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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, 2000

                                       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)

<TABLE>
<S>                                            <C>
                  MINNESOTA
        (State or other jurisdiction                            41-1639011
              of incorporation)                    (IRS Employer Identification Number)
</TABLE>

                              6690 Shady Oak Road
                         Eden Prairie, Minnesota 55344
                    (Address of Principal Executive Offices)
                                 (952) 259-4700
              (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, $.001
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 [X]  No [ ]

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 May 10, 2000, the last practicable date, the aggregate market value of the
voting and non-voting common equity held by non-affiliates of the registrant
was: $12,643,583.

At May 10, 2000, the number of shares outstanding of each of the registrant's
classes of common stock was: 36,031,453.

Documents incorporated by reference:

(1) Not Applicable
(2) Not Applicable
(3) Not Applicable
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<PAGE>   2

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for particular forward-looking statements. This Report on Form 10-K
contains forward-looking statements, which reflect our views regarding future
events and our financial performance. The words "aim," "believe," "expect,"
"anticipate," "intend," "estimate" and other expressions which indicate future
events and trends identify forward-looking statements.

     Our forward-looking statements are subject to risks and uncertainties that
could cause our actual results to differ materially from our historical results
or those we anticipate. These factors include our ability to:

     - obtain substantial additional financing quickly on acceptable terms;

     - evolve our business to our new model and profitably operate it;

     - successfully and profitably integrate acquired businesses into our
       operations;

     - compete in the resale of computer products on and off of the Internet;

     - attract and retain quality personnel; and

     - maintain our vendor relationships.

     We further discuss these and other risks of our business under "Risk
Factors" below beginning on page 9.

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                                     PART I

ITEM 1. BUSINESS.

RECENT DEVELOPMENTS

     During the past fiscal year, we focused our efforts on building our
netdirect.com business-to-consumer technology product sale website. We expended
substantial dollars to develop and market the website in late 1999, ultimately
with little tangible results. Although our net sales grew significantly during
the past fiscal year (from $4.9 million for the fiscal year ended January 31,
1999 to $81.3 million for the fiscal year ended January 31, 2000), this growth
was due primarily to our acquisitions of the operating assets comprising our GTI
and dtpdirect.com organizations. Our net loss increased from $4.4 million for
the fiscal year ended January 31, 1999 to $28.2 million for the fiscal year
ended January 31, 2000.

     In light of our large losses, we have determined to focus our efforts on
furthering our private label and co-branded technology e-commerce model and on
our GTI and dtpdirect.com operations in order to reduce our dependence on our
netdirect.com operations. However, our ability to pursue this plan is contingent
on our ability to raise substantial additional financing in a very short period
of time. As of May 5, 2000, we had only $38,000 of cash and only $436,000 of
borrowing capacity under our line of credit. We are in default of the terms of
this line of credit and our lender may foreclose on our assets. We have a large,
negative working capital position that was approximately $8.6 million at May 5,
2000. In our GTI and dtpdirect.com businesses, we are not timely paying vendors
and several important vendors have placed us on credit hold, making shipment of
products to our customers difficult and adversely affecting our net sales.

     We are attempting to reduce our cash outlay, which averaged approximately
$812,000 per month during our fiscal year ended January 31, 2000. We have
stopped our advertising and marketing expenditures for our netdirect.com
website. We have deferred the payment of accounts payable and have reduced
officer salaries and bonuses pending an improved cash position. We also intend
to downsize our workforce to reduce our payroll. We estimate that we have
reduced our monthly negative cash flow to approximately $300,000 (assuming that
we make no further payments to Cnet or Lycos). We believe that we may be able to
reduce this further (assuming we can maintain our current revenue and gross
profit levels).

     We are seeking additional equity or debt financing, but cannot assure that
we will obtain financing on acceptable terms, or at all. We are also exploring
the potential to sell all or a part of our business. Although we are in
discussions on several potential transactions, we have reached no agreement on
any transaction. If we cannot reduce our cash expenditures and raise additional
capital, we may be unable to continue our operations.

     Contingent on our ability to obtain financing, our plan of operations
follows.

OUR PLAN OF OPERATIONS

     Contingent on obtaining financing, we plan to evolve to become a
business-to-business provider of online, private label technology-oriented
market exchanges under our brand name Community Techmart(TM). Through our
Community Techmart program, we will enable our clients to create trade
communities, where their users can freely buy and sell products and services. We
intend to:

     - integrate sophisticated e-procurement software applications into our
       clients' own web pages that we host using our proprietary architecture.
       This will enable our clients to outsource their e-procurement web page
       production and maintenance, and provide robust purchasing content and
       capabilities to their users.

     - use our GTI and dtpdirect.com organizations to fulfill product orders
       placed by our clients and their users through the Community Techmart
       websites we host for our clients. By leveraging our clients'

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       own website marketing, we believe we can obtain new technology product
       customers without our own expensive marketing programs.

     - expand the products and services we offer our clients and their users. We
       believe this will enable us to increase our gross margins through
       reducing our dependence on lower margin computer technology products.

     We recently developed and installed our Community Techmart solutions for
two enterprises, the University of Minnesota and Wizmo, Inc. However, we did not
charge these clients for this work in order to create demonstration sites for
our future marketing initiatives. We plan to target the small and medium
business, educational, government and other niche business-oriented markets.

     We are a Minnesota corporation that originally was incorporated in March
1966 as MarSan Inc. In November 1999, we began doing business under the
tradename "Netdirect Corporation International." We intend to seek shareholder
approval at our next annual meeting to change our corporate name to this
business tradename. Since March 2000, our principal executive offices are
located at 6690 Shady Oak Road, Eden Prairie, Minnesota 55344. Our telephone
number is (952) 259-4700. Material found on our websites is not part of this
Report on Form 10-K. Community Techmart(TM), GTI(TM), dtpdirect.com(TM) and
netdirect.com(TM) are our trademarks used throughout this Report.

INDUSTRY BACKGROUND

The Growth of Business-to-Business E-commerce

     The Internet is fundamentally changing the way businesses interact with
other businesses. According to International Data Corporation ("IDC"), by 2003
Internet users are expected to reach 510 million users, up from 159 million
users at the end of 1998. To capitalize on this potential opportunity, companies
of all sizes have adopted Internet strategies to drive revenue, increase
efficiencies and reduce costs. Forrester Research estimates that the U.S. based
business-to-business e-commerce market, which encompasses the conduct of
electronic transactions over Internet protocols between businesses and their
partners and suppliers, is expected to account for more than 90% of the dollar
value of e-commerce in the United States by 2003, growing to $1.3 trillion from
$109 billion in 1999.

     The growth in business-to-business e-commerce is being fueled in large part
by the recurring nature of business needs and transactions, which offers
businesses the opportunity to create loyal and valuable long-term relationships
with other businesses. Business-to-business e-commerce solutions provide buyers
and suppliers with opportunities to increase revenue by reaching a broader
customer base and realize operating efficiencies by reducing the costs of
accessing information and streamlining complex purchasing and distribution
processes. These benefits have spurred the creation of electronic marketplaces,
or "e-marketplaces," that aggregate buyers and sellers in a centralized trading
environment. E-marketplaces are most well suited for large, highly fragmented
markets where buyers and sellers have limited access to information and high
procurement costs.

The Growth of Small Business E-Commerce

     The small-business market is large and rapidly growing. IDC estimates that
by 2002, the North American small business market will grow to 38.5 million
businesses from 29.6 million today. Small businesses are increasingly relying on
the Internet to access information, communicate and transact commerce. According
to Access Media International, by the end of 2002, 75% of small businesses will
use the Internet, as compared to 52% at the end of 1999. In addition, IDC
estimates that small businesses will account for about $106.8 billion in
e-commerce in 2002, increasing from $6.2 billion at the end of 1998.

The Business to Business E-Commerce Educational Market

     Many schools and local districts rely on time consuming, vendor driven,
postage service based, manual or semi-manual methods for processing purchase
orders. Current expenditures (fixed charges, energy costs, schoolbooks and
materials, student transportation and salaries of school personnel) of public
and private
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institutions of higher education are expected to reach $214 billion at the end
of the year 2000. By 2005, this is expected to grow to $244 billion according to
the National Center for Education Statistics. In public elementary and secondary
schools, current expenditures are expected to reach $294 billion by the end of
the year 2000 and grow to $314 billion by the end of the year 2003.

The Need to E-Automate Organizational Purchasing Processes

     Today, most organizations buy operating resources through paper-based or
semi-automated processes. These processes are costly, time consuming and complex
and often involve re-entering information, long approval cycles and significant
involvement of financial and administrative personnel. We believe that the cost
per procurement transaction often exceeds the cost of the items being purchased.
In addition, these time consuming and expensive processes often result in
fulfillment delays to end-users, leading to productivity losses. In addition,
personnel do not often follow internal guidelines as to which suppliers to use
for operating resource purchases. Traditional procurement processes also result
in missed revenue opportunities and additional costs to suppliers. When buyers
are unable to channel purchases to preferred suppliers, these suppliers lose
revenue. Many suppliers dedicate significant resources to the manual entry of
information from faxed or phoned-in purchase orders and the manual processing of
paper checks, invoices and shipping notices. Suppliers also spend significant
amounts on customer acquisition and sales costs, including the production and
distribution of paper catalogs. Without fully automated and integrated
electronic commerce technologies, both buyers and suppliers incur substantial
extraneous costs in conducting commerce.

OUR SOLUTION

     To address business demand and need for Internet-based technology product
purchasing capabilities, we intend to offer our clients and their users a menu
of products and services for e-purchase through our Community Techmart program.
We intend to seamlessly integrate our purchasing engine into our clients' sites
to provide a comprehensive solution for the purchase order component of their
Internet strategy. We intend to host these sites on behalf of our clients,
relieving them of the cost and expense of monitoring actively updated web
content. We will develop our web applications for each client to the "look and
feel" of a client's web site.

     As part of our comprehensive solution, we also intend to offer web site
hosting, data center and product information content services. We already
maintain sophisticated communications, processing and storage capacity and
infrastructure for web pages at our facilities as a result of development and
operation of our own netdirect.com website and intend to leverage these
resources for our Community Techmart clients. As a result, we believe that we
can reduce our clients' day-to-day management requirements while at the same
time providing them and their users with actively updated product content and
order capabilities that they require.

OUR GROWTH STRATEGY

     Our objective is to become a leading business-to-business provider of
online, private label technology-oriented market exchanges. Contingent on our
financing arrangements, key elements of our Community Techmart strategy include:

     - Penetrate Vertical Markets. We intend to focus efforts to sell our
       proprietary Community Techmart(TM) trade exchange solution to third
       parties that have attractive demographic customer bases. We will work
       with these third parties to identify key items of recurring expenditure
       and additional items of a high-margin, recurring revenue nature and
       integrate these items into our service offering. We plan to target the
       small and medium business, educational, government and other niche
       business-oriented markets.

     - Develop Vendor Relationships. We intend to develop strategic alliances
       with vendors and other third parties to address the key primary
       purchasing requirements of the business-to-business

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marketplaces we target for our solutions. We believe this will enable us to
offer a more compelling rationale to our target clients for outsourcing of their
online purchasing functionality to us.

     - Leverage Our Fulfillment Capabilities. We intend to use our GTI and
       dtpdirect.com organizations to fulfill product orders for our clients and
       their users whenever possible. By integrating this capability with our
       Community Techmart solution, we believe that we can provide superior
       customer service to our clients and their users. We believe that this
       superior customer service will encourage our clients and their users to
       repeatedly use our Community Techmart solution. We also gain the
       opportunity to generate higher gross margins through controlling our
       product sales.

     - Use Technology to Leverage Our Growth. We intend to develop and market
       innovative products and services to attract and retain clients. We will
       design these new products and services to enhance the user experience for
       our clients and their users.

COMMUNITY TECHMART(TM)

     We have designed and developed a proprietary, web-based, integrated front-
and back-office system to integrate order fulfillment, merchant authorization,
warehousing and financial systems for our clients. We designed our system to
streamline the entire procurement process and reduce costs and purchase order
times significantly.

     Our Community Techmart order and fulfillment solution platform has a number
of important capabilities, including:

     - identifying a least expensive cost source for products among our vendors;

     - real-time credit card authentication and approval;

     - real-time inventory tracking to enhance the procurement experience;

     - order tracking to increase user control;

     - a dynamic interface with general ledger;

     - customer intelligence features to gather data on preferences and purchase
       patterns; and

     - integration into electronic purchase order systems.

We have designed our Community Techmart platform to distribute workload across
multiple levels in order to increase system performance and scalability.

     In January 2000, we entered into an electronic commerce agreement with the
University of Minnesota pursuant to which we developed and, in April 2000,
implemented a Community Techmart technology product procurement system. Under
the agreement, which expires in December 2001 unless extended by the parties, we
are a nonexclusive provider to the University and its departments, employees and
students of computer hardware and software and services we elect to offer. Our
system enables University departments to place electronic purchase orders
directly with us for fulfillment. We believe that this electronic purchase order
capability will offer us a competitive advantage over other University
technology suppliers.

     In September 1999, we entered into a two year agreement with eSystems21
(now known as Wizmo, Inc.) to implement a Community Techmart application for the
benefit of Wizmo's customers and members. We implemented the application in
April 2000.

     Because the University and Wizmo applications are our first demonstrations
of the Community Techmart application, we did not charge either client for
development of their website and also do not charge for ongoing website
maintenance. We have also agreed to pay the University and Wizmo marketing and
promotional fees based on products and services we sell to them on our system.

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GTI

     Our GTI division is a national wholesale distributor of computer peripheral
equipment. GTI also integrates and assembles select computer systems at our
Phoenix, Arizona facility. GTI purchases products directly from more than 45
manufacturers, including ATI, KDS, Ezio, Hitachi, InFocus, Princeton, Matrox,
Pioneer, Okidata and Viewsonic. GTI maintains a stocking inventory of
approximately 1,600 products. We acquired the GTI division upon our purchase of
the operating assets of Herold Marketing Associates, Inc. in January 1999.
Assuming we raise adequate financing, we plan to continue use of GTI's
capabilities to perform order execution and fulfillment functions for our
Community Techmart division.

     GTI currently has over 1,000 active customers, most of whom are corporate
and governmental agency resellers, value-added resellers and system integrators.
GTI's product offerings include monitors, printers, scanners, portables, CD-ROM
drives, power protection devices, video accelerators, graphic controllers, UPS
back-up, projectors, digital cameras 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, all of which are
provided on a pre-sales basis. We believe that GTI differentiates itself from
many competitors by promoting its value-added services through competitive
pricing and face-to-face selling.

     GTI markets its products and services primarily through a sales force that
includes field account executives and telesales representatives. GTI also
advertises in major industry publications and uses direct marketing and various
other promotions to increase business opportunities.

     GTI purchases products directly from more than 40 manufacturers, generally
on a nonexclusive basis. GTI's vendor agreements typically allow termination by
either party upon 60 days notice. 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.

