<PAGE>   1
                                    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: October 31, 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

                           GRAPHICS TECHNOLOGIES, INC.
             (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)
                                 (952) 259-4700
              (Registrant's Telephone Number, Including Area Code)
                         Virtual Technology Corporation
                   (Former name, if changed since last report)

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 shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                 Yes X   No
                                    ---    ---

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 11, 2000, the latest practicable date: 41,606,447



<PAGE>   2


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM                                                                                      PAGE

                                             PART I

                                      FINANCIAL INFORMATION

<S>                                                                                       <C>
ITEM 1. FINANCIAL STATEMENTS...............................................................  3

   Condensed Balance Sheets at October 31, 2000 (unaudited)
   and January 31, 2000....................................................................  3

   Condensed Statements of Operations (unaudited) for the three and nine months ended
   October 31, 2000 and 1999 ..............................................................  4

   Condensed Statements of Cash Flows (unaudited) for the nine months ended
   October 31, 2000 and 1999...............................................................  6

   Notes to Condensed Financial Statements (unaudited).....................................  7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
     CONDITION AND RESULTS OF OPERATIONS................................................... 12

                                             PART II

                                        OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.................................................................. 18

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................... 20

ITEM 5. OTHER INFORMATION.................................................................. 20

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................... 21
</TABLE>


                                     -2-
<PAGE>   3


                         PART I - FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

                           GRAPHICS TECHNOLOGIES, INC.
                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                               October 31, 2000
                                                                 (Unaudited)     January 31, 2000
                                                               ----------------  ----------------
<S>                                                            <C>               <C>
                              ASSETS
Current assets:
   Cash                                                          $    142,734      $    698,246
   Marketable securities                                                                185,015
   Accounts receivable, net                                           479,925        12,097,442
   Inventories, net                                                   516,573         4,677,997
   Other current assets                                               768,652         2,603,725
                                                                 ------------      ------------
     Total current assets                                           1,907,884        20,262,425

Furniture and equipment, net                                          226,807         1,326,643
Capitalized software development costs, net                                             323,033
Intangibles, net                                                                     10,180,627
Other                                                                  42,012         2,574,055
                                                                 ------------      ------------
     Total assets                                                $  2,176,703      $ 34,666,783
                                                                 ============      ============

               LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Current liabilities:
   Notes and line of credit, current portion                     $    657,733      $  7,887,907
   Convertible note payable                                           330,000
   Capital lease obligations, current portion                          14,945            13,951
   Accounts payable                                                 9,164,456        15,076,375
   Accrued expenses and other current liabilities                   3,939,903         3,474,854
                                                                 ------------      ------------
     Total current liabilities                                     14,107,037        26,453,087
                                                                 ------------      ------------

Capital lease obligations, net of current portion                      39,135            50,519

Stockholders' equity (deficiency)
   Common stock - $.001 par value; 100,000,000 shares
     authorized; shares issued and outstanding - 41,606,447
     and 34,142,403, respectively                                      41,606            34,142
   Additional paid in capital                                      49,620,704        44,949,469
   Cumulative translation adjustments                                  (5,319)           (3,738)
   Stock subscription receivable                                                       (925,000)
   Accumulated deficit                                            (61,626,460)      (35,891,696)
                                                                 ------------      ------------
     Total stockholders' equity (deficiency)                      (11,969,469)        8,163,177
                                                                 ------------      ------------
     Total liabilities and stockholders' equity (deficiency)     $  2,176,703      $ 34,666,783
                                                                 ============      ============
</TABLE>

            See Notes to Condensed Financial Statements (Unaudited).


                                    -3-
<PAGE>   4



                           GRAPHICS TECHNOLOGIES, INC.
                 CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                Three months ended
                                        October 31, 2000  October 31, 1999
                                        ----------------  ----------------

<S>                                     <C>               <C>
NET SALES                                 $  1,258,114      $ 20,069,412

COST OF GOODS SOLD                           1,154,499        18,707,274
                                          ------------      ------------

GROSS MARGIN                                   103,615         1,362,138
                                          ------------      ------------

OPERATING EXPENSES
   Sales and marketing                         540,491         1,843,713
   General and administrative                1,628,127         2,168,905
   Consulting services                         605,532         1,538,702
   Amortization of intangibles                                   232,824
                                          ------------      ------------
                                             2,774,150         5,784,144
                                          ------------      ------------
LOSS FROM OPERATIONS                        (2,670,535)       (4,422,006)
                                          ------------      ------------

OTHER INCOME (EXPENSE)
   Interest expense, net                    (1,151,506)         (422,565)
   Other income (expense)                       68,929          (149,012)
                                          ------------      ------------
                                            (1,082,577)         (571,577)
                                          ------------      ------------

NET LOSS                                  $ (3,753,112)     $ (4,993,583)
                                          ============      ============
NET LOSS PER COMMON SHARE - BASIC AND
   DILUTED                                $       (.09)     $       (.16)

WEIGHTED AVERAGE COMMON SHARES
   OUTSTANDING - BASIC AND DILUTED          41,170,855        30,360,745
</TABLE>

            See Notes to Condensed Financial Statements (Unaudited).


                                     -4-
<PAGE>   5


                           GRAPHICS TECHNOLOGIES, INC.
                 CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                      Nine months ended
                                             October 31, 2000  October 31, 1999
                                             ----------------  ----------------

<S>                                          <C>               <C>
NET SALES                                      $ 39,460,108      $ 53,966,489

COST OF GOODS SOLD                               36,163,272        50,189,221
                                               ------------      ------------

GROSS MARGIN                                      3,296,836         3,777,268
                                               ------------      ------------

OPERATING EXPENSES
   Sales and marketing                            4,562,323         4,908,994
   General and administrative                     6,058,884         5,328,294
   Loss on impairment of long-lived assets       11,235,895
   Cnet litigation settlement                    (1,070,674)
   Consulting services                            4,794,504         8,092,363
   Amortization of intangibles                      667,932           698,477
                                               ------------      ------------
                                                 26,248,864        19,028,128
                                               ------------      ------------
LOSS FROM OPERATIONS                            (22,952,028)      (15,250,860)
                                               ------------      ------------

OTHER INCOME (EXPENSE)
   Interest expense, net                         (2,919,920)       (1,264,327)
   Other income (expense)                           137,184          (205,809)
                                               ------------      ------------
                                                 (2,782,736)       (1,470,136)
                                               ------------      ------------

NET LOSS                                       $(25,734,764)     $(16,720,996)
                                               ============      ============
NET LOSS PER COMMON SHARE - BASIC AND
   DILUTED                                     $       (.67)     $       (.58)

WEIGHTED AVERAGE COMMON SHARES
   OUTSTANDING - BASIC AND DILUTED               38,238,227        28,691,364
</TABLE>


            See Notes to Condensed Financial Statements (Unaudited).


