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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                    FORM 10-K
                                   (Mark one)

             [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
              THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                   FOR THE FISCAL YEAR ENDED JANUARY 31, 1999

                                       OR

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
             THE SECURITIES EXCHANGE ACT OF 1934. (NO FEE REQUIRED)
             FOR THE TRANSITION PERIOD FROM __________ TO _________

                        Commission file number: 00025397

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

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

                              3100 WEST LAKE STREET
                                    SUITE 400
                              MINNEAPOLIS, MN 55416
                    (Address of Principal Executive Offices)
                                 (612) 915-1122
               (Registrant's Telephone Number, Including Area Code)

Securities to be registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par
value

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 [ ] No [ X ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

At April 30, 1999, the last practicable date, the aggregate market value of the
voting and non-voting common equity held by non-affiliates of the registrant
was: $42,460,074

At April 30, 1999, the number of shares outstanding of each of the registrant's
classes of common stock was: 27,860,304

Documents incorporated by reference

(1)  Not Applicable
(2)  Not Applicable
(3)  Not Applicable

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. This Registration Statement on Form 10-K
contains forward-looking statements, which reflect the Company's views with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below, which could cause actual results to differ materially from
historical results or those anticipated. The words "aim," "believe," "expect,"
"anticipate," "intend," "estimate" and other expressions which indicate future
events and trends identify forward-looking statements. Actual future results and
trends may differ materially from historical results or those anticipated
depending upon a variety of factors, including, but not limited to: the
Company's ability to successfully and profitably integrate GTI into the
Company's business operations, competition in the Internet resale of computer
products, the Company's vendor relationships, the Company's ability to obtain
additional equity or debt financing on acceptable terms in order to finance its
planned growth and to retire the debt incurred in connection with the GTI
acquisition and the impact of Year 2000 issues on the Company and its
operations.

PART I

ITEM 1.  BUSINESS.

(A) GENERAL DEVELOPMENT OF BUSINESS

     In June 1996, International Gold Marketing, Inc., ("IGM"), a Minnesota
corporation, acquired all the outstanding shares of Network Storage Corporation
("NSC"), a Minnesota corporation formed in February 1996 and changed its name to
Virtual Technology Corporation ("VTC" "Virtual-World", "VW" or the "Company").
IGM was a publicly traded company listed on the OTC Bulletin Board and was
originally incorporated in March 1966 as MarSan Inc. Since the acquisition and
name change, the Company has traded on the OTC Bulletin Board under the symbol
VTCO.






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         At the time of the NSC acquisition, IGM was a non-operating entity. NSC
was in the business of providing an online data storage system via the Internet
with a software product known as Virtual Storage.

         In October 1996, VTC acquired Ashmount Research Ltd. ("ARL"), a private
London-based software firm. VTC then launched a web site for commercial
marketing of Ashmount's Virtual Access email and newsgroup software. Although
the Virtual Access marketing campaign was not economically successful,
management generated up to 1 million "hits" of traffic to its Internet site.
Realizing that VTC had gained experience at learning which internet advertising
sites could drive traffic to VTC's own web site, management refocused the
Company's business on electronic commerce ("e-commerce" or "E-Comm" ).
Specifically, VTC's internal customer research indicated a symbiosis between the
buyers visiting the Company's web site for software products and the type of
technology those buyers were interested in.

         Concluding that sophisticated computer users seek speed, power, and
graphics in their latest technology and upgrades, VTC identified sources for
such products and enhanced and launched its E-Comm site, virtual-world.com, in
October 1997. Consistent with its change of business strategy, VTC sold the
Virtual Access software source code, rights and licenses in July 1998 to
Atlantic Coast, a British company, for approximately $15,000.

         In January 1999, as part of the Company's efforts to expand both its
product offerings through its e-commerce operations and to diversify its
operations, the Company, through a wholly-owned subsidiary, acquired
substantially all of the assets and assumed certain liabilities of Herold
Marketing Associates, Inc., dba Graphics Technologies, Inc. ("GTI"). Greg
Appelhof, VTC's President and Chief Executive Officer, formerly was with GTI for
11 years, most recently as Vice President of Sales.

         The purchase price was $10.1 million (subject to certain post-closing
adjustments), paid as follows: $1.0 million at closing, $1.6 million payable by
the issuance of 228,571 shares of the Company's restricted Common Stock, subject
to resale under Rule 144 of the Securities Act of 1933, as amended (the "Act");
$4.0 million payable by a non-interest bearing promissory note of GTI due
February 27, 1999; $3.3 million payable by a non-interest bearing promissory
note from the Company due April 28, 1999 and $200,000 placed into escrow to be
held for three years to secure certain post-closing purchase price adjustments
and indemnification obligations. The Company simultaneously entered into a
three-year consulting agreement with Stephan Herold, GTI's Chairman and founder,
in consideration of 145,000 shares of the Company's Common Stock valued at $1.0
million. The Company has agreed to register the resale of such shares under the
Act as soon as practicable. Mr. Herold has agreed not to compete against the
Company for three years. The Company has repaid the $4.0 million promissory
note and $2.7 million of the $3.3 million promissory note, deducting certain
anticipated post-closing adjustments which the Company believes will be
finalized shortly.



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(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The Company operated in only one business segment through the end of fiscal
1999. As a result of the GTI acquisition, the Company will operate in two
business segments in fiscal 2000 and beyond.

(C) NARRATIVE DESCRIPTION OF BUSINESS 

     VTC is the parent of two complimentary business units: Virtual-World.com
and GTI. Both units provide computer manufacturers with channels to deliver
their products to the end consumer. Virtual-World provides products to the end
user by purchasing products directly from manufacturers or from distribution
partners. GTI provides manufacturers with a distribution channel to sell their
products to dealers, resellers,value-added resellers ("VARs") and integrators
who then sell them to the end user. Virtual-World management directs the overall
business and provides integration and leadership to the two business units.

BUSINESS OVERVIEW

     Virtual-World is an Internet retailer of high performance computer
hardware, software and peripheral products to sophisticated computer and
Internet users. Through its E-Commerce web site at www.virtual-world.com, the
Company offers more than 42,000 units of selective high-performance, brand name
computer equipment. Such web site and its contents are expressly not
incorporated by reference into this Form 10-K. Virtual-World offers an online
specialized store that is intended to provide one-stop shopping for its targeted
domestic and international customers, 24 hours a day, seven days a week.
Virtual-World's online store features a fun, easy-to-navigate interface,
competitive pricing, extensive product information and powerful search
capabilities. 

     GTI is a leading 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 directly
from more than 45 manufacturers of computer related products, and maintains a
stocking inventory of approximately 1,600 products.

     GTI also has built an active base of over 1,000 customers. GTI's customers
are primarily focused in four areas: corporate resellers, government sales to
state and federal agencies, VARs and integrators which concentrate on complete
desktop solutions. GTI provides its customers with computer peripheral equipment
from industry leaders, such as Hitachi, Matrox, Viewsonic, Mitsubishi, ATI,
Phillips, Cornerstone, Oki Data, InFocus, Mag and Mag Portables, Pioneer, NANAO,
CTX, Ezol and Panasonic. The products distributed by GTI include monitors,
printers, scanners, portables, CD-ROM drives, power protection, video
accelerators, graphic controllers, UPS back-up, projectors, digital cameras and
miscellaneous peripherals and software.

         Complementing its distribution business, GTI also offers its customers
value-added services, such as consultative and solution oriented selling,
compatibility testing, integration and configuration services and post-sales
support. GTI believes it differentiates itself from many competitors by
promoting GTI's value-added services through






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competitive pricing and face-to-face selling.

INDUSTRY

VIRTUAL-WORLD AND THE E-COMMERCE INDUSTRY

         The Internet is an increasingly significant global medium for
communication, information and commerce. VW believes that growth in Internet
usage and web commerce has been fueled by a number of factors, including (i) a
large and growing installed base of PCs in the workplace and home, (ii) advances
in the performance and speed of PCs and modems, (iii) improvements in network
infrastructure, (iv) easier and cheaper access to the Internet and (v) increased
awareness of the Internet. International Data Corporation ("IDC"), a market
research firm, has estimated that there were 69 million web users worldwide at
the end of 1997 and anticipates that number will grow to approximately 320
million by the end of 2002. In addition, IDC estimates that the total value of
goods and services purchased over the Internet will grow from $12 billion in
1997 to approximately $425 billion by the end of 2002.

         VW believes that its target market represents an attractive and rapidly
growing segment of the E-Commerce industry. According to Jupiter, a market
research firm, domestic online consumer purchases of goods and services
(excluding cars and real estate) are expected to grow from an estimated $2.6
billion in 1997 to approximately $37.5 billion by 2002. Jupiter also estimates
that the single largest web retail opportunity for the consumer and small
office/home office market is online sales of computer products (including
hardware, software and consumer electronics). By 2002, the online market for
computer products is estimated to reach approximately $10.5 billion in the
United States alone, which compares to an estimated domestic online market for
travel, books and music of $8.6 billion, $2.2 billion and $1.2 billion,
respectively. IDC estimates the worldwide consumer and small office/home office
end market for computer hardware alone (excluding peripherals) will grow from
approximately $50 billion in 1997 to approximately $80 billion in 2001.

GTI AND THE COMPUTER WHOLESALE DISTRIBUTION INDUSTRY

         Wholesale distribution has proven to be well-suited for manufacturers
of computer products. The large number and diversity of resellers makes it cost
efficient for manufacturers to rely on wholesale distributors to assume
responsibility for at least some portion of their distribution, credit,
marketing and support requirements. Similarly, due to the large number of
computer product manufacturers, VARs (which integrate proprietary software with
products provided by manufacturers and distributors), computer resellers,
traditional resellers and integrators often cannot establish direct purchasing
relationships. Instead they rely on wholesale distributors, such as GTI, to
satisfy a significant portion of their product and marketing needs.

         Management believes that the growth of the wholesale distribution
segment of the computer industry has been driven by four principal factors.
First, as a result of the use of open systems and off-the-shelf components,
hardware products are increasingly viewed as commodities. The resulting price
competition, coupled with






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rising selling costs and shorter product life cycles, make it difficult for
manufacturers to efficiently sell directly to resellers and has prompted them to
rely on more cost-efficient methods of distribution. Second, customers are
increasingly relying on wholesale distributors, such as GTI, for inventory
management and flexible customer financing, rather than stocking large
inventories themselves and maintaining credit lines to finance working capital
needs. Third, restrictions by certain major manufacturers on sales through
wholesale distributors were gradually eased, commencing in 1991. Since the
beginning of 1995, GTI has been able to sell certain products of those
manufacturers under more competitive terms and conditions ("open-sourcing").
Management believes that this has substantially reduced the advantage that
certain aggregators had over distributors such as GTI. Open-sourcing has also
contributed to price competition and margin decline in the industry. Fourth,
consolidation in the wholesale distribution industry continues as access to
financial resources and economies of scale become more critical.

STRATEGY

VW STRATEGY

         VW's objective is to operate the premier Internet web site for speed,
power and graphics through its innovative and focused marketing strategy, depth
of product selection, competitive pricing and high quality content. VW's niche
market focus is based upon the premise that consumers are generally overwhelmed
by the information available to them through different media, including the
Internet. Research conducted by IDC has found that people searching for
information about computer hardware and software generally have a very difficult
time even getting close to articles about the products they care about. By
offering consumers an array of selective, high-performance brand name computing
equipment, easy navigation, around the clock shopping convenience and
competitive pricing, VW believes it can achieve a preeminent niche position
among computer retailers. Key elements of VW's strategy include the following:

-        Niche-Oriented Strategy. A number of traditional computer retailers and
     manufacturers have created web sites to sell various computer equipment
     over the Internet. However, most of these sites are targeted towards the
     mass market, much like the phenomenon observed in the physical retail
     world. VW's strategy is to target sophisticated computer and Internet
     users who demand high performance from their systems and are
     constantly seeking upgrades for their equipment.

-        Product Availability. VW believes that its targeted customers
     have varied and unique needs for computer hardware and software products.
     Through VW's affiliation with Ingram, Tech Data and other suppliers, VW
     offers what management believes to be a






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     broad product mix. By its acquisition of GTI, the Company intends to
     further leverage its buying power to increase the number of available
     products.

-        Favored Demographics. VW's initial target market is comprised of
     individuals who are 26 years of age or older, predominately male, well
     educated and are proficient with computers and the Internet. According to
     New Century Network's reader survey, over 55% of these Internet users have
     an annual household income of over $50,000 and are twice as likely to
     purchase over the Internet than the average Internet user.

-        Web-Based and Traditional Advertising. VW utilizes aggressive
     online advertising to promote both its brand name and specific
     merchandising opportunities on a wide variety of web sites, including major
     content and service providers, targeted computer-related sites and niche,
     special interest sites. As VW grows, it also intends to advertise in trade
     journals and magazines that are typically read by its targeted customers.

-        Linking and Affiliate Programs. To direct traffic to its web site, VW
     has created inbound links that connect directly to virtual-world.com from
     other sites on the web. These links allow potential customers to simply
     click on the link to become connected to VW's web site. In addition, VW is
     developing private web sites for various user groups. For example, VW has
     entered into arrangements with the University of Minnesota and with the 
     Minnesota Service Cooperatives, a group comprising all of Minnesota's 
     elementary schools, to develop proprietary web sites offering hardware and 
     software products at special pricing for school students and faculty.

GTI STRATEGY

         To maintain and expand its position in wholesale distribution, GTI's
business strategy includes the following main elements:

-        Expand Customer Focus. GTI has historically focused its marketing on
     corporate resellers, government sales, VARs and integrators and intends to
     expand its customer base. GTI considers the corporate reseller market
     particularly attractive because its customers source products almost
     exclusively from distributors and is believed to be one of the fastest
     growing segments of the computer industry. Moreover, management believes
     that this will remain one of the fastest growing segments of the industry
     as businesses of all sizes increasingly rely on corporate resellers.

     GTI also seeks to increase its market share with fast growing retailers and
     computer superstores, as well as with VARs and integrators. In particular,
     GTI is aware of the growing integration industry and that industry's need
     for a variety of computer peripheral products. Management believes that
     supplying its existing integration customers with all of their computer
     products will enable it to increase its market share through expanded sales
     to its existing customer base. In addition, GTI seeks to attract new
     integration customers through its competitive pricing, high performance and
     efficient delivery.







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-        Expand Relationships with Existing Customers. GTI credits its strong
     customer relationships to its continued focus on providing its customers
     with knowledgeable account executives who meet directly with the customer,
     competitive pricing, a broad range of computer related products, efficient
     product delivery and on-going customer support. Currently GTI is seeking to
     expand its relationships with existing customers through program-selling:
     i.e., determining what its clients want and need and then working in
     conjunction with various manufacturers to design a program which meets the
     needs of each individual client. In addition, GTI seeks to expand its
     existing customer relationship by introducing more of its products to its
     customers who currently purchase only a portion of their computer products
     from GTI. Through marketing its product line as well as its value-added
     services to its current customer base, GTI believes it will be able to
     enhance and develop its existing customer relationships. This has the
     advantage of enabling GTI to increase its revenues without having to incur
     significant advertising and marketing expenses, as well as avoiding the
     need to employ additional account executives to solicit new customers.


-        Expand In-House Integration. GTI is aware of the growing importance of
     integrators in the computer industry and intends to expand its in-house
     integration department. Currently GTI's integration service is limited to
     one integration center in Phoenix, Arizona which configures selected
     computer products to meet the client's individual needs. GTI also intends 
     to develop relationships with resellers who can purchase GTI's integrated
     product for final sale to their customers. Moreover, GTI plans on expanding
     its integration work through its existing customer base by taking advantage
     of outsourcing opportunities. The expansion of these opportunities will be
     a direct result of developing key relationships with key resellers that
     provide contact opportunities for ongoing business and developing
     integration products for targeted niche markets.

-        Broaden Product Mix. GTI offers its customers a broad assortment of
     leading technology products. Currently GTI offers over 1,600 products from
     more than 45 vendors. By offering an even broader product assortment, GTI
     believes it can benefit from its customers' increasing desire to more
     efficiently procure product from a reduced number of direct vendor
     relationships. 

-        Expand Market Share and Geographic Growth. GTI's plan is to utilize its
     financial and industry positions to continue to expand its business
     internally and through possible acquisitions, by adding new product lines,
     increasing market share through






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     competitive pricing, providing additional value-added services and
     expanding internationally. 

TECHNOLOGY

         The Company has implemented a broad array of site management, search,
customer interaction, transaction-processing and fulfillment services systems
using a combination of its own proprietary technologies and commercially
available, licensed technologies. The Company's current strategy is to license
commercially available technology whenever possible rather than seek internally
developed solutions. VW intends to focus its efforts primarily in enhancing and
promoting its web site.

         VW hosts its web site in an Exodus facility, located in Sterling, VA. 
VW currently employs four individuals to design and maintain its
virtual-world.com web site. In addition, VW uses Exodus' National Network for 
its web site back-up.

         Exodus provides VW access to high-capacity, dynamic and dedicated
Internet connectivity through a complete range of commercial strength bandwidths
on Exodus' high-performance national network. Management believes that Exodus'
high performance national network is fast, reliable and scalable. It combines
key components that are critical to the operation of a state-of-the-art Internet
service: a high capacity national backbone, a 24 hour Network Operating Center
(NOC) and superior engineering support services including proactive monitoring
to isolate and identify problems before they affect the network of hosting
systems. The national network of Fiber-optic OC-3 and DS-3 connections link key
public and private points including MAE-East, MAE-West among many others from
New York to Seattle. 

     In January 1999, VW and Ingram, a major supplier to VW, jointly developed
and implemented a system to fully integrate the front and back office functions
of the two companies. The system is intended to provide for a seamless
throughput of customers' orders, credit authorization, posting of the sale in
the accounting system and placing the order with the "least-cost" supplier, all
within 30 seconds of each sale. This system utilizes Secure Socket Layer (SSL)
technology of the HTTP protocol for all transactions involving credit card
information. Utilizing this standard and CyberSource IVS technology, VW protects
against fraudulent transactions. The system is designed to enable real-time
price and availability from the least cost vendor and to facilitate "one-click"
ordering, processing and fulfillment.









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VW PRODUCTS AND SERVICES

     Because most of VW's "shelf space" is low-cost and essentially unlimited,
VW offers a broad selection that would be economically or physically impractical
to stock in a store or to include in a typical mail-order catalog. VW currently
offers more than 42,000 hardware, software and peripheral SKUs. VW's product
selection includes computer hardware such as PC desktops and laptops, personal
digital assistants ("PDAs"), printers, modems, memory and accessories, packaged
software for both home and office use, games and utilities. These products are
produced by a wide variety of manufacturers that include IBM, Toshiba, Hewlett
Packard, 3Com, Connectix, Intel, Symantec, Epson, Electronic Arts, Acer, Compaq
and Broderbund.

     VW offers its customers on-site service for most products in the United
States. For a nominal fee based upon the amount of purchase, the consumer may
extend the manufacturer's warranty to provide on-site service at the customer's
home or office location. VW contracts with several third party vendors to
provide such service. VW generally guarantees a service call within 24 hours in
most metropolitan areas. 

     VW believes its web site is attractive, easy to navigate and offers
distinctive competitive advantages. The user interface is simple, yet
professional and straightforward, designed to cater to the knowledgeable
technology consumer. Consumers may browse the vast database of over 42,000 items
or may selectively search and view technical "notes" or product specifications
as desired prior to purchasing online. Once a product has been selected, the
consumer may simply click on the item, which then goes into a "shopping cart" to
be added to other items until the consumer's shopping trip is complete. All of
VW's products may be reviewed and purchased "online" without having to go to a
retail location. VW provides graphic detail of products along with manufacturer
specifications.

     VW has embarked on an initiative to implement "one click" purchasing.
Management believes that this initiative will enable increased sales due to
minimizing the information the consumer will have to key in to make a purchase.
Under the "one click" system, once a product is selected, a credit card holder
may only have to input their four-digit access number or a password in order to
provide VW with all of the pertinent purchasing information. The "one click"
system will directly interface with VW's e-commerce system to perform all the
processes in the background, transparent to the consumer, to place an order.

     VW enters into special agreements from time to time directly with
manufacturers to provide value added packages or special bargains. VW is
currently working with manufacturers to establish cooperative marketing
agreements whereby VW would receive funds from the manufacturers to reimburse VW
for some marketing costs.

     VW offers a free shipping program for the domestic USA that it believes has
been favorably received. Overseas orders are shipped and fulfilled via Ingram,
which acts as VW's customs agent and processor. Overseas orders are handled the
same as domestic orders, and the process of delivery is transparent to the
customer as well as VW. Invoices and packing slips reflect VW's name so the
customer can immediately identify VW as the shipper.







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          Currently, VW encourages customers to phone in and use VW's inbound
call center Monday through Friday from 7:30 a.m. - 7:30 p.m. and Saturday from
9:00 a.m. to 2:00 p.m, Central Time. VW believes that having the opportunity to
speak with a customer enhances the likelihood that the customer will increase
the size of the order and that the price point of the average sale will also
increase. VW, by design, does not have an automated inbound call system. VW's
philosophy is that consumers have the ability to buy online or via an automated
transaction at any time. The assumption is that, once the customer has called,
he or she has made the decision to speak with someone directly at VW for
support. VW's objective is to expedite that request and not subject the consumer
to further automation or digital routing systems. VW augments its customer
service systems with various tracking software and contextual reference
databases. Customers may track shipments via Federal Express or United Parcel
Service directly through VW's web site or via hot links to the respective
shippers' sites.

          VW's does not consider its backlog of orders material to an
understanding of its business. No single customer accounted for 10% or more of
VW's net sales during fiscal 1999, 1998 or 1997.

GTI PRODUCTS AND SERVICES

          GTI sells more than 1,600 computer products in systems and peripherals
purchased directly from manufacturers in large quantities for sale to an active
customer base of more than 1,000 corporate resellers, VARs, integrators and
resellers. GTI pursues a strategy of expanding its product line to offer its
customers a broad assortment of products.

          GTI's VAR customers typically do not have the resources to establish a
large number of direct purchasing relationships or stock significant product
inventories. These resellers generally rely on distributors as their principal
source of computer products and financing. Corporate resellers and resellers, on
the other hand, often establish direct relationships with manufacturers for
their more popular products, but utilize distributors for slower-moving products
from numerous smaller manufacturers and for fill-in orders of fast moving
products. GTI does not consider its backlog of orders material to an
understanding of its business. No single customer accounted for 10% or more of
GTI's net sales during 1998, 1997 or 1996, except Entex, a large VAR, who
accounted for 24%, 33% and 20% of GTI's net sales, respectively in 1998, 1997
and 1996.

DISTRIBUTION

VW DISTRIBUTION

          VW uses alliances with Ingram Micro, Inc. ("Ingram") and Tech Data
Corporation ("Tech Data") to provide the Company with a "virtual inventory" of
hardware and software products for its site. The Company also sources products
through GTI. As a result, except for its relationship with GTI, VW carries no
inventory of products and relies on its suppliers to fulfill customers'
orders. In addition to providing a "virtual inventory" and order fulfillment for
VW, GTI, Ingram and Tech Data also provide VW with shipping and post-sale
customer support. 







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          VW utilizes a secure server to process all customer orders. After a
customer enters an order, an email is sent to the customer confirming the
purchase. Once the credit card information is authenticated, the order is
forwarded to one of VW's suppliers. In stock orders that are placed before 5:00
p.m. (Pacific Time) are generally shipped within 24 hours. An email confirmation
is sent to the customer immediately following the shipment of the products.
Customers may check the shipping status and the inventory availability directly
through the web site. VW's transaction-processing system is integrated with its
accounting and financial system through a common Microsoft Access-based
database. The integrated system allows management to more effectively manage its
operations.

GTI DISTRIBUTION

         GTI delivers products throughout the United States and Canada from its
four distribution centers in Minneapolis, Minnesota, Boston, Massachusetts, San
Francisco, California and Phoenix, Arizona. The distribution network will expand
to meet the demand from key customers and to ensure the cost competitiveness of
GTI.

VENDOR RELATIONS

VW VENDORS

          VW has formed alliances with Ingram, Tech Data and GTI to provide VW
with a "virtual inventory" of hardware and software products. These three
entities provide order fulfillment, shipping, and post sale customer support.