     As a result of our severe cash flow constraints, we have not timely paid
several of GTI's vendors and have been placed on credit hold with them or must
purchase products on a cash basis only. This has adversely affected GTI's sales
and backlog, as we are unable to timely fulfill orders for customers. If we do
not raise substantial additional financing in a very short period, we will
likely lose significant GTI vendors, customers and employees. No single customer
accounted for 10% or more of GTI's net sales during the fiscal years ended
January 31, 2000, 1999 or 1998, except CDW and Computer Resource Group, value
added resellers which accounted for 13% and 12% of GTI's net sales for the
fiscal year ended January 31, 2000 and Entex, a large value-added reseller,
which accounted for 24% and 33%, respectively, of GTI's net sales for the fiscal
year end January 31, 1999 and 1998.

DTPDIRECT.COM

     Our dtpdirect.com division is a national business-to-business direct
marketer of computer hardware and software products primarily for users of Apple
Macintosh(R) personal computers. We acquired the division upon our purchase of
the operating assets of Tech Squared Inc. in December 1999. Assuming we raise
adequate financing, we plan to continue use of dtpdirect.com's capabilities to
perform order execution and fulfillment functions for our Community Techmart
division.

     Dtpdirect.com targets desktop publishing, graphic arts and pre-press
industries through the dtpdirect.com catalog. Dtpdirect.com offers popular brand
name hardware, software and peripherals from leading vendors such as Adobe,
Apple, Epson, GCC, Hewlett-Packard, IBM, Iomega, Kodak, Minolta, Mitsubishi,
NEC, Quantum, Quark, Seagate, Sony, SyQuest and Umax Technologies.

     Dtpdirect.com markets products through targeted mailings of the
dtpdirect.com catalog and through its recently launched e-commerce site
dtpdirect.com. We produce our catalog in-house six times per year. We
continuously attract new customers by selectively mailing catalogs to
prospective customers throughout

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the year. We obtain names of prospective customers from various sources,
including vendors, trade publications and list brokers. We continuously update
our mailing lists to maximize the response rate from each catalog delivered. Our
catalogs include detailed descriptions and full-color photographs of the
products sold by us. In 1999, dtpdirect.com mailed approximately 2.5 million
catalogs (although we owned the business only since mid-December 1999). To
attract and retain small and mid-sized business customers, dtpdirect.com also
uses a dedicated outbound teleserving sales force.

     Most of dtpdirect.com's net sales fiscal 2000 were of Apple Macintosh and
related products. We believe that the expertise our sales force has developed in
Apple products contributes to our product sales. We also have an in-house
technical staff that integrates customer-selected hardware components on most
Apple computers that we sell and configures most of them with third-party
software. Consequently, a decline in sales of Apple Macintosh computers or a
decrease in the supply of or demand for software and peripherals for these
computers could have a material adverse impact on our dtpdirect.com business.

     In fiscal 2000, dtpdirect.com had over 100,000 customers, an increase from
95,000 customers over its prior fiscal year. No single customer accounted for
10% or more of dtpdirect.com's business in fiscal 2000. As a result of our
current cash flow constraints, we have not timely paid some of dtpdirect.com's
vendors and some have placed us on credit hold. This has affected
dtpdirect.com's ability to fulfill customer orders. If we cannot remedy this
situation immediately, dtpdirect.com's sales will suffer further.

NETDIRECT.COM

     Through our netdirect.com website, we continue to offer more than 60,000
stock keeping units of selective brand name computer equipment. We also link our
website to our downloadstore.com website, which enables our customers to
purchase and immediately download software products to their computers. As
indicated above, we have curtailed our advertising and marketing expenditures
for our netdirect.com website because we have not achieved the sales objectives
from it that we had anticipated. However, we believe the website offers us the
opportunity to demonstrate our creative and technical capabilities to target
clients of our Community Techmart division.

     Our online product selection includes computer hardware such as PC desktops
and laptops, personal digital assistants ("PDAs"), printers, modems, memory and
accessories, packaged software for both office and home use, utilities and
games. We offer products from a wide range of manufacturers, including IBM,
Toshiba, Hewlett-Packard, 3Com, Connectix, Intel, Symantec, Epson, Electronic
Arts, Acer, Compaq and Broderbund.

     We host our netdirect.com website at our headquarters in Eden Prairie,
Minnesota and use a secure server to process on-line orders. Once we receive and
authenticate the credit card information for an on-line product order, we
fulfill on an outsourced basis through relationships with Ingram Micro, Inc. and
Tech Data Corporation. For products that our GTI division stocks in inventory,
we fulfill product orders ourselves. We strive to have products shipped within
24 hours of the order receipt. We have integrated our transaction processing
with our accounting and financial systems to facilitate operational and
financial management.

     Customers may track Federal Express or United Parcel Service shipments
directly through our web site or by a link to the shippers' own websites.

     Our on-line customer base has grown from 4,500 in the fiscal year ended
January 31, 1999 to 40,000 in the fiscal year ended January 31, 2000. No single
customer accounted for 10% or more of our netdirect.com net sales during the
fiscal years ended January 31, 2000, 1999 or 1998. We expect this customer base
to drop substantially without sustained advertising and marketing expenditures.

SUPPLIERS

     We purchase hardware and software products for resale through our divisions
from over 150 different suppliers. However, Ingram Micro, Inc. and Tech Data
Corporation represented 20% and 8%, respectively, of our product purchases
during the fiscal year ended January 31, 2000. We also use Ingram and Tech
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Data, together with our GTI division, to fulfill and ship orders placed by our
customers through our netdirect.com website. Our dtpdirect.com division acquires
its Apple Macintosh(R) products principally through Ingram Micro and Tech Data,
a large distributor. In addition, our GTI division is highly dependent upon
Hitachi and Viewsonic for supplying computer monitors. In the fiscal year ended
January 31, 2000, 57% of GTI's net sales were of computer monitors and of those
sales, 20% and 14%, respectively, were of Hitachi and Viewsonic products. Our
loss of any of these key vendors could materially and adversely affect our
business. Because of our working capital deficiency, several of our key vendors,
including some of those named above, have reduced our credit lines with them.
Other of our vendors currently require cash payment prior to shipping products
to us for our customers. This has severely affected our ability to serve our
customers. We further discuss our working capital deficiency in this Report
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and recommend that you read that section carefully.

COMPETITION

     We compete with both Internet-based as well as traditional providers of
business services and products. Competitors in the market for our Community
Techmart web based e-procurement solution include Ariba, Captura Software,
Clarus, Commerce One, Concur Technologies, Extensity, GE Information Services,
Intelysis, Netscape Communications, WebMethods, and TRADE'ex Electronic Commerce
Systems. We may also encounter competition from several major enterprise
software developers, such as Oracle, PeopleSoft and SAP. Other competitors
include Internet sites that target niche business markets including Verticalnet,
Onvia.com, AllBusiness.com, BizBuyer.com, Digitalwork.com and Works.com.

     Additionally, the microcomputer products industry is highly competitive.
Our GTI and dtpdirect.com divisions compete with a large number and variety of
resellers of microcomputer hardware and software products as well as
manufacturers that sell directly to customers. Some of our customers and
suppliers compete against us, including Ingram Micro, Inc. and Tech Data
Corporation. In the hardware category, we compete with traditional microcomputer
retailers, computer superstores, consumer electronic and office supply
superstores, mass merchandisers, national direct marketers, other Internet
retailers, corporate resellers and value-added resellers. In the software and
accessories categories, we generally compete with these same resellers as well
as specialty retailers and resellers. In addition, as a result of improving
technology, some software manufacturers allow customers to download software
programs and packages directly onto their computer systems through the use of
the Internet, bypassing our sales channels.

     Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. If we cannot
successfully compete, our growth and operating margins could be negatively
impacted. In particular, on the Internet, technology increasingly has made it
easier for customers to identify the least expensive supplier of a product and
to purchase it from that business. As a result, our operating margins have
declined. We discuss this further in the "Management's Discussion and Analysis
of Financial Condition and Results of Operation" section of this Report and
recommend that you read that section.

TRADEMARKS

     Although we own the website name "netdirect.com," we do not have federal or
state trademark registration of our "netdirect" corporate name or logo. In fact,
there are many companies throughout the United States that use the word
"netdirect" in their name. We are not currently seeking federal trademark
registration and we cannot assure that we will ever receive it. We own the
website name "dtpdirect.com" and hold a federal trademark registration on the
"dtpdirect.com" name. In all cases, we cannot assure that others will not
infringe our tradenames and other intellectual property rights or that third
parties will not claim that we infringe their rights.

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EMPLOYEES

     As of May 5, 2000, we employed 124 full-time employees throughout our
organization. Due to our working capital deficiency, we expect to reduce our
workforce.

RISK FACTORS

     In addition to the other information provided in this Report, we recommend
that you carefully consider the following risk factors in evaluating our
business.

WE MUST RAISE SUBSTANTIAL ADDITIONAL CAPITAL OR WE MAY NEED TO STOP DOING
BUSINESS.

     For the fiscal year ended January 31, 2000, we used $6.0 million of cash in
our operations. At May 5, 2000, we had only $38,000 cash and had an estimated
negative working capital of $8.6 million. At that date, we had only $436,000 of
additional borrowing capacity under our line of credit with Coast Business
Credit. Our auditors have expressed their opinion that there is substantial
doubt as to our ability to continue business as a going concern. Several of our
vendors have placed us on credit hold and this is having a material adverse
effect on our ability to fulfill customer orders, particularly for our GTI and
dtpdirect.com divisions whose business customers are more dependent on prompt
delivery. Based upon our current plans, we believe that we must raise at least
$9.0 million of additional equity or debt financing in fiscal 2001 to support
our anticipated operations and growth plans for the fiscal year ending January
31, 2001 (assuming we make no further payments to Cnet or Lycos). We cannot
assure that we can raise these funds on terms acceptable to us, or at all.

WE HAVE NEVER MADE A PROFIT AND CANNOT PREDICT IF AND WHEN WE WILL DO SO.

     We have never been profitable. For the fiscal year ended January 31, 2000,
we incurred a net loss of $28.2 million. As of January 31, 2000, we had an
accumulated deficit of $35.9 million. We expect to incur substantial continued
losses during the fiscal year ending January 31, 2001. We cannot assure that we
will ever achieve profitability.

WE ARE IN DEFAULT OF OUR DEBT COVENANTS AND OUR LENDER COULD FORECLOSE ON OUR
ASSETS.

     Under our agreement with Coast Business Credit, we are required to comply
with particular financial covenants relating to our net tangible worth and other
matters. We currently do not meet these requirements. As of May 5, 2000, we owed
Coast Business Credit $6.0 million which is secured by all assets. We currently
do not have the funds available to repay this full amount. We cannot assure that
Coast Business Credit will not demand immediate repayment of this amount and
foreclose on our assets.

LAWSUITS AND OTHER CLAIMS AGAINST US MAY FORCE US TO SEEK FEDERAL BANKRUPTCY
PROTECTION.

     In December 1999, Cnet, Inc. filed a lawsuit against us alleging that we
owe them over $1.5 million for Internet advertising services. In addition, in
April 2000, Lycos, Inc. demanded that we pay them $2.3 million for Internet
advertising services and also threatened to sue us for up to an additional $11.1
million under an agreement we entered into with Lycos in October 1999. Although
we are defending against the Cnet lawsuit and intend to defend against any
lawsuit that Lycos might commence, our current cash position may make it
difficult for us to defend these lawsuits and make it impossible to pay the
amounts demanded, even if we lost the lawsuits. If these or any other creditors
continue to press claims against us, we might be forced to seek protection under
federal bankruptcy laws. In this case, our business would suffer materially and
our stock price would likely fall dramatically.

OUR E-COMMERCE BUSINESS MODEL DID NOT WORK AND OUR NEW BUSINESS PLAN MAY NOT
SUCCEED.

     During the fiscal year ended January 31, 2000, we expended approximately
$4.4 million in on-line sales and marketing activities primarily to attract
individual consumers to view and shop at our

                                        9
<PAGE>   11

netdirect.com website. We did not achieve our anticipated sales or profit
objectives using this model. We are now redefining our business to focus on our
new Community Techmart division. We cannot assure that we can successfully and
profitably implement this new strategy. While we are considering an expansion as
part of Community Techmart strategy to offer products with higher gross margin
potential, we have not yet identified these products and cannot assure that we
will do so or that we can profitably market them.

WE RELY ON KEY SUPPLIERS AND WOULD SUFFER IF THEY STOPPED DOING BUSINESS WITH
US.

     We rely heavily on Ingram Micro, Inc. and Tech Data Corporation to fulfill
and ship orders we receive on our netdirect.com website and to supply products
sold by our Community Techmart and dtpdirect.com. For the fiscal year ended
January 31, 2000, these vendors accounted for 20% and 8%, respectively, of our
product purchases. We have no long-term contracts or arrangements with these or
any of our other vendors to guarantee the availability of merchandise, the
continuation of particular payment terms or the extension of credit limits. As a
result of our increasing working capital deficiency, both Ingram and Tech Data
have significantly reduced their credit limits with us.

     Our dtpdirect.com division relies significantly on the supply of Apple
Macintosh(R) and related products. For the fiscal year ended January 31, 2000,
dtpdirect.com's purchases of Apple products represented approximately 32% of its
product purchases. We do not buy directly from Apple, but Apple grants us rights
to market their products. If Apple or its distributor terminated their
agreements with us, our dtpdirect.com operations would be adversely affected. In
addition, our GTI division relied on three vendors for approximately 49% of its
purchases in the fiscal year ended January 31, 2000. One of these vendors will
deliver products to GTI only against immediate payment, depleting our limited
working capital. The other two vendors will extend credit only when we make
payments against outstanding invoices, which is increasingly difficult for us to
do.

     These credit arrangements make it difficult for us to maintain and grow our
business. We cannot assure that our vendors will continue to sell merchandise to
us on current terms or that we will or could establish new or extend current
vendor relationships to ensure acquisition of merchandise in a timely and
efficient manner and on acceptable commercial terms. If we cannot develop and
maintain relationships with vendors that allow us to obtain sufficient
quantities of merchandise on acceptable commercial terms, our business,
prospects, financial condition and results of operations would be materially
adversely affected.

WE DEPEND ON KEY MANAGERS AND WOULD SUFFER IF THEY TERMINATE EMPLOYMENT.

     We depend upon the management services of our key managers. In particular,
we depend upon Gregory A. Appelhof, our President and Chief Executive Officer
and John L. Harvatine, our Chief Financial Officer. The loss of their services
or of other key managers could adversely affect our business, prospects,
financial condition and results of operations. Particularly in light of our
current financial position, we would likely have difficulty replacing any of our
key managers if they became unable to continue working for us or terminated
their employment. We do not have key person insurance on the life of any of our
employees.

WE RELY ON OUR INFORMATION TECHNOLOGY STAFF AND WOULD SUFFER IF ANY TERMINATE
EMPLOYMENT.

     We are dependent on our information technology staff to maintain the
operability of our web sites, Community Techmart hosting facilities and internal
computer systems. Competition for qualified personnel is intense, and if any of
these employees terminate employment with us, we may have difficulty replacing
them. Our current financial position would only make it more difficult to
attract replacement personnel. If we cannot maintain the performance of our
technology systems, our business and stock price would likely suffer.