                                    -5-
<PAGE>   6


                           GRAPHICS TECHNOLOGIES, INC.
                 CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                              Nine months ended
                                                                   October 31, 2000    October 31, 1999
                                                                   ----------------    ----------------
<S>                                                                <C>                 <C>
OPERATING ACTIVITIES
Net loss                                                           $  (25,734,764)     $  (16,720,996)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities
   Stock based compensation and interest expense                        7,984,145           8,363,131
   Cnet litigation settlement                                          (1,070,674)
   Loss on impairment of long-lived assets                             11,235,895
   Amortization                                                           667,932           1,617,007
   Loss on abandonment of capitalized software                             79,048
   Depreciation                                                           321,825             103,026
   Provision for losses on accounts receivable                            197,070             102,467
   Provision for inventory obsolescence                                    90,040
   Gain on sale of marketable securities                                 (120,000)
   Changes in operating assets and liabilities:
     Accounts receivable                                               11,420,447          (4,308,194)
     Inventories                                                        4,071,384           1,944,818
     Other current assets                                                 309,652            (376,658)
     Deposits                                                             (22,178)
     Accounts payable                                                  (4,841,246)            904,870
     Accrued expenses and other current liabilities                       465,049           2,434,697
                                                                   --------------        ------------
   Net cash provided (used) by operating activities                     5,053,625          (5,935,832)
                                                                   --------------        ------------

INVESTING ACTIVITIES
   Purchases of furniture and equipment                                  (701,204)           (349,392)
   Proceeds from sale of marketable securities                            305,015
   Loan to related party                                                                     (123,750)
                                                                   --------------        ------------
   Net cash used by investing activities                                 (396,189)           (473,142)
                                                                   --------------        ------------

FINANCING ACTIVITIES
   Line of credit borrowings                                           46,513,731          47,413,017
   Line of credit payments                                            (53,101,392)        (41,664,896)
   Borrowing under notes payable                                          593,416             552,092
   Payments on notes payable and convertible notes                       (675,930)         (6,796,794)
   Payments on capital lease obligations                                  (10,390)             (7,805)
   Repayment of loans from related parties                               (230,000)           (386,543)
   Loan fees                                                                                 (207,027)
   Proceeds from options and warrants exercised                           652,948             854,500
   Proceeds from issuance of common stock                               1,066,500           5,000,050
   Common stock offering costs                                            (20,250)           (525,000)
   Collection of subscription receivable                                                    2,676,436
                                                                   --------------        ------------
   Net cash (used) provided by financing activities                    (5,211,367)          6,908,030
                                                                   --------------        ------------
Effect of foreign currency on cash                                        ( 1,581)
                                                                   --------------        ------------
NET INCREASE (DECREASE) IN CASH                                          (555,512)            499,056

CASH
   Beginning of period                                                    698,246             125,993
                                                                   --------------        ------------
   End of period                                                   $      142,734        $    625,049
                                                                   ==============        ============
</TABLE>

            See Notes to Condensed Financial Statements (Unaudited).


                                      -6-
<PAGE>   7


                           GRAPHICS TECHNOLOGIES, INC.
               NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

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


1. BASIS OF PRESENTATION

         The unaudited condensed financial statements of Graphics Technologies,
Inc. (formerly known as Virtual Technology Corporation prior to the corporate
name change on December 20, 2000 and the concurrent merger of GTI Acquisition
Corporation, T2 Acquisition Corporation and Softdisk Acquisition Corporation
into the Company) as of and for the three and nine months ended October 31, 2000
and October 31, 1999 reflect all adjustments (consisting only of normal
recurring adjustments except for the asset impairment charges described in
footnote 2 of the Company's report on Form 10-Q for the quarter ended July 31,
2000) 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 Graphics
Technologies, Inc.'s Form 10-K. The results of operations for the three and nine
months ended October 31, 2000 are not necessarily indicative of the results to
be expected for the entire fiscal year ending January 31, 2001.

         The Company's condensed 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 nine months ended October 31, 2000, the Company
incurred a net loss of $25,734,764. At October 31, 2000, the Company had an
accumulated deficit of $61,626,460, a working capital deficit of $12,199,153,
was in violation of a covenant contained in its line of credit facility (which
facility the lender has sold to Philip Lacerte, a director and shareholder of
the Company) and has no commitment for any further advances in that same
facility.

         Although the Company's management has developed and attempted to
execute an operating and financing plan to reduce its operating costs, focus
resources on the profitable elements of its distribution business, and obtain
additional debt and/or equity financing, the Company has been unsuccessful in
obtaining sufficient financing to operate its business at levels that will allow
it to generate sufficient cash flows to fund its operations and service its
debts. The Company's lack of profitability and financing has caused its payments
to most of its product vendors to fall into arrears to such an extent that these
vendors are refusing to supply the Company with the inventories necessary to
operate the business. The Company has been forced to suspend and/or dramatically
reduce its operations. Certain of the Company's vendors have filed or have
threatened to file formal claims against the Company due to its failure to pay
amounts due. At least four of the creditors have received judgments totaling
$309,000 in the aggregate. In June 2000, the Company entered into a loan
agreement with Corona Viking Group, LLC ("Corona") under which the Company was
to receive $1,000,000 in debt financing. Corona advanced only $330,000 of the
total commitment of $1,000,000 and will not make any further advances. In
September 2000, the Company's working capital lender, Coast Business Credit
("Coast"), discontinued making advances to the Company, notified the Company of
a default of the loan agreement and demanded repayment of all outstanding
borrowings within 45 days of such notice. On September 28, 2000, Philip Lacerte
("Lacerte"), a director and shareholder of the Company, acquired the working
capital loan from Coast for a cash payment of $296,000. Lacerte has made no
advances to the Company on this line of credit nor has he made any commitments
to do so. The Company has no commitments from any lender or equity provider at
this time. Based upon these severe cash flow shortages, there is substantial
doubt about the Company's ability to continue as a going concern.

         These financial statements do not include any adjustments that might
result from the outcome of these uncertainties.




                                      -7-
<PAGE>   8


                           GRAPHICS TECHNOLOGIES, INC.
               NOTES TO CONDENSED 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 nine months ended October 31, 2000 and
October 31, 1999 was as follows:

<TABLE>
<CAPTION>
                                           October 31, 2000  October 31, 1999
                                           ----------------  ----------------

<S>                                        <C>               <C>
Net loss                                     $(25,734,764)     $(16,720,996)
Foreign currency translation adjustments           (1,581)
                                             ------------      ------------
Comprehensive loss                           $(25,736,345)     $(16,720,996)
                                             ============      ============
</TABLE>

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 nine month periods
ended October 31, 2000 and 1999 exclude 24,307,722 and 7,638,552 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 Financial Statements.


