
non-cash charges for consulting services. In these transactions, we issued our
equity securities in exchange for services and generally incur expense over the
term of each agreement, often over a one-year period. We recognized $4.8
million of these charges during the three months ended April 30, 1999. We will
incur at least $4.8 million of stock-based consulting services expense in
fiscal 2001, resulting from existing consulting contracts.

Amortization of intangibles totaled $353,000 for the three months ended
April 30, 2000, compared with $233,000 for the three months ended April 30,
1999. The majority of this expense was amortization of intangibles related to
our Tech Squared, GTI and Softdisk acquisitions.

Interest expense, net. Interest expense was $504,000 for the three months
ended April 30, 2000 as compared to $456,000 for three months ended April 30,
1999. The increase in interest expense for 2000 related principally to
$215,000 of interest expense on borrowings under our agreement with Coast
Business Credit and $301,000 of interest expense due to amortization of
stock-based debt issue costs associated with that agreement. During the 1999
period, we incurred $74,000 of interest to Coast, $278,000 of amortization for
stock-based debt issue costs, and $111,000 of interest on $7,000,000 of notes
payable to Herold Marketing related to our acquisition of GTI.

Other income (expense). Other income for the three months ended April 30,
2000 of approximately $112,000 resulted primarily from a gain on sale of
marketable securities. During the same period in 1999, we incurred other
expense of $53,000 of which $30,000 related to fees incurred to obtain a line
of credit.

Liquidity and Capital Resources

Current Situation. Our ability to continue as a going concern is in
jeopardy. Although between February 1 and June 5, 2000, we raised an
additional $1.0 million of cash, net of offering costs, through the sale of 2.5
million shares of our Common Stock and $653,000 through the exercise of
warrants, as of June 5, 2000, we had only $360,000 of cash and only $797,000 of
borrowing capacity under our line of credit. We are in violation of covenants
of this line of credit and our lender may declare us in default and foreclose
on our assets at any time. We have a large, negative working capital position
that was approximately $8.3 million at May 31, 2000. In our GTI and
dtpdirect.com businesses, we are not timely paying vendors and several
important vendors have placed us on credit hold, making shipment of products to
our customers difficult and adversely affecting our net sales.

We are attempting to continue reduction of our cash outlay from
operations, which averaged approximately $812,000 per month during our fiscal
year ended January 31, 2000. We reduced our cash outlay to an average of
$389,000 per month for the three months ended April 30, 2000. However, we would have
depleted our cash sooner had we made any payments to Lycos during these three
months. We have stopped our advertising and marketing expenditures for our
netdirect.com website and restructured the website. We have deferred the
payment of accounts payable and have reduced officer salaries and bonuses
pending an improved cash position. We have downsized our workforce to reduce
our payroll. We estimate that we have reduced our monthly negative cash flow
to approximately $300,000, assuming we can continue our current sales trend,
and believe that we may be able to reduce this further, contingent on our
ability to maintain sales.

On June 14, 2000, we entered into an agreement to borrow $1,000,000 from
Corona Viking Group, LLC ("Corona").  We have agreed to repay Corona this principal amount, with
interest at a rate of 10% per annum, by September 12, 2000, subject to our
right to extend the promissory note through December 12, 2000. If we fail to
timely repay the note, we have agreed to issue Corona 100,000 shares of our
Common Stock for each of the first three months, and 400,000 shares for each of
the following nine months, that we are in default. For one year after any
default, Corona may convert the amount outstanding on the note into shares of
our Common Stock at a conversion price equal to the lower of one-half of our
Common Stock market price or $.25 per share, subject to particular adjustments.
Corona automatically must convert the note into Common Stock if a
registration statement is filed under the Securities Act of 1933, as amended,
and declared effective, and our Common Stock trades at over $.50 per share for
ten consecutive trading days.

We have agreed to file a registration statement for Corona by December 31, 2000 and to seek its effectiveness with the U.S. Securities and Exchange
Commission within 90 days of the filing date. If we fail to timely file the
registration statement or

13



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obtain registration, then we have agreed to issue
Corona an additional 100,000 shares of our Common Stock for each of the first
three months, and an additional 400,000 shares for each of the following nine
months, that we are in default.

To induce Corona to enter into this arrangement, we agreed to issue
Corona a five-year warrant to purchase 500,000 shares of our Common Stock at
an exercise price of $.25 per share, subject to particular adjustments. We
also agreed to repurchase 300,000 shares of Common Stock from
affiliates of Graybox, a limited liability company that previously
arranged financing for the company
and to pay Graybox a $250,000 finders fee for the transaction.