WE HAVE SIGNIFICANT COMPETITION.

     The microcomputer products industry is highly competitive. We compete with
a large number and variety of resellers of microcomputer hardware and software
products as well as manufacturers that sell
                                       10
<PAGE>   12

directly to customers. Some of our customers and suppliers compete against us.
In the hardware category, we compete with traditional microcomputer retailers,
computer superstores, consumer electronic and office supply superstores, mass
merchandisers, national direct marketers, other Internet retailers, corporate
resellers and value-added resellers. In the software and accessories categories,
we generally compete with these same resellers as well as specialty retailers
and resellers. In addition, as a result of improving technology, some software
manufacturers allow customers to download software programs and packages
directly onto their computer systems through the use of the Internet, bypassing
our sales channels.

     Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. If we cannot
successfully compete, our growth and operating margins could be negatively
impacted. In particular, on the Internet, technology increasingly has made it
easier for customers to identify the least expensive supplier of a product and
to purchase it from that business. As a result, our operating margins have
declined. We cannot assure that we can successfully and profitably compete.

SYSTEM FAILURES, TO WHICH WE ARE PARTICULARLY VULNERABLE BECAUSE WE CURRENTLY
OPERATE ONLY ONE COMPUTER DATA CENTER, COULD ADVERSELY AFFECT OUR BUSINESS.

     Our systems and operations are vulnerable to damage or interruption from a
variety of factors, including human error, natural disasters, power loss,
telecommunication failures, break-ins, sabotage (physical or electronic),
computer viruses, vandalism and similar unexpected adverse events. We currently
operate only one computer data center. This increases our vulnerability, since
localized problems at our Minnesota facility, such as storm damage or localized
telephone failure, could make us unable to provide our services. Any system
failure, including network, software or hardware failure, that causes an
interruption in our services or a decrease in responsiveness of our hosted web
sites could result in canceled client contracts, reduced revenue and harm to our
reputation, brand and our relations with our providers and could adversely
affect our business.

POTENTIAL FLUCTUATIONS IN OUR QUARTERLY FINANCIAL RESULTS MAKE FINANCIAL
FORECASTING DIFFICULT.

     Our quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside our control.
These factors include:

     - the number, size and timing of customer orders or Community Techmart
       contracts sold;

     - the character of any development services required by our clients;

     - non-cash charges we incur in connection with the issuance of equity
       securities in exchange for services rendered to us;

     - the amount and timing of operating costs and capital expenditures
       relating to expansion of our business, operations and infrastructure;

     - our ability to develop, market and introduce new and enhanced products
       and services on a timely basis; and

     - actions taken by our competitors, including new product introductions and
       enhancements and price reductions.

     - actions taken by our vendors, including limiting available credit lines
       under which we can buy product.

     We believe that quarter-to-quarter comparisons of our operating results may
not be a good indication of our future performance. Investors should not rely on
our operating results for any particular quarter as an indication of our future
operating results.

                                       11
<PAGE>   13

OUR LARGE NON-CASH EXPENSES INCREASE OUR LOSSES AND MAY CAUSE OUR STOCK PRICE TO
FALL.

     In fiscal 2000, we incurred approximately $17.1 million of stock-based
compensation and interest expense. We expect to report similar non-cash charges
in the amount of at least $4.8 million during fiscal 2001 as a result of
commitments made prior to and after January 31, 2000. There may be substantial
additional charges if we make additional commitments. These non-cash charges
will likely require us to report net losses for fiscal 2001 regardless of our
other operating results. The reporting of continued, large losses could
adversely affect the limited trading market for our stock and our efforts to
raise additional financing.

FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR ABILITY TO
COMPETE EFFECTIVELY.

     We rely on a combination of trademark and copyright law, trade secret
protection, confidentiality agreements and other contractual arrangements to
protect our intellectual property rights. We do not rely on patented processes
or technologies. The protective steps we have taken may be inadequate to deter
misappropriation of our proprietary information. We may be unable to detect the
unauthorized use of, or take appropriate steps to enforce, our intellectual
property rights. We have no registered trademarks on our netdirect or GTI names
in the United States or elsewhere. Failure to adequately protect our
intellectual property could harm our brand, devalue our proprietary content and
affect our ability to compete effectively. Defending our intellectual property
rights could also result in the expenditure of significant financial and
managerial resources, which could materially adversely affect our business.

WE MAY HAVE TO DEFEND AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS, WHICH
COULD CAUSE SIGNIFICANT EXPENDITURES.

     Although we believe that our business activities do not infringe the
intellectual property rights of others, other parties may assert infringement
claims against us or claim that we have violated a patent or infringed a
copyright, trademark or other proprietary right belonging to them. Infringement
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources, which could materially adversely affect our
business.

WE MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CLIENT DEMANDS EVOLVE.

     To be successful, we must adapt to our rapidly changing market by
continually enhancing the technologies used in our products and services, and
introducing new technology to address the changing needs of our business and
consumers. If we are unable, for technical, legal, financial or other reasons,
to adapt in a timely manner to changing market conditions or business and client
requirements, our business could be materially adversely affected.

CONCERNS ABOUT THE SECURITY AND OPERATION OF OUR WEB SITE HOSTING SERVICES COULD
INCREASE OUR EXPENDITURES OR DECREASE OUR CLIENT BASE.

     There have been several recent widely-publicized instances of "hackers"
compromising the integrity, security and operation of web sites. We may have to
incur significant costs to protect our web site or those of our clients or to
alleviate problems caused by "hacking" if there is any:

     - perceived increase in "hacking" activity;

     - perception that our web site or the web sites that we host are
       particularly vulnerable to this kind of activity; or

     - instance in which our web site or one of the web sites we host is
       affected by this kind of activity.

     In addition to increased costs, any of these occurrences may decrease our
ability to retain existing clients or attract new ones.

                                       12
<PAGE>   14

OUR ABILITY TO MAINTAIN AND INCREASE OUR CLIENT BASE DEPENDS ON THE CONTINUED
GROWTH IN USE AND EFFICIENT OPERATION OF THE INTERNET.

     Our business would be materially adversely affected if Internet usage does
not continue to grow or grows slowly. Internet usage may be inhibited for a
number of reasons, such as:

     - inadequate Internet infrastructure to support the demands placed on it as
       usage grows;

     - continued security and authentication concerns with respect to
       transmission over the Internet of confidential information;

     - privacy concerns, including those related to the placement by web sites
       of information on a user's hard drive without the user's knowledge or
       consent;

     - any well-publicized compromise of web site or Internet transmission
       security;

     - inconsistent quality of Internet products and services;

     - limited availability of cost-effective, high-speed access to the
       Internet; and

     - significant future Internet service provider delays or outages.

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO THE INTERNET COULD
INCREASE OUR COSTS OF TRANSMITTING DATA AND LEGAL AND REGULATORY EXPENDITURES
AND DECREASE OUR CLIENT BASE.

     Existing domestic and international laws or regulations specifically
regulate communications or commerce on the Internet. Laws and regulations that
address issues such as user privacy, pricing, online content regulation,
taxation and the characteristics and quality of online products and services are
under consideration by federal, state, local and foreign governments and
agencies. Several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
services providers in a manner similar to the regulation of long distance
telephone carriers and to impose access fees on such companies. This regulation,
if imposed, could increase the cost of transmitting data over the Internet. It
may take years to determine the extent to which existing laws relating to issues
such as intellectual property ownership and infringement, libel, obscenity and
personal privacy are applicable to the Internet. The Federal Trade Commission
and government agencies in some states have been investigating Internet
companies regarding their use of personal information. We could incur additional
expenses if any new regulations regarding the use of personal information are
introduced or if these agencies chose to investigate our privacy practices.
Further, due to the global nature of the Internet, it is possible that some
states, the United States or foreign countries might attempt to levy taxes on
our activities. Any new laws or regulations relating to the Internet, or adverse
application or interpretation of existing laws, could decrease the rate of
growth in the use of the Internet and the demand for our products and services.

WE COULD BE SUBJECT TO SALES AND SIMILAR TAXES THAT WE ARE NOT CURRENTLY
COLLECTING.

     We do not currently collect sales or other similar taxes on shipments of
goods into states other than Minnesota, California and Massachusetts. However,
one or more states may seek to impose sales tax collection obligations on
out-of-state companies such as us which engage in online commerce. In addition,
any new operation in other states could subject shipments into those states to
state sales taxes under current or future laws. A successful assertion by one or
more states or any foreign country that we should collect sales or other taxes
on the sale of merchandise could have a material adverse effect on our business
and stock price.

OUR STOCK PRICE MAY FLUCTUATE WIDELY.

     The price at which our common stock trades is subject to wide fluctuations
in response to changes in earnings estimates by analysts (if any) or other
events or factors, many of which are beyond our control. The stock market has
from time to time experienced extreme price and volume fluctuations that have

                                       13
<PAGE>   15

often been unrelated to the operating performance of the companies affected.
These fluctuations have particularly affected securities of Internet-related
companies. Investors may experience a material decline in the market price of
our common stock, regardless of our operating performance. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. We may become involved in this type of litigation in the future.
Litigation of this type is often expensive and diverts management's attention
and resources.

WE HAVE SOLD SECURITIES WITHOUT REGISTRATION AND COULD BE RESPONSIBLE TO
REIMBURSE PURCHASERS IF THE SALES WERE NOT EXEMPT.

     During the past several years, we have issued equity securities in various
transactions not registered under the Securities Act of 1933, as amended, or
applicable state laws. We made these sales in reliance upon exemptions from
these registration requirements. However, if these sales were not exempt, we
could be required to offer to rescind these sales and repurchase the securities
for the price originally paid, together with interest from the date of sale, and
possibly, attorneys' fees. If we were required to make any repurchases, it could
have a material adverse effect on our stock price and our ability to sell
additional securities.

SUBSTANTIAL SALES OF OUR COMMON STOCK, OR THE PERCEPTION THAT SUBSTANTIAL SALES
MAY OCCUR, COULD CAUSE OUR STOCK PRICE TO FALL AND MAKE IT DIFFICULT FOR US TO
SELL ADDITIONAL SECURITIES.

     If our shareholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall. These sales
might also make it more difficult for us to sell equity securities in the future
at a time and price that we deem appropriate. As of April 20, 2000, we had
36,031,453 shares of common stock outstanding. Of these shares, 16,151,079 are
available for public resale under Rule 144 under the Securities Act. Further, we
are contractually obliged to file a registration statement under the Securities
Act to register the public resale of 1,139,600 of the shares not currently
available for public resale and 5,225,000 of the shares that may be issued upon
exercise of outstanding options and warrants. We intend to file a registration
statement on Form S-8 immediately after the filing of this Report to register
the issuance of approximately 750,000 shares of our common stock for service
providers. All of the shares so registered will be available for immediate
public resale.

OUR ARTICLES OF INCORPORATION AND MINNESOTA LAW MAY DISCOURAGE A TAKEOVER OF US.

     Provisions of our articles of incorporation, bylaws and Minnesota law could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our shareholders.

THERE IS ONLY A LIMITED PUBLIC MARKET FOR OUR STOCK AND THIS MAY DEPRESS OUR
STOCK PRICE.

     There is only a limited public market for our common stock on the OTC
Bulletin Board. We cannot assure that our stock will continue to trade on the
OTC Bulletin Board or on any other trading medium, 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, as
our common stock currently trades at a price substantially under $5.00 per
share, brokers and dealers trading in our stock are subject to "penny stock"
disclosure rules under the Securities and Exchange Act of 1934, as amended.
These rules 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 our stock.

WE HAVE NOT PAID DIVIDENDS AND DO NOT EXPECT TO DO SO.

     We do not anticipate the payment of cash dividends on our Common Stock in
the foreseeable future. Investors who anticipate a need for immediate income
from their investment should not purchase shares of our stock.

                                       14
<PAGE>   16

ITEM 2. PROPERTIES.

     In March 2000, we consolidated our principal executive offices,
dtpdirect.com's operations and the Minneapolis operations of GTI in a single
45,738 square foot facility located at 6690 Shady Oak Road, Eden Prairie,
Minnesota. We have a seven-year lease for this facility with average payments
over the term of the lease of approximately $41,000 per month, including taxes
and common area maintenance, expiring in February 2007. In addition, we lease
approximately 1,460 square feet of office space at 3100 West Lake Street,
Minneapolis, Minnesota under a five-year lease with average remaining payments
of approximately $2,800 per month. We are currently negotiating with a subtenant
to sublease this space.

     GTI has an additional facility located at 4685 S. Ashe Avenue, Tempe,
Arizona. GTI's facility in Arizona is approximately 11,000 square feet with
average remaining payments of approximately $7,800 per month. The lease runs
through December 31, 2002. GTI also utilizes warehouse space of a vendor for a
nominal charge in San Francisco, California.

ITEM 3. LEGAL PROCEEDINGS.

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

     In April 2000, Lycos, Inc. ("Lycos") demanded payment by us of $2,250,000
Lycos claims it is owed under an e-commerce agreement dated October 31, 1999.
Lycos asserted that if was not paid by May 12, 2000, it may seek damages of up
to $13,375,000. We did not pay any additional amounts to Lycos by that date, but
are continuing discussions with and intend to vigorously defend any future claim
by Lycos.

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

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

     We submitted no matters to a vote of security holders during the last
quarter of the fiscal year ended January 31, 2000.

                                       15
<PAGE>   17

                                    PART II

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

     Our Common Stock is 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 our 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.

                       FISCAL YEAR ENDED JANUARY 31, 2000

<TABLE>
<CAPTION>
                                                                 HIGH           LOW
                                                                -------       -------
<S>                                                             <C> <C>       <C> <C>
First Quarter (End April)...................................      7 7/16        4 3/4
Second Quarter (End July)...................................      5 3/16        2 1/16
Third Quarter (End October).................................      2 5/8         1
Fourth Quarter (End January)................................      2 9/16        1 5/8
</TABLE>

                       FISCAL YEAR ENDED JANUARY 31, 1999

<TABLE>
<CAPTION>
                                                                 HIGH         LOW
                                                                -------       ---
<S>                                                             <C> <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, we are unable to obtain
reliable information on the range of high and low bid prices of our Common Stock
due to the limited market for it prior to February 1, 1999.

     We have never paid a cash dividend on our capital stock and do not expect
to pay a cash dividend in the foreseeable future.

     As of May 10, 2000, we had 511 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 "Securities Act"):

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

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

          In fiscal 2000, we issued 5,344,917 shares of our Common Stock for
     $8,257,550 to 20 investors.

          In fiscal 2000, we issued 5,800,000 redeemable warrants with an
     exercise price of $.50 per share to six investors for $1,450,000. We
     subsequently redeemed 2,900,000 of these warrants for $1,450,000.

          In fiscal 2000, we issued 50,000 warrants with an exercise price of
     $1.00 per share to one investor for $50. We granted the right to purchase
     the warrants as a commission for raising money.