          Ingram is a leading wholesale distributor of computer-based technology
products and services worldwide. Ingram markets computer hardware, networking
equipment, and software products to more than 100,000 reseller customers in more
than 120 countries. As a wholesale distributor, Ingram markets its products to
resellers as opposed to marketing directly to end-user customers. Ingram offers
one-stop shopping to VW by providing a comprehensive inventory, which in the
aggregate on a global basis, consists of more than 145,000 products (as measured
by distinct manufacturer's part numbers) from over 1,400 suppliers, including
most of the computer industry's leading hardware manufacturers, networking
equipment suppliers and software publishers. Ingram's broad product offerings
include: desktop and notebook PCs, servers, and workstations; mass storage
devices; CD-ROM drives; monitors; printers; scanners; modems; networking hubs,
routers, and switches; network interface cards; business application software;
entertainment software; and computer supplies.

          Tech Data is the world's second largest distributor of computer
hardware and software products to VARs, corporate resellers, retailers and
direct







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marketers. Tech Data distributes products throughout the United States, Canada,
Latin America, Germany, France, Switzerland and Austria. Tech Data purchases its
products directly from more than 900 manufactures of computer hardware and
publishers of software in large quantities, maintains a stocking inventory of
more than 45,000 products and sells to an active base of over 70,000 customers.

          Tech Data provides VW with leading products including systems,
peripherals, networking, and software. Tech Data offers products from
manufacturers and publishers such as Bay Networks, Cisco, Compaq, Corel,
Creative Labs, Digital Equipment, Epson, Hewlett-Packard, IBM, Intel, Microsoft,
Novell, Okidata, Seagate, Symantec, 3Com, Toshiba, Viewsonic and Western
Digital. Tech Data generally ships products the same day the orders are received
from regionally located distribution centers.

GTI VENDORS

         Due to the proliferation of relatively small VARs and computer dealers
which purchase a limited volume of products from any single manufacturer, it is
more cost efficient for most manufacturers to rely upon distributors, such as
GTI, rather than to maintain their own sales forces to market, distribute and
support products. GTI's industry position has enabled it to obtain contracts
with most leading manufacturers. In addition, the advent of open-sourcing has
enabled GTI to cost effectively sell the products of certain major manufacturers
to customers which it had previously been restricted from servicing.

         GTI purchases products directly from more than 45 manufacturers,
generally on a nonexclusive basis. Management believes that GTI's vendor
agreements are in the form customarily used by each manufacturer and typically
contain provisions which allow termination by either party upon 60 days notice.
Such agreements generally contain stock rotation and price protection provisions
which reduce, in part, GTI's risk of loss due to slow-moving inventory, vendor
price reductions, product updates or obsolescence. Virtually none of GTI's
supplier agreements require it to sell a specified quantity of products or
restrict GTI from selling similar products manufactured by competitors.
Consequently, GTI has the flexibility to terminate or curtail sales of one
product line in favor of another product line as a result of technological
change, pricing considerations, product availability, customer demand and vendor
distribution policies. 

         From time to time, the demand for certain products sold by GTI exceeds
the supply available from the manufacturer. GTI then receives an allocation of
the products available. Management believes that GTI's ability to compete is not
adversely affected by these periodic shortages and the resulting allocations.






                                       13
<PAGE>   14



TRADEMARKS AND PROPRIETARY RIGHTS

          The Company does not have federal or state trademark registration of
its corporate or web site name or its "V" logo. There are many companies
throughout the United States that use the words "virtual technology" in their
name.  In addition, the Company recently received correspondence challenging the
Company's right to use its "V" logo.  In light of these potential conflicts, the
Company is considering a change in its corporate name and logo.  Any change will
cause the Company to incur substantial expense and goodwill in promoting a new
name and logo and in abandoning the use of its old name and logo.  Even if the
Company selects a new name and logo, there can be no assurance that the steps
taken by the Company to protect its proprietary rights will be copyrights,
trademarks, trade dress and similar proprietary rights.  In addition, there can
be no assurance that other parties will not assert infringement claims against
the Company.

COMPETITION

VW COMPETITION

          The online commerce market is new, rapidly evolving and intensely
competitive. Current and new competitors can launch new sites at a relatively
low cost. In addition, the computer products retail industry is intensely
competitive. VW currently or potentially competes with a variety of other
companies. 

These competitors include:

     (i)       various traditional computer retailers, including CompUSA and
               MicroCenter;
     (ii)      various mail-order retailers, including CDW, MicroWarehouse,
               Insight, PC Connection, and Creative Computers;
     (iii)     various Internet-focused computer retailers, including
               Egghead.com, software.net Corporation, NECX Direct, and Cyberian
               Outpost;
     (iv)      various manufacturers that sell directly over the Internet,
               including Dell, Gateway, Apple and many software companies;
     (v)       a number of online service providers, including America Online
               and the Microsoft Network that offer computer products directly
               or in partnership with other retailers;
     (vi)      some non-computer retailers, such as Wal-Mart, that sell a
               limited selection of computer products in their stores;
     (vii)     computer product distributors that may develop direct channels to
               the consumer market; and
     (viii)    various resellers in the business to business segment.

          Increased competition from these and other sources could require VW to
respond to competitive pressures by establishing pricing, marketing and other
programs or seeking out additional strategic alliances or acquisitions, any of
which could have a material adverse effect on the business, prospects, financial
condition and results of operations of the Company.







                                       14
<PAGE>   15
          VW believes that the principal competitive factors in its market are
brand recognition, selection, price, variety of value-added services, ease of
use, site content, fulfillment, reliability, quality of search tools, customer
service and technical expertise. Many of VW's current and potential competitors
have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial, marketing and other resources
than VW. In addition, online retailers may be acquired by, receive investments
from or enter into other commercial relationships with larger, well-established
and well-financed companies as use of the Internet and other online services
increases. VW is aware that certain of its competitors have and may continue to
adopt aggressive pricing or inventory availability policies and devote
substantially more resources to web site and systems development than VW.
Increased competition may result in reduced operating margins, loss of market
share and a diminished brand franchise, any of which would have a material
adverse effect on VW. Moreover, companies that control access to transactions
through network access or web browsers currently promote, and will likely
continue to promote, competitors of VW. There can be no assurance that the
Company will be able to respond effectively to increasing competitive pressures
or to compete successfully with current and future competitors.

GTI COMPETITION

          GTI operates in a market characterized by intense competition.
Competition within the industry is based on product availability, price, credit
availability, delivery and various services and support provided by the
distributor to the reseller. Major competitors include Tech Data, Ingram, 
Merisel, Inc. and a variety of other distributors of computer related
products. Many of GTI's competitors are larger and have greater resources than
GTI. GTI also faces competition directly from manufacturers. GTI nevertheless
believes that in the majority of cases, manufacturers choose to sell products
through distributors because of the relatively small volume and high selling
costs associated with numerous small orders. Management also believes that GTI's
prompt delivery of products and efficient handling, of returns provide an
important competitive advantage over manufacturers' efforts to market their
products directly.

SALES AND MARKETING

         VW markets its products and services exclusively through its
virtual-world.com website and through offering teleservice support.  GTI markets
its products and services primarily through a sales force that includes field
account executives and in-house sales representatives.  GTI also advertises in
major industry publications and uses direct marketing and various other
promotions to increase business opportunities.
  





                                       15
<PAGE>   16

EMPLOYEES

         As of April 30, 1999, the Company, including subsidiaries, employed 65
full-time employees.

FINANCING MATTERS

          In February 1999, the Company and GTI entered into a Loan and Security
Agreement with Coast Business Credit ("CBC"), a division of Southern Pacific
Bank (the "Coast Agreement"). Under the Coast Agreement, the Company and GTI may
borrow up to $10.0 million based upon eligible receivables and inventory at an
interest rate equal to 1.5% in excess of the bank's reference rate. As part of
the overall credit facility, the Company and GTI may borrow up to $250,000 for
capital expenditure purchases at an interest rate equal to 2% in excess to the
bank's reference rate, not subject to eligible receivables and inventory.
Further, the Company and GTI may borrow up to $500,000 at an interest rate equal
to 2% in excess of the bank's reference rate, payable in 24 equal monthly
installments, also not based on eligible receivables and inventory. As of April
30, 1999, the Company and GTI owed $4.0 million under the Coast Agreement. In
consideration of the Coast Agreement, the Company has granted CBC a three-year
warrant to purchase 500,000 shares of the Company's Common Stock at an exercise
price of $6.29. The Company has agreed to register under the Act the resale of
the shares underlying the warrant upon CBC's demand and upon filing of certain
after registration statements under the Act.

RISK FACTORS

         In addition to the other information provided in this report, the
following risk factors should be considered carefully in evaluating the Company
and its business.

LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES. The Company
had no business operations prior to February 1996. Accordingly, the Company has
a limited operating history on which to base an evaluation of its business and
prospects. For the fiscal year ended January 31, 1999, the Company incurred a
net loss of $(4.4 million) and as of January 31, 1999, had an accumulated
deficit of $(7.7 million). The Company expects to continue to incur substantial
losses during fiscal 2000. The Company's prospects must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in new and rapidly
evolving markets such as online commerce. Such risks for the Company include,
but are not limited to, an evolving and unpredictable business model and the
management of growth. To address these risks, the Company must, among other
things, maintain and increase its customer base, implement and successfully
execute its business and marketing strategy, continue to develop and upgrade its
technology and transaction-processing systems, improve its Web site, provide
superior customer service and order fulfillment, respond to competitive
developments, and attract, retain and motivate qualified personnel. There can be
no assurance that the Company will be successful in addressing such risks, and
the failure to do so







                                       16
<PAGE>   17

could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.

NEED FOR ADDITIONAL CAPITAL. Based upon management's current plans, the Company,
as consolidated with GTI, believes that its existing cash, borrowing capacity
under the Coast Agreement and cash generated from operations will be adequate to
support the Company's operations through the end of fiscal 2000. However, if the
Company does not achieve its planned operating results, if the Company is unable
to utilize its borrowing capacity under the Coast Agreement as planned or if
management's plans change materially, the Company may be required to raise
additional equity or debt financing to support continued operations and growth.
In this case, there is no assurance that such funds will be available to the
Company at terms acceptable to it, or at all.

UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS. As a result of the Company's limited operating history and
the emerging nature of the markets in which it competes, the Company is unable
to accurately forecast its revenues. The Company's current and future expense
levels are based largely on its investment plans and estimates of future
revenues and are to a large extent fixed. Sales and operating results generally
depend on the volume of, timing of and ability to fulfill orders received, which
are difficult to forecast. The Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall in revenues in relation to the Company's planned
expenditures would have an immediate adverse effect on the Company's business,
prospects, financial condition and results of operations. Further, as a
strategic response to changes in the competitive environment, the Company may
from time to time make certain pricing, service or marketing decisions that
could have a material adverse effect on its business, prospects, financial
condition and results of operations.

         The Company expects to experience significant fluctuations in its
future quarterly operating results due to a variety of factors, many of which
are outside the Company's control. Factors that may adversely affect the
Company's quarterly operating results include (i) the Company's ability to
retain existing customers, attract new customers at a steady rate and maintain
customer satisfaction, (ii) the announcement or introduction of new sites,
services and products by the Company and its competitors, (iii) price
competition or higher wholesale prices in the industry, (iv) failure of the
level of use of the Internet and online services and consumer acceptance of the
Internet and other online services for the purchase of consumer products such as
those offered by the Company to increase at the rate anticipated, (v) the
Company's ability to upgrade and develop its systems and infrastructure and
attract new personnel in a timely and effective manner, (vi) the level of
traffic on the Company's Web site, (vii) technical difficulties, system downtime
or Internet brownouts, (viii) the amount and timing of operating costs and
capital expenditures relating to expansion of the Company's business, operations
and infrastructure, (ix) technological advancement of personal computing
products, (x) the level of merchandise returns experienced by the Company, (xi)
governmental regulation, and (xii) general economic conditions and economic
conditions specific to the Internet, online commerce and the computer industry.

SUBSTANTIAL NON-CASH EXPENSES.  In fiscal 1999, the Company incurred  
approximately $1.3 million of non-cash compensation and consulting service
charges.  The Company expects to report similar non-cash charges in the amount
of $12.0 million during fiscal 2000 as a result of commitments made prior to
and after January 31, 1999.  There may be substantial additional charges if the
Company makes additional commitments.  These non-cash charges will likely
require the Company to report net losses for fiscal 2000 regardless of the
Company's other operating results.  Such losses could adversely affect the
limited trading market for the Company's Common Stock or efforts to raise
additional financing.

COMPETITION. The online commerce market, particularly over the Internet, is new,
rapidly evolving and intensely competitive, which competition the Company
expects to intensify in the future. Barriers to entry are minimal, and current
and new competitors can launch new sites at a relatively low cost. In addition,
the hardware and software retail industry is intensely competitive.







                                       17
<PAGE>   18

The Company currently or potentially competes with a variety of other companies.
These competitors include (i) various online computer equipment and software
resellers and wholesalers and distributors and vendors of other
information-based products and (ii) a number of indirect competitors that
specialize in online commerce or derive a substantial portion of their revenues
from online commerce, including America Online, Inc. ("AOL") and Microsoft
Corporation, through which other computer equipment resellers may offer
products. Competitive pressures created by any one of these companies, or by the
Company's competitors collectively, could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.

         Many of the Company's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, online retailers may be acquired by, receive investments from or
enter into other commercial relationships with larger, well-established and
well-financed companies as use of the Internet and other online services
increases. Certain of the Company's competitors may be able to secure
merchandise from vendors on more favorable terms, devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing or inventory
availability policies and devote substantially more resources to Web site and
systems development than the Company. Increased competition may result in
reduced operating margins, loss of market share and a diminished brand
franchise. There can be no assurance that the Company will be able to compete
successfully against current and future competitors, and competitive pressures
faced by the Company may have a material adverse effect on the Company's
business, prospects, financial condition and results of operations. Further, as
a strategic response to changes in the competitive environment, the Company may
from time to time make certain pricing, service or marketing decisions or
acquisitions that could have a material adverse effect on its business,
prospects, financial condition and results of operations. New technologies and
the expansion of existing technologies may increase the competitive pressures on
the Company. In addition, companies that control access to transactions through
network access or Web browsers could promote the Company's competitors or charge
the Company a substantial fee for inclusion.

         In addition, the Company's GTI subsidiary incurs substantial
competition in the wholesale distribution of computer products and peripherals.
In addition to competitive risks similar to those generally applicable to the
Company described above, many of GTI's competitors are larger, better financed,
have more efficient distribution systems and have a greater number of customers.

RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS. A key element of the Company's strategy is to generate a high
volume of traffic on, and use of, its Web site. Accordingly, the satisfactory
performance, reliability and availability of the Company's Web site, 
transaction-processing systems and network infrastructure are critical to the
Company's reputation and its ability to attract and retain customers and
maintain adequate customer service levels. The Company's revenues depend on the
number of visitors who shop on its Web site and the volume of orders it
fulfills. Any system interruptions that result in the unavailability of the
Company's Web site or reduced order fulfillment performance would reduce









                                       18



<PAGE>   19


the volume of goods sold and the attractiveness of the Company's product and
service offerings. Any substantial increase in the volume of traffic on the
Company's Web site or the number of orders placed by customers may require the
Company to further expand and upgrade its technology, transaction-processing
systems and network infrastructure. There can be no assurance that the Company
will be able to accurately project the rate or timing of increases, if any, in
the use of its Web site or timely expand and upgrade its systems and
infrastructure to accommodate such increases.

RISK OF SYSTEM FAILURE, SINGLE SITE AND ORDER INTERFACE. The Company's success,
in particular its ability to successfully receive and fulfill orders and provide
high-quality customer service, largely depends on the efficient and
uninterrupted operation of its computer and communications hardware systems. The
Company's Internet servers are hosted off site by Exodus, a major Internet
service provider. Although the Company's systems and operations are protected,
they are still vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, break-ins and similar events.

         The Company does not carry sufficient business interruption insurance
to compensate it for losses that may occur if its Internet services are
significantly disrupted. Despite the implementation of network security measures
by the Company, its servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to interruptions,
delays, loss of data or the inability to accept and fulfill customer orders. In
the event of a major loss, the Company's disaster plan calls for full recovery
of all operations within 24 hours, but such recovery cannot be assured. Further,
in spite of this protection, the occurrence of any of the foregoing risks could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.

DEPENDENCE ON CONTINUED GROWTH OF ONLINE COMMERCE. The Company's future revenues
and any future profits are substantially dependent upon the widespread
acceptance and use of the Internet and other online services as an effective
medium of commerce by consumers. Rapid growth in the use of and interest in the
Web, the Internet and other online services is a recent phenomenon, and there
can be no assurance that acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt, and continue to use, the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty and there exist few proven services and
products. The Company relies on consumers who have historically used traditional
means of commerce to purchase merchandise. For the Company to be successful,
these consumers must accept and utilize novel ways of conducting business and
exchanging information.

         In addition, the Internet and other online services may not be accepted
as a viable commercial marketplace for a number of reasons, including
potentially inadequate development of the necessary network infrastructure or
delayed development of enabling technologies and performance improvements. To
the extent that the Internet and other online services continue to experience
significant growth in the number of users, their frequency of use or an increase
in their bandwidth requirements, there can be no assurance that the
infrastructure for the Internet and other online services will be able to
support the demands placed upon them. In addition, the Internet or other online
services could lose their viability due to delays in the development or adoption
of new 






                                       19
<PAGE>   20



standards and protocols required to handle increased levels of Internet or other
online service activity, or due to increased governmental regulation.

         Changes in or insufficient availability of telecommunications services
to support the Internet or other online services also could result in slower
response times and adversely affect usage of the Internet and other online
services generally and the Company's web site in particular. If use of the
Internet and other online services does not continue to grow or grows more
slowly than expected, if the infrastructure for the Internet and other online
services does not effectively support growth that may occur, or if the Internet
and other online services do not become a viable commercial marketplace, the
Company's business, prospects, financial condition and results of operations
would be materially adversely affected.

RAPID TECHNOLOGICAL CHANGE. To remain competitive, the Company must continue to
enhance and improve the responsiveness, functionality and features of its online
store. The Internet and the online commerce industry are characterized by rapid
technological change, changes in user and customer requirements and preferences,
frequent new product and service introductions embodying new technologies and
the emergence of new industry standards and practices that could render the
Company's existing Web site and proprietary technology and systems obsolete. The
Company's success will depend, in part, on its ability to license leading
technologies useful in its business, enhance its existing services, develop new
services and technology that address the increasingly sophisticated and varied
needs of its prospective customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
The development of Web site and other proprietary technology entails significant
technical and business risks. There can be no assurance that the Company will
successfully use new technologies effectively or adapt its Web site, proprietary
technology and transaction-processing systems to customer requirements or
emerging industry standards. If the Company is unable, for technical, legal,
financial or other reasons, to adapt in a timely manner in response to changing
market conditions or customer requirements, its business, prospects, financial
condition and results of operations would be materially adversely affected.

DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the management
services of Kenneth Israel, Chairman, Greg Appelhof, President and Chief
Executive Officer and John Harvatine, Chief Financial Officer. The loss of the
services of any of such persons could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations. In
the event that any of Messrs. Israel, Appelhof or Harvatine are unable to
continue working for the Company or terminate their employment, there is no
assurance that the Company would be able to employ qualified persons to replace
such individuals. In June 1998, Mr. Israel was diagnosed with large cell B
lymphoma. He received chemotherapy treatments between June 1998 and January
1999. Although to date, Mr. Israel's cancer has not materially affected his
ability to perform his duties for the Company, there can be no assurance that
Mr. Israel's illness will not affect the Company in the future.  As of April
30, 1999, Mr. Israel's cancer is currently in remission although there can be
no assurance it will not reoccur at some future date.  The Company does
not presently maintain key person insurance on the life of any of Messrs.
Israel, Appelhof or Harvatine.

ONLINE COMMERCE SECURITY RISKS. A significant barrier to online commerce and
communications is the secure transmission of confidential information over
public networks. The Company relies on encryption and authentication technology
licensed from third parties to provide the security and







                                       20
<PAGE>   21
authentication necessary to effect secure transmission of confidential
information, such as customer credit card numbers. There can be no assurance
that advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments will not result in a compromise or
breach of the algorithms used by the Company to protect customer transaction
data. If any such compromise of the Company's security were to occur, it could
have a material adverse effect on the Company's reputation, business, prospects,
financial condition and results of operations. A party who is able to circumvent
the Company's security measures could misappropriate proprietary information or
cause interruptions in the Company's operations. The Company may be required to
expend significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches. Concerns over the
security of transactions conducted on the Internet and other online services and
the privacy of users may also inhibit the growth of the Internet and other
online services generally, and the Web in particular, especially as a means of
conducting commercial transactions. To the extent that activities of the Company
or third-party contractors involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could damage the
Company's reputation and expose the Company to a risk of loss or litigation and
possible liability. There can be no assurance that the Company's security
measures will prevent security breaches or that failure to prevent such security
breaches will not have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.

RELIANCE ON CERTAIN SUPPLIERS. VW purchases a substantial majority of its
products from two major vendors, Ingram and Tech Data as well as its subsidiary,
GTI. VW carries no inventory other than that maintained by GTI, and relies to a
large extent on rapid fulfillment from these and other vendors. VW has no
long-term contracts or arrangements with any of its vendors, other than GTI,
that guarantee the availability of merchandise, the continuation of particular
payment terms or the extension of credit limits. GTI relied on 3 vendors for 77%
of its purchases in fiscal 1999. There can be no assurance that the Company's
current vendors will continue to sell merchandise to the Company on current
terms or that the Company will be able to establish new or extend current vendor
relationships to ensure acquisition of merchandise in a timely and efficient
manner and on acceptable commercial terms. If the Company were unable to develop
and maintain relationships with vendors that would allow it to obtain sufficient
quantities of merchandise on acceptable commercial terms, its business,
prospects, financial condition and results of operations would be materially
adversely affected.

INTEGRATION OF GTI; FUTURE POTENTIAL ACQUISITIONS. Successfully integrating the
operations of GTI with those of the Company may divert a significant portion of
management's time and the Company's resources from its Internet business and
there is no assurance that the Company can successfully complete its integration
plans. The inability of the Company to successfully integrate the GTI operations
would have a material adverse affect on the Company's operations, financial
condition and business. In addition, the Company regularly considers additional
acquisitions (although it has no agreements as of the date hereof to acquire 
any additional businesses), which activities would require management attention
and the diversion of resources which otherwise would be available for conduct 
of existing operations.







                                       21


<PAGE>   22


COMPANY HIGHLY LEVERAGED. In connection with the acquisition of GTI's assets,
the Company and GTI entered into a Loan and Security Agreement with CBC, under
which the Company may borrow up to $10.0 million, subject to borrowing base
limitations. As of April 30, 1999, the Company owed $4.0 million to CBC. CBC has
a security interest in the Company's assets and could foreclose on such assets
if the Company were unable to service its debt.

RISKS ASSOCIATED WITH ENTRY INTO NEW BUSINESS AREAS. The Company may choose to
expand its operations by developing new Web sites, promoting new or
complementary products or sales formats, expanding the breadth and depth of
products and services offered or expanding its market presence through
relationships with third parties. In addition, the Company may pursue the
acquisition of new or complementary businesses, products or technologies,
although it has no present understandings, commitments or agreements with
respect to any material acquisitions or investments. There can be no assurance
that the Company would be able to expand its efforts and operations in a
cost-effective or timely manner or that any such efforts would increase overall
market acceptance. Furthermore, any new business or Web site launched by the
Company that is not favorably received by consumers could damage the Company's
reputation or its current web site brand. Expansion of the Company's operations
in this manner would also require significant additional expenses and
development, operations and editorial resources and would strain the Company's
management, financial and operational resources. The lack of market acceptance
of such efforts or the Company's inability to generate satisfactory revenues
from such expanded services or products to offset their cost could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.

YEAR 2000 COMPLIANCE. In connection with the approach of the Year 2000, industry
experts have predicted a variety of adverse consequences, including catastrophic
system failures, that may result from organizations' computer systems having
been programmed to record and process year dates by two, rather than four,
digits. Although the Company believes that its computer and communications
systems will be compliant by the year 2000, there can be no such assurance.
Further, the Company cannot predict whether its suppliers, customers and other
organizations with whom the Company conducts business will in a timely fashion
bring their computer systems or product offerings into Year 2000 compliance. If
the Company's suppliers or customers fail to complete any required Year 2000
remediation of their computer systems or product offerings, the Company could
suffer delays in product delivery or in processing of payments owed to the
Company. In addition, if any products sold by the Company to its customers were
to fail, the Company could be liable to its customers for damages and costs to
the extent that the Company's suppliers do not cover such liability. Any such
Year 2000 failures could have a material adverse effect on the Company's
business, operating results or financial condition.