5. COMMITMENTS AND CONTINGENCIES

         The Company has an agreement with a consultant pursuant to which, 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 October 31, 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. ("Lycos") for comprehensive Internet marketing
activities, including co-branding of a Company website on the Lycos network.
Under the agreement, the Company paid Lycos $1,125,000, but has paid no further
sums. However, the agreement required the Company 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 contractually due for services
provided in the accompanying financial statements as of January 31, 2000 and
October 31, 2000 and for the three and nine months ended October 31, 2000. On
May 19, 2000, Lycos formally terminated the agreement. In September 2000, Lycos
offered to settle this dispute for a $2,250,000 cash payment.

         Between July and October 2000, seven other vendors filed lawsuits to
collect an aggregate of $760,000 that they claim is due for inventory sold to or
services rendered for the Company. In addition, one inventory vendor has
commenced an arbitration proceeding to collect approximately $227,000. At least
four of these vendors have received judgments totaling $309,000. Due to its
financial position, the


                                      -8-
<PAGE>   9


                           GRAPHICS TECHNOLOGIES, INC.
               NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)


Company did not contest any of these actions. However, the Company believes it
has adequately accrued for any amounts that may be due as a result of these
actions.

         In addition to these claims, the Company regularly receives numerous
demands for payment of past-due invoices from other creditors. These demands
have included the threat of legal action if payment is not made. Due to its
financial position, the Company currently is unable to make payments to satisfy
its creditors.

         In December 1999, the Company entered into an agreement with a
shareholder (the "Lender") that extended a $300,000 letter of credit (the "LC")
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 Lender
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 LC being drawn upon, the
Company 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 LC, the Company agreed to 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 LC. Further and again contingent on a draw against the LC, the
Company 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 shares as
reported on the OTC Bulletin Board on the date that the Lender gives written
notice to the Company of the Lender's intent to effect such a conversion. In
September and October 2000, the Company failed to pay some lease and tenant
improvement costs. As a result, as of October 31, 2000, the lessor drew $131,000
on the letter of credit. The Company recorded this amount as a liability.

         In June 2000, the Company entered into an agreement to borrow
$1,000,000 from Corona and subsequently Corona advanced $330,000 under terms of
this agreement. The Company agreed to repay Corona this principal amount, with
interest at a rate of 10% per annum, by September 12, 2000, subject to a right
to extend the promissory note through December 11, 2000. In September 2000, the
maturity date was extended to December 11, 2000. Corona has the option to
convert any outstanding amounts of principal and interest into the company's
Common Stock at a rate of $.25 per share. If the Company fails to repay the
note, it has agreed to issue Corona 100,000 shares of its Common Stock for each
of the first three months of delinquency, and 400,000 shares for each of the
following nine months, that the Company is in payment default. In addition, the
interest rate on the note increases to an annual rate of 14% or the highest rate
permitted by law, whichever is higher. Further, for a period of one year after
any default, Corona may convert the amount outstanding on the note into shares
of the Company's Common Stock at a conversion price equal to the lower of (i)
one-half the per share average closing high bid price of the Company's Common
Stock for the ten trading days preceding the date of default, or (ii) $.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.

         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
has agreed to issue Corona an additional 100,000 shares of its 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. The Company does not
expect to file this registration statement timely, or at all.

         To induce Corona to enter into this arrangement, the Company 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 its Common
Stock from affiliates of Graybox, a limited liability company that previously
arranged financing for the Company, and to pay Graybox a finders' fee of
$100,000 upon completion of this transaction and an additional $150,000 upon
completion of an additional $3,000,000 of debt or equity financing raised by
Graybox.


                                      -9-
<PAGE>   10


                           GRAPHICS TECHNOLOGIES, INC.
               NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)


6. OPERATING SEGMENTS AND RELATED INFORMATION

         The Company operates in two segments, retail sales and distribution
sales to retail and wholesale outlets.



<TABLE>
<CAPTION>
                                                      FOR THE                                         FOR THE
                                        THREE MONTHS ENDED OCTOBER 31, 2000             THREE MONTHS ENDED OCTOBER 31,1999
                                    -------------------------------------------     -------------------------------------------
                                       RETAIL      DISTRIBUTION        TOTAL          RETAIL       DISTRIBUTION        TOTAL
                                    -----------    ------------     -----------     -----------    ------------     -----------

<S>                                 <C>            <C>              <C>             <C>            <C>              <C>
Net sales to external customers     $    87,138     $ 1,170,976     $ 1,258,114     $ 4,168,644     $15,900,768     $20,069,412
Cost of goods sold                       78,221       1,076,278       1,154,499       4,027,725      14,679,549      18,707,274
                                    -----------     -----------     -----------     -----------     -----------     -----------
Gross profit                        $     8,917     $    94,698     $   103,615     $   140,919     $ 1,221,219     $ 1,362,138
                                    ===========     ===========     ===========     ===========     ===========     ===========
</TABLE>

<TABLE>
<CAPTION>
                                                      FOR THE                                         FOR THE
                                         NINE MONTHS ENDED OCTOBER 31, 2000             NINE MONTHS ENDED OCTOBER 31,1999
                                    -------------------------------------------     -------------------------------------------
                                       RETAIL      DISTRIBUTION        TOTAL          RETAIL       DISTRIBUTION        TOTAL
                                    -----------    ------------     -----------     -----------    ------------     -----------

<S>                                 <C>            <C>              <C>             <C>            <C>             <C>
Net sales to external customers     $11,754,222    $27,705,886      $39,460,108     $ 9,141,002    $44,825,487     $53,966,489
Cost of goods sold                   10,387,136     25,776,136       36,163,272       8,794,607     41,394,614      50,189,221
                                    -----------    -----------      -----------     -----------    -----------     -----------
Gross profit                        $ 1,367,086    $ 1,929,750      $ 3,296,836     $   346,395    $ 3,430,873     $ 3,777,268
                                    ===========    ===========      ===========     ===========    ===========     ===========
</TABLE>



                                      -10-
<PAGE>   11


                           GRAPHICS TECHNOLOGIES, INC.
               NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)


7. SUBSEQUENT EVENTS

         In November 2000, a shareholder demanded rescission of a $150,000
purchase of securities. The Company denies the right of rescission and intends
to vigorously defend any action brought by the shareholder. The Company has made
no provision for this claim in the financial statements as of and for the three
and nine months ended October 31, 2000.

         In November 2000, the Company defaulted on its building lease by
failing to pay additional lease costs. As a result, in December 2000, the lessor
drew an additional $37,000 on the Lender's LC referred to in footnote 5.