          Between February 1 and May 10, 2000, we issued 1,389,050 shares of our
     Common Stock to 11 investors for $1,118,947.

                                       16
<PAGE>   18

     B. In December 1999, we issued 245,359 shares of our Common Stock to two
individuals and one entity in connection with the acquisition of some assets of
Softdisk, LLC. The issuance of such shares was exempt pursuant to Rule 506 of
Regulation D and/or Section 4(2) of the Securities Act.

     C. In January 1999, we 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 Securities Act.

     D. In fiscal 1999, the holders of convertible debentures we issued in
fiscal 1997 and 1998 converted their debentures (without payment of additional
consideration) into 1,173,091 shares of our Common Stock in reliance upon the
exemption contained in Section 3(a)(9) of the Securities Act.

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

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

          In fiscal 1999, we issued 2,069,532 shares of our Common Stock to 30
     individuals and entities (eleven of whom were accredited investors) in
     exchange for $961,625 of services rendered to us.

          In fiscal 2000, we issued 1,605,000 shares of our Common Stock to
     seven individuals and entities (all of whom were accredited investors) in
     exchange for $3,019,025 of services rendered to us.

          Between February 1, 2000 and May 10, 2000, we issued 500,000 shares of
     our Common Stock to one accredited investor in exchange for $1,265,000 of
     services rendered to us.

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

          In fiscal 2000, we granted to 160 individuals or entities an aggregate
     of 4,494,950 options and warrants to purchase shares of our Common Stock,
     exercisable at prices ranging between $.05 and $6.29 per share.

          Between February 1, 2000 and May 10, 2000, we granted to seven
     individuals or entities an aggregate of 626,250 options and warrants to
     purchase shares of our Common Stock, exercisable at $.70 per share.

     G. In fiscal 2000, we paid offering costs in cash to the following firms in
connection with sales of our securities as described above:

<TABLE>
<S>                                                             <C>
         Waterford Financial, Inc...........................    $ 20,000
         Janda & Garrington, LLC............................    $400,000
         Winchester Investment Securities...................    $250,000
</TABLE>

In addition, we granted Waterford Financial, Inc. a two-year warrant to purchase
20,000 shares of our Common Stock at $1.00 per share, and we granted Trautman
Kramer a three-year warrant to purchase 125,000 shares of our Common Stock for
$3.00 per share. We have included the issuance of these warrants above.

     Between February 1, 2000 and May 10, 2000, we paid $20,250 cash in offering
costs to Waterford Financial, Inc. in connection with sales of our securities as
described above. In addition, we granted Winchester Investment Securities a
two-year warrant to purchase 75,758 shares of our Common Stock at $1.00 per
share. We have included the issuance of these warrants above.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

     The following table contains selected consolidated financial data as of and
for each of the four fiscal years ended January 31, 2000. We derived this
selected consolidated financial data from our audited historical consolidated
financial statements. We have included our consolidated financial statements and
notes as of January 31, 2000 and 1999 and for each of the three fiscal years
ended January 31, 2000

                                       17
<PAGE>   19

elsewhere in this Report on Form 10-K. We recommend that you read this
information with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our historical consolidated financial statements
and related notes included elsewhere in this Report on Form 10-K. The table
below contains no selected financial data for the fiscal year ended January 31,
1996 because we did not conduct any operations in that period.

<TABLE>
<CAPTION>
                                                  FY00           FY99           FY98           FY97
                                                  ----           ----           ----           ----
<S>                                           <C>             <C>            <C>            <C>
Net sales.................................    $ 81,318,775    $ 4,945,907    $   174,669    $        0
Net loss..................................     (28,166,026)    (4,357,088)    (2,539,161)     (829,421)
Net loss per common share.................           (0.95)         (0.26)         (0.36)        (0.13)
Total current assets......................      20,262,425     15,297,683         16,514       105,412
Total assets..............................      34,666,783     25,742,578         59,409     1,023,828
Long term liabilities.....................          50,519        420,810        715,342       138,102
Total liabilities.........................      26,503,606     16,820,452      1,452,978       255,954
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATION.

GENERAL

     The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and our financial statements and notes thereto appearing elsewhere in this
annual report. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may differ
substantially from those anticipated in these forward-looking statements.

OVERVIEW

     Historically, we have been an e-commerce provider of high performance
computer hardware, software and peripheral products to computer end-users and to
wholesale and retail customers throughout the United States and Canada. We have
been operating in two primary business segments in the computer products
industry: sales to end users through our netdirect.com website and dtpdirect.com
direct marketing business, and sales to wholesale and retail outlets through our
GTI wholesale distribution business. As described in "Recent Developments"
above, and contingent on financing, we intend to transition our business away
from dependence on our netdirect.com operations and toward our Community
Techmart division.

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

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

     Netdirect.com is our website through which we offer computer-related
products. During fiscal 2000, we planned to build a loyal customer base by
attracting new customers through online advertising, competitive pricing and
free shipping. The results of this strategy were disappointing. Although we were
able to build significant revenue and customer base, our margins, net of
advertising costs, were too low to sustain a business. As a result, and
contingent on new financing, we intend to refocus our online efforts on our
Community Techmart division, a proprietary, web-based, integrated front- and
back-office system

                                       18
<PAGE>   20

designed to integrate order fulfillment, merchant authorization, warehousing and
financial systems for our clients. Because we did not make our first significant
installation of our Techmart solution until April 2000, we have limited data
available to gauge the success of the Techmart business model and cannot assure
its success.

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

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

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                     YEAR ENDED JANUARY 31,
                                                                --------------------------------
                                                                2000        1999          1998
                                                                ----        ----          ----
<S>                                                             <C>         <C>         <C>
Net sales...................................................    100.0%      100.0%         100.0%
Cost of goods sold..........................................     94.0        96.4
                                                                -----       -----       --------
  Gross profit..............................................      6.0         3.6          100.0
Operating expenses:
  Sales and marketing.......................................      8.7        36.2          315.3
  General and administrative................................      9.9        28.4          657.3
  Consulting services, stock based..........................     12.6        26.7
  Amortization of intangibles...............................      1.1
  Write-off of Virtual Technology (UK) Ltd. assets..........                               529.6
                                                                -----       -----       --------
                                                                 32.3        91.3        1,502.2
Loss from operations........................................    (26.3)      (87.7)      (1,402.2)
Other income (expense):
  Interest expense..........................................     (8.1)       (1.6)         (33.4)
  Other (expense) income, net...............................     (0.2)        1.3          (18.1)
                                                                -----       -----       --------
                                                                 (8.3)       (0.3)         (51.5)
                                                                -----       -----       --------
Net loss....................................................    (34.6)%     (88.0)%     (1,453.7)%
                                                                =====       =====       ========
</TABLE>

FISCAL YEAR ENDED JANUARY 31, 2000 AS COMPARED TO THE FISCAL YEAR ENDED JANUARY
31, 1999

     NET SALES. Our net sales increased to $81.3 million for the fiscal year
ended January 31, 2000, from $4.9 million for the fiscal year ended January 31,
1999, reflecting an increase of $76.4 million or 1,544%. Our sales increase
represented a $7.3 million, or 159%, increase for netdirect.com (internet
retail) sales and a $5.2 million increase and a $63.9 million increase for
dtpdirect.com (catalog retail) sales and GTI (distribution) sales, respectively,
as a result of the Tech Squared and GTI acquisitions. The netdirect.com increase
was primarily the result of the growth of Internet sales through our website. We
acquired GTI on January 28, 1999 and Tech Squared as of November 30, 1999 and
therefore did not report net sales from GTI and dtpdirect.com prior to those
dates.

     COST OF GOODS SOLD. Cost of goods sold during the fiscal year ended January
31, 2000 was $76.4 million, or 94.0% of net sales, reflecting an increase of
$71.7 million or 1,502%. The cost of goods sold increase includes a $7.0
million, or 158%, increase for netdirect.com's cost of goods sold and a

                                       19
<PAGE>   21

$4.6 million increase and a $60.1 million increase for dtpdirect.com's and GTI's
cost of goods sold, respectively, as a result of the Tech Squared and GTI
acquisitions. The netdirect.com increase was primarily the result of the
increase in sales. We did not include any cost of goods sold from GTI and
dtpdirect.com prior to our acquisition of those assets. The gross margin was
6.0% of net sales for fiscal year 2000 as compared to 3.6% of net sales for
fiscal year 1999. This increase reflects the impact of the acquisitions of GTI
and Tech Squared which generated gross margins of 5.9% and 12.8%, respectively
during fiscal 2000.

     OPERATING EXPENSES. Our sales and marketing expenses increased to $7.1
million during the fiscal year ended January 31, 2000 from $1.8 million for the
fiscal year ended January 31, 1999. The primary components of the increase were
an increase in advertising and promotion expenditures of $3.0 million and an
increase in sales and marketing personnel expenses of $2.0 million. These
increases resulted from our expanded effort to add customers particularly in our
retail segment. As a percentage of net sales, sales and marketing expenses were
8.7% for the fiscal year ended January 31, 2000, as compared to 36.2% for the
fiscal year ended January 31, 1999.

     General and administrative expenses increased to $8.0 million for the
fiscal year ended January 31, 2000 from $1.4 million for the fiscal year ended
January 31, 1999. The increase in fiscal 2000 over fiscal 1999 was primarily due
to an increase in personnel expenses of $2.8 million and legal, accounting and
other professional services of $1.5 million. These increases reflect the
expanded size of our operations resulting primarily from our January 1999
acquisition of GTI and our December 1999 acquisition of Tech Squared. As a
percentage of net sales, general and administrative expenses were 9.9% during
the fiscal year ended January 31, 2000, as compared to 28.4% for the fiscal year
ended January 31, 1999.

     For the fiscal year ended January 31, 2000, we incurred $10.3 million of
non-cash charges for consulting services. In these transactions, we issued our
equity securities in exchange for services and generally incur expense over the
term of each agreement, often over a one-year period. We recognized $1.3 million
of these charges during the fiscal year ended January 31, 1999. We will incur
$4.8 million of stock-based consulting services expense in fiscal 2001,
resulting from existing consulting contracts.

     Amortization of intangibles totaled $930,000 for the fiscal year ended
January 31, 2000, compared with no amortization for the fiscal year ended
January 31, 1999. Most of this expense was amortization of intangibles related
to our Tech Squared and GTI acquisitions.

     OTHER EXPENSES. Interest expense was $6.6 million in fiscal 2000 as
compared to $80,000 for fiscal 1999. The increase in interest expense relates
principally to $500,000 of interest expense on borrowings under our credit
agreement with Coast executed in January 1999, $1.2 million of interest expense
due to amortization of stock-based debt issue costs associated with this credit
agreement and $4.8 million of interest costs related to issuance of redeemable
warrants in December 1999. For more detail, we suggest you see note 7 to our
consolidated financial statements.

     Other expense of approximately $206,000 in fiscal year 2000 resulted
primarily from $150,000 paid to settle a lawsuit.

     INCOME TAXES. We have never generated taxable income. Accordingly, we paid
no income taxes in fiscal year 2000 or 1999. As of January 31, 2000, we had
approximately $11.5 million of net operating loss carryforwards for federal
income tax purposes, which expire beginning in 2012. Due to the uncertainty of
our future profitability, we have recorded a valuation allowance to offset our
net deferred tax assets. Changes in our ownership resulting from our past and
future 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.

                                       20
<PAGE>   22

FISCAL YEAR ENDED JANUARY 31, 1999 AS COMPARED TO THE FISCAL YEAR ENDED JANUARY
31, 1998

     NET SALES. Our net sales increased to $4.9 million for fiscal 1999, from
$175,000 for fiscal 1998. The sales increases in fiscal 1999 were primarily a
result of a shift in our strategy to e-commerce from backup data storage
services.

     COST OF GOODS SOLD. Cost of goods sold during fiscal 1999 was $4.8 million,
or 96.4% of net sales. During fiscal 1998, we had no significant direct cost of
service sales.

     OPERATING EXPENSES. Sales and marketing expenses increased to $1.8 million
in fiscal 1999 from $551,000 for fiscal 1998. 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.

     General and administrative expenses increased to $1.4 million for fiscal
1999 from $1.1 million for fiscal 1998. The fiscal 1999 increase over fiscal
1998 was primarily due to an increase in personnel expenses. As a percentage of
net sales, general and administrative expenses were 28.4% in fiscal 1999.

     For the fiscal year ended January 31, 1999, we recognized $1.3 million of
non-cash charges for consulting services. In these transactions, we issued our
equity securities in exchange for services and generally incur expense over the
term of each agreement, often over a one-year period. We recognized $134,000 of
these charges during the fiscal year ended January 31, 1998.

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

QUARTERLY RESULTS

     The following table sets forth our unaudited quarterly financial data for
each quarter of 1998 and 1999. In our opinion, this unaudited information has
been prepared on the same basis as the audited information and includes all
adjustments (including all normal recurring adjustments) necessary to present
fairly the information set forth below. The operating results for any quarter
are not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
                                                            QUARTERS ENDED
                          ----------------------------------------------------------------------------------
                                       FISCAL 1999                                FISCAL 2000
                          -------------------------------------    -----------------------------------------
                          APR 30    JUL 31    OCT 31    JAN 31     APR 30     JUL 30     OCT 31      JAN 31
                          ------    ------    ------    ------     ------     ------     ------      ------
                                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                       <C>       <C>       <C>       <C>        <C>        <C>        <C>        <C>
Net sales.............    $  590    $  952    $1,551    $ 1,853    $17,383    $16,514    $20,069    $ 27,353
Gross profit (loss)...      (120)       47       116        134      1,213      1,202      1,362       1,117
Loss from
  operations..........      (451)     (482)     (722)    (2,689)    (6,544)    (4,284)    (4,422)     (6,143)
Net loss..............      (471)     (438)     (737)    (2,714)    (7,053)    (4,674)    (4,994)    (11,445)
Loss per share........     (0.05)    (0.03)    (0.04)     (0.13)     (0.27)     (0.16)     (0.16)      (0.35)
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

     CURRENT SITUATION. Our ability to continue as a going concern is in
jeopardy. Although between February 1 and April 30, 2000, we raised an
additional $1.1 million of cash through the sale of 1.4 million shares of our
Common Stock, as of May 5, 2000, we had only $38,000 of cash and only $436,000
of borrowing capacity under our line of credit. We are in default of the terms
of this line of credit and our lender may foreclose on our assets. We have a
large, negative working capital position that was approximately $8.6 million at
May 5, 2000. In our GTI and dtpdirect.com businesses, we are not timely paying
vendors and several important vendors have placed us on credit hold, making
shipment of products to our customers difficult and adversely affecting our net
sales.

                                       21
<PAGE>   23

     We are attempting to reduce our cash outlay, which averaged approximately
$812,000 per month during our fiscal year ended January 31, 2000. We have
stopped our advertising and marketing expenditures for our netdirect.com
website. We have deferred the payment of accounts payable and have reduced
officer salaries and bonuses pending an improved cash position. We also intend
to downsize our workforce to reduce our payroll. We estimate that we have
reduced our monthly negative cash flow to approximately $300,000 and believe
that we may be able to reduce this further (assuming we make no further payments
to Cnet or Lycos).