GTI's internal information systems, including sales and purchase order
processing, inventory management, accounts payable and receivable and general
ledger, are not Year 2000 compliant.  The Company has tested the potential of
using VW's software platform for GTI's business operations and does not believe
that an appropriate conversion can be timely effected.  Accordingly, the Company
now plans, at an estimated cost of up to $250,000, to implement a newer version
of GTI's existing software.  Although the software manufacturer has represented
the Year 2000 compliance of its newer version, GTI has not tested the software
and cannot assure its Year 2000 compliance or timely installation.

TRADEMARKS AND PROPRIETARY RIGHTS. The Company does not have federal or state
trademark registration of its corporate or web site name or its "V" logo. There
are many companies throughout the United States that use the words "virtual
technology" in their name. In addition, the Company recently received
correspondence challenging the Company's right to use its "V" logo. In light of
these potential conflicts, the Company is considering a change in its corporate
name and logo. Any change will cause the Company to incur substantial expense
and goodwill in 







                                       22

<PAGE>   23

promoting a new name and logo and in abandoning the use of its old name and
logo. Even if the Company selects a new name and logo, there can be no assurance
that the steps taken by the Company to protect its proprietary rights will be
adequate or that third parties will not infringe or misappropriate the Company's
copyrights, trademarks, trade dress and similar proprietary rights. In addition,
there can be no assurance that other parties will not assert infringement claims
against the Company.

SALES OF UNREGISTERED SECURITIES; SHARES AVAILABLE FOR PUBLIC RESALE During
fiscal  1999, the Company issued 16,856,026 shares of the Common Stock for an
aggregate consideration of $12.6 million. During the fiscal 1998, the Company
issued 1,697,839 shares of its Common Stock for an aggregate consideration of
$343,000. During fiscal 1997, the Company issued 3,579,090 shares of its Common
Stock for an aggregate consideration of $520,000. The sales of these securities
were not registered under the Act or applicable state laws and such sales were
made by the Company in reliance upon certain exemptions from such registration
requirements. Accordingly, if it were determined that such sales were not
exempt, the Company may be required to offer to rescind such sales and
repurchase such securities for the price originally paid for such securities,
together with interest from the date of such sales, and possibly, certain
attorneys' fees. If the Company is required to make any such repurchases, it
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.

     As of April 30, 1999, the Company had 27,860,304 shares of Common Stock
outstanding. Of such shares, 15,262,560 are available for public resale under
Rule 144 under the Act. In addition, 11,083,403 and 1,514,341 of such shares
will become eligible for public resale under Rule 144 under the Act in fiscal
2000 and 2001, respectively. Further, the Company is contractually obliged to
file a registration statement under the Act to register the public resale of
145,000 of the shares not currently available for public resale and 2,525,000 of
the shares that may be issued upon exercise of outstanding options and warrants.
The Company intends to file such registration statement as soon as practicable.
The availability for public resale, or the actual public resale, of such shares
may depress the limited trading market existing for such shares.

GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES. The Company is not currently
subject to direct regulation by any domestic or foreign governmental agency,
other than regulations applicable to businesses generally, and laws or
regulations directly applicable to access to online commerce. However, due to
the increasing popularity and use of the Internet and other online services, it
is possible that a number of laws and regulations may be adopted with respect to
the Internet or other online services covering issues such as user privacy,
pricing, content, copyrights, distribution and characteristics and quality of
products and services. Furthermore, the growth and development of the market for
online commerce may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies conducting business
online. The adoption of any additional laws or regulations may decrease the
growth of the Internet or other online services, which could, in turn, decrease
the demand for the Company's products and services and increase the Company's
cost of doing business, or otherwise have an adverse effect on the Company's
business, prospects, financial condition and results of operations. Moreover,
the









                                       23

<PAGE>   24


applicability to the Internet and other online services of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes, libel and personal privacy is uncertain and may take years to
resolve. Any such new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to the
Internet and other online services could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.

SALES AND OTHER TAXES. The Company does not currently collect sales or other
similar taxes in respect of shipments of goods into states other than Minnesota,
California, Florida, Arizona, Missouri, Massachusetts, Michigan and Texas.
However, one or more states may seek to impose sales tax collection obligations
on out-of-state companies such as the Company which engage in online commerce.
In addition, any new operation in other states could subject shipments into such
states to state sales taxes under current or future laws. A successful assertion
by one or more states or any foreign country that the Company should collect
sales or other taxes on the sale of merchandise could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.

LIMITED PUBLIC MARKET. There is presently a limited public market for the
Company's Common Stock, and there can be no assurance that a more significant
trading market will develop or that investors will be able to resell their
shares at the price quoted on the OTC Bulletin Board, or at all. In addition, if
the Company's Common Stock trades at a price under $5.00 per share, brokers and
dealers trading in the Company's Common Stock are subject to "penny stock"
disclosure rules under the Securities and Exchange Act of 1934, as amended. The
rules relating to the sale of penny stocks require brokers and dealers to
provide investors with information relating to the risks and dangers associated
with investing in penny stocks. The disclosure of such information could have a
material adverse effect on the price of the Company's Common Stock traded on the
OTC Bulletin Board. It is the Company's intention to file for listing with the
Nasdaq Small-Cap or National Market system as soon as possible. However, there
is no assurance that listing on Nasdaq will be granted.

POTENTIAL ADVERSE EFFECTS OF UNDESIGNATED PREFERRED STOCK. The authorized and
unissued capital stock of the Company includes undesignated preferred shares.
The Board, without any action by the Company's shareholders, is authorized to
designate and issue the undesignated preferred shares in such classes or series
as it deems appropriate, and to establish the rights, preferences and privileges
of such shares, including dividend, liquidation and voting rights. No shares of
preferred stock or other senior equity securities are currently designated, and
there is no current plan to designate or issue any such securities. However, the
ability of the Board to designate and issue any such undesignated shares could
impede or deter an unsolicited tender offer or takeover proposal regarding the
Company, and the issuance of additional shares having preferential rights could
adversely affect the voting power and other rights of holders of Common Stock.

ABSENCE OF DIVIDENDS. The Company does not anticipate the payment of cash
dividends on its Common Stock in the foreseeable future. Investors who
anticipate a need for immediate income from their investment should not purchase
shares of the Company's Common Stock.








                                       24

<PAGE>   25


FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. This Form 10-K contains
forward-looking statements regarding, among other things, the Company's growth
strategy and anticipated trends in the Company's business. These forward-looking
statements are based largely on the Company's expectations and are subject to a
number of risk and uncertainties, certain of which are beyond the Company's
control. Actual results could differ materially from these forward-looking
statements as a result of the factors described under "Risk Factors" and
elsewhere herein, including, among others, regulatory or economic influences. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this Form 10-K will in fact transpire
or prove to be accurate.

ITEM 2.  PROPERTIES.

FACILITIES

         The Company leases approximately 1,500 square feet of office space at
3100 West Lake Street, Suite 400, Minneapolis, Minnesota pursuant to a 5-year
lease with payments of approximately $2,500 per month expiring in July 2001. In
addition, the Company leases approximately 3,900 square feet of office space at
1422 West Lake Street, Minneapolis, Minnesota pursuant to a month-to-month lease
with payments of approximately $6,200 per month.

         GTI's executive offices and principal warehouse space is located at
7615 Golden Triangle Drive, Suite G, Eden Prairie, Minnesota. Additional GTI's
facilities are located at 4685 S Ashe Ave., Tempe, Arizona, and 233 Needham
Street, Newton, Massachusetts.

         GTI leases approximately 11,000 square feet of space in Minnesota with
payments of approximately $8,600 per month. GTI's facility in Arizona is also
approximately 11,000 square feet with payments of approximately $8,600 per
month. The facility in Massachusetts is approximately 3,000 square feet with
payments of approximately $3,300 per month. All of these GTI leases have
expiration dates of within 10 months from April 30, 1999. GTI also utilizes
certain warehouse space of a vendor without charge in San Francisco, California.

         The Company is currently investigating its options with respect to
integrating its facilities in Minneapolis.

ITEM 3.  LEGAL PROCEEDINGS.

         From time to time, the Company may be involved in litigation relating
to claims arising out of its ordinary course of business. The Company presently
is not subject to any material legal proceedings.

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

         There have been no matters submitted to a vote of security holders
during the last quarter of the fiscal year ended January 31, 1999.

PART II 








                                       25

<PAGE>   26


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The Company's common stock is currently traded on the OTC Bulletin
Board under the symbol VTCO.

         The following table sets forth, for the period indicated, the range of
high and low bid prices of the Company's Common Stock as provided by 
quotecentral.com.  The prices represent quotations between dealers without 
adjustment for retail markups, markdowns, or commissions and may not represent 
actual transactions.

<TABLE>
<CAPTION>
                                  FISCAL YEAR ENDED JANUARY 31, 1999
                                  ----------------------------------

                                             High   Low
                                             ----   ----
<S>                                         <C>       <C>
FIRST QUARTER (END APRIL)                   1-9/32    1/2
SECOND QUARTER (END JULY)                   2-7/32   13/32
THIRD QUARTER (END OCTOBER)                 1-31/32  13/16
FOURTH QUARTER (END JANUARY)                  10     13/16
</TABLE>

         For the fiscal year ended January 31, 1998, the Company is unable to 
obtain reliable information on the range of high and low bid prices of the
Company's Common Stock due to the limited market for the Company's Common Stock
prior to February 1, 1999.

         The Company has never paid a cash dividend on its capital stock and
does not expect to pay a cash dividend in the foreseeable future.

         As of April 30, 1999, the Company had 476 shareholders of record.




RECENT SALES OF UNREGISTERED SECURITIES

     A.     Sales for cash consideration to accredited investors only pursuant 
to Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933,
as amended (the "Act"):

         In fiscal 1997, the Company issued 3,085,590 shares of its Common Stock
for $405,377 to 12 investors and $135,000 of convertible debentures to two
investors.

         In fiscal 1998, the Company issued 1,553,800 shares of its Common Stock
for $243,250 to ten investors and $237,000 of convertible debentures to five
investors.

         In fiscal 1999, the Company issued 13,299,832 shares of its Common
Stock for $8,554,549 to 39 investors.

         Between February 1 and May 3, 1999, the Company issued 1,514,341
shares of its Common Stock for $3,104,500 to seven investors.

     B.     In October 1996, the Company issued 427,500 shares pursuant to
Regulation S to four individuals in connection with the acquisition of ARL.

     C.     In January 1999, the Company issued 373,571 shares to two
accredited investors in connection with the acquisition of GTI's assets and
certain related consulting services.  The issuance of such shares was exempt
pursuant to Rule 506 of Regulation D and/or Section 4(2) of the Act.

     D.     In fiscal 1999, the holders of the convertible debentures as
described in (A) above converted such debentures into 1,173,091 shares of
Common Stock in reliance upon the exemption contained in Section 3(a)(9) 
of the Act.






                                       26

<PAGE>   27


     E.  Sales made solely in exchange for services rendered pursuant to Rule 
504 of Regulation D and/or Section 4(2) of the Act:

         In fiscal 1997, the Company issued 66,000 shares of its Common Stock
to five individuals (three of whom were accredited investors) in exchange for
$132,000 of services rendered to the Company.

         In fiscal 1998, the Company issued 144,039 shares of its Common Stock
to seven individuals and entities (two of whom were accredited investors) in
exchange for $99,746 of services rendered to the Company.

         In fiscal 1999, the Company issued 2,069,532 shares of its Common
Stock to thirty individuals and entities (eleven of whom were accredited
investors) in exchange for $961,625 of services rendered to the Company.

C.  Issuance of options and warrants involving no sale of securities:

         In fiscal 1997, the Company granted to ten individuals or entities an
aggregate of 1,341,000 options and warrants to purchase shares of the Company's
Common Stock, exercisable at prices ranging between $.25 and $7.50 per share.

         In fiscal 1998, the Company granted to thirteen individuals or entities
an aggregate of 590,100 options and warrants to purchase shares of the Company's
Common Stock, exercisable at prices ranging between $1.00 and $5.00 per share.

         In fiscal 1999, the Company granted to fifteen individuals or entities
an aggregate of 6,018,885 options and warrants to purchase shares of the
Company's Common Stock, exercisable at prices ranging between $.25 and $3.75
per share.

         Between February 1 and May 3, 1999, the Company granted to five
entities an aggregate of 1,475,000 warrants to purchase shares of the Company's
Common Stock, exercisable at prices ranging between $1.00 and $6.29 per share.

          During fiscal 1999, the Company paid the following firms cash
commissions in connection with certain fiscal 1999 sales of Common Stock as
described above: Waterford Financial, Inc.: $50,000; Trautman Kramer & Co.,
Inc.: $98,564; and Janda & Garrington, LLC: $165,000.  In addition, Waterford
Financial was granted a five-year warrant to purchase 50,000 shares at $1.50
per share, and Trautman Kramer was granted a three-year warrant to purchase
125,000 shares at $3.00 per share, as additional consideration for effecting
the sale transactions.  The issuance of such warrants is described as part of
the above transactions.

ITEM 6.  SELECTED FINANCIAL DATA.

         The following table sets forth certain selected financial data of VTC
as of and for each of the three years in the period ended January 31, 1999. The
selected historical financial data as of January 31, 1999 and 1998 and for each
of the two years in the period ended January 31, 1999 have been derived from the
historical consolidated financial statements of VTC, audited by Lurie, Besikof,
Lapidus & Co., LLP, independent accountants, and included elsewhere in this Form
10-K. The selected historical financial data as of and for the period ended
January 31, 1997 have been derived from the historical financial statements of
VTC, audited by Copeland Buhl & Company P.L.L.P.  The information contained in
the following table should also be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements and related notes included elsewhere in this
Form 10-K. The table contains no selected financial data for the periods ended
January 31, 1996 and 1995, as the Company did not conduct any operations in
those periods.

<TABLE>
<CAPTION>
                                        FY99           FY98          FY97 
<S>                               <C>             <C>           <C>
Net Sales.......................  $  4,945,907    $   174,669   $        0 
Net Loss .......................    (4,357,088)    (2,539,161)    (829,421)
Net Loss Per Common Share.......         (0.26)         (0.36)       (0.13)
Total Assets....................    25,742,578         59,409    1,023,828 
Long Term Liabilities...........       420,810        715,342      138,102 
</TABLE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.






                                       27

<PAGE>   28



THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS 
AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. 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.
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.

VW OVERVIEW

         VW is an Internet retailer of high performance computer hardware,
software and peripheral products to sophisticated computer and Internet users.
Through its E-Commerce web site at www.virtual-world.com, VW offers more than
42,000 units of selective high-performance, brand name computer equipment. VW
offers an online specialized store that is intended to provide one-stop shopping
for its targeted domestic and international customers, 24 hours a day, seven
days a week. VW's online store features a fun, easy to navigate interface,
competitive pricing, extensive product information and powerful search
capabilities.

         VW began online marketing of a proprietary email and newsgroup software
in January 1997. In October 1997, VW launched its E-Commerce site offering a
range of selective high-performance brand names for computer equipment and
software programs. To facilitate its expansion, VW formed alliances with GTI,
Ingram and Tech Data to provide the Company with a "virtual inventory" of
hardware and software products. These three entities provide order fulfillment,
shipping, and post sale customer support.

         VW derives its revenue primarily from sales of third-party computer
hardware, software and accessories. Revenues from the sale of computer products,
net of estimated returns, are recognized upon shipment of the physical product
to the end-user. The amount payable to the supplier is reported as cost of
sales. VW bears full credit risk with respect to substantially all sales. VW,
through GTI, maintains a supply of certain computer products to meet the
delivery requirements of its customers.

         In January 1999, the Company acquired substantially all of GTI's
assets. The Company plans to leverage GTI's buying power to improve gross
margins in the sale of computer products on VW's website, but there is no
assurance that such operating efficiencies can or will be achieved. 

         The Company has a limited operating history upon which investors may
evaluate its business and prospects. At February 7, 1996, VW was essentially
a shell corporation without any products or revenues. Since such date, the
Company has incurred significant losses, and as of January 31, 1999 had an
accumulated deficit of approximately $(7.7 million). The Company




  

                                     28

<PAGE>   29




intends to continue to expend significant financial and management resources on
the development of additional services, sales and marketing, improved
technology, acquisitions and expanded operations. As a result, the Company
expects to incur substantial additional losses and continued negative cash flow
from operations for the foreseeable future, and management anticipates that such
losses will increase substantially from current levels. There can be no
assurance that the Company's sales will increase or even continue at their
current level or that the Company will achieve or maintain profitability or
generate cash from operations in future periods. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets such as electronic commerce. To
address these risks, the Company must, among other things, maintain existing and
develop new relationships with hardware, software and accessories manufacturers,
implement and successfully execute its business and marketing strategy, continue
to develop and upgrade its technology, provide superior customer service and
order fulfillment, respond to competitive developments, and attract, retain and
motivate qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks, and the failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's current and future expense levels are based
largely on its planned operations and estimates of future sales. Sales and
operating results generally depend on the volume and timing of orders received,
which are difficult to forecast. The Company may be unable to adjust spending in
a timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall in sales would immediately and adversely affect the
Company's business, financial condition and results of operations. In view of
the rapidly evolving nature of the Company's business and its limited operating
history, the Company is unable to accurately forecast its sales and believes
that period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.

RESULTS OF OPERATIONS








                                       29

<PAGE>   30
         During fiscal 1998 and 1997, the Company had insignificant net sales
and cost of goods sold. Accordingly, management believes that comparisons of the
Company's net sales, cost of goods sold and expenses, as expressed as a
percentage of net sales, over such fiscal years are not meaningful.

         NET SALES. The Company derives its revenue primarily from sales of
third-party computer hardware, software and accessories. The Company recognizes
revenue from the sale of computer products upon shipment of the physical product
to the end-user. Net sales are comprised of the gross selling price of products
sold by the Company, net of estimated returns. The Company bears credit risk
with respect to substantially all sales. The Company's net sales increased to
$4.9 million for fiscal 1999, from $175,000 for fiscal 1998 and $0 for fiscal
1997. The sales increases in fiscal 1999 were primarily a result of a shift in
Company strategy to e-commerce from software development and sales. The sales
increases in fiscal 1998 were primarily a result of limited marketing
activities.

         COST OF GOODS SOLD. Cost of goods sold consists primarily of the
amounts payable to computer manufacturers for products sold to the end-user and
related shipping and distribution costs. Cost of goods sold during fiscal 1999
was $4.8 million, or 96.4% of net sales. During fiscal 1998 and 1997, the
Company had no product sales and thus did not record any cost of goods sold.

         SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of personnel, advertising and promotional expenses. Sales and
marketing expenses increased to $1.8 million in fiscal 1999 from $551,000 and
$155,000 for fiscal 1998 and 1997, respectively. The primary component of the
increase in fiscal 1999 from 1998 was an increase in advertising and promotion
expenditures of $1.3 million. As a percentage of net sales, sales and marketing
expenses were 36.2% in fiscal 1999. The primary component of the increase in
fiscal 1998 from 1997 was an increase in advertising and promotion expenditures
of $218,000. The Company expects that sales and marketing






                                       30
<PAGE>   31
expenses will continue to increase in absolute dollars as the Company continues
to build its sales and marketing infrastructure and to develop marketing
programs. 

         GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses consist principally of executive, accounting and administrative
personnel expenses, legal, consulting and accounting expenses, and bad debt
expense. General and administrative expenses increased to $2.7 million for
fiscal 1999 from $1.1 million and $390,000 for fiscal 1998 and 1997,
respectively. The fiscal 1999 increase over the prior year was primarily due to
an increase in professional and consulting fees of $1.0 million. The fiscal 1998
increase over the prior year was primarily attributable to operating expenses of
ARL. As a percentage of net sales, general and administrative expenses were
55.2% in fiscal 1999. In fiscal 1999, the Company incurred approximately $1.3
million of non-cash compensation and consulting service charges. The Company
expects to report similar non-cash charges in the amount of $12.0 million during
fiscal 2000 as a result of commitments made prior to and after January 31, 1999.
There may be substantial additional charges if the Company makes additional
commitments.

         INCOME TAXES. The Company has incurred a net loss for each period since
inception. As of January 31, 1999 the Company had approximately $5.6 million of
net operating loss carryforwards for federal income tax purposes, which expire
beginning in 2012. Due to the uncertainty of future profitability, a valuation
allowance equal to the deferred tax asset has been recorded. Certain changes in
ownership resulting from the sales of Common Stock could limit the future annual
realization of the tax net operating loss carryforwards to a specified
percentage under Section 382 of the Internal Revenue Code. The Company paid no 
income taxes in fiscal 1999, 1998 and 1997.

         WRITE OFF OF VIRTUAL TECHNOLOGY (UK) LIMITED. In fiscal 1998, the
Company recorded $925,000 of non-recurring expense related to the write-off of
the Virtual Technology (UK) Limited (formerly known as ARL) operations.

GTI OVERVIEW

         GTI is a leading distributor of computer peripheral equipment to
wholesale and retail outlets throughout the United States and Canada. The
Company specializes in high performance computer equipment, computer integrated
systems design and the assembly and sale of complete computer systems. The
Company purchases products directly from more than 45 manufacturers of computer 
related products, and maintains a stocking inventory of approximately 1,600 
products.

         GTI derives its revenue primarily from sales of third-party computer
hardware and accessories. Revenues from the sale of computer products, net of
estimated returns, are recognized upon shipment of the physical product to the
end-user. The amount payable to the supplier is reported as cost of sales. The
Company bears full credit risk with respect to substantially all sales.

         For the three years prior to the Company's acquisition of GTI's assets
in January 1999, GTI was an S corporation for federal and state income tax
purposes. Accordingly, GTI did not pay federal or state income taxes during such
fiscal years. As a subsidiary of the Company, management anticipates that GTI's
future income or losses will be consolidated with the Company's future income or
losses for federal and state income tax purposes.

   RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                     1998                       1997                      1996
                                                     ---------------------------------------------------------
<S>                                                  <C>                       <C>                       <C>   
Sales.............................................   100.0%                    100.0%                    100.0%
Cost of sales.....................................    90.5                      89.8                      91.2

         Gross profit.............................     9.5                      10.2                       8.8

Operating expenses................................     8.2                       9.0                       7.7

Income from operations............................     1.3                       1.2                       1.1

Net income........................................     1.3                       1.3                       1.2
</TABLE>
                                       31

 
<PAGE>   32
         SALES. GTI derives its revenue primarily from sales of computer
hardware and accessories. GTI recognizes revenue from the sale of computer
hardware upon shipment of the physical product to the reseller. Sales are
comprised of the gross selling price of products sold, net of returns, plus any
outbound shipping and handling charges. GTI bears credit risk with respect to
substantially all sales. GTI's sales decreased to $65.2 million for 1998 from
$83.8 million for 1997. The sales decrease in 1998 was primarily a result of
decreases in per unit sales prices. GTI's sales decreased to $83.8 million for
1997 from $87.8 million for 1996. This decline resulted primarily from a change
in customer mix.

         COST OF SALES. Cost of sales consists primarily of the amount payable
to the computer manufacturers for products sold to the reseller. As a percentage
of sales, cost of sales increased to 90.5% in 1998 from 89.8% in 1997, primarily
as a result of increased price competition in the industry that forced GTI to
reduce its sales prices to its customers. Cost of sales as a percentage of sales
declined in 1997 from 91.2% in 1996 primarily as a result of favorable prices
without a commensurate reduction in selling prices. 

         OPERATING EXPENSES.  Operating expenses consist primarily of
compensation and employee benefits, rent and legal and professional fees.
Operating expenses declined to $5.4 million, or 8.2% of sales, in 1998 from $7.5
million, or 9.0% of sales, in 1997, primarily as a result of a reduction in
owner's compensation.  Operating expenses were $6.7 million or 7.7% of sales, in
1996. The increase in operating expenses for 1997 over 1996 in absolute dollars
and as a percentage of sales is primarily attributable to an increase in owner's
compensation.

 LIQUIDITY AND CAPITAL RESOURCES.

         The Company historically has financed its operations primarily through
the private placement of equity and debt securities, which have yielded net
proceeds of $4.9 million, $480,000 and $355,000 for fiscal 1999, 1998 and 1997,
respectively. GTI historically has financed its operating activities primarily
through cash provided from operations.