         In September 2000, Lycos offered to settle their dispute with the
Company for a $2,250,000 cash payment. In November 2000, Lycos filed suit in
United States District Court, District of Massachusetts to collect an amount to
be established by trial up to the remaining $13,375,000 value of the contract.
Although the Company believes that Lycos breached the contract, the Company did
not contest the suit due to its financial position. In December 2000, Lycos
requested a default judgment for an amount yet to be determined. Based upon the
September offer from Lycos to settle the dispute, the Company has provided for
$2,250,000 for this claim in the financial statements as of and for the three
and nine months ended October 31, 2000.

         In November and December 2000, three additional product vendors filed
lawsuits to collect an aggregate of $239,000 for inventory sold to the Company.
Due to its financial position, the Company has not contested any of these
actions. However, the Company believes it has adequately accrued for any amounts
that may be due as a result of these actions.

         In December 1999, the Company entered into a purchase agreement to
acquire certain of the assets of Softdisk, Inc., including the downloadstore.com
website, and to lease the screensaverstudio.com website from Softdisk, Inc. in
exchange for cash, common stock and an interest-free note payable over 12 months
at $9,150 per month. The note payable was secured by the downloadstore.com
website and a customer list (the "Assets"). Between July and October 2000, the
Company defaulted or failed to make timely payments on the note. In November
2000 Softdisk, Inc. foreclosed on and subsequently took possession of the Assets
to satisfy a total secured debt of $55,000 due from the Company. The Company
believes no additional amounts are due Softdisk for the secured debt.

         The Company did not repay the Corona note by December 11, 2000 and is
therefore in default. However, on December 19, 2000, Inc.ubator funded a Credit
Agreement with the Company (the "Credit Agreement"). Under the Credit Agreement,
Inc.ubator agreed to assume the Company's obligation to repay Corona. However,
the Company may be responsible to pay Corona if Inc.ubator fails to do so.

         Under the Credit Agreement, Inc.ubator also advanced $125,000 to the
Company and paid $65,000 of expenses associated with the transaction. The
Company has agreed to repay these amounts within 30 days of Inc.ubator's
advance. The Company has agreed to repay all other sums paid or advanced upon
Inc.ubator's demand. The Company has granted Inc.ubator a security interest in
the Company's assets. Inc.ubator also may convert any amount advanced to or paid
for the Company into Common Stock of the Company. The conversion price is the
lower of (i) one-half the average per share closing high bid price of the
Company's Common Stock for the ten trading days preceding the date of default,
or (ii) $.06 per share, subject to particular adjustments.

         On November 1, 2000, Graybox agreed to accept $50,000 in lieu of any
other finders' fees or the share repurchase described above. Under the Credit
Agreement, Inc.ubator agreed to assume the Company's obligation to pay Graybox.
However, the Company may be responsible to pay Graybox if Inc.ubator fails to do
so.

         The Company's Board of Directors has authorized the Company to seek
protection under federal bankruptcy laws to reorganize its debts. The Company
expects to file its bankruptcy petition on December 20, 2000. In advance of this
anticipated bankruptcy filing, the Company has merged its subsidiaries GTI
Acquisition Corporation, T2 Acquisition Corporation and Softdisk Acquisition
Corporation into the Company (under its new corporate name) to facilitate a
single bankruptcy court filing. There is no assurance that the Company will
obtain post-petition financing or otherwise satisfactorily reorganize its debts
and continue as a going concern.



                                      -11-
<PAGE>   12


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

         As described in the footnotes to the financial statements, we continue
to experience severe cash shortages and have suspended much of our operations.
During our third fiscal quarter, these cash flow shortages led to an acute
decrease in net sales. Net sales decreased from $10.9 million for the three
months ended July 31, 2000 to $1.3 million for the three months ended October
31, 2000. Additionally, net sales were approximately $337,000 for the month of
October 2000, and we experienced a further significant decrease in sales in
November 2000 to less than $100,000. Other than $125,000 advanced to us by
Incubator Capital, Inc. on December 19, 2000, our plans to raise additional
debt or equity funding have not materialized. On September 28, 2000, Philip
Lacerte, a director and shareholder of the Company, purchased Coast's credit
agreement for $296,000 in cash. Since that date, Lacerte has made no advances on
the line of credit nor has he committed to making any advances. As a result of
Corona's failure since June 2000 to advance all funds promised to us under loan
agreements negotiated and duly executed, our inability during the past several
months to obtain other debt or equity funding, Coast's termination in September
2000 of our loan agreement, Lacerte's failure to make further advances on the
Coast line of credit and our vendors' refusals to ship products to us, our
ability to continue as a going concern is in further jeopardy. Further, our
severe cash shortage has forced us to reduce our employee count from 124 as of
April 30, 2000 to 26 as of December 11, 2000. We expect to make further staff
reductions.

         In December 2000, our Board of Directors authorized us to seek
protection under federal bankruptcy laws to reorganize our debts. We expect to
make this filing on December 20, 2000. In advance of our anticipated bankruptcy
filing, we have merged our subsidiaries GTI Acquisition Corporation, T2
Acquisition Corporation and Softdisk Acquisition Corporation into us (under our
new corporate name) to facilitate a single bankruptcy court filing. We have no
commitment for post-petition financing. We may not be able to satisfactorily
reorganize our debts and continue as a going concern.

         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. Our working
capital shortage has led us to suspend our dtpdirect.com direct marketing
business. Therefore, contingent on obtaining financing, we intend to focus our
business on the operations of GTI, a distributor of computer peripheral
equipment to wholesale and retail outlets throughout the United States and
Canada.

         GTI has specialized in high performance computer equipment, computer
integrated systems design and the assembly and sale of complete computer
systems. Until our vendors stopped shipping to us, GTI purchased products from
more than 40 manufacturers of computer related products, maintained a stocking
inventory of approximately 1,600 products and acted as a fulfillment business
for our end-user businesses. We cannot assure that, even with new funding, we
will be able to reestablish relationships with our former vendors.

         Until our working capital shortage required us to suspend and liquidate
the operations of our dtpdirect.com division, the division was a national
business-to-business direct marketer of computer hardware and software products
primarily for users of Apple Macintosh(R) personal computers. We acquired the
division upon our purchase of the operating assets of Tech Squared Inc. in
December 1999. We accounted for this acquisition using the purchase method of
accounting. As of December 11, 2000, we have downsized the dtpdirect.com
workforce through layoff or attrition to three from approximately 60 employees
as of April 30, 2000. Our restructuring resulted in no significant severance or
incremental costs.

         Netdirect.com was our website through which we offered 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


                                      -12-
<PAGE>   13


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 costs.

         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 maintained a supply of inventory to allow us to meet our customers'
delivery demands in a timely manner. However, our recent cash shortfall has
increasingly made this difficult and we have lost sales as a result of our
failure to timely deliver, or cause delivery of, products to our customers.
Virtually all of our vendors have discontinued shipment of products to us. Our
vendor situation and cash shortage is adversely affecting, and will continue to
adversely affect, our net sales.