     We are seeking additional equity or debt financing, but cannot assure that
we will obtain financing on acceptable terms, or at all. We are also exploring
the potential to sell all or a part of our business. Although we are in
discussions on several potential transactions, we have reached no agreement on
any transaction. If we cannot reduce our cash expenditures and raise additional
capital, we may be unable to continue our operations.

     HISTORICAL SOURCES AND USES OF CASH. We historically have financed our
operations primarily through the private placement of equity and debt
securities. Primary uses of cash have been to fund our operation through the
development stage and the acquisition and integration of subsidiary businesses.
If we are successful in achieving future revenue growth, our working capital
requirement is likely to increase.

     Net cash used by our operating activities during the fiscal year ended
January 31, 2000 was $6.0 million as compared to $3.6 million for the fiscal
year ended January 31, 1999 and $787,000 for the fiscal year ended January 31,
1998. Net cash used by us for operating activities during the 2000 fiscal year
was primarily the result of net losses and increases in accounts receivable,
offset in part by non-cash expenses decreases in inventories, and increases in
accounts payable and accrued expenses. Net cash used by our operating activities
during the 1999 fiscal year was primarily the result of net losses and increases
in accounts receivable, partially offset by non-cash expenses increases in
accrued expenses, and net cash used by our operating activities for 1998 fiscal
year was primarily a result of net losses, partially offset by non-cash expenses
and increases in accounts payable and accrued expenses.

     We used cash of $4.5 million, $1.2 million and $19,200 in investing
activities in our fiscal years 2000, 1999 and 1998, respectively. During the
fiscal year ended January 31, 2000, we used $844,000 for purchases of furniture
and equipment, $185,000 for the purchase of marketable securities and $3.5
million for the purchase of the assets comprising our subsidiary operations. For
the fiscal year ended January 31, 1999, we used approximately $1.0 million of
net cash to acquire GTI's assets.

     Cash provided by financing activities was $11.1 million for the fiscal year
ended January 31, 2000, as compared to cash provided by financing activities of
$4.9 million for the fiscal year ended January 31, 1999 and $783,000 for the
year ended January 31, 1998. During the fiscal year ended January 31, 2000, we
received net proceeds of $8.2 million from issuance of equity securities
including the exercise of options and warrants and $2.7 million from the
collection of a stock subscription receivable. In addition, during the 2000
fiscal year, we borrowed $68.1 million under our line of credit and repaid $61.2
million on it. Proceeds from these financing activities were used to fund our
working capital needs, and to retire $6.7 million of notes payable in connection
with our acquisition of GTI's assets. We also used the proceeds to retire
$186,000 of loans from related parties and to fund $245,000 in loan fees to
establish our line of credit.

     GTI ACQUISITION, OTHER FINANCING ARRANGEMENTS AND RELATED COVENANT
VIOLATIONS. On January 28, 1999, we acquired substantially all of the assets of
GTI and assumed certain of GTI's liabilities. The purchase price was $17.1
million, $1.0 million of which we paid at closing primarily out of funds
generated from the sale of our equity securities in January 1999. Under the
terms of the acquisition agreement, we paid an additional $4.0 million of the
purchase price in February 1999 by repayment of a promissory note. In April
1999, we also deposited $200,000 with an escrow agent to be used for liabilities
arising after closing. In May 1999, we paid $2.7 million of the remaining $3.3
million note issued at closing. The payment differential is due to certain
post-closing adjustments still under negotiation. We expect to finalize these
post-closing adjustments during fiscal 2001.
                                       22
<PAGE>   24

     We acquired the funds to retire these notes from borrowings under our line
of credit and out of cash from the private placement of our securities. Under
the terms of our line of credit, we 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, we may
borrow up to $250,000 for capital expenditure purchases at an interest rate
equal to 2% in excess of the bank's reference rate, not subject to eligible
receivables and inventory. Further, we 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.

     The line of credit agreement requires us to maintain a minimum level of
tangible net worth and contains a covenant that allows our lender to declare an
event of default in the event there is a material adverse change in our
financial position or results of operations. At January 31, 2000, we were in
violation of the tangible net worth covenant with our lender that we negotiated
in December 1999 and are also in violation of this covenant at the date of this
Report. Because of our covenant violations, our lender has the right to declare
us in default and to require repayment of all borrowings under the line of
credit agreement.

     GTI's payables to several of its major vendors were historically insured by
an independent credit insurance company. In July 1999, the insurance company
discontinued its coverage, citing our reduction in net tangible assets and
recent large losses. As a result, GTI's vendors are increasingly shipping orders
only against our immediate cash payment. If we cannot replace the lost insurance
or otherwise obtain credit from GTI's major vendors, our operating and business
results likely will be materially adversely affected.

     TECH SQUARED ACQUISITION FINANCING ARRANGEMENTS. In November 1999, we
entered into a definitive agreement to acquire most of the operating assets of
Tech Squared Inc. for $3.2 million in cash. On December 17, 1999, we closed on
the acquisition upon payment of $1.4 million in cash and issuance of a $2.1
million promissory note due on December 20, 1999. In anticipation of this
transaction, we entered into an amended line of credit agreement under which, on
December 20, 1999, our lender provided $2.1 million to us which we used to
retire the Tech Squared promissory note.

     As a condition of its $2.1 million loan, our lender required that we obtain
a minimum of $1.0 million of additional equity funds prior to closing and
established a new covenant requiring us to raise a total of $2.0 million of
additional equity funds during December 1999, including the first $1.0 million.
On December 17, 1999, we satisfied the lender's $1.0 million requirement upon
receipt of $1.65 million of cash raised through a private placement. In the
private placement, we sold 400,000 shares of our Common Stock for $1.00 per
share.

     In addition, we raised $500,000 in the private placement by the sale of
2,000,000 five-year warrants exercisable at $.50 per share to purchase our
Common Stock. Upon this investor's demand, we were obligated to redeem one-half
of the warrants for the original $500,000 purchase price. The investor made
demand for this redemption and we redeemed one half of the warrants for $500,000
on December 22, 1999. If we had failed to redeem the warrants by December 24,
1999, the investor could have foreclosed upon certain assets we pledged to the
investor. We also agreed to file a registration statement under the Securities
Act to register the shares underlying the warrants and any other of our
convertible securities owned by the investor at the time the registration
statement is filed. If we fail to obtain effectiveness of this registration
statement by May 31, 2000, the investor's warrants will automatically double (to
2,000,000 warrants since the redemption of 1,000,000 warrants has already
occurred). Because we have not yet filed the registration statement, we expect
that we will issue the additional warrants.

     Three of our directors also purchased $750,000 of the securities we offered
in the private placement on the same terms as the $500,000 investment described
in the preceding paragraph, except that we pledged no collateral to these
investors to secure our redemption obligations. We similarly redeemed one-half
of their warrants in January 2000. Because we have not filed the required
registration statement, we also expect to issue them additional warrants.

                                       23
<PAGE>   25

     We satisfied our new lending covenant that required us to raise a total of
$2.0 million of equity funds in December 1999 by the sale of an additional
1,000,000 shares of our Common Stock for $1.00 per share. In addition, two of
our other directors each purchased $100,000 of the redeemable warrant securities
we describe above, except that we pledged no collateral to these investors to
secure our redemption obligations. We also redeemed one-half of their warrants
in January 2000. Because we have not filed the required registration statement,
we also expect to issue them additional warrants.

     SOFTDISK ACQUISITION FINANCING ARRANGEMENTS. In December 1999, we entered
into a definitive agreement to acquire certain of the operating assets of
Softdisk, LLC for $752,000 in a combination of $150,000 of cash, $465,200 of our
Common stock and a promissory note of $104,000 payable in twelve monthly
payments of $9,150. We used $150,000 of the cash raised through our December
1999 private placement to complete the acquisition of these assets. We are
currently in default on payment of $9,150 under the promissory note.

     ADDITIONAL ARRANGEMENTS WITH OUR PRINCIPAL LENDER. At September 30 and
October 31, 1999, we were in default on our tangible net worth covenant with our
lender. The lender waived these defaults in December 1999 in exchange for
issuance to it of a five-year warrant to purchase 50,000 shares of our Common
Stock at an exercise price of $2.04 per share, subject to certain adjustments.
As a further condition to amending our line of credit agreement in December 1999
in advance of the Tech Squared acquisition to allow inclusion of the Tech
Squared assets in our borrowing base, our lender required us to issue to it an
additional five-year warrant to purchase 200,000 shares of our Common Stock at
an exercise price of $2.04 per share, subject to certain adjustments. The
amended line of credit agreement also provides that in the event that we
terminate it before March 2003, we will continue to pay the lender, as a
termination fee, the minimum monthly interest that the lender would otherwise
have received under the agreement. We currently estimate this termination fee
would be approximately $33,000 per month.

     LYCOS AGREEMENT. In October 1999, we entered into a three-year E-Commerce
Agreement with Lycos, Inc. for comprehensive Internet marketing activities,
including co-branding of one of our websites on the Lycos network. Under the
agreement, we paid Lycos $1.125 million and agreed to pay an additional $3.375
million by July 2000 including $2.25 million due by April 1, 2000 that we have
not paid. We also agreed to pay an additional $5.0 million to Lycos during each
of the second and third years of the agreement, subject to Lycos' right to
terminate the agreement unless we agree to pay $6.5 million in such years. Lycos
has threatened to sue us and we are currently negotiating with Lycos to
terminate the agreement.

     NEW HEADQUARTERS LEASE. We entered into a new seven-year facilities lease
effective in March 2000 to house the combined operations of netdirect.com,
dtpdirect.com, our corporate administrative staff and GTI's Minneapolis
operations. The landlord required a $300,000 letter of credit to be pledged as
security for the new lease, which is to cover leasehold improvements for the
facility. We obtained the required letter of credit from an investor in exchange
for issuance of 100,000 warrants exercisable over five years to purchase our
Common Stock at $1.68 per share.

     Although we have no material commitments for capital expenditures, we
anticipate that, subject to financing, we will expend approximately $600,000
during fiscal year 2001 on additional computer hardware resources, including
e-commerce servers and other furniture and equipment as needed. Our capital
expenditures could be materially different if our operating plans are altered.

RECENT ACCOUNTING DEVELOPMENTS

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. This statement
establishes a new model for accounting for derivatives and hedging activities.
Under FAS 133, we must recognize all derivatives as assets and liabilities and
measure them at fair value. In July 1999, the FASB issued Statement of
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of Effective Date of FASB Statement No. 133," which defers
the effective date to
                                       24
<PAGE>   26

all fiscal quarters of fiscal years beginning after June 15, 2000. We do not
expect the adoption of FAS 133 to have a significant impact on its financial
positions, results of operations or cash flows.

     In December 1999, the Staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." This SAB summarizes certain of the Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Application of the views expressed in SAB 101, as amended
by SAB 101A, is required no later than June 30, 2000. Although it has not made a
definite determination of its impact, we do not expect the adoption of SAB 101
to have a materially adverse effect on our financial positions, results of
operations or cash flows.

     In April 2000, The FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB 25." FIN 44 clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award and (d)
the accounting for an exchange of stock compensation awards in a business
combination. We do not expect the adoption of FAS 133 to have a significant
impact on our financial positions, results of operations or cash flows.

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

     The following discusses our exposure to market risk related to changes in
interest rates, foreign exchange rates and equity prices.

     Interest rate risk. As of January 31, 2000, we had $698,000 in cash, which
consisted entirely of cash operating accounts. We also had $185,000 of
marketable securities, which consisted of $160,000 in stock in a privately held
company and $25,000 in U.S. Treasury notes. A decrease in market rates of
interest would have no material effect on the value of these assets. As of
January 31, 2000, we had $7.9 million of debt. Interest accruing on this debt
fluctuates based upon market rates, which therefore can affect our financial
results.

     Foreign currency exchange rate risk. Almost all of our net sales are in the
United States and our sales transactions are denominated in the U.S. dollar.
Therefore, we are not currently exposed to any material foreign currency
exchange risk.

     Equity price risk. We do not own any equity investments, except for a
$160,000 investment in stock that we sold in February 2000 for $240,000.
Therefore, we are not currently exposed to any direct equity price risk.

     Inflation. We do not believe that inflation has had a material effect on
our results of operations in recent years. There can be no assurance, however,
that our business will not be adversely affected by inflation in the future.

                                       25
<PAGE>   27

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
<S>                                                             <C>
Report of Independent Accountants at January 31, 2000 and
  for the year then ended...................................     F-1
Independent Auditor's Report at January 31, 1999 and for the
  two years then ended......................................     F-2
Consolidated Balance Sheets at January 31, 2000 and 1999....     F-3
Consolidated Statements of Operations for the years ended
  January 31, 2000..........................................     F-4
Consolidated Statements of Comprehensive Income (Loss) for
  the years ended January 31, 2000, 1999 and 1998...........     F-5
Consolidated Statements of Changes in Stockholders' Equity
  for the years ended January 31, 2000, 1999 and 1998.......     F-6
Consolidated Statements of Cash Flows for the years ended
  January 31, 2000, 1999 and 1998...........................    F-11
Notes to Consolidated Financial Statements for the years
  ended January 31, 2000, 1999 and 1998.....................    F-12
Independent Auditor's Report on the Financial Statement
  Schedule..................................................    F-27
Financial Statement Schedule................................    F-28
</TABLE>

                                       26
<PAGE>   28

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
of Virtual Technology Corporation:

     In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Virtual Technology Corporation (the Company) and its subsidiaries at
January 31, 2000, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. 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 audit
of these statements in accordance with auditing standards generally accepted in
the United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered significant
operating losses, has an accumulated deficit of $35,891,696, a working capital
deficiency and is in violation of a covenant contained in its line of credit
facility, all of which raise substantial doubt the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota
April 7, 2000, except as to Note 2,
  for which the date is May 1, 2000.

                                       F-1
<PAGE>   29

                          INDEPENDENT AUDITOR'S REPORT

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

     We have audited the accompanying consolidated balance sheet of Virtual
Technology Corporation and Subsidiaries as of January 31, 1999, and the related
consolidated statements of operations, comprehensive income (loss), changes in
stockholders' equity, 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 auditing standards generally
accepted in the United States of America. 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, 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 accounting principles generally
accepted in the United States of America.