         Net cash used by operating activities for the Company in fiscal 1999,
1998 and 1997 was $3.6 million, $787,000 and $255,000, respectively. Net cash
used by operating activities for the Company in fiscal 1999 was primarily the
result of net operating losses and increases in accounts receivables, offset in
part by increases in accrued expenses and non-cash expenses. For fiscal 1998 and
1997, net cash used by operating activities for the Company was primarily a
result of net losses, offset by non-cash expenses and increases in accounts
payable and accrued expenses. Net cash provided by operations for GTI during
1998, 1997 and 1996 was used primarily for shareholder distributions.

         In fiscal 1999, the Company used approximately $950,000 of its net cash
to acquire GTI'S assets.

         In 1996 and 1997, GTI advanced $571,000 and $14,000, respectively, on
loans collected in 1998 primarily from a related party.

         On January 28, 1999, the Company acquired substantially all of the
assets of GTI and assumed certain of GTI's liabilities. The purchase price was
$10.1 million, $1.0 million of which the Company paid at closing primarily out
of funds generated from the sale during fiscal 1999 of its equity securities.
Under the terms of the acquisition agreement, the Company paid an additional
$4.0 million of the purchase price in February 1999 by repayment of a promissory
note. The Company acquired the funds to retire such note from borrowings under
the Coast Agreement. See "Business -- Financing Matters." In May 1999, the
Company paid an additional $2.7 million of the remaining $3.3 million promissory
note under the acquisition agreement. The payment shortage is due to certain
post-closing adjustments still under negotiation between the Company and Herold
Marketing Associates, Inc. The Company believes these post-closing adjustments
will be finalized shortly. The Company made the payment on such note out of cash
from the private placement of the Company's securities and from additional 
advances under the Coast Agreement.

         Although the Company, as consolidated with GTI, has no material
commitments for capital expenditures, the Company anticipates that it will
expend approximately $500,000 during fiscal 2000 on additional computer hardware
resources, including commerce servers and expansion of the Company's principal 
executive offices. The Company's capital expenditures could be materially 
different if the Company's operating plans are altered.

         As of April 30, 1999, the Company, as consolidated with GTI, had cash
of approximately $2.0 million. At such date, the Company owed $4.0 million under
the Coast Agreement and estimates that it had additional borrowing capacity
thereunder of approximately $3.3 million. Based upon management's current plans,
the Company, as consolidated with GTI, believes that its existing cash,
borrowing capacity under the Coast Agreement and cash generated from operations
will be adequate to support the Company's operations through the end of fiscal
2000. However, if the Company does not achieve its planned operating results, if
the Company is unable to utilize its borrowing capacity under the Coast
Agreement as planned or if management's plans change materially, the Company may
be required to raise additional equity or debt financing to support continued
operations and growth. In this case, there is no assurance that such funds will
be available to the Company at terms acceptable to it, or at all.

YEAR 2000 COMPLIANCE. 

         Like many other companies, the Company and GTI face risks associated
with Year 2000 computer issues. If the Company's internal management information
systems and external electronic commerce information systems do not correctly
recognize and process date information beyond the year 1999, it could have a
significant adverse impact on the Company's ability to process client and
end-user transactions, which could create significant potential liability for
the Company. To address potential Year 2000 issues with its internal and
external systems, the Company has evaluated such systems. Remediation is
proceeding, and the Company currently plans to have changes to these systems
completed and tested by September 30, 1999. These activities are intended to
encompass all major categories of systems used by the Company, including
electronic commerce, sales processing, sales and financial systems. The initial
assessment indicated that certain internal systems should be upgraded or
replaced as part of a solution to the Year 2000 problem. Specifically, GTI's
internal information systems, including sales and purchase order processing,
inventory management, accounts payable and receivable and general ledger, are
not Year 2000 Compliant.  The Company has tested the potential of using VW's
software platform for GTI's business operations and does not believe that an
appropriate conversion can be timely effected.  Accordingly, the Company now
plans, to implement a newer version of GTI's existing software. Although the
software manufacturer has represented the Year 2000 compliance of its newer
version, GTI has not tested the software and cannot assure its Year 2000
compliance or timely installation. These estimates do not include potential
costs related to any customer or other claims or the cost of internal software
and hardware replaced in the normal course of business. These estimates are
based on management's current assessment of its year 2000 projects and is
subject to change as the projects progress.

         The Company is also working with key suppliers of products and services
to determine that their operations and products are Year 2000 compliant or to
monitor their progress toward Year 2000 compliance, as appropriate. The failure
of a major supplier to become Year 2000 compliant on a timely basis, or any
system conversion by a supplier that is incompatible with the Company's systems,
could have a material adverse effect on the Company's business, financial
condition and operating results. In addition, the Company's business, financial
condition and operating results may be materially adversely affected to the
extent that its end-users are unable to use their credit cards due to the Year
2000 issues that are not rectified by their credit card vendors.

         In addition, the Company has begun internal discussions concerning
contingency planning to address potential problem areas with internal systems
and with suppliers and other third parties. Management expects that assessment,
remediation and contingency planning activities will be on-going throughout
calendar year 1999 with the goal of appropriately resolving all material
internal and external systems and third party issues. In the event of a Year
2000 failure of GTI's internal systems, management believes that GTI could
temporarily continue operations by manually processing transactions, although on
a less efficient and more costly basis.

         As used by the Company, "Year 2000 Compliant" means software that
can individually, and in combination and in conjunction with all other systems,
products or processes with which they are required or designed to interface,
continue to be used normally and to operate successfully (both in functionality
and performance in all material respects) over the transition into the
twenty-first century when used in accordance with the documentation relating to
such software, including being able to, before, on and after January 1, 2000
substantially conform to the following: (i) use logic pertaining to dates which
allow users to identify and/or use the century portion of any date fields
without special processing; (ii) respond to all date elements and date input so
as to resolve any ambiguity as to century in a disclosed, defined and
pre-determined manner; and (iii) provide date information in ways which are
unambiguous as to century. This may be achieved by permitting or requiring the
century to be specified or where the data element is represented without a
century, the correct century is unambiguous for all manipulations involving that
element.





                                       32

<PAGE>   33

ITEM 7A.  QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.

         The Company does not enter into financial instruments for trading or
speculative purposes and does not currently utilize derivative financial
instruments. The operations of the Company are conducted primarily in the United
States and as such are not subject to material foreign currency exchange rate
risk. 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Index to Financial Statements

Independent Auditor's Report............................................ F-1

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

Consolidated Balance Sheets at January 31, 1999 and 1998................ F-3

Consolidated Statements of Operations for the years ended January 31,
1999 and 1998 and for the period February 7, 1996 to 
January 31, 1997........................................................ F-4

Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the years ended January 31, 1999 and 1998 and the period 
February 7, 1996 to January 31, 1997.................................... F-5

Consolidated Statements of Cash Flows for the years ended January 31,
1999 and 1998 and the period February 7, 1996 to January 31, 1997....... F-11

Notes to Consolidated Financial Statements for the years ended 
January 31, 1999 and 1998 and the period February 7, 1996 to 
January 31, 1997........................................................ F-12

Accountants' Report..................................................... F-24

Balance Sheets as of December 31, 1998 and 1997......................... F-26

Statement of Income for the years ended December 31, 1998 and 1997...... F-28

Statement of Retained Earnings for the year ended December 31, 1998
and 1997................................................................ F-29

Statement of Cash Flows for the years ended December 31, 1998 and 1997.. F-30
Notes to Financial Statements for the years ended December 31, 1998 
and 1997................................................................ F-32

Independent Auditor's Report............................................ F-37

Balance Sheet as of December 31, 1996................................... F-39

Statement of Income for the year ended December 31, 1996................ F-41

Statement of Retained Earnings for the year ended December 31, 1996..... F-42

Statement of Cash Flows for the year ended December 31, 1996............ F-43

Notes to Financial Statements for the year ended December 31, 1996...... F-45

Independent Auditor's Report............................................ F-50

Financial Statement Schedule............................................ F-51




                                       







                                       33
<PAGE>   34
  INDEPENDENT AUDITOR'S REPORT




Board of Directors and Stockholders
Virtual Technology Corporation and Subsidiaries
Minneapolis, Minnesota


We have audited the accompanying consolidated balance sheets of VIRTUAL
TECHNOLOGY CORPORATION AND SUBSIDIARIES as of January 31, 1998 and 1999, and the
related consolidated statements of operations, change in stockholders' equity
(deficit), and cash flows for each of the two years in the period ended January
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of VIRTUAL TECHNOLOGY
CORPORATION AND SUBSIDIARIES as of January 31, 1998 and 1999, and the results of
their operations and their cash flows for each of the two years in the period
ended January 31, 1999, in conformity with generally accepted accounting
principles.




                                          /s/ LURIE, BESIKOF, LAPIDUS & CO., LLP

Minneapolis, Minnesota
April 23, 1999


                                      F-1
<PAGE>   35
               Report of Independent Certified Public Accountants
               --------------------------------------------------

Board of Directors and Stockholders
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Minneapolis, Minnesota

We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Virtual Technology Corporation and
Subsidiaries (A Development Stage Enterprise) for the period from inception
(February 7, 1996) to January 31, 1997. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results  of operations and cash flows  of Virtual
Technology Corporation and Subsidiaries  for the period from inception
(February 7, 1996) to January 31, 1997, in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming that the
Companies will continue as a going concern. As discussed in Note A to the
financial statements, the Companies require additional financing to support
operations and have accumulated a deficit during the development stage. These
matters raise substantial doubt about the Companies' ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Copeland Buhl & Company P.L.L.P.
COPELAND BUHL & COMPANY P.L.L.P.
Minneapolis, Minnesota


April 11, 1997


                                      F-2

<PAGE>   36




                                      - 3 -
                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                          January 31,
                                                                 ----------------------------          
                                          ASSETS                     1998            1999     
                                                                 ------------    ------------
<S>                                                              <C>             <C>         
CURRENT ASSETS
    Cash                                                         $      3,649    $    125,993
    Receivables:
       Accounts (net of allowance for doubtful accounts of
        $-0- and $263,000)                                                672       4,364,905
       Credit cards                                                         -         132,387
       Stock subscription, subsequently collected                           -       2,676,436
    Inventories                                                         8,287       5,236,292
    Other current assets                                                3,906       2,761,670
                                                                 ------------    ------------
       TOTAL CURRENT ASSETS                                            16,514      15,297,683
                                                                 ------------    ------------
FURNITURE AND EQUIPMENT, net of accumulated depreciation
    of $32,303 and $38,612, respectively                               42,895         381,662
                                                                 ------------    ------------
OTHER ASSETS
    Goodwill                                                                -       8,345,295
    Covenant not to compete                                                 -         500,000
    Consulting agreement                                                    -       1,042,115
    Prepaid investor relation services                                      -         103,600
    Loan fees                                                               -          50,250
    Deposits                                                                -          21,973
                                                                 ------------    ------------
                                                                            -      10,063,233
                                                                 ------------    ------------
                                                                 $     59,409    $ 25,742,578
                                                                 ============    ============
       LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
    Accounts payable - trade                                     $    256,637    $  4,950,358
    Accounts payable - customers                                            -       2,213,000
    Accrued expenses and other current liabilities                    479,797       1,884,983
    Notes payable                                                           -       7,295,673
    Current amount of capital lease obligations                         1,202          10,628
    Loans from related parties                                              -          45,000
                                                                 ------------    ------------
       TOTAL CURRENT LIABILITIES                                      737,636      16,399,642
                                                                 ------------    ------------
OTHER LIABILITIES
    Loans from related parties                                        341,543         371,543
    Convertible debentures                                            372,000               -
    Capital lease obligations, net of current amount                    1,799          49,267
                                                                 ------------    ------------
                                                                      715,342         420,810
                                                                 ------------    ------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT)
    Preferred stock - 5,000,000 shares authorized; none issued              -               -
    Common stock - no par value; 50,000,000 shares authorized;
       shares issued and outstanding - 8,489,937 and
       25,345,963 respectively                                      1,975,013      17,572,796
    Stock subscription receivable                                           -        (925,000)
    Accumulated deficit                                            (3,368,582)     (7,725,670)
                                                                 ------------    ------------
                                                                   (1,393,569)      8,922,126
                                                                 ------------    ------------
                                                                 $     59,409    $ 25,742,578
                                                                 ============    ============
</TABLE>

See notes to consolidated financial statements.







                                      F-3
<PAGE>   37




                                      - 4 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                     February 7,
                                                       1996                Years Ended
                                                   (Inception) to          January 31,
                                                      January 31,  ----------------------------         
                                                        1997            1998           1999    
                                                   --------------  ------------    ------------
<S>                                                <C>             <C>             <C>         
NET SALES                                          $          -    $    174,669    $  4,945,907

COST OF GOODS SOLD                                            -               -       4,769,313
                                                   ------------    ------------    ------------

GROSS PROFIT                                                  -         174,669         176,594
                                                   ------------    ------------    ------------

OPERATING EXPENSES
    Sales and marketing                                 154,887         550,802       1,792,238
    General and administrative                          389,878       1,148,067       2,727,937
    Write-off of Virtual Technology (UK) Limited              -         925,000               -
    Purchased research and development costs            284,576               -               - 
                                                   ------------    ------------    ------------
                                                        829,341       2,623,869       4,520,175
                                                   ------------    ------------    ------------

LOSS FROM OPERATIONS                                   (829,341)     (2,449,200)     (4,343,581)
                                                   ------------    ------------    ------------

OTHER INCOME (EXPENSE)
    Interest expense                                     (1,699)        (58,254)        (79,618)
    Other                                                 1,619         (31,707)         66,111
                                                   ------------    ------------    ------------
                                                            (80)        (89,961)        (13,507)
                                                   ------------    ------------    ------------

NET LOSS                                              ($829,421)    ($2,539,161)    ($4,357,088)
                                                   ============    ============    ============

NET LOSS PER COMMON SHARE -
    BASIC AND DILUTED                                    ($0.13)         ($0.36)         ($0.26)
                                                   ============    ============    ============

WEIGHTED AVERAGE COMMON
    SHARES OUTSTANDING - BASIC
    AND DILUTED                                       6,380,084       7,068,687      16,958,284
</TABLE>






See notes to consolidated financial statements.






                                      F-4
<PAGE>   38


                                      - 5 -
                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                                             Common Stock                                                      
                                                           - Subsidiaries              Common Stock - Parent 
                                                     --------------------------     ---------------------------       Accumulated
                                                       Shares          Amount         Shares          Amount            Deficit  
                                                     -----------     ----------     ----------      -----------      -------------
<S>                                                  <C>             <C>            <C>             <C>              <C>
Balance - February 7, 1996, prior to
    acquisition of subsidiary                                  -     $        -      3,213,008      $ 1,112,286        ($1,112,286)
February 7, 1996:
    Initial issuance of stock for cash, fair value
    of investments, and reimbursement of
    expenses - $.01 to $.167 per share                 3,014,030        226,500              -                -                  - 
May 4, 1996:
    Stock issued in private placement for cash -
    $2.46 to $2.50 per share                              27,560         68,877              -                -                  - 
Acquisition of Network Storage, Inc. 
    on June 17, 1996                                  (3,041,590)      (295,377)     3,041,590          295,377                  - 
Reorganization of Virtual Technology
    Corporation upon acquisition of subsidiary                 -              -              -       (1,112,286)         1,112,286
August 27, 1996 to January 18, 1997:
    Stock issued in private placement:
       Stock issued for cash - $2.50 per share                 -              -         44,000          110,000                  - 
       Stock issued for services - $2.00 per
        share                                                  -              -         66,000          132,000                  - 
Acquisition of VTL on October 31, 1996 -
    $2.56 per share                                            -              -        427,500        1,094,640                  - 
Compensation expense                                           -              -              -                -                  - 
Net loss                                                       -              -              -                -           (829,421)
                                                     -----------     ----------      ---------      -----------      -------------
Balance - January 31, 1997                                     -     $        -      6,792,098      $ 1,632,017          ($829,421)
                                                     ===========     ==========      =========      ===========      =============
</TABLE>


<TABLE>
<CAPTION>
                                                                                Stock         Stockholders'           
                                                            Unearned         Subscription       Equity      
                                                          Compensation        Receivable       (Deficit)                           
                                                         --------------     -------------     ------------                         
<S>                                                      <C>                <C>               <C>          
Balance - February 7, 1996, prior to                                                                                           
    acquisition of subsidiary                            $            -     $           -     $          - 
February 7, 1996:
    Initial issuance of stock for cash, fair value
    of investments, and reimbursement of
    expenses - $.01 to $.167 per share                         (100,000)                -          126,500
May 4, 1996:
    Stock issued in private placement for cash -
    $2.46 to $2.50 per share                                          -                 -           68,877
Acquisition of Network Storage, Inc. 
    on June 17, 1996                                                  -                 -                - 
Reorganization of Virtual Technology
    Corporation upon acquisition of subsidiary                        -                 -                - 
August 27, 1996 to January 18, 1997:
    Stock issued in private placement:
       Stock issued for cash - $2.50 per share                        -                 -          110,000
       Stock issued for services - $2.00 per
        share                                                         -                 -          132,000
Acquisition of VTL on October 31, 1996 -
    $2.56 per share                                                   -                 -        1,094,640
Compensation expense                                             65,278                 -           65,278
Net loss                                                              -                 -         (829,421)
                                                         --------------     -------------    -------------
Balance - January 31, 1997                                     ($34,722)    $           -    $     767,874
                                                         ==============     =============    =============
</TABLE>

(continued)

See notes to consolidated financial statements.
                                                  
                                                  



                                      F-5
<PAGE>   39


                                      - 6 -
                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Continued)


<TABLE>
<CAPTION>
                                                         Common Stock                                                            
                                                       - Subsidiaries              Common Stock - Parent        
                                                 --------------------------     ---------------------------       Accumulated
                                                    Shares          Amount       Shares            Amount           Deficit         
                                                 -----------     ----------     ----------      -----------      -------------    
<S>                                              <C>             <C>            <C>             <C>              <C>           
Balance - January 31, 1997                              -        $     -         6,792,098      $ 1,632,017          ($829,421)    

March 21, 1997 to May 5, 1997:
    Stock issued for cash - $2.50 per share             -              -            18,800           47,000               -        
May 8, 1997 to June 17, 1997:
    Stock issued for services - $1.25 per share         -              -            36,539           45,674               -        
September 25, 1997:
    Stock issued for cash - $.40 per share              -              -            25,000           10,000               -        
    Stock issued for cash - $.25 per share              -              -           200,000           50,000               -        
    Stock issued for services - $1.50 per share         -              -            15,000           22,500               -        
November 12, 1997:
    Stock issued for cash - $.125 per share             -              -            50,000            6,250               -        
December 3, 1997 to December 19, 1997:
    Stock issued for cash - $.10 per share              -              -           900,000           90,000               -        
    Stock issued for services - $.50 per share          -              -            25,000           12,500               -        
    Stock issued for services - $.375 per share         -              -            50,000           18,750               -        
December 19, 1997:
    Stock issued for cash - $.50 per share              -              -            10,000            5,000               -        
January 26, 1998:
    Stock issued for cash - $.10 per share              -              -           350,000           35,000               -        
    Stock issued for services - $.018 per share         -              -            17,500              322               -        
Compensation expense                                    -              -              -                -                  -        
Net loss                                                -              -              -                -            (2,539,161)
                                                   -----------   ----------      ---------      -----------       ------------      
Balance - January 31, 1998                              -        $     -         8,489,937      $ 1,975,013      ($  3,368,582)    
                                                   ===========   ==========      =========      ===========       ============
</TABLE>



<TABLE>
<CAPTION>
                                                                                         Stock          Stockholders'           
                                                                       Unearned       Subscription         Equity     
                                                                     Compensation      Receivable         (Deficit)                 
                                                                    -------------     -------------     ------------                
<S>                                                                 <C>               <C>               <C>                         
Balance - January 31, 1997                                              ($34,722)     $        -        $    767,874                
                                                                                                                                    
March 21, 1997 to May 5, 1997:                                                                                                      
    Stock issued for cash - $2.50 per share                                 -                  -              47,000                
May 8, 1997 to June 17, 1997:                                                                                                       
    Stock issued for services - $1.25 per share                             -                  -              45,674                
September 25, 1997:                                                                                                                 
    Stock issued for cash - $.40 per share                                  -                  -              10,000                
    Stock issued for cash - $.25 per share                                  -                  -              50,000                
    Stock issued for services - $1.50 per share                             -                  -              22,500                
November 12, 1997:                                                                                                                  
    Stock issued for cash - $.125 per share                                 -                  -               6,250                
December 3, 1997 to December 19, 1997:                                                                                              
    Stock issued for cash - $.10 per share                                  -                  -              90,000                
    Stock issued for services - $.50 per share                              -                  -              12,500                
    Stock issued for services - $.375 per share                             -                  -              18,750                
December 19, 1997:                                                                                                                  
    Stock issued for cash - $.50 per share                                  -                  -               5,000                
January 26, 1998:                                                                                                                   
    Stock issued for cash - $.10 per share                                  -                  -              35,000                
    Stock issued for services - $.018 per share                             -                  -                 322                
Compensation expense                                                      34,722               -              34,722                
Net loss                                                                    -                  -          (2,539,161)               
                                                                      ----------      -------------      -----------                
Balance - January 31, 1998                                            $     -         $        -         ($1,393,569)
                                                                      ==========      =============     ============
</TABLE>
                   
(continued)                                                         



See notes to consolidated financial statements.

                                      F-6
<PAGE>   40

                                      - 7 -
                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Continued)


<TABLE>
<CAPTION>
                                                          Common Stock                                                              
                                                        - Subsidiaries              Common Stock - Parent           
                                                 --------------------------     ---------------------------        Accumulated    
                                                    Shares          Amount       Shares            Amount            Deficit     
                                                 -----------     ----------     ----------      -----------        -----------    
 
<S>                                              <C>             <C>             <C>            <C>                <C>              
Balance - January 31, 1998                              -        $     -         8,489,937      $ 1,975,013        ($3,368,582)     

Correction to shares beginning of year                  -              -           (60,000)            -                  -         

February 25 to March 10, 1998:
    Stock issued for cash - $.10 per share              -              -           250,000           25,000               -         
    Stock issued for services - $.10 per share          -              -           240,000           24,000               -         

March 10, 1998:
    Stock issued for cash - $.25 per share              -              -            30,000            7,500               -         

March 18 to March 23, 1998:
    Stock issued for cash - $.08 per share              -              -         1,250,000          100,000               -         
    Stock issued for services - $.10 per share          -              -            70,000            7,000               -         

March 23, 1998:
    Stock issued for services - $.25 per share          -              -           600,000          150,000               -         

April 2 to April 27, 1998:
    Stock issued for cash - $.10 per share              -              -         1,690,000          169,000               -         
    Stock issued for services - $.10 per share          -              -            85,000            8,500               -         

April 29, 1998:
    Stock issued for services - $.10 per share          -              -            50,000            5,000               -         

</TABLE>



<TABLE>
<CAPTION>
                                                                               Stock         Stockholders'
                                                           Unearned         Subscription       Equity            
                                                          Compensation        Receivable      (Deficit)   
                                                          ------------     -------------     ------------               
<S>                                                       <C>              <C>                <C>                        
Balance - January 31, 1998                                $      -         $        -         ($1,393,569)               
                                                                                                                       
Correction to shares beginning of year                           -                  -                -                  
                                                                                                                        
February 25 to March 10, 1998:                                                                                          
    Stock issued for cash - $.10 per share                       -                  -              25,000               
    Stock issued for services - $.10 per share                   -                  -              24,000               
                                                                                                                        
March 10, 1998:                                                                                                         
    Stock issued for cash - $.25 per share                       -                  -               7,500               
                                                                                                                        
March 18 to March 23, 1998:                                                                                             
    Stock issued for cash - $.08 per share                       -                  -             100,000               
    Stock issued for services - $.10 per share                   -                  -               7,000               
                                                                                                                        
March 23, 1998:                                                                                                         
    Stock issued for services - $.25 per share                   -                  -             150,000               
                                                                                                                        
April 2 to April 27, 1998:                                                                                              
    Stock issued for cash - $.10 per share                       -                  -             169,000               
    Stock issued for services - $.10 per share                   -                  -               8,500               
                                                                                                                        
April 29, 1998:                                                                                                         
    Stock issued for services - $.10 per share                   -                  -               5,000               
</TABLE>

(continued)



See notes to consolidated financial statements.