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

Impairment of Long-lived Assets

         Following the three months ended July 31, 2000, we reviewed the values
of our long-lived assets for the purpose of determining if the carrying value of
said assets had been impaired. In reviewing these asset values, we considered
the following facts: 1) Corona's failure since June 2000 to advance all funds
promised to us; 2) our inability during the previous several months to obtain
other debt or equity funding; 3) Coast's collection of all cash we received on
account to reduce our debt to Coast; 4) Coast's termination in September 2000 of
our loan agreement; and 5) our vendors' refusals to ship products to us. We
concluded that our ability to continue as a going concern was in jeopardy.
Furthermore, we concluded consistent with the provisions of Financial Accounting
Standard Number 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", that the carrying value of our long-lived
assets exceeded their fair values. Accordingly, at July 31, 2000, we wrote down
the carrying value of our assets by $11.2 million and have recognized a
corresponding charge to our operations. Our asset write-down and related charge
to operations relate to the write down of the carrying value of all acquired
identifiable intangible assets and goodwill to zero and the write down of
furniture and equipment to their estimated fair values.

Results of Operations

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

<TABLE>
<CAPTION>
                                       Three Months Ended October 31,  Nine Months Ended October 31,
                                       ------------------------------  -----------------------------
                                            2000          1999              2000          1999
                                           ------        ------            ------        ------
<S>                                    <C>               <C>               <C>           <C>
Net sales                                   100.0%        100.0%            100.0%        100.0%
Cost of goods sold                           91.8          93.2              91.6          93.0
                                           ------        ------            ------        ------
Gross margin                                  8.2           6.8               8.4           7.0

Operating expenses
Sales and marketing                          43.0           9.2              11.5           9.1
General and administrative                  129.4          10.8              15.3           9.9
Loss in impairment of long-lived assets                                      28.5
Litigation settlement                                                        (2.7)
Consulting services                          48.1           7.6              12.2          15.0
Amortization of intangibles                                 1.2               1.7           1.3
                                           ------        ------            ------        ------
                                            220.5          28.8              66.5          35.3

Loss from operations                       (212.3)        (22.0)            (58.1)        (28.3)

Other income (expense)
Interest expense, net                       (91.5)         (2.1)             (7.4)         (2.3)
Other (expense) income                        5.5           (.8)               .3           (.4)
                                           ------        ------            ------        ------
                                            (86.0)         (2.9)             (7.1)         (2.7)
                                           ------        ------            ------        ------
Net loss                                   (298.3)%       (24.9)%           (65.2)%       (31.0)%
                                           ======        ======            ======        ======
</TABLE>


                                      -13-
<PAGE>   14


         Three Months Ended October 31, 2000 as Compared to the Three Months
Ended October 31, 1999

         Net sales. Our net sales decreased to $1.3 million for the three months
ended October 31, 2000, from $20.1 million for the three months ended October
31, 1999, reflecting a decrease of $18.8 million or 93.5%. Our sales decrease
occurred primarily because our cash shortfall has made it virtually impossible
to purchase inventory for sale. Additionally, we suspended much of our
operations as described above, which has also caused a decrease in net sales.
Absent substantial additional funding, we expect that our sales will continue to
decline as we deplete our remaining inventories.

         Cost of goods sold. Cost of goods sold during the three months ended
October 31, 2000 was $1.2 million, or 91.8% of net sales, reflecting a decrease
of $17.6 million or 93.8%. Our cost of goods decrease is directly related to the
decrease in sales. Our gross margin was 8.2% for the three months ended October
31, 2000 compared to our gross margin of 6.8% for the three months ended October
31, 1999. This principally reflects the gross margin from sales by our GTI
division which was our primary source of revenues in fiscal year 2001 and in the
current quarter.

         Operating expenses. Our sales and marketing expenses decreased to
$540,000 during the three months ended October 31, 2000 from $1.8 million for
the three months ended October 31, 1999. The largest component of our sales and
marketing expenses for the three months ended October 31, 2000 was an increase
in our provision for the claim by Lycos against us of $250,000 and salaries in
our GTI division of $206,000. As a percentage of net sales, sales and
marketing expenses were 43.0% for the three months ended October 31, 2000, as
compared to 9.2% for the three months ended October 31, 1999. The percentage
increase is primarily attributable to a reduction in our sales.

         General and administrative expenses decreased to $1.6 million for the
three months ended October 31, 2000 from $2.2 million for the three months ended
October 31, 1999. The decrease is primarily due to a significant reduction in
the workforce due to suspension of much of our operations. As a percentage of
net sales, general and administrative expenses were 129.4% for the three months
ended October 31, 2000, as compared to 10.8% for the three months ended October
31, 1999. The percentage increase is primarily attributable to a reduction in
our sales.

         For the three months ended October 31, 2000, we incurred $606,000 of
non-cash charges for consulting services. In these consulting 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 $1.5 million of consulting charges during the three months ended
October 31, 1999. We expect to incur at least $431,000 of additional stock-based
consulting services expense in fiscal 2001, resulting from existing consulting
contracts.

         Amortization of intangibles totaled $0 for the three months ended
October 31, 2000, as compared with $233,000 for the three months ended October
31, 1999. As discussed above, all remaining intangibles were written down to
zero in the quarter ended July 31, 2000.

         Interest expense, net. Interest expense was $1.2 million for the three
months ended October 31, 2000 as compared to $423,000 for three months ended
October 31, 1999. The increase in interest expense for 2000 related principally
to $1.1 million of interest expense for amortization of stock-based debt issue
costs associated with the Coast agreement. During the 1999 period, we incurred
$278,000 of amortization for stock-based debt issue costs.

         Nine Months Ended October 31, 2000 as Compared to the Nine Months Ended
October 31, 1999

         Net sales. Our net sales decreased to $39.5 million for the nine months
ended October 31, 2000, from $54.0 million for the nine months ended October 31,
1999, reflecting a decrease of $14.5 million or 26.9%. The decrease was the
result of our cash shortfall, which has made it virtually impossible to purchase
inventory for sale. We expect our sales to decline without additional
substantial funding, as almost all of our vendors have ceased their product
shipments to us. Additionally, we have suspended much of our operations as
described above, which has also caused a decrease in net sales.

         Cost of goods sold. Cost of goods sold during the nine months ended
October 31, 2000 was $36.2 million, or 91.6% of net sales, reflecting a decrease
of $14.0 million or 27.9%. Our cost of goods decrease is directly related to the
decrease in sales. Our gross margin was 8.4% of net sales for the nine months
ended October 31, 2000 as compared to 7.0% of net sales for the nine months
ended October 31, 1999.