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

Minneapolis, Minnesota
April 23, 1999

                                       F-2
<PAGE>   30

                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                          AT JANUARY 31, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                    2000           1999
                                                                    ----           ----
<S>                                                             <C>             <C>
ASSETS
Current assets:
  Cash......................................................    $    698,246    $   125,993
  Marketable securities.....................................         185,015
  Receivables:
     Customer (net of allowances for doubtful accounts and
      returns of $1,238,131 and $263,000 at January 31, 2000
      and 1999, respectively)...............................      11,811,050      4,364,905
     Credit cards...........................................         106,440        132,387
     Stock subscription.....................................                      2,676,436
     Other..................................................         179,952
  Inventories...............................................       4,677,997      5,236,292
  Other current assets......................................       2,603,725      2,761,670
                                                                ------------    -----------
     Total current assets...................................      20,262,425     15,297,683
Furniture and equipment, net................................       1,326,643        280,364
Capitalized software development costs, net.................         323,033        101,298
Intangibles, net............................................      10,180,627      9,887,410
Other.......................................................       2,574,055        175,823
                                                                ------------    -----------
     Total assets...........................................    $ 34,666,783    $25,742,578
                                                                ============    ===========
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes and line of credit, current portion.................    $  7,887,907    $ 7,340,673
  Capital lease obligations, current portion................          13,951         10,628
  Accounts payable..........................................      15,076,375      7,163,358
  Accrued expenses and other current liabilities............       3,474,854      1,884,983
                                                                ------------    -----------
     Total current liabilities..............................      26,453,087     16,399,642
                                                                ============    ===========
Notes and line of credit payable, net of current portion....                        371,543
Capital lease obligations, net of current portion...........          50,519         49,267
Commitments and contingencies
Stockholders' equity:
  Common stock $.001 par value (no par value as of January
     31, 1999) 100,000,000 shares authorized; 34,142,403 and
     25,345,963 shares issued and outstanding at January 31,
     2000 and 1999, respectively............................          34,142     17,572,796
  Additional paid-in capital................................      44,949,469
  Cumulative translation adjustment.........................          (3,738)
  Stock subscription receivable.............................        (925,000)      (925,000)
  Accumulated deficit.......................................     (35,891,696)    (7,725,670)
                                                                ------------    -----------
     Total stockholders' equity.............................       8,163,177      8,922,126
                                                                ------------    -----------
     Total liabilities and stockholders' equity.............    $ 34,666,783    $25,742,578
                                                                ============    ===========
</TABLE>

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

                                       F-3
<PAGE>   31

                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                   YEAR ENDED JANUARY 31,
                                                         ------------------------------------------
                                                             2000           1999           1998
                                                             ----           ----           ----
<S>                                                      <C>             <C>            <C>
Net sales............................................    $ 81,318,775    $ 4,945,907    $   174,669
Cost of goods sold...................................      76,424,745      4,769,313
                                                         ------------    -----------    -----------
Gross profit.........................................       4,894,030        176,594        174,669
                                                         ------------    -----------    -----------
Operating expenses:
  Sales and marketing................................       7,074,673      1,792,238        550,802
  General and administrative.........................       8,018,285      1,405,577      1,148,067
  Consulting services, stock based (see Note 6)......      10,263,401      1,322,360
  Amortization of intangibles........................         930,463
  Write-off of Virtual Technology (UK) Limited
     assets..........................................                                       925,000
                                                         ------------    -----------    -----------
                                                           26,286,822      4,520,175      2,623,869
                                                         ------------    -----------    -----------
Loss from operations.................................     (21,392,792)    (4,343,581)    (2,449,200)
                                                         ------------    -----------    -----------
Other income (expense):
  Interest expense...................................      (6,566,915)       (79,618)       (58,254)
  Other (expense) income, net........................        (206,319)        66,111        (31,707)
                                                         ------------    -----------    -----------
                                                           (6,773,234)       (13,507)       (89,961)
                                                         ------------    -----------    -----------
Net loss.............................................    $(28,166,026)   $(4,357,088)   $(2,539,161)
                                                         ============    ===========    ===========
Net loss per common share -- basic and diluted.......    $       (.95)   $      (.26)   $      (.36)
                                                         ============    ===========    ===========
Weighted average common shares outstanding -- basic
  and diluted........................................      29,740,670     16,958,284      7,068,687
                                                         ============    ===========    ===========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-4
<PAGE>   32

                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
              FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                   YEAR ENDED JANUARY 31,
                                                         ------------------------------------------
                                                             2000           1999           1998
                                                             ----           ----           ----
<S>                                                      <C>             <C>            <C>
Net loss, as reported................................    $(28,166,026)   $(4,357,088)   $(2,539,161)
Other comprehensive income (loss):
  Foreign currency translation adjustment............          (3,738)
                                                         ------------    -----------    -----------
Comprehensive loss...................................    $(28,169,764)   $(4,357,088)   $(2,539,161)
                                                         ============    ===========    ===========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-5
<PAGE>   33

                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                                                                             OTHER
                                      COMMON STOCK          ADDITIONAL                   COMPREHENSIVE      STOCK
                                -------------------------     PAID-IN       UNEARNED        INCOME       SUBSCRIPTION
                                  SHARES        AMOUNT        CAPITAL     COMPENSATION      (LOSS)        RECEIVABLE
                                  ------        ------      ----------    ------------   -------------   ------------
<S>                             <C>          <C>            <C>           <C>            <C>             <C>
Balances -- January 31, 1997:    6,792,098   $  1,632,017                   $(34,722)
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
Stock compensation expense....                                                34,722
Net loss......................
                                ----------   ------------   -----------     --------       --------       ---------
Balances -- January 31,
 1998.........................   8,489,937      1,975,013
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

<CAPTION>

                                               STOCKHOLDERS'
                                ACCUMULATED       EQUITY
                                  DEFICIT        (DEFICIT)
                                -----------    -------------
<S>                             <C>            <C>
Balances -- January 31, 1997:   $   (829,421)  $    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
Stock compensation expense....                       34,722
Net loss......................    (2,539,161)    (2,539,161)
                                ------------   ------------
Balances -- January 31,
 1998.........................    (3,368,582)    (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
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-6
<PAGE>   34
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
              FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                                                                             OTHER
                                      COMMON STOCK          ADDITIONAL                   COMPREHENSIVE      STOCK
                                -------------------------     PAID-IN       UNEARNED        INCOME       SUBSCRIPTION
                                  SHARES        AMOUNT        CAPITAL     COMPENSATION      (LOSS)        RECEIVABLE
                                  ------        ------      ----------    ------------   -------------   ------------
<S>                             <C>          <C>            <C>           <C>            <C>             <C>
 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
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
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

<CAPTION>

                                               STOCKHOLDERS'
                                ACCUMULATED       EQUITY
                                  DEFICIT        (DEFICIT)
                                -----------    -------------
<S>                             <C>            <C>
 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
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
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
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-7
<PAGE>   35
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
              FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                                                                             OTHER
                                      COMMON STOCK          ADDITIONAL                   COMPREHENSIVE      STOCK
                                -------------------------     PAID-IN       UNEARNED        INCOME       SUBSCRIPTION
                                  SHARES        AMOUNT        CAPITAL     COMPENSATION      (LOSS)        RECEIVABLE
                                  ------        ------      ----------    ------------   -------------   ------------
<S>                             <C>          <C>            <C>           <C>            <C>             <C>
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 net of
   offering costs of
   $50,000....................     333,333        450,000
 Stock issued for cash --
   $1.50 per share, net of
   offering costs of
   $165,000...................   1,000,000      1,335,000
 Stock issued for services --
   $2.75 per share............     114,532        315,000
 Exercise of warrants -- $.75
   per share..................     213,333        160,000
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 net of
   offering costs of
   $98,564....................     700,000      3,601,436                                                  (925,000)
 Stock issued in purchase of
   GTI -- $7.187 per share
   (Note 4)...................     228,571      1,642,740
 Stock issued for consulting
   agreement in connection
   with purchase of
   GTI -- $7.187 per share
   (Note 4)...................     145,000      1,042,115
 Exercise of warrants -- $1.00
   per share..................   1,000,000      1,000,000
Warrants and options issued
 for services (Note 6)........                  2,970,400
Net loss......................
                                ----------   ------------   -----------     --------       --------       ---------
Balances -- January 31,
 1999.........................  25,345,963     17,572,796                                                  (925,000)
Warrants issued for cash......          --             50

<CAPTION>

                                               STOCKHOLDERS'
                                ACCUMULATED       EQUITY
                                  DEFICIT        (DEFICIT)
                                -----------    -------------
<S>                             <C>            <C>
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 net of
   offering costs of
   $50,000....................                      450,000
 Stock issued for cash --
   $1.50 per share, net of
   offering costs of
   $165,000...................                    1,335,000
 Stock issued for services --
   $2.75 per share............                      315,000
 Exercise of warrants -- $.75
   per share..................                      160,000
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
   $5.2857 per share net of
   offering costs of
   $98,564....................                    2,676,436
 Stock issued in purchase of
   GTI -- $7.187 per share
   (Note 4)...................                    1,642,740
 Stock issued for consulting
   agreement in connection
   with purchase of
   GTI -- $7.187 per share
   (Note 4)...................                    1,042,115
 Exercise of warrants -- $1.00
   per share..................                    1,000,000
Warrants and options issued
 for services (Note 6)........                    2,970,400
Net loss......................    (4,357,088)    (4,357,088)
                                ------------   ------------
Balances -- January 31,
 1999.........................    (7,725,670)     8,922,126
Warrants issued for cash......                           50
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-8
<PAGE>   36
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
              FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                                                                             OTHER
                                      COMMON STOCK          ADDITIONAL                   COMPREHENSIVE      STOCK
                                -------------------------     PAID-IN       UNEARNED        INCOME       SUBSCRIPTION
                                  SHARES        AMOUNT        CAPITAL     COMPENSATION      (LOSS)        RECEIVABLE
                                  ------        ------      ----------    ------------   -------------   ------------
<S>                             <C>          <C>            <C>           <C>            <C>             <C>
February 23, 1999
 Stock issued for services --
   $2.937 per share...........   1,000,000   $  2,937,000
February 24, 1999
 Stock issued for cash --
   $4.50 per share............       1,000          4,500
February 24, 1999
 Exercise of warrants -- $.250
   per share..................      50,000         12,500
February 24, 1999 --
 April 26, 1999
 Exercise of warrants -- $1.00
   per share..................     806,000        806,000
March 5, 1999
 Stock issued for cash --
   $3.84 per share, net of
   offering costs of
   $275,000...................     651,041      2,225,000
March 17, 1999
 Exercise of warrants -- $5.00
   per share..................       6,300         31,500
May 4, 1999
 Stock issued for services --
   $5.00 per share............      25,000        125,000
May 19, 1999
 Stock issued for cash --
   $3.299 per share, net of
   offering costs of
   $250,000...................     757,576      2,250,000
February 1, 1999 --
 May 31, 1999
 Warrants and options issued
   for services (Note 6)......                  7,062,000
 Warrants cancelled...........                   (740,000)
 Stock issued to replace
   cancelled warrants.........     400,000
June 1999
 Adjustment to change common
   stock par value from none
   to $.001 per share.........                (32,257,303)   32,257,303
June 17, 1999
 Stock issued for services --
   $1.721 per share...........     450,000            450       774,384
July 1, 1999
 Stock issued for services --
   $2.875 per share...........      25,000             25        71,850
July 20, 1999
 Cancellation of shares issued
   for services...............    (666,700)          (667)   (1,957,431)
August 5, 1999
 Stock issued for services --
   $1.37 per share............     162,500            163       222,462

<CAPTION>

                                               STOCKHOLDERS'
                                ACCUMULATED       EQUITY
                                  DEFICIT        (DEFICIT)
                                -----------    -------------
<S>                             <C>            <C>
February 23, 1999
 Stock issued for services --
   $2.937 per share...........                 $  2,937,000
February 24, 1999
 Stock issued for cash --
   $4.50 per share............                        4,500
February 24, 1999
 Exercise of warrants -- $.250
   per share..................                       12,500
February 24, 1999 --
 April 26, 1999
 Exercise of warrants -- $1.00
   per share..................                      806,000
March 5, 1999
 Stock issued for cash --
   $3.84 per share, net of
   offering costs of
   $275,000...................                    2,225,000
March 17, 1999
 Exercise of warrants -- $5.00
   per share..................                       31,500
May 4, 1999
 Stock issued for services --
   $5.00 per share............                      125,000
May 19, 1999
 Stock issued for cash --
   $3.299 per share, net of
   offering costs of
   $250,000...................                    2,250,000
February 1, 1999 --
 May 31, 1999
 Warrants and options issued
   for services (Note 6)......                    7,062,000
 Warrants cancelled...........                     (740,000)
 Stock issued to replace
   cancelled warrants.........
June 1999
 Adjustment to change common
   stock par value from none
   to $.001 per share.........
June 17, 1999
 Stock issued for services --
   $1.721 per share...........                      774,834
July 1, 1999
 Stock issued for services --
   $2.875 per share...........                       71,875
July 20, 1999
 Cancellation of shares issued
   for services...............                   (1,958,098)
August 5, 1999
 Stock issued for services --
   $1.37 per share............                      222,625
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-9
<PAGE>   37
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
              FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                                                                             OTHER
                                      COMMON STOCK          ADDITIONAL                   COMPREHENSIVE      STOCK
                                -------------------------     PAID-IN       UNEARNED        INCOME       SUBSCRIPTION
                                  SHARES        AMOUNT        CAPITAL     COMPENSATION      (LOSS)        RECEIVABLE
                                  ------        ------      ----------    ------------   -------------   ------------
<S>                             <C>          <C>            <C>           <C>            <C>             <C>
August 9, 1999
 Stock issued for services --
   $1.69 per share............      15,000   $         15        25,335
August 23, 1999
 Stock issued for services --
   $1.8125 per share..........   1,500,000          1,500     2,717,250
September 9, 1999
 Stock issued for services --
   $2.37 per share............      10,000             10        23,690
November 1, 1999 -- December
 29, 1999
 Stock issued for cash --
   $1.00 per share, net of
   offering costs of
   $145,000...................   2,505,000          2,505     2,357,495
 Warrants issued for cash.....                                2,900,000
 Redemption of warrants (Note
   7).........................                               (1,450,000)
November 23, 1999
 Stock issued for services --
   $2.00 per share............     250,000            250       499,750
December 30, 1999
 Stock issued in purchase of
   Softdisk -- $1.896 per
   share (Note 4).............     245,359            245       464,955
December 30, 1999
 Exercise of warrants -- $1.00
   per share..................     568,000            568       567,432
January 13, 1999
 Stock issued for services --
   $1.75 per share............      10,000             10        17,490
January 20, 1999
 Stock issued for services --
   $1.843 per share...........      20,000             20        36,829
Issuance of missing stock
 certificates.................       5,364              5            (5)
June 1 1999 --
 January 31, 2000
 Warrants and Options issued
   for services (Note 6)......                                5,420,680
Net loss......................
Cumulative translation
 adjustment...................                                                             $ (3,738)
                                ----------   ------------   -----------     --------       --------       ---------
Balances -- January 31,
 2000.........................  34,142,403   $     34,142   $44,949,469     $     --       $ (3,738)      $(925,000)
                                ==========   ============   ===========     ========       ========       =========