                                      F-7
<PAGE>   41


                                      - 8 -
                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)


<TABLE>
<CAPTION>
                                                          Common Stock                                                      
                                                        - Subsidiaries             Common Stock - Parent        
                                                 --------------------------     ---------------------------      Accumulated 
                                                    Shares          Amount       Shares            Amount          Deficit        
                                                 -----------     ----------     ----------      -----------      -------------    
<S>                                              <C>             <C>               <C>          <C>               <C>             
May 12, 1998:
    Stock issued for conversion of
       debentures - $.25 per share                      -        $     -           694,000      $   173,500       $       -       

May 14 to May 15, 1998:
    Stock issued for cash - $.10 per share              -              -           660,000           66,000               -       

May 18, 1998:
    Stock issued for cash - $.25 per share              -              -           100,000           25,000               -       

May 19 to May 21, 1998:
    Stock issued for cash - $.10 per share              -              -            50,000            5,000               -       
    Stock issued for services - $.10 per share          -              -            50,000            5,000               -       

May 23, 1998:
    Stock issued for cash - $.08 per share              -              -         1,250,000          100,000               -       

June 22, 1998:
    Stock issued for cash - $.08 per share              -              -           625,000           50,000               -       

July 3, 1998:
    Stock issued for cash - $.125 per share             -              -           200,000           25,000               -       

July 6, 1998:
    Stock issued for cash - $.08 per share              -              -         1,250,000          100,000               -       

July 14, 1998:
    Stock issued for services - $.10 per share          -              -            50,000            5,000               -       
</TABLE>

<TABLE>
<CAPTION>
                                                                                    Stock         Stockholders'  
                                                                  Unearned       Subscription        Equity  
                                                                Compensation      Receivable        (Deficit)                  
                                                                ------------     ------------     -------------                
<S>                                                              <C>             <C>               <C>                         
May 12, 1998:                                                                                                                  
    Stock issued for conversion of                                                                                             
       debentures - $.25 per share                               $     -         $        -        $    173,500                
                                                                                                                               
May 14 to May 15, 1998:                                                                                                        
    Stock issued for cash - $.10 per share                             -                  -              66,000                
                                                                                                                               
May 18, 1998:                                                                                                                  
    Stock issued for cash - $.25 per share                             -                  -              25,000                
                                                                                                                               
May 19 to May 21, 1998:                                                                                                        
    Stock issued for cash - $.10 per share                             -                  -               5,000                
    Stock issued for services - $.10 per share                         -                  -               5,000                
                                                                                                                               
May 23, 1998:                                                                                                                  
    Stock issued for cash - $.08 per share                             -                  -             100,000                
                                                                                                                               
June 22, 1998:                                                                                                                 
    Stock issued for cash - $.08 per share                             -                  -              50,000                
                                                                                                                               
July 3, 1998:                                                                                                                  
    Stock issued for cash - $.125 per share                            -                  -              25,000                
                                                                                                                               
July 6, 1998:                                                                                                                  
    Stock issued for cash - $.08 per share                             -                  -             100,000                
                                                                                                                               
July 14, 1998:                                                                                                                 
    Stock issued for services - $.10 per share                         -                  -               5,000                
</TABLE>

(continued)

See notes to consolidated financial statements.



                                      F-8
<PAGE>   42

                                      - 9 -
                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)

<TABLE>
<CAPTION>
                                                          Common Stock                                                       
                                                        - Subsidiaries             Common Stock - Parent  
                                                 --------------------------     ---------------------------        Accumulated
                                                    Shares          Amount        Shares           Amount           Deficit         
                                                 -----------     ----------     ----------      -----------       ------------ 
<S>                                              <C>             <C>            <C>             <C>               <C>              
July 9 to July 20, 1998:
    Stock issued for cash - $.125 per share             -        $     -            50,000      $     6,250       $       -        
    Stock issued for cash - $.375 per share             -              -           705,500          264,562               -        
    Stock issued for conversion of
       debentures - $.25 per share                      -              -           126,000           31,500               -        
    Stock issued for services - $.375 per share         -              -             5,000            1,875               -        

July 29 to July 31, 1998:
    Stock issued for cash - $.80 per share              -              -            56,000           44,800               -        
    Stock issued for conversion of
       debentures - $.25 per share                      -              -           175,648           43,912               -        

July 31 to October 31, 1998:
    Stock issued for cash - $.375 per share             -              -         1,386,666          520,000               -        
    Stock issued for services - $.375 per share         -              -           580,000          217,500               -        

November 11 to December 12, 1998:
    Stock issued for cash - $1.00 per share             -              -           500,000          500,000               -        
    Stock issued for services - $.99 per share          -              -           225,000          222,750               -        

December 22, 1998 to January 26, 1999:
    Stock issued for cash - $1.50 per share,
       less commission of $50,000                       -              -           333,333          450,000               -        
    Stock issued for cash - $1.50 per share,
       less commissions of $165,000                     -              -         1,000,000        1,335,000               -        
    Stock issued for services - $2.75 per share         -              -           114,532          315,000               -        
    Stock issued for exercise of warrants - $0.75
       per share                                        -              -           213,333          160,000               -        
</TABLE>

<TABLE>
<CAPTION>
                                                                                  Stock          Stockholders'         
                                                                Unearned       Subscription        Equity  
                                                              Compensation      Receivable        (Deficit)                         
                                                             -------------     -------------     ------------                       
<S>                                                            <C>             <C>               <C>                                
July 9 to July 20, 1998:                                                                                                            
    Stock issued for cash - $.125 per share                    $     -         $        -        $      6,250                       
    Stock issued for cash - $.375 per share                          -                  -             264,562                       
    Stock issued for conversion of                                                                                                  
       debentures - $.25 per share                                   -                  -              31,500                       
    Stock issued for services - $.375 per share                      -                  -               1,875                       
                                                                                                                                    
July 29 to July 31, 1998:                                                                                                           
    Stock issued for cash - $.80 per share                           -                  -              44,800                       
    Stock issued for conversion of                                                                                                  
       debentures - $.25 per share                                   -                  -              43,912                       
                                                                                                                                    
July 31 to October 31, 1998:                                                                                                        
    Stock issued for cash - $.375 per share                          -                  -             520,000                       
    Stock issued for services - $.375 per share                      -                  -             217,500                       
                                                                                                                                    
November 11 to December 12, 1998:                                                                                                   
    Stock issued for cash - $1.00 per share                          -                  -             500,000                       
    Stock issued for services - $.99 per share                       -                  -             222,750                       
                                                                                                                                    
December 22, 1998 to January 26, 1999:                                                                                              
    Stock issued for cash - $1.50 per share,                                                                                        
       less commission of $50,000                                    -                  -             450,000                       
    Stock issued for cash - $1.50 per share,                                                                                        
       less commissions of $165,000                                  -                  -           1,335,000                       
    Stock issued for services - $2.75 per share                      -                  -             315,000                       
    Stock issued for exercise of warrants - $0.75                                                                                   
       per share                                                     -                  -             160,000                       
</TABLE>

(continued)

See notes to consolidated financial statements.



                                      F-9
<PAGE>   43

                                     - 10 -
                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)



<TABLE>
<CAPTION>
                                                          Common Stock                                                        
                                                        - Subsidiaries             Common Stock - Parent   
                                                 --------------------------     ---------------------------       Accumulated
                                                    Shares          Amount       Shares            Amount           Deficit  
                                                 -----------     ----------     ----------      -----------      -------------
<S>                                              <C>             <C>               <C>          <C>              <C>      
January 15, 1999:
    Stock issued for conversion of debentures -
       $1.00 per share                                  -        $     -           177,443      $    177,443     $           - 

January 25 to January 29, 1999:
    Subscription agreement to purchase stock
       for cash at $5.2857 per share less
       commissions of $98,564                           -              -           700,000         3,601,436                 - 
    Stock issued in purchase of GTI - $7.187
       per share                                        -              -           228,571         1,642,740                 - 
    Stock issued for consulting agreement in
       connection with purchase of GTI -
       $7.187 per share                                 -              -           145,000         1,042,115                 - 
    Stock issued for exercise of warrants -
       $1.00 per share                                  -              -         1,000,000         1,000,000                 - 

Value of warrants and options issued for
    services                                            -              -                 -         2,970,400                 - 

Net loss                                                -              -                 -                 -        (4,357,088)

                                                 -----------     ----------     ----------      ------------     -------------
Balance - January 31, 1999                              -        $     -        25,345,963      $ 17,572,796       ($7,725,670)  
                                                 ===========     ==========     ==========      ============     =============
</TABLE>

   
<TABLE>
<CAPTION>
                                                                                    Stock          Stockholders'            
                                                                  Unearned       Subscription         Equity     
                                                                Compensation      Receivable         (Deficit)              
                                                                ------------     -------------     ------------             
<S>                                                              <C>             <C>               <C>
January 15, 1999:                                                                                                           
    Stock issued for conversion of debentures -                                                                             
       $1.00 per share                                           $     -         $        -        $    177,443             
                                                                                                                            
January 25 to January 29, 1999:                                                                                             
    Subscription agreement to purchase stock                                                                                
       for cash at $5.285 per share less                                                                                    
       commissions of $98,064                                          -              (925,000)       2,676,436             
    Stock issued in purchase of GTI - $7.187                                                                                
       per share                                                       -                  -           1,642,740             
    Stock issued for consulting agreement in                                                                                
       connection with purchase of GTI -                                                                                    
       $7.187 per share                                                -                  -           1,042,115             
    Stock issued for exercise of warrants -                                                                                 
       $1.00 per share                                                 -                  -           1,000,000             
                                                                                                                            
Value of warrants and options issued for                                                                                       
    services                                                           -                  -           2,970,400                    
                                                                                                                                
Net loss                                                               -                  -          (4,357,088)                   
                                                                 -----------     -------------     ------------                 
Balance - January 31, 1999                                       $     -             ($925,000)    $  8,922,126                 
                                                                 ===========     =============     ============                 
</TABLE>


See notes to consolidated financial statements.


                                     
                                      F-10
<PAGE>   44




                                     - 11 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                           
<TABLE>
<CAPTION>
                                                             February 7, 
                                                                1996     
                                                           (Inception) to      Year Ended January 31,
                                                              January 31, -------------------------------  
                                                                1997          1998               1999
                                                            ------------- ------------       ------------      
<S>                                                          <C>          <C>                <C>        
OPERATING ACTIVITIES
    Net loss                                                 ($829,421)   ($2,539,161)       ($4,357,088)
    Adjustments to reconcile net loss to net cash
     used by operating activities:
       Stock issued for compensation and services              232,778        134,468          1,322,360
       Purchased research and development                      284,576              -                  -
       Depreciation                                              2,599         19,649             28,357
       Loss on disposal of equipment                                 -         10,054                  -
       Amortization of intangible assets                        35,000              -                  -
       Write-off of VTL                                              -        925,000                  -
       Gain on sale of investments                                (202)             -                  -
       Changes in operating assets and liabilities:
          Accounts and credit card receivables                       -         11,092         (1,139,854)
          Inventories                                                -         (8,287)            21,736
          Other current assets                                       -          2,756           (164,519)  
          Deposits                                                   -              -             (9,631)
          Accounts payable                                      17,981        223,823           (102,436)
          Accrued expenses and other current liabilities         1,350        433,744            821,779
                                                             ---------    -----------        -----------
             Net cash used by operating activities            (255,339)      (786,862)        (3,579,296)
                                                             ---------    -----------        -----------

INVESTING ACTIVITIES
    Purchases of furniture and equipment                       (29,248)       (19,061)          (230,706)
    Proceeds from sale of investments                           50,202              -                  -
    Purchase of subsidiaries, net of cash acquired             (15,787)             -           (950,147)
    Advances to subsidiary                                     (77,000)             -                  -
    Other                                                            -           (122)                 - 
                                                             ---------    -----------        -----------
             Net cash used by investing activities             (71,833)       (19,183)        (1,180,853)
                                                             ---------    -----------        -----------

FINANCING ACTIVITIES
    Loan fees                                                        -              -            (50,250)
    Proceeds from issuance of common stock                     219,877        243,251          4,912,551
    Payments on capital lease obligations                         (719)        (1,121)            (4,524)
    Payments on notes payable and convertible debentures             -        (37,965)           (50,284)
    Loans from related parties                                       -        341,543             75,000
    Proceeds from convertible debentures                       135,000        237,000                  - 
                                                             ---------    -----------        -----------
             Net cash provided by financing activities         354,158        782,708          4,882,493
                                                             ---------    -----------        -----------

NET INCREASE (DECREASE) IN CASH                                 26,986        (23,337)           122,344

CASH
    Beginning of period                                              -         26,986              3,649
                                                             ---------    -----------        -----------
    End of period                                            $  26,986    $     3,649        $   125,993
                                                             =========    ===========        ===========
</TABLE>



See notes to consolidated financial statements.


                                     
                                      F-11
<PAGE>   45

                                     - 12 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 1.    The Company and Summary of Significant Accounting Policies -

       The Company

       Virtual Technology Corporation (VTC) is an internet retailer of high
       performance computer hardware, software and peripheral products to
       sophisticated computer and internet users. GTI Acquisition Corporation
       (GAC), a wholly-owned subsidiary, is a leading distributor of computer
       peripheral equipment to wholesale and retail outlets throughout the
       United States and Canada.

       Virtual Technology (UK) Limited (VTL), formerly known as Ashmount
       Research Ltd., is a wholly-owned subsidiary located in the United
       Kingdom. VTL was dormant during fiscal 1999 but is expected to begin new
       operations as a European electronic commerce business.

       During fiscal 1999, the Company commenced operations and therefore the
       consolidated financial statements no longer reflect those of a
       developmental stage company.

       In prior years, the auditor's report stated there was substantial doubt
       about the Company's ability to continue as a going concern since the
       Company had not commenced its planned principal operations, and therefore
       had not generated revenues to support operations, had an accumulated
       deficit, and required additional financing. During fiscal 1999, the
       Company commenced operations and raised $4,912,551 of cash through the
       issuance of common stock and raised additional proceeds of approximately
       $2,250,000 subsequent to January 31, 1999. The Company also acquired
       Herold Marketing Associates, Inc. (Note 2) which had profitable
       operations and obtained a $10,000,000 credit agreement in February 1999
       (Note 17).

       The Company now believes that existing cash and cash equivalents, 
       available borrowing capacity and cash generated from operations will be
       adequate to meet its operating cash needs through the end of fiscal 
       2000, although the Company may seek to raise additional capital during 
       that period.

       Principles of Consolidation

       The consolidated financial statements include the accounts of Virtual
       Technology Corporation and its wholly-owned subsidiaries, GTI Acquisition
       Corporation (formed to acquire the assets of Herold Marketing Associates,
       Inc. on January 28, 1999 and is included in the consolidated statements
       of operations and cash flows for three days in fiscal 1999) and Virtual
       Technology (UK) Limited. VTL was a nonoperating entity during fiscal
       1999. All significant intercompany accounts and transactions have been
       eliminated.

       VTL has an October 31 fiscal year and is included in the 1998
       consolidated financial statements for the fifteen months ended January
       31, 1998 and in the 1997 consolidated financial statements for the year
       ended October 31, 1997. The results of operations of VTL for the period
       November 1, 1997 to January 31, 1998, are not significant.

       (continued)


                                     
                                      F-12
<PAGE>   46




                                     - 13 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 1.    The Company and Summary of Significant Accounting Policies - (continued)

       Use of Estimates

       The preparation of these consolidated financial statements in conformity
       with generally accepted accounting principles requires management to make
       estimates and assumptions that affect reported amounts and disclosures in
       the financial statements and accompanying notes. Actual results could
       differ from these estimates.

       Revenue Recognition

       The Company recognizes revenue upon the shipment of the product.

       Inventories

       Inventories are stated at the lower of cost (first-in, first-out) or
       market.

       Furniture and Equipment

       Furniture and equipment are recorded at cost. Depreciation is provided in
       amounts sufficient to relate the cost to operations over their estimated
       service lives, generally 3 to 7 years. The straight-line method of
       depreciation is used for financial reporting.

       Financial Instruments

       The carrying values of cash, receivables, notes payable, accounts
       payable, and other financial instruments approximate their fair values
       principally because of their short-term nature. The carrying value of
       long-term debt does not differ significantly from its fair value. It is
       not practicable to determine the fair value of loans from related parties
       as the relationship influences the terms, and similar instruments are not
       generally available.

       Advertising Costs

       Advertising costs are expensed when incurred and totalled approximately
       $4,800, $222,600, and $1,530,900, for the periods ended January 31, 1997,
       1998, and 1999, respectively.

       (continued)


                                     
                                      F-13
<PAGE>   47




                                     - 14 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 1.    The Company and Summary of Significant Accounting Policies - (continued)

       Intangible Assets

       Amortization of intangible assets is recognized on the straight-line
       method over the following estimated lives:

<TABLE>
<CAPTION>
                               Description                            Years
                        -----------------------                       -----
<S>                                                              <C>
                                Goodwill                               20
                        Covenant not to compete                         3
                          Consulting agreement                          3
                               Loan fees                                3
</TABLE>

       Goodwill and the covenant not to compete result from the acquisition
       of Herold Marketing Associates, Inc. and will begin to be amortized
       February 1, 1999. There was no accumulated amortization on any intangible
       assets at January 31, 1999.

       Net Loss Per Common Share

       Basic net loss per common share is computed by dividing the net loss by
       the weighted average number of common shares outstanding during the
       period. Diluted net loss per common share is the same as basic as stock
       options, warrants, and convertible debt are antidulutive.

       Accounting for Stock-Based Compensation

       The Company accounts for employee stock options under the method
       prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
       Stock Issued to Employees," and provides the pro forma disclosures
       required by Statement of Financial Accounting Standards No. 123,
       "Accounting for Stock- Based Compensation."

       Derivative Instruments, Hedging Activities and Other Comprehensive Income

       The Company holds no derivative instruments, engages in no hedging
       activities and has no significant items of other comprehensive income.

       Recently Issued Accounting Standards

       Accounting Standards Executive Committee Statement of Position 98-1,
       "Accounting for the Costs of Computer Software Developed or Obtained for
       Internal Use" (SOP 98-1), issued in March 1998 and effective for fiscal
       years beginning after December 15, 1998, provides guidance on accounting
       for the costs of computer software developed or obtained for internal
       use. SOP 98-1 requires all costs related to the development of
       internal-use software other than those incurred during the application
       development stage to be expensed as incurred. Costs incurred during the
       application development stage are required to be capitalized and
       amortized over the estimated useful life of the software. The Company
       plans to adopt SOP 98-1 effective with the first quarter of fiscal 2000.
       Adoption is not expected to have a material effect on the Company's
       financial position or results of operations.

       Accounting Standards Executive Committee Statement of Position 98-5,
       "Reporting on the Costs of Start- Up Activities" (SOP 98-5), issued in
       April 1998 and effective for fiscal years beginning after December 15,
       1998, requires an entity to expense all start-up activities as incurred.
       The Company is currently in compliance with the provisions of SOP 98-5
       and, accordingly, the adoption of SOP 98-5 will not impact the Company's
       financial position or results of operations.


                                     
                                      F-14
<PAGE>   48




                                     - 15 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 2.    Acquisitions -

       On June 17, 1996, the stockholders of International Gold Marketing, Inc.
       (IGM) approved the acquisition of Network Storage, Inc. (NSI). IGM, a
       nonoperating entity, exchanged its common stock for all the common stock
       of NSI and subsequently changed its name to Virtual Technology
       Corporation (VTC). The merger was accounted for as a
       pooling-of-interests. Combined and separate operations of NSI and IGM
       during the periods preceding the merger are not disclosed as NSI was not
       incorporated until 1996 and previous operations of IGM are unrelated to
       current operations and immaterial. In conjunction with the acquisition,
       VTC adopted fresh-start reporting. Accordingly, the deficit accumulated
       from previous nonrelated operations was offset against the remaining
       equity. No gain or loss resulted from the reorganization.

       On October 31, 1996, VTC acquired all the outstanding common stock of
       Virtual Technology (UK) Limited (VTL) for $18,000 in cash and 427,500
       shares of common stock. The acquisition was accounted for using the
       purchase method of accounting. Accordingly, the purchase price was
       allocated to the net assets acquired based on their estimated fair
       values. The balance of the purchase price was allocated to software
       development costs ($600,000), trademarks, patents and copyrights
       ($250,000), and goodwill ($50,000). Also, certain research and
       development projects totaling $284,576 were determined to have no
       alternative future use and were charged to operations. In fiscal 1998,
       the Company wrote off $925,000 of intangible assets and advances due to
       the termination of the VTL operations.

       On January 28, 1999, VTC acquired through its wholly-owned subsidiary,
       GTI Acquisition Corporation, substantially all the assets and incurred
       certain liabilities of Herold Marketing Associates, Inc. dba Graphics
       Technology, Inc. (GTI) and entered into a three year covenant not to
       compete agreement with the chairman and founder of GTI for $1,000,000 in
       cash, $7,300,000 in notes (discounted to $7,188,600 due to imputed
       interest), $200,000 to be placed into escrow for three years (included in
       other current liabilities at January 31, 1999) and 228,571 shares of VTC
       stock valued at $1,642,740. In addition, the chairman and founder
       received 145,000 shares of VTC stock valued at $1,042,115 for a three
       year consulting agreement. The acquisition was accounted for using the
       purchase method of accounting. Accordingly, the purchase price was
       allocated to the net assets acquired based upon their estimated fair
       values. The purchase price was allocated as follows:

<TABLE>
<CAPTION>
<S>                                                    <C>         
            Inventories                                $  3,693,283
            Other current assets                            181,761
            Accounts receivable                           3,360,637
            Goodwill                                      8,345,295
            Covenant not to compete                         500,000
            Accounts payable                             (5,358,497)
            Other liabilities                              (691,139)
</TABLE>



       (continued)


                                     
                                      F-15
<PAGE>   49




                                     - 16 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 2.    Acquisitions - (continued)

       The purchase agreement provides for a post-closing adjustment to the
       purchase price (dollar for dollar reduction to the extent GTI's
       stockholders' equity at closing is less than $2.1 million and GTI's
       funded debt exceeds $1.7 million). The determination of the closing
       stockholders' equity was audited by GTI's auditors and, under the
       purchase agreement, is subject to approval by the Company. The Company
       has not completed its review of the closing GTI audit and therefore the
       final purchase price is subject to change. The Company believes that a
       post-closing adjustment, if any, will result in a decrease to the
       purchase price as currently recorded in the consolidated financial
       statements.

       The following unaudited pro forma financial information gives effect to
       the GTI acquisition as if it had occurred at the beginning of each of the
       years ended January 31, 1998 and 1999. The pro forma results were
       prepared for comparative purposes only and do not purport to be
       indicative of the results of operations which actually would result had
       the acquisition occurred on the date indicated, or which may result in
       the future.

<TABLE>
<CAPTION>
                                              Year Ended January 31,                    
                                          ------------------------------   
                                              1998               1999   
                                          ------------      ------------ 
          <S>                             <C>               <C>         
          Net sales                       $ 89,944,000      $ 69,180,200
          Net loss                          (2,334,800)       (4,387,900)
          Net loss per common share -
            basic and diluted                    (0.29)            (0.24)
          Weighted average common shares
            outstanding - 
            basic and diluted                8,108,925        17,987,122
</TABLE>
          
 3.    Inventories -

       Inventories consist of the following:

<TABLE>
<CAPTION>
                                                 January 31,
                                         -------------------------        
                                            1998           1999
                                         ----------     ----------    
         <S>                            <C>            <C>       
          Inventory                      $    8,287     $3,536,292
          Inventory - returned goods              -      1,700,000
                                         ----------     ----------
                                         $    8,287     $5,236,292
                                         ==========     ==========
</TABLE>


       Inventory at January 31, 1999, includes a reserve for obsolescence of
       $350,000. Returned goods represent GAC inventory returned to the Company
       subsequent to January 31, 1999.