We are seeking additional equity or debt financing, but cannot assure you
that we will obtain financing on acceptable terms, or at all. We have also
entered into a letter of intent to merge our business with BuyItNow,
Incorporated, as described below. We believe, but cannot assure, that our
ability to raise additional capital may be enhanced by consummation of this
proposed business combination. In any event, if we cannot reduce our cash
expenditures and raise additional capital, we may be unable to continue our
operations.

Historical Sources and Uses of Cash. We historically have financed our
operations primarily through the private placement of equity and debt
securities. Primary uses of cash have been to fund our operation through the
development stage and the acquisition and integration of subsidiary businesses.
If we are successful in achieving continued revenue growth, our working capital
requirement is likely to increase.

Net cash used by our operating activities during the three months ended
April 30, 2000 was $544,000 as compared to $3.0 million for the three months
ended April 30, 1999. Net cash used by us for operating activities during the
three months ended April 30, 2000 was primarily the result of net losses and
decreases in accounts payable, offset in part by non-cash expenses and
decreases in inventories and accounts receivable and increases in accrued
expenses. Net cash used by our operating activities during the three months
ended April 30, 1999 was primarily the result of net losses and increases in
accounts receivable and other current assets, and decreases in accrued
expenses, partially offset by non-cash expenses, decreases in inventories and
increases in accounts payable.

We used cash of $ 246,000 and $187,000 in investing activities in the
three months ended April 30, 2000 and April 30, 1999, respectively. During the
three months ended April 30, 2000, we used $526,000 for purchases of leasehold
improvements, furniture and equipment, including $349,000 related to the
consolidation of our operations into a new facility in Eden Prairie, MN, and
$152,000 for Techmart software development. Offsetting these increases was
$280,000 received for the one time sale of marketable securities, resulting in
a gain of $120,000. For the three months ended April 30, 1999, we used $63,000
for the purchase of furniture and equipment and loaned $124,000 to one of our
officers to start a television infomercial business, which we subsequently
acquired.

Net cash provided by financing activities was $126,000 for the three
months ended April 30, 2000, as compared to net cash provided by financing
activities of $5.4 million for the three months ended April 30, 1999. During
the three months ended April 30, 2000, we received net proceeds of $1.1 million
from issuance of equity securities including the exercise of options and
warrants. In addition, during the three months ended April 30, 2000, we
borrowed $30.0 million under our line of credit and repaid $30.4 million on it.
Proceeds from these financing activities were used to fund our working capital
needs and to retire $230,000 of loans from related parties and $104,000 of
notes payable and convertible debentures. During the three months ended April
30, 1999, we received $5.8 million from issuance of equity securities and the
collection of a stock subscription receivable of $2.7 million. In addition, we
borrowed $4.0 million under the Coast line of credit. We used the proceeds
from these 1999 financing activities to retire a $4.0 million note payable to
Herold Marketing in connection with our acquisition of GTI. We also used these
proceeds to retire $218,000 of loans to related parties and to pay $210,000 in
loans fees to establish the Coast line of credit.

Lycos Agreement. In October 1999, we entered into a three-year E-Commerce
Agreement with Lycos, Inc. for comprehensive Internet marketing activities,
including co-branding of one of our websites on the Lycos network. Under the
agreement, we paid Lycos $1.125 million and agreed to pay an additional $3.375
million by July 2000 including $2.25 million due by April 1, 2000 that we have
not paid. We also agreed to pay an additional $5.0 million to Lycos during
each of the second and third years of the agreement, subject to Lycos right to
terminate the agreement unless we agree to pay $6.5 million in such years.
Lycos terminated the agreement by notice to us in May 2000, terminated the
links to our netdirect.com website from the Lycos network and has threatened to
sue us. We are currently negotiating a settlement of the agreement with Lycos,
but cannot assure you that we can reach agreement on terms acceptable to us, or
at all.

Capital
Expenditures. Although we have no material commitments for
capital expenditures, we anticipate that, subject to financing and the effect
of our newly proposed business combination with BuyItNow, Incorporated, we will
expend approximately $1 million during fiscal year 2001 on additional computer
hardware and software resources, including Techmart development e-commerce
servers. Our capital expenditures could be materially different if our
operating plans are altered.

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Recent Accounting Developments

In December 1999, the Staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements. This SAB summarizes certain of the Staffs views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Application of the views expressed in SAB 101, as
amended by SAB 101A, is required no later than the Companys second quarter of
fiscal year 2001. Although it has not made a definite determination of its
impact, the Company does not expect the adoption of SAB 101 to have a
significant impact on its financial position, results of operations or cash
flows.