<CAPTION>

                                               STOCKHOLDERS'
                                ACCUMULATED       EQUITY
                                  DEFICIT        (DEFICIT)
                                -----------    -------------
<S>                             <C>            <C>
August 9, 1999
 Stock issued for services --
   $1.69 per share............                 $     25,350
August 23, 1999
 Stock issued for services --
   $1.8125 per share..........                    2,718,750
September 9, 1999
 Stock issued for services --
   $2.37 per share............                       23,700
November 1, 1999 -- December
 29, 1999
 Stock issued for cash --
   $1.00 per share, net of
   offering costs of
   $145,000...................                    2,360,000
 Warrants issued for cash.....                    2,900,000
 Redemption of warrants (Note
   7).........................                   (1,450,000)
November 23, 1999
 Stock issued for services --
   $2.00 per share............                      500,000
December 30, 1999
 Stock issued in purchase of
   Softdisk -- $1.896 per
   share (Note 4).............                      465,200
December 30, 1999
 Exercise of warrants -- $1.00
   per share..................                      568,000
January 13, 1999
 Stock issued for services --
   $1.75 per share............                       17,500
January 20, 1999
 Stock issued for services --
   $1.843 per share...........                       36,849
Issuance of missing stock
 certificates.................
June 1 1999 --
 January 31, 2000
 Warrants and Options issued
   for services (Note 6)......                    5,420,680
Net loss......................  $(28,166,026)   (28,166,026)
Cumulative translation
 adjustment...................                       (3,738)
                                ------------   ------------
Balances -- January 31,
 2000.........................  $(35,891,696)  $  8,163,177
                                ============   ============
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                      F-10
<PAGE>   38

                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                   YEAR ENDED JANUARY 31,
                                                         ------------------------------------------
                                                             2000           1999           1998
                                                             ----           ----           ----
<S>                                                      <C>             <C>            <C>
Operating activities:
  Net loss...........................................    $(28,166,026)   $(4,357,088)   $(2,539,161)
  Adjustments to reconcile net loss to net cash used
     by operating activities:
     Stock-based compensation and interest expense...      17,143,204      1,322,360        134,468
     Depreciation....................................         307,292         25,155         19,649
     Amortization....................................         966,906          3,202
     Provision for losses on accounts receivable.....         292,528        157,780
     Provision for inventory obsolescence............          48,853
     Loss on disposal of equipment...................                                        10,054
     Write-off of Virtual Technology (UK) Limited
       assets........................................                                       925,000
     Changes in operating assets and liabilities:
       Customer and credit card receivables..........      (4,898,037)    (1,297,634)        11,092
       Inventories...................................       2,205,571         21,736         (8,287)
       Other current assets..........................        (124,103)      (164,519)         2,756
       Deposits......................................           3,939         (9,631)
       Accounts payable..............................       5,124,029       (102,436)       223,823
       Accrued expenses and other current
          liabilities................................       1,120,736        821,779        433,744
                                                         ------------    -----------    -----------
     Net cash used by operating activities...........      (5,975,108)    (3,579,296)      (786,862)
                                                         ============    ===========    ===========
Investing activities:
  Purchases of furniture and equipment...............        (843,548)      (230,706)       (19,061)
  Acquisition of businesses, net of cash acquired....      (3,480,352)      (950,147)
  Marketable securities..............................        (185,015)                         (122)
                                                         ------------    -----------    -----------
     Net cash used in investing activities...........      (4,508,915)    (1,180,853)       (19,183)
                                                         ------------    -----------    -----------
Financing activities:
  Line of credit borrowings..........................      68,085,917
  Line of credit payments............................     (61,202,102)
  Borrowing under notes payable......................         552,091
  Proceeds from convertible debentures...............                                       237,000
  Loans from related parties.........................        (186,543)        75,000        341,543
  Payments on notes payable and convertible
     debentures......................................      (6,883,057)       (50,284)       (37,965)
  Loan fees..........................................        (244,853)       (50,250)
  Payments on capital lease obligations..............           4,575         (4,524)        (1,121)
  Proceeds from issuance of common stock.............       7,505,050      5,127,551        243,251
  Offering costs incurred for common stock
     issuance........................................        (670,000)      (215,000)
  Collection of subscription receivable..............       2,676,436
  Proceeds from options and warrants exercised.......       1,422,500
                                                         ------------    -----------    -----------
     Net cash provided in financing activities.......      11,060,014      4,882,493        782,708
                                                         ------------    -----------    -----------
Effect of foreign currency on cash...................          (3,738)
                                                         ------------    -----------    -----------
Net increase (decrease) in cash......................         572,253        122,344        (23,337)
Cash:
  Beginning of year..................................         125,993          3,649         26,986
                                                         ------------    -----------    -----------
  End of year........................................    $    698,246    $   125,993    $     3,649
                                                         ============    ===========    ===========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                      F-11
<PAGE>   39

                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

     Virtual Technology Corporation ("VTC" or the "Company") is an e-commerce
provider of high performance computer hardware, software and peripheral products
to sophisticated computer users. Through its distribution, catalog and web-based
business, the Company sells computer and peripheral equipment to wholesale and
retail outlets throughout the United States and Canada.

2. BASIS OF PRESENTATION

     The Company's consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
However, the Company incurred a net loss of $28,166,026 and negative cash flows
from operations of $5,975,108 during the fiscal year ended January 31, 2000. At
January 31, 2000, the Company had an accumulated deficit of $35,891,696, a
working capital deficit of $6,190,662 and was in violation of a covenant
contained in its line of credit facility (see Note 7).

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

     - reduce operating costs and/or increase revenues and operating margins, in
       order to improve operating cash flows;

     - obtain additional debt and/or equity financing; and

     - obtain waivers or renegotiate the terms of its existing line of credit.

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

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

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, GTI Acquisition Corporation ("GTI"), T2
Acquisition Corporation ("T2"), and Virtual Technology (UK) Limited ("VTL"). GTI
acquired the assets of Herold Marketing Associates, Inc. ("HMA") on January 28,
1999, and is included in the consolidated statements of operations and cash
flows from January 29, 1999 (three days in fiscal 1999) through January 31,
2000. T2 Acquisition Corporation acquired certain assets and assumed certain
liabilities of Tech Squared, Inc. effective November 30, 1999 and is included in
the consolidated statements of operations and cash flows from November 30, 1999
through January 31, 2000. VTL is a wholly owned subsidiary operating in the
United Kingdom. In fiscal 1998, the Company wrote off $925,000 of intangible
assets and advances due to the termination of the VTL operations. VTL was
dormant throughout fiscal 1999 and limited operations were started again in
fiscal 2000.

                                      F-12
<PAGE>   40
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     USE OF ESTIMATES

     The preparation of these consolidated financial statements in conformity
with accounting principles generally accepted in the United States 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 these
estimates.

     REVENUE RECOGNITION

     The Company recognizes revenue upon the shipment of the product. A
provision for estimated returns is recorded as a reduction of net sales at the
time of sale.

     MARKETABLE SECURITIES

     Marketable securities as of January 31, 2000 consist of U.S.
government-backed obligations with a carrying value of $25,015 and common stock
of a private company with a carrying value of $160,000. Marketable securities
are classified as short-term or long-term in the balance sheet based upon their
maturity date and expectations regarding sales.

     At January 31, 2000, all marketable securities are classified as available
for sale. Available-for-sale securities are carried at fair value, with
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity until realized. The fair values are determined using quoted
market prices, if available. The carrying amounts of securities for purposes of
computing unrealized gains and losses are determined by specific identification.
The cost of the U.S. government-backed securities approximates fair value. The
carrying amount of the Company's common stock investment equals cost, as no
market value is readily available.

     CAPITALIZED SOFTWARE

     In accordance with Statement of Position 98-1 ("SOP 98-1"), "Accounting for
the Costs of Computer Software Development or Obtained for Internal Use," it is
the Company's policy to capitalize the cost of its internal use software.
Capitalized software consists of purchased software, outsourcing costs and
internal staff costs incurred to develop software, including the Company's web
sites. The Company's policy is to amortize these costs over three years.
Software development costs not capitalizable pursuant to SOP 98-1, which totaled
$438,399, $107,835 and $13,440 in 2000, 1999 and 1998, respectively, are
included in general and administrative expenses.

     INVENTORIES

     Inventories consist of finished goods and are stated at the lower of cost
or market, with cost determined using the first-in, first-out (FIFO) method.
Appropriate consideration is given to obsolescence and other factors in
evaluating net realizable value.

     FURNITURE AND EQUIPMENT

     Furniture and equipment are stated at cost. Significant additions or
improvements extending asset lives are capitalized, while repairs and
maintenance are charged to expense as incurred. Depreciation is recorded using
the straight-line method over the estimated useful lives of the assets, ranging
from three to seven years. Gains or losses on dispositions are included in
current operations.

                                      F-13
<PAGE>   41
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     FINANCIAL INSTRUMENTS

     The carrying values of cash, receivables, notes payable and accounts
payable 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, excluding direct response catalog advertising, are
expensed when incurred and totaled approximately $4,460,226, $1,530,900 and
$222,600 for the periods ended January 31, 2000, 1999 and 1998, respectively.
Advertising costs related to direct response catalog advertising are deferred
and charged to expense over the period during which the related sales are
expected to occur. The Company uses an accelerated amortization schedule for its
deferred catalog costs whereby approximately 90% of the costs are amortized in
the first four months following the release of the catalog and fully amortized
by the sixth month. Direct response catalog advertising expense was $16,574 for
the year ended January 31, 2000.

     INTANGIBLE ASSETS

     Intangible assets are being amortized on a straight-line basis over their
estimated lives, which range from 3 to 20 years. There was no accumulated
amortization on any intangible assets at January 31, 1999.

     NET LOSS PER COMMON SHARE

     Basic and diluted net loss per common share is computed by dividing net
loss by the weighted average number of common and common equivalent shares
outstanding during the period. The Company's common equivalent shares are those
that result from dilutive common stock options, warrants, and convertible debt.
The calculation of diluted net loss per common share for 2000, 1999 and 1998
excludes 14,317,502, 6,342,152 and 3,085,841 equivalent shares, respectively,
because their effect would be antidilutive.

     ACCOUNTING FOR STOCK-BASED COMPENSATION

     The Company accounts for employee stock and options under the method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations and provides the pro forma
disclosures required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." Compensation for common stock,
options and warrants issued in exchange for investment banking, strategic
planning, legal and other services are measured in accordance with EITF Issue
No. 98-16, "Accounting for Equity Instruments that are Issued to other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."

     VALUATION OF LONG-LIVED ASSETS

     The Company periodically, at least quarterly, analyzes its long-lived
assets for potential impairment, assessing the appropriateness of lives and
recoverability of unamortized balances through measurement of undiscounted
operating cash flows.

     INCOME TAXES

     The Company calculates income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes," which requires the use of the
liability method of accounting for income taxes. Under the liability method,
deferred income taxes are recorded to reflect the tax consequences in future
years of temporary differences between the tax bases of assets and liabilities
and their financial

                                      F-14
<PAGE>   42
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

reporting amounts using enacted tax rates for the years in which these items are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is tax payable and the change during the period in deferred
tax assets and liabilities.

     OTHER RECENT ACCOUNTING DEVELOPMENTS

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. This statement
establishes a new model for accounting for derivatives and hedging activities.
Under FAS 133, the Company must recognize all derivatives as assets and
liabilities and measure them at fair value. In July 1999, the FASB issued
Statement of Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement
No. 133," which defers the effective date to all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect the adoption of FAS
133 to have a significant impact on its financial position, results of
operations or cash flows.

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

     In April 2000, The FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25." FIN 44 clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Company does not expect the adoption of FAS 133 to have a
significant impact on its financial position, results of operations or cash
flows.

4. ACQUISITIONS

     On December 17, 1999, the Company, through its wholly-owned subsidiary, T2
Acquisition Corporation, completed its acquisition with an effective date of
November 30, 1999, of substantially all of the operating assets of Tech Squared
Inc. ("Tech") for approximately $3,200,000 in cash and the assumption of certain
liabilities. The acquisition was accounted for using the purchase method of
accounting.

     Tech sells microcomputer hardware and software products. Tech's target
markets are (i) desktop publishing, graphic arts and pre-press industries, (ii)
computer dealers and value-added resellers, and (iii) developers of internal
corporate intranet and external Internet sites and managers of local area
networks and wide area networks.

                                      F-15
<PAGE>   43
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The table below is a summary of the purchase price and calculation of
amounts allocated to intangible assets:

<TABLE>
<S>                                                             <C>
Cash........................................................    $3,252,536
Liabilities assumed.........................................     3,048,568
Acquisition costs...........................................       200,000
                                                                ----------
       Total purchase price.................................     6,501,104
Estimated fair value of tangible assets acquired............     5,301,104
                                                                ----------
Purchase price in excess of the estimated fair value of
  assets acquired...........................................    $1,200,000
                                                                ==========
</TABLE>

     The Company has allocated the excess purchase price to intangible assets as
follows:

<TABLE>
<CAPTION>
                                                                        AMORTIZATION
                     DESCRIPTION                           AMOUNT      PERIOD (YEARS)
                     -----------                           ------      --------------
<S>                                                      <C>           <C>
Customer list........................................    $  690,000          5
Assembled workforce..................................       225,000          4
Domain names.........................................       130,000          5
Trade names..........................................       155,000          7
                                                         ----------
                                                         $1,200,000
                                                         ==========
</TABLE>

     On December 30, 1999, the Company completed its acquisition of certain
assets of Softdisk, Inc., including the Internet web site domain name and
trademark for downloadstore.com for $752,220, which included cash, 245,359
shares of the Company's common stock and a promissory note. The acquisition was
accounted for using the purchase method of accounting.

     Downloadstore.com is an Internet retail web site in the business of selling
downloadable software and licenses to end user consumers and businesses.

     The table below is a summary of the purchase price and calculation of
amounts allocated to intangible assets:

<TABLE>
<S>                                                             <C>
Cash........................................................    $150,000
Common stock................................................     465,200
Promissory note due seller..................................     104,215
Acquisition costs...........................................      32,805
                                                                --------
     Total purchase price...................................     752,220
Estimated fair value of tangible assets acquired............     325,000
                                                                --------
Purchase price in excess of the estimated fair value of
  assets acquired...........................................    $427,220
                                                                ========
</TABLE>

     The Company has allocated the excess purchase price to intangible assets as
follows:

<TABLE>
<CAPTION>
                                                                       AMORTIZATION
                     DESCRIPTION                           AMOUNT     PERIOD (YEARS)
                     -----------                           ------     --------------
<S>                                                       <C>         <C>
Customer list.........................................    $394,415          4
Goodwill..............................................      32,805          5
                                                          --------
                                                          $427,220
                                                          ========
</TABLE>

     On January 28, 1999, the Company, through its wholly-owned subsidiary, GTI
Acquisition Corporation ("GTI"), completed its acquisition of substantially all
of the operating assets of Herold Marketing Associates, Inc., dba Graphics
Technology, Inc. for approximately $17,100,000, which included

                                      F-16
<PAGE>   44
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

cash, 373,571 shares of the Company's common stock and notes and the assumption
of certain liabilities. The acquisition was accounted for using the purchase
method of accounting.

     GTI is a distributor of computer peripheral equipment to wholesale and
retail outlets throughout the United States and Canada. GTI specializes in high
performance computer equipment, computer integrated systems design and the
assembly and sale of complete computer systems. GTI purchases products directly
from more than 40 manufacturers of computer-related products, and maintains a
stock inventory of approximately 1,600 products.