                                     F-16
<PAGE>   50




                                     - 17 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 4.    Other Current Assets -

       Other current assets consist of the following:

<TABLE>
<CAPTION>
                                                                        January 31,       
                                                                ---------------------------
                                                                  1998              1999
                                                                -------       -------------    
<S>                                                             <C>           <C> 
             Prepaid consulting and service agreements          $  -          $   2,546,630
             Credit card company holdbacks                         -                174,000
             Other                                                3,906              41,040
                                                                -------       -------------
                                                                $ 3,906       $   2,761,670
                                                                =======       =============
                                                                                                          
</TABLE>


       In fiscal 1999, the Company entered into consulting and service
       agreements whereby the Company receives, generally over a period of one
       year or less as specified in the agreements, investment banking, legal,
       and other services. As consideration for these agreements the Company
       paid cash, issued common stock, issued warrants to purchase common stock,
       or a combination thereof. The Company valued the equity consideration
       based on the most recent sale price of the Company's stock for periods
       prior to November 1, 1998; for periods subsequent, valuations were based
       on the quoted market price of the Company's common stock. For periods
       prior to November 1, 1998 the Company believes due to the stock being
       thinly traded, using the quoted market price to determine the value of
       the equity consideration given would overstate the value of the 
       consideration received. The agreements are being amortized over the 
       contract service period.


 5.    Notes Payable -

       Notes payable consist of the following:

<TABLE>
<CAPTION>
                                                                        January 31,    
                                                                ---------------------------   
                                                                  1998              1999   
                                                                -------       ------------- 
<S>                                                             <C>           <C>          
             Payable to GTI, interest imputed at 9.75%:
                Due February 27, 1999                           $  -          $   3,967,936
                Due April 28, 1999                                 -              3,220,664
             8% notes payable to former stockholder of VTL in
                settlement of litigation                           -                 93,129
             Other notes                                           -                 13,944
                                                                -------       -------------
                                                                $  -          $   7,295,673
                                                                =======       =============
</TABLE>


 6.    Loans from Related Parties -

       Related party loans bear interest at 10% and are due in fiscal years 2000
       and 2001. Interest expense was approximately $0, $20,300 and $36,595 in
       fiscal 1997, 1998 and 1999, respectively, and is included in accrued
       expenses.



                                     
                                      F-17
<PAGE>   51




                                     - 18 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 7.    Convertible Debentures -

       During 1999, the Company repaid the 12% convertible debentures due to
       stockholders and related parties, including accrued interest, for $10,000
       in cash and the issuance of 1,173,091 shares of the Company's common
       stock. Interest expense in fiscal 1997, 1998 and 1999 was approximately
       $1,400, $35,500 and $22,800, respectively.


 8.    Capital Lease Obligations -

       The Company leases office equipment under capital leases expiring August
       2003. Equipment capitalized under these leases is as follows:

<TABLE>
<CAPTION>
                                                            January 31,
                                                      ----------------------   
                                                         1998         1999  
                                                      --------     ---------
<S>                                                   <C>          <C>      
                Office equipment                      $  4,842     $  66,260
                Less accumulated amortization            1,614         8,724
                                                      --------     ---------
                                                      $  3,228     $  57,536
                                                      ========     =========
</TABLE>

       Amortization of equipment under capital lease is included in depreciation
       expense.

       A schedule of future minimum lease payments under the capital lease
       together with the present value of the net minimum lease payments is as
       follows:

<TABLE>
<CAPTION>
                              Year Ending
                               January 31,                               Amount
        --------------------------------------------------------      ---------
<S>     <C>                                                           <C>      
                                  2000                                $  19,766
                                  2001                                   18,701
                                  2002                                   18,168
                                  2003                                   18,168
                                  2004                                   10,598
                                                                      ---------
        Total minimum lease payments                                     85,401
        Less amount representing interest                                25,506
                                                                      ---------
        Present value of net minimum lease payments                      59,895
        Less current amount                                              10,628
                                                                      ---------
                                                                      $  49,267
                                                                      =========
</TABLE>

 9.    Unearned Compensation -

       Two directors were issued stock in lieu of salary for the 18 months from
       inception. Compensation expense was $65,278 and $34,722 for fiscal 1997
       and 1998, respectively.


                                     
                                      F-18
<PAGE>   52




                                     - 19 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



10.    Stock Options and Warrants -

       Transactions related to options and warrants during the last three years
       are summarized as follows:

<TABLE>
<CAPTION>
                                               Number          Weighted Average
                                             of Shares         Exercise Price  
                                            -----------        ----------------

<S>                                         <C>                  <C>  
       Balance at January 31, 1996                 -             $   -
         Granted                              1,341,000              1.47
                                            -----------
       Balance at January 31, 1997            1,341,000              1.47
         Granted                                590,100              1.31
                                            -----------
       Balance at January 31, 1998            1,931,100              1.42
         Granted                              6,018,885              1.18
         Exercised                           (1,213,333)             0.96
         Forfeited                             (394,500)             2.42
                                            -----------
       Balance at January 31, 1999            6,342,152              1.54
                                            ===========
</TABLE>

       The weighted average fair values of options and warrants granted during
       fiscal 1997, 1998 and 1999 were $0.13, $0.59 and $1.22, respectively.

       The following table summarizes information about stock options and
       warrants at January 31, 1999:

<TABLE>
<CAPTION>
                                             Outstanding                                      Exercisable   
                              -------------------------------------------------    -------------------------------------

                                                         Weighted Average      
                                                ------------------------------
                                                Remaining
              Range of        Options and      Contractual                         Options and          Weighted Average
          Exercise Prices      Warrants         Life-Years      Exercise Price      Warrants             Exercise Price
          ---------------     -----------      -----------      --------------     -----------          ----------------     
<S>       <C>                 <C>              <C>              <C>                <C>                  <C>
              $ 0.25               90,000          4.16             $ 0.25              90,000              $ 0.25  
                1.00            5,220,219          4.36               1.00           3,960,219                1.00
                1.25               50,000          1.39               1.25              50,000                1.25            
                1.50              263,333          1.36               1.50             263,333                1.50
                2.00              400,000          4.49               2.00             400,000                2.00
                3.75              250,000          9.93               3.75              62,500                3.75
                5.00               68,600          0.15               5.00              68,600                5.00
                              -----------                                            ---------              
                                6,342,152                             1.54           4,894,652                1.19
                              ===========                                            =========              
</TABLE>                        
                                                                                
                                                                  
                                                                                
       As permitted by SFAS 123, "Accounting for Stock-Based Compensation", the
       Company elected to follow Accounting Principles Board Opinion No. 25 (APB
       25), "Accounting for Stock Issued to Employees", to measure compensation
       cost for stock options and warrants. Under APB 25, if the exercise price
       of the Company's stock options and or warrants equals the market price of
       the underlying stock on the date of grant, no compensation expense is
       recognized.

       (continued)


                                     
                                      F-19
<PAGE>   53




                                     - 20 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



10.    Stock Options and Warrants - (continued)

       Pro forma information regarding net loss and net loss per share is
       required by SFAS 123, and was determined as if the Company had accounted
       for its stock options and warrants under the fair value method of that
       Statement. The fair value for these options was estimated at the date of
       grant using a Black-Scholes option pricing model with the following
       assumptions:

<TABLE>
<CAPTION>
                                                                 Period Ended January 31,                     
                                           -------------------------------------------------------------------
                                                   1997                    1998                    1999        
                                            ------------------      ------------------     --------------------
<S>                                            <C>                     <C>                     <C>          
          Dividend yield                            0%                      0%                      0%
          Volatility factor                         0%                      0%                  240% - 307%
          Risk-free interest rates             5.04% - 5.64%           5.48% - 5.66%           4.46% - 5.62%
          Expected lives - years                 0.2 - 3.3               1.1 - 4.8               1.6 - 8.0
</TABLE>

       The Black-Scholes option valuation model was developed for use in
       estimating the fair value of traded options which have no vesting
       restriction and are fully transferable. In addition, option valuation
       models require the input of highly subjective assumptions including the
       expected stock price volatility. Because the Company's stock options and
       warrants have characteristics significantly different from those of
       traded options and warrants, and because changes in the subjective input
       assumptions can materially affect the fair value estimate, in
       management's opinion, the existing models do not necessarily provide a
       reliable measure of the fair value of its stock options and warrants.

       For purposes of pro forma disclosure, the estimated fair value of the
       options is amortized over the option's vesting period. The pro forma
       information is as follows:

<TABLE>
<CAPTION>
                                                               Period Ended January 31,
                                                   --------------------------------------------------
                                                       1997              1998                1999    
                                                   -----------       ------------       -------------
<S>                                                  <C>              <C>                 <C>         
             Net loss:
                As reported                          ($829,421)       ($2,539,161)        ($4,357,088)
                Pro forma                             (948,422)        (2,820,496)         (7,822,096)
             Net loss per common share- 
              basic and diluted:
                As reported                              (0.13)             (0.36)              (0.26)
                Pro forma                                (0.15)             (0.40)              (0.46)
</TABLE>


11.    Income Taxes -

       The Company provides income taxes based on income reported for financial
       reporting purposes. Deferred taxes are recognized for temporary
       differences between the bases of assets and liabilities for financial
       statement and income tax purposes. Deferred tax assets were reduced by a
       valuation allowance until their realization is reasonably assured. No
       income taxes are currently payable due to the net operating losses.

       (continued)


                                     
                                      F-20
<PAGE>   54




                                     - 21 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



11.    Income Taxes - (continued)

       The significant components of deferred income tax assets and liabilities,
       all of which are long-term, are as follows:

<TABLE>
<CAPTION>
                                                                            January 31,
                                    ----------------------------------------------------------------------------------- 
                                                      1998                                       1999                       
                                    --------------------------------------     ----------------------------------------
                                     Total          Federal       State          Total          Federal       State   
                                     -----          -------       -----          -----          -------       -----
<S>                                 <C>            <C>           <C>           <C>            <C>            <C>      
      Deferred tax assets:
       Net operating loss
          carryforwards             $  606,900     $ 471,100     $ 135,800     $2,485,000     $1,929,000     $ 556,000
       Write-off of VTL                457,600       355,200       102,400        457,600        355,200       102,400
                                    ----------     ---------     ---------     ----------     ----------     ---------
                                     1,064,500       826,300       238,200      2,942,600      2,284,200       658,400
      Valuation allowance             (983,500)     (745,300)     (238,200)    (2,718,800)    (2,060,400)     (658,400)
                                    ----------     ---------     ---------     ----------     ----------     ---------
                                        81,000        81,000             -        223,800        223,800             -
      Deferred tax liabilities:
       Other                            81,000        81,000             -        223,800        223,800             -   
                                    ----------     ---------     ---------     ----------     ----------     ---------

      Net                           $        -     $       -     $       -     $        -     $        -     $       -   
                                    ==========     =========     =========     ==========     ==========     =========
</TABLE>

      Approximately $437,000, $949,000 and $4,200,000 of the net operating
      losses expire in 2012, 2013 and 2017 respectively. The change in the
      valuation allowance was an increase of $176,700, $806,800 and $1,735,300
      in fiscal 1997, 1998, and 1999, respectively.

      Certain changes in ownership resulting from the sales of common stock will
      limit the future annual realization of the tax net operating loss carry
      forwards to a specified percentage under Section 382 of the Internal
      Revenue Code.


12.   Commitments -

      Leases

      The Company conducts operations in leased facilities under noncancellable
      operating leases. Certain leases are renewable. Rent expense for fiscal
      1997, 1998 and 1999 totalled approximately $9,000, $31,300 and $58,400,
      respectively.

      Approximate future minimum rental commitments under all operating leases
      are as follows:

<TABLE>
<CAPTION>
                                               Year Ending
                                               January 31,            Amount 
                                               -----------         -----------
<S>                                               <C>              <C>        
                                                  2000             $   190,900
                                                  2001                  34,300
                                                  2002                  16,400
                                                  2003                   1,700
                                                                   -----------
                                                                   $   243,300
                                                                   ===========
</TABLE>

       (continued)


                                     
                                      F-21
<PAGE>   55

                                     - 22 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



12.    Commitments - (continued)

       Consulting Agreement

       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. No compensation has been recorded related to the bonus as it
       is currently unknown whether the performance measures will be met.


13.    Shareholder Lawsuit -

       A shareholder threatened a lawsuit against the Company related to the
       acquisition of VTL and certain employment matters. The threatened lawsuit
       was settled in 1998 by the issuance of two notes payable for $55,000 and
       $75,000.


14.    Supplemental Disclosures of Cash Flow Information -

<TABLE>
<CAPTION>
                                                                                      Period Ended January 31,
                                                                                 -------------------------------------     
                                                                                   1997        1998           1999    
                                                                                 ------     --------     -------------
<S>                                                                              <C>        <C>          <C>          
       Cash paid for interest                                                    $  349     $  3,835     $      74,451

       Noncash Investing and Financing Activities:
          Capital lease obligation incurred for equipment purchase               $ -        $   -        $      61,418
          Note payable issued for prior year accrued expenses                      -            -              130,000
          Note payable issued for insurance                                        -            -               27,357
          Stock subscriptions                                                      -            -            3,601,436
          Warrants issued for prepaid consulting and service
             agreements                                                            -            -            2,650,226
          Debt converted to common stock                                           -            -              426,355
          Stock issued for consulting agreement                                    -            -            1,042,115
</TABLE>


15.    Economic Dependency -

       Major Customer
       --------------

       The following summarizes GTI's customers with net sales in excess of 10%
       of GTI's fiscal net sales:

<TABLE>
<CAPTION>
        
       Customer             1997      1998      1999
       --------             ----      ----      ----
<S>                         <C>       <C>       <C>
          1                 20%       33%       24%
         
</TABLE>

       Vendors
       -------

       The following summarizes GTI's dependence on key vendors expressed as a 
       percentage of GTI's fiscal net sales:

<TABLE>
<CAPTION>
        
          Vendor               1997      1998      1999
          ------               ----      ----      ----
 <S>                           <C>       <C>       <C>
             1                  29%       36%       30%
             2                  24%       24%       28%
             3                   5%       15%       19%
             4                  12%        1%        1%
 </TABLE>  
        


                                      F-22
<PAGE>   56



                                     - 23 -

                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



16.    Operating Segments and Related Information -

       Prior to January 28, 1999, the Company operated in one segment, internet
       sales. In connection with the acquisition of GTI, the Company now
       operates in two segments, internet sales and distribution sales to retail
       and wholesale outlets. Since the acquisition occurred near the end of
       fiscal 1999, substantially all operations for fiscal 1999 relate to
       internet sales. Identifiable assets at January 31, 1999, are as follows:

<TABLE>
<CAPTION>
                           Segment
                        ------------  
<S>                                               <C>           
                        Internet                            $    6,548,239
                        Distribution                            19,257,221
                                                            --------------
                                                            $   25,805,460
                                                            ==============
</TABLE>


17.    Subsequent Events -

       Pursuant to a consulting agreement with a principal shareholder, the
       Company issued 1,000,000 shares of common stock for services to be
       performed for one year commencing February 23, 1999. The value of the
       stock was $5,875,000 ($5.875 per share).

       In February 1999, the Company entered into a credit agreement with Coast
       Business Credit to provide financing of up to $10,000,000, based upon
       eligible receivables and inventory. The loan bears interest at the prime
       rate plus 1.5% and expires March 31, 2002. As part of the agreement, the
       Company may also borrow up to $250,000 for capital expenditures at the
       bank's reference rate plus 2.0%, not subject to eligible receivables and
       inventory. In addition, the Company may borrow up to $500,000 at the
       bank's reference rate plus 2%, payable in 24 equal monthly installments,
       also not based on eligible receivables and inventory. The notes are
       collateralized by all of the assets of the Company.

       In connection with the credit agreement, three year stock warrants were
       issued in February 1999 for the purchase of 500,000 shares of common
       stock at $6.29 per share.

       In addition to the 1,000,000 shares of common stock issued noted above,
       the Company issued an additional 1,064,341 shares subsequent to January
       31, 1999.

       In April 1999, the Company issued warrants to purchase 750,000 shares of
       the Company's common stock for three years at an exercise price of $1.00
       per share to a stockholder; the warrants were exercised by the
       stockholder.


                                      F-23

                                     
<PAGE>   57
                               ACCOUNTANTS' REPORT


To the Board of Directors
and Stockholders of


Herold Marketing Associates, Inc.


         We have audited the accompanying balance sheets of Herold Marketing
Associates, Inc., as of December 31, 1998 and 1997 and the related statements of
income, retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Herold Marketing
Associates, Inc. as of December 31, 1998 and 1997, and the results of operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.


/s/ SAMUEL T. KANTOS AND ASSOCIATES

February 10, 1999



                                      F-24
<PAGE>   58











                        HEROLD MARKETING ASSOCIATES, INC.

                              FINANCIAL STATEMENTS

                               FOR THE YEARS ENDED

                           DECEMBER 31, 1998 AND 1997


















                                      F-25
<PAGE>   59
                        HEROLD MARKETING ASSOCIATES, INC.
                                 BALANCE SHEETS
                        AS OF DECEMBER 31, 1998 AND 1997



                                     ASSETS
<TABLE>
<CAPTION>


                                         1998             1997   
                                       --------         ---------
<S>                                 <C>              <C>          
Current Assets
  Cash                              $ 1,681,597      $ 1,429,583  
Accounts Receivable, Net
  of Allowance For Doubtful
  Accounts of $ 37,000 and
  $ 46,000 in 1998 and 1997           5,099,296        5,358,144
  Inventory                           2,535,642        4,205,896   
Employee Advances                        14,551           12,988
  Rebates Receivable                    186,330                0
  Prepaid Expenses                       31,911           27,342
                                     ----------       ----------


     Total Current Assets             9,549,327       11,033,953
                                     ----------       ----------

Property and Equipment
  Furniture and Fixtures                109,846          106,746
  Leasehold Improvements                 10,539            8,836
  Computer Equipment                    108,909           83,356
                                     ----------       ----------

     Total Property and Equipment       229,294          198,938
     Less Accumulated Depreciation      165,082          143,749
                                     ----------       ----------


     Net Property and Equipment          64,212           55,189
                                     ----------       ----------

Other Assets
  Note Receivable                             0           85,000
  Loan Receivable Other                       0          500,000
  Security Deposits                      13,057           14,622
                                     ----------       ----------


     Total Other Assets                  13,057          599,622
                                     ----------       ----------



     Total Assets                   $ 9,626,596      $11,688,764
                                     ==========       ==========
</TABLE>








                 The accompanying notes and accountants' report
                 should be read with these financial statements.


                                      F-26


<PAGE>   60





                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>


                                         1998             1997   
                                       --------         ---------
<S>                                 <C>              <C>        
Current Liabilities
  Accounts Payable                  $ 7,506,763      $ 8,491,643
  Accrued and Withheld
    Payroll Taxes                         1,897            2,661
  Accrued Expenses                      286,007          252,089
  Accrued Warranty                        6,035           12,020
  Loan Payable, Stockholder                   0          482,079   
Note Payable, Line of Credit              2,028           10,780
                                     ----------       ----------


     Total Current Liabilities        7,802,730        9,251,272

Long-Term Liabilities
  Accrued Warranty                       30,000          155,068
                                     ----------       ----------


     Total Long-Term Liabilities         30,000          155,068
                                     ----------       ----------


Stockholders' Equity
  Common Stock, no par Value, 2,500
  Shares Authorized, 595 Shares
  Issued and Outstanding                  1,000            1,000
  Retained Earnings                   1,792,866        2,281,424 
                                     ----------       -----------


     Total Stockholders' Equity       1,793,866        2,282,424  


     Total Liabilities and
     Stockholders' Equity           $ 9,626,596      $11,688,764
                                     ==========       ==========
</TABLE>



                                      F-27
<PAGE>   61



                        HEROLD MARKETING ASSOCIATES, INC.
                               STATEMENT OF INCOME
                               FOR THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>


                                         1998             1997   
                                       --------         ---------



<S>                                 <C>              <C>        
Sales                               $65,155,760      $83,767,758

Cost of Sales                        58,953,052       75,218,638
                                     ----------       ----------

     Gross Profit on Sales            6,202,708        8,549,120

Other Operating Income
  Sales Commissions                           0            1,547
                                     ----------       ----------


     Gross Profit                     6,202,708        8,550,667

Operating Expenses                    5,368,526        7,519,567
                                     ----------       ----------


     Income From Operations             834,182        1,031,100
                                     ----------       ----------

Other Income
  Miscellaneous                           2,982            9,212
  Interest                               66,864           95,345
                                     ----------       ----------

     Total Other Income                  69,846          104,557
                                     ----------       ----------

     Income Before Taxes                904,028        1,135,657

Provision for Income Taxes                8,157            5,000
                                     ----------       ----------



     Net Income                     $   895,871      $ 1,130,657
                                     ==========       ==========
</TABLE>







                 The accompanying notes and accountants' report
                 should be read with these financial statements.



                                      F-28
<PAGE>   62

                        HEROLD MARKETING ASSOCIATES, INC.
                         STATEMENT OF RETAINED EARNINGS
                               FOR THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>


                                        1998              1997   
                                      --------          ---------


<S>                                <C>               <C>        
Retained Earnings Beginning        $ 2,281,424       $ 1,875,767

     Stockholder Distribution       (1,384,429)         (725,000)

     Net Income                        895,871         1,130,657 
                                    ----------        -----------



Retained Earnings Ending           $ 1,792,866       $ 2,281,424
                                    ==========        ==========
</TABLE>

















                 The accompanying notes and accountants' report
                 should be read with these financial statements.


                                      F-29
<PAGE>   63

                        HEROLD MARKETING ASSOCIATES, INC.
                             STATEMENT OF CASH FLOWS
                               FOR THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>


                                         1998             1997   
                                       --------         ---------
<S>                                 <C>              <C>        
Cash Flow From Operating Activities
  Net Income                        $   895,871      $ 1,130,657
  Adjustments to Reconcile Net
  Income to Net Cash Provided by
  Operating Activities:

  Depreciation and Amortization          21,332           19,027

 (Increase) Decrease in:
     Accounts Receivable                258,849        2,172,864      
     Inventory                        1,670,254       (2,387,158)      
     Employee Advances                   (1,564)          (7,454)
     Rebates Receivable                (186,330)               0
     Prepaid Expenses                    (4,569)             919
  Increase (Decrease) in:
     Accounts Payable                  (984,878)        (125,038)      
     Accrued and Withheld 
     Payroll Taxes                         (764)          (1,367)      
     Accrued Expenses                    33,918         (146,148)
     Accrued Warranty                  (131,053)         (15,855)
                                     ----------       ----------

           Net Cash Provided (Used)
           by Operating Activities    1,571,066          640,447
                                     ----------       ----------


Cash Flow From Investing Activities
  Purchase of Property and Equipment    (30,357)         (21,113)
  Loan Receivable Other                 500,000          (13,988)
  Note Receivable                        85,000                0
  Security Deposits                       1,565            2,085
                                     ----------       ----------


           Net Cash Provided (Used)
           by Investing Activities      556,208          (33,016)
                                     ----------       ----------
</TABLE>











                 The accompanying notes and accountants' report
                 should be read with these financial statements.


                                       F-30
<PAGE>   64
                       HEROLD MARKETING ASSOCIATES, INC.
                            STATEMENT OF CASH FLOWS
                              FOR THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>



                                                   1998             1997
                                                 --------        ---------
STATEMENT OF CASH FLOWS (CONTINUED)

<S>                                           <C>              <C>
Cash Flow From Financing Activities
  Proceeds From Short-Term
     Borrowing                                $ 4,090,208      $ 2,880,917
  Proceeds From Stockholder
     Borrowing Short-Term                       1,949,957        2,770,132
Payments on Short-Term Borrowing               (4,098,940)      (2,870,137)
Payments on Short-Term Stockholder
     Borrowing                                 (2,432,056)      (2,564,730)
  Stockholder Distribution                     (1,384,429)        (725,000)
                                               ----------       ----------

           Net Cash Provided (Used)
           by Financing Activities             (1,875,260)        (508,818)

           Net Increase
             (Decrease) in Cash                   252,014           98,613

           Cash at Beginning of Year            1,429,583        1,330,970


           Cash at End of Year                $ 1,681,597      $ 1,429,583
                                               ==========       ==========
<CAPTION>





Supplemental disclosures of cash flow information:

<S>                                           <C>              <C>
   Cash Paid Interest                         $   132,314      $   121,672
                                               ==========       ==========


   Income Taxes Paid                          $     8,157      $     5,000
                                               ==========       ==========
</TABLE>













                 The accompanying notes and accountants' report
                 should be read with these financial statements.