         Operating expenses. Our sales and marketing expenses decreased to $4.6
million during the nine months ended October 31, 2000 from $4.9 million for the
nine months ended October 31, 1999. The decrease is primarily due to a reduction
in advertising expense related to suspension of much of our operations. As a
percentage of net sales, sales and marketing expenses were 11.5% for the nine
months ended October 31, 2000, as compared to 9.1% for the nine months ended
October 31, 1999. As our sales decline, we expect that our sales and marketing
expenses will increase as a percentage of our sales.

         General and administrative expenses increased to $6.1 million for the
nine months ended October 31, 2000 from $5.3 million for the nine months ended
October 31, 1999. The increase is primarily due to the expanded size of our
operations resulting from our December 1999 acquisition of Tech Squared. The
primary components of that increase were personnel expenses of $660,000, credit
card charges of $159,000


                                      -14-
<PAGE>   15


and rent of $91,000. As a percentage of net sales, general and administrative
expenses were 15.3% for the nine months ended October 31, 2000, as compared to
9.9% for the nine months ended October 31, 1999. As our sales decline, we expect
that our general and administrative expenses will increase as a percentage of
our sales.

         Loss on impairment of long-lived assets was $11.2 million for the nine
months ended October 31, 2000. During the three months ended July 31, 2000, our
lack of working capital forced us to downsize our operations, lay off a
significant number of employees and seek to recapitalize or sell all or parts of
our operations. As a result of Corona's failure since June 2000 to advance all
funds promised to us, our inability during the past several months to obtain
other debt or equity funding, Coast's termination in September 2000 of our loan
agreement, Lacerte's failure to make further advances on the line of credit and
our vendors' refusals to ship products to us, we believe that our ability to
continue as a going concern is in jeopardy. As described above, we have
determined that the carrying value of our long-lived assets at July 31, 2000,
were impaired. We therefore have written down the carrying value of these
assets.

         The Cnet litigation settlement resulted in a $1.1 million decrease in
our operating expenses for the nine months ended October 31, 2000. In August
2000, we settled our dispute with Cnet. Cnet accepted 2,000,000 shares of our
Common Stock as payment in full for the liability to them.

         For the nine months ended October 31, 2000, we incurred $4.8 million of
non-cash charges for consulting services and a penalty relating to warrants. In
these consulting 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. The penalty expense of $986,000 represents warrants issued to
directors and officers as a penalty for our failure to register shares
underlying warrants which we issued to those persons in December 1999. We
recognized $8.1 million of stock-based consulting service charges during the
nine months ended October 31, 1999. We expect to incur at least $431,000 of
additional stock-based consulting services expense in fiscal 2001, resulting
from existing consulting contracts.

         Amortization of intangibles totaled $668,000 for the nine months ended
October 31, 2000, as compared with $698,000 for the nine months ended October
31, 1999. The majority of this expense was amortization of intangibles related
to our Tech Squared, GTI and Softdisk acquisitions. We wrote all remaining
intangibles down to zero in the quarter ended July 31, 2000.

         Interest expense, net. Interest expense was $2.9 million for the nine
months ended October 31, 2000 as compared to $1.3 million for the nine months
ended October 31, 1999. The increase in interest expense for 2000 related
principally to $2.5 million of amortization of stock-based debt issue costs
associated with the Coast agreement. During the 1999 period, we incurred
$833,000 of amortization for stock-based debt issue costs.

         Other income (expense). Other income for the nine months ended October
31, 2000 of approximately $137,000 resulted primarily from a gain on sale of
marketable securities. During the same period in 1999, we incurred other expense
of $206,000. This included $30,000 for fees incurred to obtain a line of credit
and $150,000 to settle a lawsuit.

Liquidity and Capital Resources

         Current situation. Our ability to continue as a going concern is in
further jeopardy. As of December 11, 2000, we had only $71,000 of cash. We are
in violation of covenants of our line of credit with Lacerte. Lacerte has also
not advanced funds to us for working capital, including product purchases.
Inc.ubator provided us with only $125,000 of working capital, which is
insufficient to sustain our operations. An increasing number of creditors have
sued us and are obtaining judgments. In December 2000, our Board of Directors
authorized us to seek protection under federal bankruptcy laws to reorganize our
debts. We expect to make this filing on December 20, 2000. However, we have no
commitment for post-petition financing. We are seeking additional equity or debt
financing, but cannot assure you that we will obtain financing on acceptable
terms, or at all. We may not be able to satisfactorily reorganize our debts and
continue as a going concern.

         We have a large, negative working capital position that was
approximately $12.5 million at November 30, 2000. We are not timely paying
vendors and virtually all vendors have placed us on credit hold and refused to
ship even on cash terms, making shipment of products to our customers extremely
difficult and adversely affecting our net sales. In addition, because we are
unable to timely pay our creditors, we face increasing lawsuits and other
threats of legal action seeking payment. As of December 14, 2000, we have
received formal claims totaling $1.2 million from eleven of our vendors. In
addition, one of our creditors, Lycos, seeks an amount to be determined by
trial, which we estimate may be up to $13,375,000. We were not financially able
to respond to Lycos' suit and Lycos is now seeking a default judgment against
us.

         In June 2000, we entered into an agreement to borrow $1,000,000 from
Corona Viking, LLC. We agreed to repay Corona, with interest at a rate of 10%
per annum, by September 12, 2000, subject to our right to extend the promissory
note through December 11, 2000. In June 2000, Corona funded $330,000 of the
$1,000,000 promised in the agreement. To date, Corona has funded no additional
amounts. Corona's failure to fund under agreed upon terms and conditions has
contributed to our need to continue downsizing our operations and has further
limited our ability to pay creditors and obtain products for resale.



                                      -15-
<PAGE>   16


         We did not repay the Corona note by December 11, 2000 and therefore are
in default. We believe that Corona's failure to advance the balance of funds
committed may excuse our repayment of the funds advanced to date, our issuance
of additional shares promised upon particular defaults by us or filing of a
registration statement for the benefit of Corona. However, on December 19, 2000,
Inc.ubator Capital, Inc. entered into a $570,000 Credit Agreement with us. Under
this Credit Agreement, Inc.ubator agreed to assume our obligation to repay
Corona. We may be responsible to pay Corona if Inc.ubator fails to do so.

         Under the Credit Agreement, Inc.ubator also advanced us $125,000 and
paid $65,000 of expenses associated with the transaction. We agreed to repay
these amounts within 30 days of Inc.ubator's advance. We have agreed to repay
all other sums paid or advanced upon Inc.ubator's demand. We granted Inc.ubator
a security interest in our assets. Inc.ubator also may convert any amount
advanced to or paid for us into our Common Stock. The conversion price is the
lower of (i) one-half the average per share closing high bid price of our Common
Stock for the ten trading days preceding the date of default, or (ii) $.06 per
share, subject to particular adjustments.