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PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In December 1999, Cnet, Inc. (Cnet) filed a lawsuit against us in the
United States District Court for the District of Minnesota. Cnet alleges that
we owe them $1,570,674, plus interest, attorneys fees and costs in connection
with advertising services provided to us. They allege that they permitted us
to list products on Cnets Internet sites and to receive a link from the Cnet
Internet site to our own website in return for which Cnet was to receive click
through charges for each time that a user utilized a link to our website. We
have acknowledged that Cnet provided some services, but maintain that the value
for these services is overstated in the lawsuit. In February 2000, we asserted
a counterclaim for an accounting to clarify the amount being charged for
website links and other services alleged to have been provided by Cnet. In May
2000 Cnet filed a second claim in which it reduced the original claim to
$1,483,332 and asked for an additional $500,000 for breach of contract. We
intend to vigorously defend this claim. No discovery has been performed to
date and no trial date has been set.

In April 2000, Lycos, Inc. (Lycos) demanded payment by us of $2,250,000
they claim is owed under an e-commerce agreement dated October 31, 1999. Lycos
asserted that if was not paid by May 12, 2000, it may seek damages of up to
$13,375,000. We did not pay any additional amounts to Lycos by that date. On
May 19, 2000 Lycos formally terminated our agreement and continues to seek
remedies as provided under the agreement. We intend to vigorously defend all
claims by Lycos.

We are attempting to settle
the above disputes, but cannot assure that we will do so on
acceptable terms, or at all.

In connection with our January 1999 acquisition of the operating assets of
Herold Marketing Associates, Inc. dba Graphics Technologies, Inc. (Herold),
we escrowed $200,000 of funds for possible future payment to Herold upon a
post-closing purchase price reconciliation. Umax, Inc. has asserted a claim
against the escrowed funds based on a money judgment against Herold in a matter
unrelated to us. Herold and we authorized the payment into court of $85,000 of
the amount in escrow for determination by the court as to whether Umax may make
a claim for those funds. The matter has not been resolved to date.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) None

(b) None

(c) Recent Sales of Unregistered Securities.

(1) Sales for cash consideration to accredited investors



| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Between February 1 and April 30, 2000, the Company issued to eight accredited
individuals and entities 482,500 shares of its Common Stock and warrants to
purchase 320,250 shares of its Common Stock for $1.00 per share, for
$462,250.



| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Between February 1 and April 30, 2000, the Company issued to three accredited
individuals and entities, 906,550 shares of its Common Stock for $652,948 for
the exercise of warrants at exercise prices ranging from $.05 to $1.00 per
share.

(2) Sales in exchange for services rendered to accredited investors



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Between February 1 and April 30, 2000, the Company issued 500,000 shares of
its common Stock to one entity for $1,265,000 of consulting services.

(d) None

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ITEM 5. OTHER INFORMATION

On June 9, 2000, we entered into a non-binding letter of intent to merge
with BuyItNow, Incorporated, an Internet retailer affiliated with Clear Channel
Communications, Inc., Emmis Communications, Inc., NBC Interactive, Inc., Star
Media, Inc and e4L, Inc. (BIN). BINs web site features a large selection
of brand name products and unique specialty items, including computer hardware
and software. In the transaction, we propose to issue to the stockholders of
BIN, in exchange for all of the outstanding BIN capital stock, shares of a new
class of our convertible preferred stock that will represent 79% of the
economic value and voting power of our outstanding Common Stock (assuming
exercise and conversion of all outstanding options, warrants and other rights
to acquire our Common Stock having exercise prices in excess of the current
market price). The transaction is subject to our due diligence investigation
and board approval, receipt of an independent appraisal and negotiation of a
definitive agreement. We cannot assure that we will consummate this
transaction.

On June 14, 2000, we entered into an agreement to borrow $1,000,000 from
Corona Viking Group, LLC ("Corona"). We have agreed to repay Corona this principal amount, with
interest at a rate of 10% per annum, by September 12, 2000, subject to our
right to extend the promissory note through December 12, 2000. If we fail to
timely repay the note, we have agreed to issue Corona 100,000 shares of our
Common Stock for each of the first three months, and 400,000 shares for each of
the following nine months, that we are in default. For one year after any
default, Corona may convert the amount outstanding on the note into shares of
our Common Stock at a conversion price equal to the lower of one-half of our
Common Stock market price or $.25 per share, subject to particular adjustments.
Corona automatically must convert the note into Common Stock if a
registration statement is filed under the Securities Act of 1933, as amended,
and declared effective, and our Common Stock trades at over $.50 per share for
ten consecutive trading days.

We have agreed to file a
registration statement for Corona by December
31, 2000 and to seek its effectiveness with the U.S. Securities and Exchange
Commission within 90 days of the filing date. If we fail to timely file the
registration statement or obtain registration, then we have agreed to issue
Corona an additional 100,000 shares of our Common Stock for each of the first
three months, and an additional 400,000 shares for each of the following nine
months, that we are in default.