                                      F-31
<PAGE>   65

                        HEROLD MARKETING ASSOCIATES, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

Note 1 - Summary of Significant Accounting Policies

              This summary of significant accounting policies of Herold
         Marketing Associates, Inc. is presented to assist in understanding the
         Company's financial statements. The financial statements and notes are
         representations of the Company's management who are responsible for
         their integrity and objectivity. These accounting policies conform to
         generally accepted accounting principles and have been consistently
         applied in the preparation of the financial statements.

         Business Activity

              The Company sells computers and computer peripheral products to
         wholesale and retail outlets throughout the nation.

        Cash and Cash Equivalents

              For purposes of preparing the statement of cash flows,
         unrestricted currency, demand deposits, and money market accounts are
         considered cash and cash equivalents.

         Concentration of Credit Risk

                  The Company grants credit to its customers during the normal
         course of business. The Company performs ongoing credit evaluations and
         generally requires no collateral from its customers. At times
         throughout the year the Company does maintain certain bank accounts and
         money market accounts in excess of the FDIC and SPIC insured limits.

         Inventory

              Inventory consists primarily of computer peripheral products held
         for resale. Inventory is stated at the lower of cost or market on a
         first in first out basis.

         Property and Equipment

              Property and equipment are stated at cost. Expenditures for
         maintenance and repairs are charged against operations. Depreciation is
         computed for financial statement purposes on a straight line basis over
         the estimated useful lives of the assets and amounted to $ 21,332 and $
         19,027 respectively. The cost and related accumulated depreciation of
         property and equipment sold or


                                      F-32
<PAGE>   66


                        HEROLD MARKETING ASSOCIATES, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

       Note 1 - Summary of Significant Accounting Policies (Continued)

         otherwise disposed of are removed from the accounts and any
         gain or loss is reported as current year's revenue or expense. For
         Federal income tax purposes depreciation is computed using the
         accelerated cost recovery system with certain assets being expensed in
         the year of purchase.

         Warranties

              Revenues derived from warranty contracts are recognized ratably
         over the terms of the contracts. Accrued warranty liabilities recognize
         the estimated current and long-term future costs associated with
         fulfilling the warranty contract obligations.

         Income Taxes

              The Company with the consent of its shareholders, has elected
         under the Internal Revenue Code to be an S corporation for the year
         beginning January 1, 1996. In lieu of corporation income taxes, the
         shareholders of an S corporation are taxed on their proportionate share
         of the Company's taxable income. Some states require a minimum tax of
         corporations doing business in their state. Any minimum tax required is
         included in the provision for income taxes for 1998 and 1997.

         Use of Estimates

              The preparation of financial statements in conformity with
         generally accepted accounting principals requires management to make
         estimates and assumptions that affect the reported amounts of assets
         and liabilities and disclosure of contingent assets and liabilities at
         the date of the financial statements and the reported amounts of
         revenues and expenses during the reporting period. Actual results could
         differ from those estimates.

         Advertising

                  The Company follows the policy of charging the net cost of
         advertising to expense as incurred. Advertising expense was $ 6,238 and
         $ 28,335 in 1998 and 1997 respectively.


                                      F-33
<PAGE>   67




                        HEROLD MARKETING ASSOCIATES, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997


Note 2 - Note Payable Line of Credit and Stockholder
     
     Note Payable Line of Credit

              The Company's loan agreement provides the Company with a revolving
         line of credit of up to $ 5,000,000. The line of credit requires
         monthly payments of accrued interest at 1% over prime. The loan
         agreement is reviewed annually. This loan is secured by substantially
         all assets of the Company.

     Note Payable Stockholder

              The stockholder also advances funds when required to during the
         course of business and is paid the same interest as the financial
         institutions and is unsecured. Interest expense was $ 45,261 in 1998
         and $ 121,672 in 1997.

     Note 3 - Long-Term Liabilities
<TABLE>


<S>                                   <C>                <C>        
         Accrued Warranty
         (see warranty in Note 1)     $    36,035        $   155,068
                                       ==========         ==========
</TABLE>



         Maturities of long-term liabilities are as follows:
<TABLE>
<CAPTION>

                          Year Ending
                          December 31,        Amount     
                          -----------         ------ 

<S>                       <C>               <C>   
                          1999                  30,000
                                            ----------

                                            $   30,000
                                            ==========
</TABLE>



     Note 4 - Lease Commitments

                  The Company's Minnesota location is leased under a 36 month
         non-cancelable operating lease commencing March 1, 1997. The lease
         requires monthly base rent payments of $ 5,405 payable through February
         2000. The Company leases other facilities in Arizona, Florida,
         Illinois, Massachusetts and Missouri under non-cancelable operating
         leases into 1998. The majority of the leases are for 1 year with
         automatic renewals with minor adjustments. The total lease expense for
         all facilities for 1998 and 1997 was $ 249,556 and $ 232,321
         respectively.


                                      F-34
<PAGE>   68

                        HEROLD MARKETING ASSOCIATES, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997


     Note 4 - Lease Commitments (Continued)

                  In addition, the Company leases vehicles under non-cancelable
         operating leases having lease terms of 36 to 48 months. The vehicle
         lease expense for 1998 and 1997 was $ 17,618 and $ 32,763 respectively.

                  At December 31, 1998, future minimum lease payments under all
         operating leases were as follows:

<TABLE>
<CAPTION>

                Year Ending
                December 31,                  Amount
                ------------                  ------


<S>                                           <C>    
                    1999                      160,959
                    2000                      160,959
                    2001                       96,099
                    2002                       96,099
                    2003                       96,099
                                           ----------

                  Total                    $  610,215
                                           ==========
</TABLE>



     Note 5 - Income Taxes

                  The provision for Federal and State income taxes consists of 
         the following:

<TABLE>
<CAPTION>

                                        1998            1997

<S>                                 <C>             <C>       
          Current taxes             $    8,157      $    5,000
                                     ---------       ---------


            Total provision
            for income taxes        $    8,157      $    5,000
                                     =========       =========
</TABLE>



     Note 6 - Related Party Transactions

                 The Company has balances due from a related party, Technology
         Marketing Unlimited, LLC which is owned 50% by the sole stockholder of
         Herold Marketing Associates, Inc. On December 31, 1998 and 1997, the
         amount of receivables from this related party were $ 0 and $ 500,000.

              Also see Note 2 relating to loans from the stockholder and terms
accordingly.


                                      F-35
<PAGE>   69


                        HEROLD MARKETING ASSOCIATES, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997


     Note 7 - Note Receivable

              This note was issued on July 16, 1996 in the amount of $ 85,000
         with an interest rate of 9.25%, with a maturity date of December 31,
         1996. This note was collected in 1998.

     Note 8 - Contingencies

     1.   The Company is currently in litigation with the Commissioner of
          Internal Revenue regarding the tax years 1992 and 1993. According to
          the Commissioner, the Company owes additional taxes of $245,508 and
          $247,829 respectively for the years mentioned. The United States Tax
          Court has ruled in favor of the Company as of January 29, 1999. The
          Government has 90 days to appeal the decision and as of the date of
          the report has not done so.

     2.   The Company is currently involved in other litigation that has been
          properly provided for in the accompanying financial statements.







                                      F-36










































<PAGE>   70
                          INDEPENDENT AUDITORS' REPORT


HEROLD MARKETING ASSOCIATES, INC.                                 
7615 Golden Triangle Drive
Eden Prairie, Minnesota 55344


To the Board of Directors

     We have audited the accompanying balance sheet of Herold Marketing
Associates, Inc. as of December 31, 1996, and the related statements of income,
retained earnings and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

     In our opinion, the financial statements referred to above present fairly, 
in all material respects, the financial position of Herold Marketing Associates,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.

/s/ SAMUEL T. KANTOS & ASSOCIATES
April 23 1999


                                      F-37
<PAGE>   71
                        HEROLD MARKETING ASSOCIATES, INC.

                              FINANCIAL STATEMENTS

                      FOR THE YEAR ENDED DECEMBER 31, 1996

                                      F-38
<PAGE>   72
                        HEROLD MARKETING ASSOCIATES, INC.
                                  BALANCE SHEET
                             AS OF DECEMBER 31, 1996


<TABLE>
<CAPTION>

                          ASSETS

Current Assets
<S>                                 <C>        
  Cash                              $ 1,330,970
  Accounts Receivable, Net
  of Allowance For Doubtful
  Accounts of $ 46,000                7,531,008
  Inventory                           1,818,738                    
  Employee Advances                       5,534
  Prepaid Expenses                       28,261
                                     ----------

     Total Current Assets                            $10,714,511

Property and Equipment
  Furniture and Fixtures                134,316
  Leasehold Improvements                  8,836
  Computer Equipment                     95,160
                                     ----------

     Total Property and Equipment       238,312
     Less Accumulated Depreciation      185,212

     Net Property and Equipment                           53,100

Other Assets
  Note Receivable                        85,000
  Other Receivables                     486,012
  Security Deposits                      16,707
                                     ----------

     Total Other Assets                                  587,719
                                                     -----------  

     Total Assets                                    $11,355,330
                                                     ===========
</TABLE>



         The accompanying notes and auditors' report should be read with
                          these financial statements.

                                      F-39
<PAGE>   73
<TABLE>
<CAPTION>

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<S>                                 <C>              <C>
Current Liabilities
  Accounts Payable                  $ 8,616,681
  Accrued and Withheld
  Payroll Taxes                           4,028
  Accrued Expenses                      398,237
  Accrued Warranty                       24,412
  Note Payable Stockholder              276,674
                                     ----------

     Total Current Liabilities                       $ 9,320,032

Long-Term Liabilities
  Accrued Warranty                      158,531

     Total Long-Term Liabilities                         158,531

Stockholders' Equity
  Common Stock, no par Value, 2,500
  Shares Authorized, 595 Shares
  Issued and Outstanding                  1,000
  Retained Earnings                   1,875,767       
                                     ----------

     Total Stockholders' Equity                        1,876,767  
                                                     -----------


     Total Liabilities and
     Stockholders' Equity                            $11,355,330
                                                     ===========
</TABLE>


                                      F-40
<PAGE>   74

                        HEROLD MARKETING ASSOCIATES, INC.
                               STATEMENT OF INCOME
                      FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
<S>                                 <C>              <C>
Sales                                                $87,832,805

Cost of Sales                                         80,101,466
                                                     -----------

     Gross Profit on Sales                             7,731,339


Other Operating Income
  Sales Commissions                                        8,385
                                                     -----------

     Gross Profit                                      7,739,724

Operating Expenses                                     6,749,520
                                                     -----------           

     Income From Operations                              990,204

Other Income and (Expense)
  Miscellaneous                     $     3,455
  Interest                              112,469
  Gain on Sale of Other Assets            3,148
                                    -----------

     Total Other
     Income and (Expense)                                119,072
                                                     -----------  

     Income Before Taxes                               1,109,276

Provision for Income Taxes                                34,000
                                                     -----------                 


     Net Income                                      $ 1,075,276
                                                     ===========
</TABLE>




         The accompanying notes and auditors' report should be read with
                          these financial statements.

                                      F-41
<PAGE>   75
                        HEROLD MARKETING ASSOCIATES, INC.
                         STATEMENT OF RETAINED EARNINGS
                      FOR THE YEAR ENDED DECEMBER 31, 1996


<TABLE>
<CAPTION>

<S>                                                 <C>        
Retained Earnings Beginning                         $   800,491

     Net Income                                       1,075,276
                                                     ----------


Retained Earnings Ending                            $ 1,875,767
                                                     ==========
</TABLE>





         The accompanying notes and auditors' report should be read with
                          these financial statements.

                                      F-42
<PAGE>   76

                        HEROLD MARKETING ASSOCIATES, INC.
                             STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 1996



<TABLE>
<CAPTION>
<S>                                             <C>                <C>
Cash Flow From Operating Activities
  Net Income                                    $  1,075,276
  Adjustments to Reconcile Net
  Income to Net Cash Provided by
  Operating Activities:

  Depreciation and Amortization                       18,094
  Gain on Sale of Other Assets                        (3,148)

 (Increase) Decrease in:
     Accounts Receivable                           2,774,105
     Inventory                                      (386,430)
     Employee Advances                                 7,461
     Prepaid Expenses                                (13,357)
     Deferred Income Taxes                            29,000
  Increase (Decrease) in:
     Accounts Payable                             (2,314,187)
     Accrued and Withheld
     Payroll Taxes                                     1,649
     Accrued Expenses                                 66,003
     Accrued Warranty                                182,943
     Income Taxes Payable                            (54,747)
                                                 -----------

           Net Cash Provided (Used)
           by Operating Activities                                 $ 1,382,662
                                                                    ----------


Cash Flow From Investing Activities
  Purchase of Property and Equipment                 (25,956)
  Loan Receivable Other                             (486,012)
  Note Receivable                                    (85,000)
  Proceeds From Sale of Other Assets                  26,898
  Security Deposits                                    6,555
                                                 -----------

           Net Cash Provided (Used)
           by Investing Activities                                    (563,515)
                                                                    ----------
</TABLE>


         The accompanying notes and auditors' report should be read with
                          these financial statements.


                                      F-43
<PAGE>   77

                        HEROLD MARKETING ASSOCIATES, INC.
                             STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 1996


<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS (CONTINUED)

<S>                                           <C>                 <C>
Cash Flow From Financing Activities
  Proceeds From Short-Term
     Borrowing                                $          0
  Proceeds From Stockholder
     Borrowing Short-Term                          426,233         
  Payments on Short-Term Borrowing                (655,005)
  Payments on Long-Term Stockholder
     Borrowing                                    (800,000)
                                               -----------

           Net Cash Provided (Used)
           by Financing Activities                                $(1,028,772)
                                                                   ----------

           Net Increase
             (Decrease) in Cash                                      (209,625)

           Cash at Beginning of Year                                1,540,595
                                                                   ----------

           Cash at End of Year                                    $ 1,330,970
                                                                   ==========
<CAPTION>
Supplemental disclosures of cash flow information:

<S>                                                               <C>
   Cash Paid Interest                                             $    69,938
                                                                   ==========


   Income Taxes Paid                                              $    59,747
                                                                   ==========
</TABLE>




        The accompanying notes and auditors' report should be read with
                          these financial statements.

                                      F-44
<PAGE>   78

                        HEROLD MARKETING ASSOCIATES, INC.
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1996



Note 1 - Summary of Significant Accounting Policies

              This summary of significant accounting policies of Herold
         Marketing Associates, Inc. is presented to assist in understanding the
         Company's financial statements. The financial statements and notes are
         representations of the Company's management who are responsible for
         their integrity and objectivity. These accounting policies conform to
         generally accepted accounting principles and have been consistently
         applied in the preparation of the financial statements.

         Business Activity

              The Company sells computer peripheral products to wholesale and
         retail outlets throughout the nation. In 1995 the company began the
         assembly and sale of complete computer systems through its current
         sales outlets.

         Inventory

              Inventory consists primarily of computer peripheral products held
         for resale. Inventory is stated at the lower of cost or market on a
         first in first out basis.

         Property and Equipment

              Property and equipment are stated at cost. Expenditures for
         maintenance and repairs are charged against operations. Depreciation is
         computed for financial statement purposes on a straight-line basis over
         the estimated useful lives of the assets and amounted to $ 18,094. For
         Federal income tax purposes depreciation is computed using the
         accelerated cost recovery system with certain assets being expensed in
         the year of purchase.

         Warranty Costs

              The financial statements include a product warranty reserve of $
         182,943 in 1996. This reserve is based on estimates of future costs
         associated with fulfilling the warranty obligations on the sold
         computer systems. The estimates are derived from historical industry
         costs.

                                      F-45
<PAGE>   79

                        HEROLD MARKETING ASSOCIATES, INC.
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1996



       Note 1 - Summary of Significant Accounting Policies (Continued)

         Income Taxes

             The Company with the consent of its shareholders has elected under
         the Internal Revenue Code to be an S corporation for the year beginning
         January 1, 1996. In lieu of corporation income taxes, the shareholders
         of an S corporation are taxed on their proportionate share of the
         Company's taxable income. Some states require a minimum tax of
         corporations doing business in their state. Any minimum tax required is
         included in the provision for income taxes.

         Use of Estimates

              The preparation of financial statements in conformity with
         generally accepted accounting principals requires management to make
         estimates and assumptions that affect the reported amounts of assets
         and liabilities and disclosure of contingent assets and liabilities at
         the date of the financial statements and the reported amounts of
         revenues and expenses during the reporting period. Actual results could
         differ from those estimates.

         Cash Equivalents

         The Company considers all highly liquid debt instruments with an
         original maturity of three months or less to be cash equivalents for
         the purpose of determining cash flows.

         Concentration of Credit Risk

         The Company grants credit to its customers during the normal course of
         business. The Company performs ongoing credit evaluations and generally
         requires no collateral from its customers. At times throughout the year
         the Company does maintain certain bank accounts in excess of the FDIC
         insured limits.

         Advertising

         The Company follows the policy of charging the costs of advertising to
         expense as incurred. Advertising expense for the year was $ 29,606.



                                      F-46
<PAGE>   80

                        HEROLD MARKETING ASSOCIATES, INC.
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1996



    Note 2 - Note Receivable

              The note receivable issued July 16, 1996 in the amount of $ 85,000
         was collected during 1998 including all interest at 9.25%.

    Note 3 - Other Receivables

              A loan receivable from Technology Marketing Unlimited, LLC a

         company owned 50% by the sole shareholder of Herold Marketing
         Associates, Inc. was determined to be uncorrectable during 1998.

    Note 4 - Line of Credit

              The Company's loan agreement provides the Company with a revolving
         line of credit of up to $ 2,000,000. The line of credit requires
         monthly payments of accrued interest at 1% over prime. The loan
         agreement is reviewed annually. This loan is secured by substantially
         all assets of the Company. Interest expense was $ 69,938.


    Note 5 - Note Payable Stockholder

              The Company stockholder advances funds to the Company as needed
         under a continuous note requiring interest at the same rate as the
         Company's line of credit. The note is unsecured and requires no
         specific payments.

   Note 6 - Income Taxes

              The provision for Federal and State income taxes consists of the
         following:

<TABLE>
<S>                            <C>              <C>
     Current taxes             $    5,000

     Deferred taxes                29,000
                                ---------
       Total provision
       for income taxes                        $   34,000
                                                =========
</TABLE>


                                      F-47
<PAGE>   81

                        HEROLD MARKETING ASSOCIATES, INC.
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1996



       Note 7 - Long-Term Liabilities

<TABLE>
<S>                                                  <C>             <C>
         Accrued Warranty costs                      $   182,943

         Rent Payable - long-term
         portion of unamortized rent.                      1,191

           Total                                                     $   184,134

           Less Current Portion
           included in Accrued
           Expenses                                                       25,603

           Net Long-Term
           Liabilities                                               $   158,531
                                                                      ==========
</TABLE>

         Maturities of long-term liabilities are as follows:

<TABLE>
<CAPTION>

                                                       Year Ending
                                                      December 31,      Amount
                                                      ------------      ------
                                                      <S>             <C>
                                                          1997        $   25,603
                                                          1998            79,266
                                                          1999            79,265
                                                                      ----------

                                                                      $  184,134
                                                                      ==========
</TABLE>

Note 8 - Lease Commitments

                  The Company's Minnesota location is leased under a 36-month
         non-cancelable operating lease commencing March 1, 1997. The lease
         requires monthly base rent payments of $ 5,405 payable through February
         2000. The Company leases other facilities in Arizona, Missouri, Florida
         and Massachusetts under non-cancelable operating leases through 1998.
         The total lease expense for all facilities for 1996 was $ 205,008.


              In addition, the Company leases vehicles under non-cancelable
         operating leases having lease terms of 36 to 48 months. The vehicle
         lease expense for 1996 was $ 16,988.


                                      F-48
<PAGE>   82
\
                        HEROLD MARKETING ASSOCIATES, INC.
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1996



         Note 8 - Lease Commitments (Continued)

         At December 31, 1996, future minimum lease payments under all operating
         leases were as follows:

<TABLE>
<CAPTION>
                         Year Ending
                         December 31,              Amount
                         ------------              ------

<S>                                            <C>       
                            1997                $  152,276
                            1998                   138,632
                            1999                    64,860
                            2000                    10,810
                                                 ---------


                           Total                $  366,578 
                                                 ==========
</TABLE>


          Note 9 - Contingencies

                  The Company is currently in litigation with the Commissioner
         of Internal Revenue regarding the tax years 1992 and 1993. According to
         the Commissioner, the Company owes additional taxes of $245,508 and
         $247,829 respectively for the years mentioned. The United States Tax
         Court has ruled in favor of the Company as of January 29, 1999. The
         Government has 90 days to appeal the decision and as of the date of the
         report has not done so.

          Note 10 - Related Party Transactions

              The Company transactions with related parties are explained in
         notes 3 and 5.





                                      F-49
<PAGE>   83
                          INDEPENDENT AUDITOR'S REPORT




Board of Directors and Stockholders
Virtual Technology Corporation and Subsidiaries
Minneapolis, Minnesota


We have audited the consolidated financial statements of Virtual Technology
Corporation and Subsidiaries as of January 31, 1998 and 1999, and for each of
the two years in the period ended January 31, 1999, and have issued our report
thereon dated April 23, 1999; such financial statements and report are included
elsewhere in this Form 10-K. Our audits also included the financial statement
schedules of Virtual Technology Corporation and Subsidiaries, listed in Item 14
for each of the two years in the period ended January 31, 1999. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.




                                         /s/ LURIE, BESIKOF, LAPIDUS & CO., LLP

Minneapolis, Minnesota
April 23, 1999


                                     
                                      F-50
<PAGE>   84

                                                                     SCHEDULE II


                 VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS




<TABLE>
<CAPTION>
                                                                 Column C
                                                               ------------
                 Column A                    Column B            Additions                    Column D         Column E
                --------                 -----------       ---------------------------        --------         ---------  
                                                                           Charged
                                          Balance at       Charged to      to Other                           Balance at
                                          Beginning        Costs and       Accounts -        Deductions -     End of
               Description                of Period        Expenses        Describe(1)       Describe(2)      Period 
-----------------------------             -----------       --------       ----------        ----------       --------  
<S>                                       <C>              <C>           <C>                <C>              <C>
Year Ended January 31, 1997  
Deducted from asset accounts:
      Allowance for doubtful                 
       accounts                              $-            $     -          $    -            $   -           $     -
      Allowance for obsolete                 
         inventory                           $-            $     -          $    -            $   -           $     -

Year Ended January 31, 1998  
Deducted from asset accounts:
      Allowance for doubtful                 
       accounts                              $-            $     -          $    -            $   -           $     -
      Allowance for obsolete                 
         inventory                           $-            $     -          $    -            $   -           $     -

Year Ended January 31, 1999  
Deducted from asset accounts:
      Allowance for doubtful                 
       accounts                              $-            $  157,780       $ 175,000        ($ 69,780)       $  263,000
      Allowance for obsolete                 
         inventory                           $-            $     -          $ 350,000         $   -           $  350,000
</TABLE>


  (1) Allowances and reserves for receivables and inventory related to assets
acquired by GTI Acquisition Corporation.

  (2) Uncollectible accounts written off, net of recoveries.


                                     
                                      F-51
<PAGE>   85

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

          In January 1998, the Company engaged Lurie, Besikof, Lapidus & Co.,
LLP as its independent public accountants to audit the financial statements as
of January 31, 1998 and for the year then ended. The decision to dismiss
Copeland, Buhl & Company, P.L.L.P and engage Lurie, Besikof, Lapidus & Co., LLP
as the Company's independent public accountants was approved by the Board of
Directors. The report of Copeland Buhl & Company P.L.L.P as of January 31, 1997
and for the year then ended does not contain an adverse opinion or a disclaimer
of opinion, but was qualified with respect to the Company's ability to continue
operations as a going concern. Such report was not otherwise qualified or
modified as to uncertainty, audit scope or accounting principles. There were no
disagreements with the former auditors on any matters of accounting principles
or practices, financial statement disclosure or auditing scope or procedures
which, if not resolved to the former auditor's satisfaction, would have caused
them to make reference to the subject matter in their report. Prior to retaining
Lurie, Besikof, Lapidus & Co., LLP, the Company did not consult with Lurie,
Besikof, Lapidus & Co., LLP regarding the application of accounting principles
to a specified transaction, the type of audit opinion that might be rendered on
the Company's financial statements or any other matter.