         Historical Sources and Uses of Cash. We historically 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. However, more recently, we have been unable
to raise cash through equity or debt financings.

         Net cash provided by our operating activities during the nine months
ended October 31, 2000 was $5.1 million as compared to $5.9 million used during
the nine months ended October 31, 1999. Net cash provided by operating
activities during the nine months ended October 31, 2000 was primarily the
result of decreases in inventories and accounts receivable and increases in
accrued expenses offset in part by net losses (less non-cash expenses) and
decreases in accounts payable. Virtually all of this cash provided by operating
activities was generated by deferring payments to our vendors and virtually all
of it was used to repay our working capital lender, Coast Business Credit. Net
cash used by our operating activities during the nine months ended October 31,
1999 was primarily the result of net losses and increases in accounts receivable
and other current assets, partially offset by non-cash expenses, decreases in
inventories and increases in accounts payable and accrued expenses.

         We used cash of $396,000 and $473,000 in investing activities in the
nine months ended October 31, 2000 and October 31, 1999, respectively. During
the nine months ended October 31, 2000, we used $701,000 for purchases of
leasehold improvements, furniture and equipment, including $417,000 related to
the consolidation of our operations into a new facility in Eden Prairie,
Minnesota. These increases were offset by $305,000 we received for the one time
sale of marketable securities, resulting in a gain of $120,000. For the nine
months ended October 31, 1999, we used $349,000 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 used by financing activities was $5.2 million for the nine
months ended October 31, 2000, as compared to net cash provided by financing
activities of $6.9 million for the nine months ended October 31, 1999. During
the nine months ended October 31, 2000, we received net proceeds of $1.7 million
from issuance of equity securities including the exercise of options and
warrants. In addition, during the nine months ended October 31, 2000, we
borrowed $46.5 million under the Coast line of credit and repaid $53.1 million
on it. We also borrowed $593,000 on notes payable. Proceeds from these financing
activities were used to fund our working capital needs and to retire $230,000 of
loans from related parties and $676,000 of notes payable and convertible notes.
During the nine months ended October 31, 1999, we received $8.0 million from
issuance of equity securities and the collection of a stock subscription
receivable of $2.7 million. In addition, we borrowed $47.4 million under the
Coast line of credit and repaid $41.7 million on it. We also borrowed $500,000
from Coast on a term loan. We used the proceeds from these 1999 financing
activities to retire a $4.0 million note payable to Herold Marketing and $2.7
million of a $3.3 million note payable in connection with our acquisition of
GTI. We also used these proceeds to retire $386,000 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. ("Lycos") for comprehensive Internet
marketing activities, including co-branding of our website on the Lycos network.
Under the agreement, we paid Lycos $1,125,000, but paid no further sums.
However, the agreement required us to pay an additional $5,875,000 in fiscal
2001, $5,000,000 in fiscal 2002 and $2,500,000 in fiscal 2003. We have included
all amounts contractually due for services provided in the accompanying
financial statements as of January 31, 2000 and October 31, 2000 and for the
three and nine months ended October 31, 2000. On May 19, 2000, Lycos formally
terminated the agreement. In November 2000, Lycos filed suit in United States
District Court, District of Massachusetts to collect an amount to be established
by trial up to the remaining $13,375,000 value of the contract. Although we
believe that Lycos breached the contract, we did not contest the suit due to our
financial position. In December 2000, Lycos requested a default judgment for an
amount yet to be determined.

         Capital Expenditures. We have no material commitments for capital
expenditures beyond the expenditures already recorded during fiscal year 2001.
Our capital expenditures could be materially different if our operating plans
are altered.



                                      -16-
<PAGE>   17


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." SAB 101 summarizes some of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We are required to apply SAB 101, as amended by SAB 101A, no later
than our second quarter of fiscal year 2001. We do not expect the adoption of
SAB 101 to have a significant impact on our financial position, results of
operations or cash flows.

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("FAS 133"), which establishes accounting and reporting
standards for derivative instruments. FAS 133 requires that an entity recognize
all derivatives as either assets or liabilities at fair value in the statement
of financial position, and establishes special accounting for the following
three types of hedges: fair value hedges, cash flow hedges, and hedges of
foreign currency exposures of net investments in foreign operations. The
statement was originally effective for fiscal years beginning after June 15,
1999. In June, 1999 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 ("FAS 137"). FAS 137 requires the application of FAS 133 for fiscal years
beginning after June 15, 2000.

         In June 2000, the FASB issued FAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an amendment of FASB
Statement No. 133 ("FAS 138"). FAS 138, which will be adopted concurrently with
FAS 133 amends the accounting and reporting standards of FAS 133 for certain
derivative instruments and hedging activities and incorporates decisions made by
the FASB related to the Derivatives Implementation Group process.

         We are currently evaluating the effect of FAS 133 and FAS 138 on our
results of operations and financial position.



                                      -17-
<PAGE>   18


                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         On December 20, 2000, we expect to file a petition in the U.S.
Bankruptcy Court for the District of Minnesota to reorganize our debts under
Chapter 11 of the U.S. Bankruptcy Code.

         We settled our litigation with Cnet, Inc. in August 1999 in exchange
for our issuance to Cnet of 2,000,000 shares of our Common Stock.

         In September 2000 Lycos offered to settle their dispute with the
Company for a $2,250,000 cash payment. In November 2000, Lycos filed suit in
United States District Court, District of Massachusetts, to collect an amount to
be established by trial up to the total remaining value of our contract. We
estimate our total exposure at up to $13,375,000. Due to our financial position,
we did not contest the suit. In December 2000, Lycos requested a default
judgment against us. Based upon the September offer from Lycos to settle the
dispute, we have provided for $2,250,000 for this claim in the financial
statements as of and for the three and nine months ended October 31, 2000.

         In July 2000, EZ Quest, Inc., a vendor of our dtpdirect.com operation,
filed suit in Orange County Superior Court in Santa Ana, California to collect
approximately $65,000 that EZ Quest claims is due from sales of products to us.
In October 2000, EZ Quest obtained a default judgment for the total amount
claimed. We believe that we have adequately provided for this judgment against
us.

         In September 2000, Mitsubishi Electric & Electronics USA, Inc.
("Mitsubishi") filed a claim with the American Arbitration Association in Orange
County, California demanding payment of $227,000 plus late payment fees,
arbitration costs and attorney's fees for products delivered to our GTI
subsidiary in April, May and June 2000. We believe we have adequately provided
for any amounts due as a result of this claim.

         In September 2000, Perry Judds ("Judds") filed suit in Hennepin County
District Court in Minneapolis, Minnesota to collect approximately $162,000 plus
court costs and attorney's fees that Judds claims is due for publishing T2
Acquisition Corporation product catalogs. In November 2000, Judds obtained a
default judgment for the total amount claimed. We believe that we have
adequately provided for this judgment against us.