To induce Corona to enter into this arrangement, we agreed to issue
Corona a five-year warrant to purchase 500,000 shares of our Common Stock at
an exercise price of $.25 per share, subject to particular adjustments. We
also agreed to repurchase 300,000 shares of Common Stock from
affiliates of Graybox, a limited liability company that previously
arranged financing for the company
and to pay Graybox a $250,000 finders fee for the transaction.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) All schedules and exhibits not included are not applicable, not
required or would contain information which is shown in the financial
statements or notes thereto.

|         |  |                                                                                                                                                                                                                                          
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBITS |  | DESCRIPTION                                                                                                                                                                                                                              
|         |  |                                                                                                                                                                                                                                          
|3.1      |  | Articles of Incorporation of the Company, as amended.*                                                                                                                                                                                   
|        
|        
|        
|        
|3.2      |  | By-Laws of the Company, as amended.*                                                                                                                                                                                                     
|        
|        
|        
|        
|4.1      |  | Form of Stock Certificate, form of Stock Purchase Warrant and Stock Option Agreement.*                                                                                                                                                   
|        
|        
|        
|        
|4.2      |  | Form of redeemable warrant for December 1999 private
placement.*****                                                                                                                                                                     
|        
|        
|        
|        
|10.1     |  | Asset Purchase Agreement dated January 28, 1999, by and among GTI
Acquisition Corporation, Herald Marketing Associates, Incorporated, dba
Graphics Technology, Inc. and Stephan G. Herold*                                               
|        
|        
|        
|        
|10.2     |  | Consulting Agreement dated January 28, 1999, between GTI Acquisition
Corporation and Stephan G. Herold*                                                                                                                                  
|        
|        
|        
|        
|10.3     |  | Loan and Security Agreement dated February 11, 1999, by and among Virtual
Technology Corporation, GTI Acquisition Corporation and Coast Business
Credit.*                                                                                
|        
|        
|        
|        
|10.4     |  | Employment Agreement with Gregory Appelhof. ***                                                                                                                                                                                          
|        
|        
|        
|        
|10.5     |  | Employment Agreement with John Harvatine.***                                                                                                                                                                                             
|        
|        
|        
|        
|10.6     |  | Asset Purchase Agreement dated November 8, 1999 among Tech Squared Inc.,
T2 Acquisition Corporation, Chareles E. Reese Jr. and Joel A Ronning.****                                                                                       
|        
|        
|        
|        
|10.7     |  | First and Second Amendments to the Loan and Security Agreement dated
December 10, 1999 and December 15, 1999, respectively, by and among
Virtual Technology Corporation, GTI Acquisition Corporation and T2
Acquisition Corporation.*****

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|     |  |                                                                                                                                                                                   
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8 |  | Agreement dated effective September 1, 1999 between Virtual Technology
Corporation and eSystems21 Corporation.*****                                                               
|    
|    
|    
|    
|10.9 |  | Electronic Commerce Agreement dated effective January 4, 2000 between
Virtual Technology Corporation dba Netdirect Corporation International and
the University of Minnesota.*****
|    
|    
|    
|    
|    
|    
|    
|    
|    
|    
|    
|    
|27.  |  | Financial Data Schedule                                                                                                                                                           

(b) Reports on
Form 8-K. On March 1, 2000, we filed an amended report on Form
8-K/A to supply the Item 7 financial statement information required
in connection with our December 1999 acquisition of the operating
assets of Tech Squared, Inc.



|*     |  | Incorporated by reference from the Companys 10-SB, filed with the SEC on
February 12, 1999.        
|----- |  | ----------------------------------------------------------------------------------------------------
|     
|     
|     
|     
|**    |  | Incorporated by reference from the Companys amended Form S-8, filed with
the SEC on April 15, 1999.
|     
|     
|     
|     
|***   |  | Incorporated by reference from the Companys 10-K, filed with the SEC on
May 6, 1999.               
|     
|     
|     
|     
|****  |  | Incorporated by reference from the Companys 8-K, filed with the SEC on
December 30, 1999.          
|     
|     
|     
|     
|***** |  | Incorporated by reference from the Companys 10-K, filed with the SEC on
May 16, 2000.              

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                     |  |  |  |  |  |                               
|-------------------- |  |  |  |  |  | ------------------------------
|                     |  |  |  |  |  | Virtual Technology Corporation
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                     |  |  |  |  |  | By: /s/ Gregory Appelhof      
|                     |  |  |  |  |  |                               
|                     |  |  |  |  |  | Its: Chief Executive Officer  
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                     |  |  |  |  |  | By: /s/ John Harvatine        
|                     |  |  |  |  |  |                               
|                     |  |  |  |  |  | Its: Chief Financial Officer  
|                    
|                    
|                    
|                    
|Dated: June 14, 2000 |  |  |  | 

18