PART III 

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

EXECUTIVE OFFICERS AND DIRECTORS

          KENNETH M. ISRAEL, 47. Mr. Israel has been Chairman and a director of
the Company since February 1996 and was Chief Executive Officer between February
1996 and November 1998. Between March 1989 and January 1996, Mr. Israel served
as Chairman of Exchange Resources, Inc., a company specializing in disaster
recovery services and facilities. Between 1981 and 1987, Mr. Israel was the
Regional Manager of Lanier Business Products, a company that was later acquired
by Harris Corporation, where he became Director of Research and Development.
From 1979 to 1981, Mr. Israel was the General Manager of Pi Engineering, where
he was the Project Manager for the redesigning and rebuilding of the security
and communications systems for Northern States Power nuclear plants. Prior to
1979, Mr. Israel served for five years as a Regional Service Manager with
Raytheon Data Systems with responsibility for the Southeastern United States and
Central and South America.

          GREGORY A. APPELHOF, 37. Mr. Appelhof joined VTC in October 1998 as
the Company's President and a director. He was named as Chief Executive Officer
in November 1998. Prior to joining VTC, Mr. Appelhof was employed by GTI for
over 11 years until its acquisition by the Company, most recently as Vice
President of Sales. Mr. Appelhof was responsible for building GTI's sales
strategies to increase market penetration and revenues. He was instrumental in
developing and implementing GTI's sales segments, including GTI's major focus on
corporate resellers. 






                                       34
<PAGE>   86

         JOHN L. HARVATINE, 48. Mr. Harvatine became Chief Financial Officer of
the Company in January 1999. Between 1997 and 1998, he served as Chief Financial
Officer of CyberStar Computer Corporation. Between 1987 and 1996, he served in a
variety of financial positions with AmeriData Technologies, Inc., most recently
as Chief Financial Officer. From 1986 to 1987, he served as Controller of Fisher
Cheese Co. From 1973 to 1986, Mr. Harvatine served in various management
positions with The Pillsbury Company, most recently as Accounting Manager -
Marketing.

         JEFFREY MAYNARD, 54. Mr. Maynard has been Executive Vice President of
Technology and a director of the Company since February 1996. Mr. Maynard has
more than 30 years of experience as an information technologist. Between 1993
and 1996, Mr. Maynard was the Chief Executive Officer of Secure Backup Systems,
a company he formed to deliver public data vaulting services. Between 1990 and
1993, he was Development Director for Mercury Communications. Mr. Maynard served
as Managing Director for Mtel Corp. and SkyTel Ltd. between 1989 and 1990. 

         PHILIP LACERTE, 53. Mr. Lacerte has served as a director of the Company
since April 1999. Since 1982, Mr. Lacerte has been Executive Vice President of
Lacerte Software Corporation. Prior to Lacerte Software Corporation, Mr. Lacerte
held a management position with Data Processing, Inc. He has also served as the
Chairman of the Board of Crystallex, an American Stock Exchange Company, and has
worked as a consultant and advisor for various start-up companies.














                                       35
<PAGE>   87

Item 11.  Executive Compensation.

The following table summarizes the amount of compensation paid to the Company's
executive officers for the fiscal years ended January 31, 1997, 1998 and 1999.
No other executive officers had aggregate salaries and bonuses that exceeded
$100,000.



<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------------
                            Annual Compensation                      Long-Term Compensation
                            -----------------------------------------------------------------------------------------------------
                                                                           Awards                        Payouts
                                                                 ----------------------------------------------------------------
                                                                                Securities
Name and                                          Other           Restricted    Underlying          LTIP      All Other
Principal                      Salary   Bonus     Annual          Stock         Options/SAR's       Payouts   Compensation
Position               Year   ($)      ($)        Compensation    Award         (#)                 ($)       ($)
                                                  ($)             ($)                                         
---------------------------------------------------------------------------------------------------------------------------------
<S>                    <C>     <C>                    <C>           <C>           <C>               <C>       <C>
Greg
Appelhof,              1999    86,115    0            2,000               0       1,250,000          0         0
Chief
Executive
Officer
---------------------------------------------------------------------------------------------------------------------------------
Kenneth                1997         0    0                0         909.091         280,000          0         0  
Israel,                1998         0    0                0         600,000          56,000          0         0
Chairman               1999   163,750    0            6,000          10,000          30,000          0         0
---------------------------------------------------------------------------------------------------------------------------------
John
Harvatine,             1999     8,334    0              400               0         250,000          0         0  
Chief
Financial
Officer
---------------------------------------------------------------------------------------------------------------------------------

</TABLE>














                                       36
<PAGE>   88



OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

     The following table sets forth information as of January 31, 1999 regarding
outstanding options to executive officers and directors granted for the year
ended January 31, 1999:

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------
                                                                                  Potential Realizable Value at
                                                                                  Assumed Annual Rates of Stock
                                                                                  Price Appreciation for Option
                                  Individual Grants                               Term
------------------------------------------------------------------------------------------------------------------
                                         Percent of
                          Number of         Total
                         Securities       Options/
                         Underlying         SAR's
                        Options/SAR's    Granted to   Exercise Of
                           Granted      Employees in  Base Price
                                         Fiscal Year    ($/Sh.)
                                            1999                     Expiration
Name                                                                    Date           5% ($)      10% ($)
-----------------------------------------------------------------------------------------------------------------
<S>                       <C>                <C>         <C>           <C>            <C>         <C>
Kenneth Israel               30,000          1.9%        $ .25         3/31/03         --            --
-----------------------------------------------------------------------------------------------------------------
Greg Appelhof             1,250,000           80%        $1.00         10/8/08        657,500     1,787,500

-----------------------------------------------------------------------------------------------------------------
John Harvatine              250,000           16%        $3.75          1/4/09        589,500     1,494,250
-----------------------------------------------------------------------------------------------------------------
Jeff Maynard                 30,000          1.9%        $ .25         3/31/03         --            --
-----------------------------------------------------------------------------------------------------------------
</TABLE>












                                       37
<PAGE>   89




AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES

<TABLE>
<CAPTION>

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


                                                            Number of Securities               
                                                            Underlying Unexercised             
                                                            Options/SAR's at                   Value of Unexercised
                                                            FY-End                             In-The-Money Options/SAR's
                      Shares Acquired on       Value        (#)                                At FY-End
Name                  Exercise                 Realized     Exercisable/Unexercisable          ($) Exercisable/Unexercisable
-------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>                <C>                     <C>                               <C>
Greg Appelhof                    0                  0                       0                                 0
-------------------------------------------------------------------------------------------------------------------------------
Kenneth Israel                   0                  0                       0                                 0
-------------------------------------------------------------------------------------------------------------------------------
John Harvatine                   0                  0                       0                                 0
-------------------------------------------------------------------------------------------------------------------------------

</TABLE>
















                                       38
<PAGE>   90
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following table sets forth information as of April 30, 1999
regarding the ownership of the Company's common stock by officers and directors
and those persons known by the Company to be beneficial owners of 5% or more of
such stock. Each shareholder has sole voting and investment power with respect
to the shares shown as beneficially owned, except as otherwise indicated in a
footnote.

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------
                                                             Amount and Nature of
                                                            Beneficial Ownership
                                                                    (1)
Name                                    Title of Class                                   Percent of Class
-----------------------------------------------------------------------------------------------------------------
<S>                                        <C>                   <C>                             <C>
Kenneth Israel (2)                         Common                2,298,598 (3)                 8.3%
-----------------------------------------------------------------------------------------------------------------
Harry Lowell                               Common                8,538,429 (6)                30.6%
-----------------------------------------------------------------------------------------------------------------
Stephen Antebi                             Common                2,500,000 (12)                9.0%
-----------------------------------------------------------------------------------------------------------------
Greg Appelhof (2)                          Common                  606,666 (7)                 2.1%
-----------------------------------------------------------------------------------------------------------------
John Harvatine (2)                         Common                   62,500 (10)                7.2%
-----------------------------------------------------------------------------------------------------------------
Mary Joy Stead                             Common                1,494,000 (5)                 5.3%
-----------------------------------------------------------------------------------------------------------------
Stephan Herold                             Common                2,130,570 (8)                 7.6%
-----------------------------------------------------------------------------------------------------------------
Jeff Maynard (2)                           Common                  820,000 (4)                 2.9%
-----------------------------------------------------------------------------------------------------------------
Philip Lacerte (2)                         Common                1,651,041 (9)                 5.9%
-----------------------------------------------------------------------------------------------------------------
All Officers and Directors as a            Common                5,813,805 (11)               19.6%
Group
-----------------------------------------------------------------------------------------------------------------

</TABLE>

     * Denotes less than 1%

         (1) Shares issuable upon the exercise of outstanding stock options and
warrants that are currently exercisable or become exercisable within 60 days
from the date hereof are considered outstanding for the purpose of calculating
the percentage of Common Stock owned by such person and owned by a group, but
not for the purpose of calculating the percentage of Common Stock owned by any
other person.

         (2)  The address of each of these executive officers or directors is:
              c/o Virtual Technology Corporation, 3100 West Lake Street,
              Suite 400, Minneapolis, Minnesota 55416.
         (3)  Includes options to purchase 428,000 shares of the Company's 
              Common Stock. Mr. Israel's wife owns 11,850 shares. Companies
              under Mr. Israel's control own options to purchase 62,000 shares
              of the Company's Common Stock.
         (4)  Includes options to purchase 310,000 shares of the Company's
              Common Stock.
         (5)  Includes 50,000 shares owned and controlled by Jerre Stead, 
              Ms. Stead's spouse.
         (6)  Includes warrants to purchase  504,886 shares of the Company's
              Common Stock. Also includes 531,800 shares, and warrants to
              purchase an additional 8,800 shares of the Company's Common Stock
              held by Laurel Center Management Co., a company controlled by Dr.
              Lowell.
         (7)  Includes options to purchase 553,333 shares of the Company's
              Common Stock.
         (8)  Includes warrants to purchase 213,333 shares of the Company's
              Common Stock.  Also includes 228,571 shares of the Company's
              Common Stock issued to Herold Marketing Associates, Inc., of which
              Mr. Herold is the sole shareholder, in connection with the
              Company's acquisition of the assets of GTI.  Also includes 145,000
              shares issued to Mr. Herold in connection with a consulting
              agreement between Mr. Herold and GTI.




                                       39
<PAGE>   91

         (9)  All shares attributed to Mr. Lacerte are owned by Euro Realty
              Development, Ltd., a company controlled by Mr. Lacerte.
         (10) Includes options to purchase 62,500 shares of the Company's Common
              Stock.
         (11) Includes options to purchase 1,737,500 shares of the Company's 
              Common Stock.
         (12) Includes 1,500,000 shares owned by Fontenelle, LLC, of which Mr.
              Antebi is the sole equity owner and manager.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

GTI ACQUISITION

         Greg Appelhof, VTC's President and Chief Executive Officer, formerly
was with GTI for 11 years, most recently as Vice President of Sales. The Company
acquired substantially all of the assets and assumed certain liabilities of GTI
in January 1999 for an aggregate purchase price of $10.1 million. Mr. Appelhof
owned the right to be treated as though he were a 20% owner of GTI's stock in
the event of a sale of GTI for purposes of distributing the proceeds of such
sale to GTI's stockholders. Mr. Appelhof entered into this agreement with GTI's
sole shareholder, Stephan G. Herold. As of April 30, 1999, Mr. Appelhof had
received $1.0 million of cash distributions from GTI. The Company understands
that final distribution of cash received by GTI for the sale of GTI's assets to
VTC is due to Mr. Appelhof at the time the last payment is received by GTI from
VTC.

EMPLOYMENT AGREEMENTS

         Effective as of October 8, 1998, the Company and Mr. Appelhof entered
into an employment agreement whereby Mr. Appelhof will receive an annual salary
of $150,000, with a quarterly guaranteed $25,000 bonus and a quarterly
performance bonus award based upon the Company reaching certain performance
goals. Under the agreement, Mr. Appelhof is to be granted options to purchase
1,250,000 shares of the Company Common Stock at $1.00 per share. 500,000 of such
options vested in April 1999, 500,000 options vest in October 1999, 125,000
options vest in October 2000 and the remaining 125,000 options vest in October
2001, assuming Mr. Appelhof's continued employment by the Company. All vested
options granted pursuant to the employment agreement will be exercisable until
October 2008. In addition, Mr. Appelhof will be granted 30,000 options in his
role as a Director of the Company. The Company also has agreed to provide Mr.
Appelhof with a monthly vehicle allowance of $500. Under the agreement, if Mr.
Appelhof is terminated involuntarily for reasons other than cause in the first
year of employment by the Company, he will receive a severance equal to six
months of base salary. If terminated involuntarily after the first year of
employment but before the second year, he will receive severance pay equal to
one year of base salary. If Mr. Appelhof is terminated involuntarily after the
second year of employment, he will receive severance pay equal to 18 months of
base salary.

         Effective as of January 4, 1999, the Company and Mr. Harvatine entered
into an employment agreement whereby Mr. Harvatine will receive an annual salary
of $100,000, with an annual $25,000 bonus awarded based upon Mr. Harvatine
reaching certain performance goals. Under the agreement, Mr. Harvatine was
granted options to purchase 250,000 shares of the Company Common Stock at $3.75
per share. 62,500 of such options vested immediately upon Mr. Harvatine's
employment, 62,500 options vest in January 2000, 62,500 vest in January 2001,
and the remaining 62,500 options vest in January 2002, assuming Mr. Harvatine's
continued employment by the Company. All vested options granted pursuant to the
employment agreement will be exercisable until January 2009. The Company also
has agreed to provide Mr. Harvatine with a monthly vehicle allowance of $400.
Under the agreement, if Mr. Harvatine is terminated involuntarily for reasons
other than cause in the first year of employment by the Company, he will receive
a severance pay equal to three months of base salary. If terminated
involuntarily after the first year of employment, he will receive a severance
pay equal to six months of base salary. 

LOANS FROM RELATED PARTIES

         Between March 1997 and June 1998, the Company received loans from
Kenneth Israel, its CEO, Kate Israel, his daughter and certain companies under
his control for loans in the total amount of $371,543. These loans bear interest
at 10% per annum and are due in fiscal year 2001. As of April 30, 1999, the
Company had repaid $200,000 of the amount due and then owed $190,000, including
interest. Mr. Israel and the Company have agreed that Mr. Israel may convert the
balance outstanding, including any interest, into the Company's Common Stock at
some future date, solely at Mr. Israel's option.

         In October 1998, the Company issued a promissory note to Harry Lowell,
a major shareholder of the Company, in the amount of $40,000 with an interest
rate of 10%, due on November 20, 1998. The Company and Dr. Lowell agreed to
extend the due date of the note to April 14, 1999 and the Company repaid the
note, including interest of $1,552, on February 28, 1999.

LOANS TO RELATED PARTIES

         Between February and April 1999, the Company received seven promissory
notes from Kenneth Israel, its Chairman of the Board, totaling $123,750. Mr.
Israel used the proceeds of the loan and $25,000 of his personal money to form
VTCO, LLC, a start-up company to compete in




                                       40
<PAGE>   92
the direct response informercial market. On March 25, 1999, the Company
incorporated VTC TV, Inc. ("VTC TV") with the intention of acquiring the assets
of VTCO, LLC in exchange for $148,750. The Company intends to loan VTC TV the
$148,750 for this purpose.

CONSULTING AGREEMENTS WITH RELATED PARTIES

         In February 1999, the Company entered into one-year a Consulting
Agreement with Fontenelle, LLC ("Fontenelle"), an affiliate of Stephan Antebi a
principal stockholder, to provide business consulting services to the Company.
In exchange for Fontenelle's services, the Company issued 1,000,000 share of its
Common Stock valued at $5.875 per share, for a total consideration of
$5,875,000. The Company registered the issuance of such shares with the SEC on
Form S-8.


         On January 28, 1999, GTI entered into a three-year consulting agreement
with Stephan Herold, a principal stockholder of the Company and founder of GTI,
to provide general consulting services to GTI. In exchange for Mr. Herold's
services, the Company issued 145,000 shares of its Common Stock. The Company
agreed to register the public resale of such shares with the SEC as soon as
practicable.


         In November 1998, the Company entered into an agreement with 
Fontenelle to provide certain business and public relations consulting services
to the Company. In exchange for such services, the Company issued 225,000 shares
of its Common Stock valued at $.99 per share and granted 1,000,000 warrants to
purchase shares of its Common Stock, at an exercise price of $1.00 per share
with a three year term. In January 1999, Fontenelle exercised the warrants for
$1,000,000. 

         In February 1999, the Company agreed to register, with the SEC the
public resale of certain of Fontenelle's shares.  The Company further agreed to
grant Fontenelle warrants to purchase an additional 750,000 shares in the event
the Company did not obtain effectiveness of such registration statement by June
1, 1999. In April 1999, the Company, having determined that the effectiveness of
such registration would be impossible, issued such warrants and Fontenelle 
exercised them at $1.00 per share.
         
ADDITIONAL ISSUANCES OF COMMON STOCK

         In fiscal 1999, Ken Israel and Jeff Maynard each received 10,000
shares of the Company's Common Stock as directors' compensation. 

         In fiscal 1999, Mr. Israel received 600,000 of the Company's Common
Stock shares in lieu of $150,000 compensation for fiscal 1998.  Also in fiscal 
1999, Mr. Israel received 175,648 shares of the Company's Common Stock by 
converting $35,000 of debentures.

         In fiscal 1999, Mr. Maynard received 200,000 shares of the Company's 
Common Stock in lieu of $20,000 compensation for fiscal 1998.

         In fiscal 1999, Harry Lowell received 177,443 shares of the Company's
Common Stock by converting $150,000 of debentures.  In fiscal 1999, Dr. Lowell 
and affiliates purchased 6,695,000 shares of the Company's Common Stock for 
$592,500 cash.

         In fiscal 1999, Mary Joy Stead, received 226,000 shares of the
Company's Common Stock upon conversion of a $50,000 debenture held by her
spouse, Jerre Stead. Also in fiscal 1999, Mary Joy Stead received 468,000 shares
of the Company's Common Stock by converting $100,000 of debentures.

         In fiscal 1999, Phil LaCerte and affiliates purchased 1,000,000 shares
of the Company's Common Stock for $1,500,000 cash.

         In fiscal 1999, Fontenelle, LLC purchased 500,000 shares of the
Company's Common Stock for $500,000 cash.  Also in fiscal 1999, Fontenelle, LLC
received 1,000,000 shares of the Company's Common Stock by exercising 1,000,000
warrants.

         In fiscal 1999, Greg Appelhof purchased 53,333 shares of the Company's
Common Stock for $20,000 cash. In connection, Mr. Appelhof received 53,333
warrants, at $1.00 for 2 years.

         In fiscal 1999 Stephan Herold purchased 1,333,000 shares of the
Company's Common Stock for $500,000 cash. In connection with the stock purchase,
Mr. Herold received 213,333 warrants at $.75 for 2 years and 213,333 warrants at
$1.50 for 2 years. Also in fiscal 1999, Mr. Herold exercised 213,333 warrants
for $159,999 cash. In fiscal 1999, Herold Marketing Associates, Inc, of which
Mr. Herold is a principal stockholder, received 228,571 shares in connection
with the Company's acquisition of the assets of GTI. In addition, Mr. Herold 
received 145,000 shares in connection with the Company's acquisition of the 
assets of GTI.

PART IV 

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

                                       41
<PAGE>   93


(a)(1)    Consolidated Financial Statements  

     VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                                                                   Page
                                                                                   ----
<S>                                                                                <C>
          Independent Auditor's Report............................................ F-1

          Report of Independent Public Accountants................................ F-2
      
          Consolidated Balance Sheets at January 31, 1999 and 1998................ F-3
      
          Consolidated Statements of Operations for the years ended January 31,
          1999 and 1998 and for the period February 7, 1996 to 
          January 31, 1997........................................................ F-4
      
          Consolidated Statements of Changes in Stockholders' Equity (Deficit)
          for the years ended January 31, 1999 and 1998 and the period 
          February 7, 1996 to January 31, 1997.................................... F-5
      
          Consolidated Statements of Cash Flows for the years ended January 31,
          1999 and 1998 and the period February 7, 1996 to January 31, 1997....... F-11
      
          Notes to Consolidated Financial Statements for the years ended 
          January 31, 1999 and 1998 and the period February 7, 1996 to 
          January 31, 1997........................................................ F-12

          Accountants' Report..................................................... F-24

          Balance Sheets as of December 31, 1998 and 1997......................... F-26

          Statement of Income for the years ended December 31, 1998 and 1997...... F-28

          Statement of Retained Earnings for the year ended December 31, 1998
          and 1997................................................................ F-29

          Statement of Cash Flows for the years ended December 31, 1998 and 1997.. F-30

          Notes to Financial Statements for the years ended December 31, 1998 
          and 1997................................................................ F-32

          Independent Auditor's Report............................................ F-37

          Balance Sheet as of December 31, 1996................................... F-39

          Statement of Income for the year ended December 31, 1996................ F-41

          Statement of Retained Earnings for the year ended December 31, 1996..... F-42

          Statement of Cash Flows for the year ended December 31, 1996............ F-43

          Notes to Financial Statements for the year ended December 31, 1996...... F-45

          Independent Auditor's Report............................................ F-50

          Financial Statement Schedule............................................ F-51
</TABLE>
(a)(2)    None.
(a)(3)



                                       42
<PAGE>   94

          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.  Incorporated
          by reference from the Company's Form 10-SB as filed with the SEC on 
          February 12, 1999.*

 3.2      By-Laws of the Company, as amended. Incorporated by reference from the
          Company's Form 10-SB as filed with the SEC on February 12, 1999.*

 4.1      Form of Stock Certificate, form of Stock Purchase Warrant and Stock
          Option Agreement.  Incorporated by reference from the Company's Form 
          10-SB as filed with the SEC on February 12, 1999.*

 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*

 10.4     Acquisition Corporation and Coast Business Credit Fontenelle, L.L.C.
          Consulting Agreement*

 10.5     Consulting Agreement with Fontenelle, LLC.**

 10.6     Employment Agreement with Gregory Appelhof

 10.7     Employment Agreement with John Harvatine

 21.      The Company has only one subsidiary, GTI Acquisition Corporation, a
          Minnesota Corporation, doing business as "Graphics Technology, 
          Incorporated" and "GTI" none of the Company's other subsidiaries is 
          a "significant subsidiary" as defined by Rule 1-02(w) of Regulation 
          S-X promulgated under the Securities Act of 1933, as amended.

 23.1     Consent of Lurie, Besikof, Lapidus & Co., LLP

 23.2     Consent of Copeland Buhl & Company, P.L.L.P.
          
 23.3     Consent of Samuel T. Kuntos

 24       Power of Attorney. Included in this 10-K under "Signatures."

 27       Financial Data Schedule
------------

(b)  Reports on Form 8-K.  The Company did not file any current reports on Form
     8-K during the fourth quarter ended January 31, 1999.

(c)  See Part IV, Item 14(a)(3) and the exhibit list immediately above.

(d)  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.




                                       43
<PAGE>   95


(27) - Financial Data Schedule

(99) --

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


By: /s/ Gregory Appelhof
   ---------------------------------------------
    Gregory Appelhof
    Its: Chief Executive Officer and President (Principal Executive Officer)
Date:  May 3, 1999





                                POWER OF ATTORNEY

Each person whose signature to this Annual Report on Form 10-K appears below
hereby appoints Gregory Appelhof and Kenneth Israel, or either of them, as his
attorney-in-fact to sign on his behalf individually and in the capacity stated
below and to file all amendments and post-effective amendments to this Annual
Report on Form 10-K, and any and all instruments or documents filed as part of
or in conception with this Annual Report on Form 10-K or the amendments thereto,
and the attorney-in-fact, or either of them, may make such changes and additions
to this Annual Report on Form 10-K as the attorney-in-fact, or either of them,
may deem necessary or appropriate.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.


By: /s/ John Harvatine
   ----------------------------------------------
     John Harvatine
     Its:  Chief Financial Officer (Principal Financial and Accounting Officer)
Date:  May 3, 1999


By: /s/ Kenneth Israel
   ----------------------------------------------
     Kenneth Israel
     Its:  Director
Date:  May 3, 1999





                                       44
<PAGE>   96



By: /s/ Jeff Maynard
   ----------------------------------------------
    Jeff Maynard
    Its:  Director
Date:  May 3, 1999

By: /s/ Philip Lacerte
   ----------------------------------------------
     Philip Lacerte
     Its:  Director
Date:  May 3, 1999

By: /s/ Gregory Appelhof
   ----------------------------------------------
     Gregory Appelhof
     Its:  Director
Date:  May 3, 1999






























                                       45