         In September 2000, Hansol Multitech, Inc. ("Hansol") filed suit in
Orange County Superior Court in Santa Ana, California to collect approximately
$199,000 plus interest, court costs and attorney's fees that Hansol claims is
due for supplying products to GTI Acquisition Corporation. We believe that we
have adequately provided for any amounts due as a result of this claim.

         In September 2000, Merisel Americas, Inc. ("Merisel") filed suit in
Superior Court of California in Los Angeles, California to collect approximately
$109,000 plus interest, court costs and attorney's fees that Merisel claims is
due for supplying products to T2 Acquisition Corporation. Netdirect was also
named in this suit. We believe that we have adequately provided for any amounts
due as a result of this claim.

         In September 2000, the debtor in possession of the assets of Microage,
Inc. ("Microage") filed suit in the United States Bankruptcy Court in Phoenix,
Arizona to collect approximately $102,000 plus interest, court costs and
attorney's fees that Microage claims is due for supplying products to Netdirect
and T2 Acquisition Corporation. We believe that we have adequately provided for
any amounts due as a result of this claim.

         In October 2000, Bill Dinges ("Dinges") filed suit in the Justice
Court, West Tempe Precinct, Maricopa County, Arizona to collect approximately
$2,500 that Dinges claims is due for publishing product brochures for GTI
Acquisition Corporation. In November 2000, Dinges obtained a default judgment
for the total amount claimed. We believe that we have adequately provided for
this judgment against us.

         In October 2000, Carmichael, Lynch, Spong ("Carmichael") filed suit in
Hennepin County District Court in Minneapolis, Minnesota to collect
approximately $79,000 that Carmichael claims is due for supplying public
relations services to Netdirect. In December 2000, Carmichael obtained a default
judgment for the total amount claimed. We believe that we have adequately
provided for any amounts due as a result of this claim.

         In October 2000, Merisel Americas, Inc. ("Merisel") filed suit in
Superior Court of California in Los Angeles, California to collect approximately
$40,000 plus interest, court costs and attorney's fees that Merisel claims is
due for supplying products to Netdirect. We believe that we have adequately
provided for any amounts due as a result of this claim.

         In November 2000, Ricoh Corporation ("Ricoh") filed suit in Hennepin
County District Court in Minneapolis, Minnesota to collect approximately
$105,000 that Ricoh claims is due for supplying products to GTI Acquisition
Corporation. We believe that we have adequately provided for any amounts due as
a result of this claim.


                                      -18-
<PAGE>   19


         In November 2000, Wynit ("Wynit") filed suit in Hennepin County
District Court in Minneapolis, Minnesota to collect approximately $111,000 that
Wynit claims is due for supplying products to T2 Acquisition Corporation. We
believe that we have adequately provided for any amounts due as a result of this
claim.

         In December 2000, Iiyama North America, Inc. ("Iiyama") filed suit in
Hennepin County District Court in Minneapolis, Minnesota to collect
approximately $22,000 that Iiyama claims is due for supplying products to
Netdirect. We believe that we have adequately provided for any amounts due as a
result of this claim.

         Because of our financial position, we have not contested any of the
above claims, and all of them could result in default judgments for the amount
of the claim.

         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. 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.



                                      -19-
<PAGE>   20




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a)   None

(b)   None

(c)   Recent Sales of Unregistered Securities.

      (1) Issuance of shares with no cash consideration:

          Between August 1 and October 31, 2000, we issued 2,000,000 shares to
      CNET, Inc. to settle our $500,000 litigation dispute. We believe the
      issuance of these shares was exempt under Sections 4(2) and 4(6) of the
      Securities Act of 1933, as amended.

(d)   None

ITEM 5. OTHER INFORMATION

         In December 1999 we entered into a purchase agreement to acquire
certain of the assets of Softdisk, Inc., including the downloadstore.com
website, and to lease the screensaverstudio.com website from Softdisk, Inc. in
exchange for cash, Common Stock and an interest-free note payable over 12 months
at $9,150 per month. The note payable was secured by the downloadstore.com
website and a customer list (the "Assets"). In July 2000, we defaulted on the
note and subsequently failed to make timely payments in August, September and
October 2000. In November 2000, Softdisk foreclosed on and subsequently took
possession of the Assets to satisfy a total secured debt of $55,000. We believe
no additional amounts are due Softdisk for the secured debt.

         In September 2000, Coast Business Credit sent us notice of default on
our loan and security agreement and demanded full repayment of its loans within
45 days. On September 28, 2000 Philip Lacerte ("Lacerte"), a director and
shareholder of our company, purchased the loan from Coast for $296,000. As a
result, Lacerte holds a senior secured position over our assets.

         In November 2000, a shareholder demanded rescission of a $150,000
purchase of securities. We deny the right of rescission and intend to vigorously
defend any action brought by the shareholder.




                                      -20-
<PAGE>   21


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, Charles 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.*****

10.11             Registration Rights Agreement by and between Virtual
                  Technology Corporation and Corona Viking Group, LLC dated June
                  14, 2000.******

10.12             Convertible Promissory Note made by Virtual Technology
                  Corporation payable to Corona Viking Group, LLC and dated June
                  14, 2000.******

10.13             Form of warrant from Virtual Technology corporation to Corona
                  Viking Group, LLC issued June 14, 2000.******

10.14             Side letter agreement entered into between Virtual Technology
                  Corporation and Graybox, LLC dated June 16, 2000.******

10.15             Credit Agreement dated November 20, 2000, by and among Virtual
                  Technology Corporation, GTI Acquisition Corporation and
                  Inc.Ubator Capital, Inc. *******

10.16             Convertible Promissory Note made by Virtual Technology
                  Corporation payable to Inc.Ubator Capital, Inc. and dated
                  November 20, 2000.*******

10.17             (Form of) General Security Agreement in favor of Inc.Ubator
                  Capital, Inc. dated November 20, 2000.*******

10.18             (Form of) Warrant from Virtual Technology Corporation to
                  Inc.Ubator Capital, Inc. issued November 20,2000.*******

27.               Financial Data Schedule

(b) Reports on Form 8-K.

         None

*        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.

******   Incorporated by reference from the Company's 8-K, filed with the SEC on
         June 26, 2000.

*******  To be filed by amendment to this Form 10-Q.


                                      -21-
<PAGE>   22


                                   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.

                                         Graphics Technologies, Inc.



                                         By: /s/ Gregory Appelhof
                                            -------------------------
                                         Its: Chief Executive Officer


                                         By: /s/ John Harvatine
                                            -------------------------
                                         Its: Chief Financial Officer

Dated: December 20, 2000