     The table below is a summary of the purchase price and calculation of the
preliminary amounts allocated to intangible assets:

<TABLE>
<S>                                                             <C>
Cash........................................................    $1,200,000
Notes payable, net of discount of $111,400..................     7,188,600
Common stock................................................     2,684,855
Liabilities assumed.........................................     6,049,636
                                                                ----------
       Total purchase price.................................    17,123,091
Estimated fair value of tangible assets acquired
  (approximates recorded book value)........................     7,235,681
                                                                ----------
Purchase price in excess of the estimated fair value of
  assets acquired...........................................    $9,887,410
                                                                ==========
</TABLE>

     The Company initially allocated the excess purchase price to intangible
assets as follows:

<TABLE>
<CAPTION>
                                                                        AMORTIZATION
                     DESCRIPTION                           AMOUNT      PERIOD (YEARS)
                     -----------                           ------      --------------
<S>                                                      <C>           <C>
Covenant not to compete..............................    $  500,000           3
Consulting agreement.................................     1,042,115           3
Goodwill.............................................     8,345,295          20
                                                         ----------
                                                         $9,887,410
                                                         ==========
</TABLE>

     In fiscal 2000, the Company settled certain contingencies and more
accurately determined the values of certain tangible assets and liabilities
assumed related to the GTI acquisition. As a result, goodwill was reduced by
$403,539 to $7,941,756.

     The following unaudited pro forma financial information gives effect to the
Tech, Softdisk, and Graphics acquisitions as if they had occurred at the
beginning of each of the years ended January 31, 2000 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
acquisitions occurred on the date indicated, or which may result in the future.

<TABLE>
<CAPTION>
                                                         YEAR ENDED JANUARY 31,
                                                      ----------------------------
                                                          2000            1999
                                                          ----            ----
                                                              (UNAUDITED)
<S>                                                   <C>             <C>
Net sales.........................................    $118,960,522    $108,334,478
Net loss..........................................     (32,842,423)     (6,321,555)
Net loss per common share -- basic and diluted....           (1.05)          (0.33)
Weighted average common shares
  outstanding -- basic and diluted................      31,191,922      19,449,774
</TABLE>

                                      F-17
<PAGE>   45
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. SELECTED BALANCE SHEET INFORMATION

     The following provides additional balance sheet information:

<TABLE>
<CAPTION>
                                                                JANUARY 31,
                                                         -------------------------
                                                            2000           1999
                                                            ----           ----
<S>                                                      <C>            <C>
Other current assets:
  Prepaid consulting and service agreements..........    $ 1,934,173    $2,546,630
  Credit card company holdbacks......................        470,069       174,000
  Prepaid expenses and other.........................        116,706        41,040
  Prepaid catalog....................................         82,777
                                                         -----------    ----------
                                                         $ 2,603,725    $2,761,670
                                                         ===========    ==========
Furniture and equipment:
  Office furniture and equipment.....................    $   344,161    $  291,674
  Computer equipment and purchased software..........      1,325,185        24,100
                                                         -----------    ----------
                                                           1,669,346       315,774
  Less accumulated depreciation......................       (342,703)      (35,410)
                                                         -----------    ----------
                                                         $ 1,326,643    $  280,364
                                                         ===========    ==========
Capitalized software development costs...............    $   362,678    $  104,500
Less accumulated amortization........................        (39,645)       (3,202)
                                                         -----------    ----------
                                                         $   323,033    $  101,298
                                                         ===========    ==========
</TABLE>

     Amortization expense resulting from amortization of capitalized software
development costs was $36,443, $3,202 and $-0- during 2000, 1999 and 1998,
respectively.

<TABLE>
<CAPTION>
                                                                JANUARY 31,
                                                         -------------------------
                                                            2000           1999
                                                            ----           ----
<S>                                                      <C>            <C>
Intangible assets:
  Goodwill...........................................    $ 7,974,560    $8,345,295
  Covenant not to compete............................        500,000       500,000
  Consulting agreement...............................      1,042,115     1,042,115
  Customer lists.....................................      1,084,415
  Assembled workforce................................        225,000
  Domain names.......................................        130,000
  Trade names........................................        155,000
                                                         -----------    ----------
                                                          11,111,090     9,887,410
  Less accumulated amortization......................       (930,463)
                                                         -----------    ----------
                                                         $10,180,627    $9,887,410
                                                         ===========    ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                JANUARY 31,
                                                         -------------------------
                                                            2000           1999
                                                            ----           ----
<S>                                                      <C>            <C>
Other assets:
  Prepaid investor relation services.................    $    74,000    $  103,600
  Loan fees..........................................      2,482,021        50,250
  Deposits...........................................         18,034        21,973
                                                         -----------    ----------
                                                         $ 2,574,055    $  175,823
                                                         ===========    ==========
</TABLE>

                                      F-18
<PAGE>   46
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. PREPAID CONSULTING AND SERVICE AGREEMENTS

     The Company enters 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 and/or issued
warrants to purchase common stock, or a combination thereof. In fiscal 2000, the
Company accounted for such agreements pursuant to the requirements of Emerging
Issues Task Force Issue No. 96-18 and Statement of Financial Standards No. 123.

     As of January 31, 2000, the Company has $1,934,173 included in prepaid and
other current assets and $1,190,093 included in other assets which will be
charged to operating and interest expense, respectively, during fiscal year 2001
as the underlying services are provided or over the term of the Company's line
of credit agreement. Total expenses related to these agreements were $10,263,401
and $1,322,360 in fiscal years 2000 and 1999, respectively.

7. NOTES AND LINE OF CREDIT PAYABLE

     Notes and line of credit payable consist of the following:

<TABLE>
<CAPTION>
                                                               JANUARY 31,
                                                        --------------------------
                                                           2000           1999
                                                           ----           ----
<S>                                                     <C>            <C>
Line of credit, Coast Business Credit...............    $ 6,883,816
Note payable, Coast Business Credit.................        375,000
Note payable to HMA, interest imputed at 9.75%,
  balance due in fiscal 2001........................        276,673    $ 7,188,600
Notes payable to former stockholder of VTL with
  interest at 8%....................................                        93,129
Notes payable to related parties with interest at
  10%, due December 2000 and March 2001, repaid in
  April 2000........................................         30,000        416,543
Note payable to related party, repaid in February
  2000..............................................        200,000
Softdisk note, discounted at 9.75%, due in monthly
  payments of $9,150 through December 2000..........         95,911
Other notes payable.................................         26,507         13,944
                                                        -----------    -----------
                                                          7,887,907      7,712,216
Less current portion................................     (7,887,907)    (7,340,673)
                                                        -----------    -----------
                                                        $        --    $   371,543
                                                        ===========    ===========
</TABLE>

     In February 1999, the Company entered into a three-year credit agreement
(the "Coast Agreement") with Coast Business Credit, a division of Southern
Pacific Bank ("Coast"), to provide line of credit financing of up to
$10,000,000, based upon eligible levels of receivables and inventories. The loan
bears interest at the prime rate (8.5% at January 31, 2000) plus 1.5% and, as
amended, expires March 31, 2003. In connection with setting up the Coast
Agreement, the Company incurred certain fees and expenses that it paid for with
a combination of cash and warrants to purchase the Company's common stock. The
loan fees are being amortized over the term of the Coast Agreement and charged
to interest expense. The total loan fees of $3,332,278 included three-year
warrants to purchase 500,000 shares of common stock at $6.29 per share.
Approximately $1,110,800 of the loan fee was amortized to interest expense
during the year ended January 31, 2000. As part of the Coast Agreement, the
Company may also borrow up to an additional $250,000 for capital expenditures at
the bank's reference rate plus 2.0%. In addition, the Company may borrow up to
$500,000 at the bank's reference rate plus 2%, with principal borrowings payable
in 24 equal monthly installments. As of January 31, 2000, the Company had
borrowed $375,000 of

                                      F-19
<PAGE>   47
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the $500,000 available. Borrowings under the Coast Agreement are collateralized
by all of the assets of the Company. The Coast Agreement requires the Company to
maintain a minimum level of tangible net worth and contains a covenant which
allows Coast to declare an event of default in the event there is a material
adverse change in the Company's financial position or results of operations
("material adverse effect"), as defined. As of January 31, 2000, the Company had
$6,883,816 of borrowings under the line of credit. At January 31, 2000, the
Company was in violation of the tangible net worth covenant contained in the
Coast Agreement. Because of the covenant violation, Coast has the right to
declare the Company in default and to require repayment of all borrowings under
the Coast Agreement. Accordingly, all Coast borrowings have been classified as a
current liability.

     The Company was in violation of the tangible net worth covenant, contained
in the Coast Agreement, as of September 30, 1999 and October 31, 1999. In
December 1999, Coast and the Company amended the Coast Agreement ("the Amended
Agreement") to permanently waive these covenant violations in exchange for a
five-year warrant to purchase 50,000 shares of the Company's common stock at an
exercise price of $2.04 per share. The value of the warrants, $59,500, has been
included in fiscal year 2000 interest expense. The Amended Agreement also
provides that in the event that the Company terminates the agreement prior to
March 31, 2003, the Company will continue to pay Coast, as a termination fee,
the minimum monthly interest that Coast would otherwise have received under the
agreement. The Company currently estimates this termination fee would be
approximately $33,000 per month. In addition, the Amended Agreement provided for
additional borrowings of $2,100,000 to partially fund the Tech Squared
acquisition and added the Tech Squared assets as additional collateral for
borrowings under the Amended Agreement.

     As a condition of its $2,100,000 loan, Coast required that the Company
obtain a minimum of $2,000,000 of additional equity funds, and issue to Coast an
additional five-year warrant to purchase 200,000 shares of the Company's common
stock at an exercise price of $2.04 per share, subject to certain adjustments.
The $238,000 value of the warrants has been recorded as prepaid loan fees, and
is being amortized over the term of the Amended Agreement. The Company satisfied
Coast's additional equity requirement in December 1999 upon receipt of
$1,423,000 from the sale of 1,423,000 shares of common stock and $1,450,000 from
the sale of five-year warrants to purchase 5,800,000 shares of common stock for
$0.50 per share. The warrant holders had the right to demand redemption of
one-half of these warrants for $0.50 per warrant. Upon the warrant holders'
demand in December 1999 and January 2000, the Company redeemed all of the
2,900,000 redeemable warrants for $1,450,000 in cash. The fair value of the
remaining 2,900,000 warrants of $4,777,000 was charged to interest expense in
fiscal year 2000. If the Company does not register the shares underlying these
warrants with the Securities and Exchange Commission by May 31, 2000, the
Company is required to issue these warrant holders additional warrants to
purchase an aggregate of 2,900,000 shares of common stock for $0.50 per share.

                                      F-20
<PAGE>   48
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. LEASE COMMITMENTS

     OPERATING LEASES

     The Company leases office facilities and certain office equipment under
operating lease agreements which expire at various dates through February 2007.
The Company may elect to extend its headquarter facility lease for an additional
five years, beginning March 2007. The lease requires the Company to pay
insurance, property taxes and other operating expenses related to the leased
facility. Total rent expense was $295,082, $58,400 and $31,300 for the years
ended January 31, 2000, 1999 and 1998.

     CAPITAL LEASES

     The Company has entered into capital lease agreements for certain office
equipment. These agreements, which expire at various dates through October 2004,
require monthly lease payments, including interest at annual rates from 10.8% to
16.5%. Cost of equipment in the accompanying balance sheets includes the
following amounts under capital leases as of January 31:

<TABLE>
<CAPTION>
                                                                2000       1999
                                                                ----       ----
<S>                                                            <C>        <C>
Cost.......................................................    $82,091    $66,260
Less accumulated amortization..............................    (22,768)    (8,724)
                                                               -------    -------
                                                               $59,323    $57,536
                                                               =======    =======
</TABLE>

     Future minimum lease payments under capital and operating leases are as
follows as of January 31, 2000:

<TABLE>
<CAPTION>
                                                            CAPITAL     OPERATING
                                                            -------     ---------
<S>                                                         <C>         <C>
2001....................................................    $ 22,806    $  420,434
2002....................................................      22,273       422,994
2003....................................................      22,273       411,209
2004....................................................      14,704       333,960
2005....................................................       3,079       342,611
Thereafter..............................................                   741,207
                                                            --------    ----------
                                                              85,135    $2,672,415
                                                                        ==========
Less amount representing interest.......................     (20,665)
                                                            --------
Present value of minimum lease payments.................      64,470
Less current portion....................................     (13,951)
                                                            --------
                                                            $ 50,519
                                                            ========
</TABLE>

9. STOCKHOLDERS' EQUITY

     In June 1999, the stockholders of the Company approved an amendment to the
Company's Articles of Incorporation to increase the authorized number of shares
of capital stock from 55,000,000 to 100,000,000 shares, to eliminate the
distinction between authorized common stock and authorized Preferred Stock, and
to change the par value from no par value to $.001 per share. As a result of
this action, effective June 1999, $32,257,303 was reclassified from common stock
to additional paid in capital.

     During fiscal 2000, the Company issued 5,364 common shares to a shareholder
of a predecessor company who had not previously contacted the Company to present
such shares for exchange.

                                      F-21
<PAGE>   49
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCK OPTIONS AND WARRANTS

     The Company maintains a stock option plan (the Plan) pursuant to which a
maximum of the greater of 4,000,000 shares or 15% of the total outstanding
shares of common stock are reserved for issuance. These options can be either
incentive stock options or nonqualified options as designated by the Board of
Directors at the time of grant. Incentive stock options may be granted to
employees, including officers, at exercise prices determined at the discretion
of the Board of Directors. Nonqualified stock options may be granted to
directors, officers, employees and other eligible recipients at exercise prices
determined at the discretion of the Board of Directors.

     The vesting and expiration terms of stock options granted under the Plan
are determined by the Board of Directors at the time of grant, but in no event
are options exercisable more than ten years after the date of grant. A summary
of selected information regarding the stock option activity under the Plan is as
follows:

<TABLE>
<CAPTION>
                                                                     WEIGHTED AVERAGE
                                                                      EXERCISE PRICE
                                                         OPTIONS        PER OPTION
                                                         -------     ----------------
<S>                                                     <C>          <C>
Balance at January 31, 1998
  Granted...........................................    1,500,000         $1.46
                                                        ---------         -----
Balance at January 31, 1999.........................    1,500,000         $1.46
  Granted...........................................    1,868,000         $3.24
  Cancelled.........................................      (15,000)        $4.75
                                                        ---------         -----
Balance at January 31, 2000.........................    3,353,000         $2.46
                                                        ---------         -----
</TABLE>

     At January 31, 2000, 1,768,360 options were available for grant under the
Plan.

     The weighted average fair value of options granted under the Plan at the
date of grant was $3.13 and $0.93 during fiscal 2000 and 1999, respectively. All
of these options had exercise prices equal to or greater than the fair value of
common stock on the date of grant.

     OTHER OPTION GRANTS

     The Company's Board of Directors, at their discretion, may grant stock
options that are not part of the Plan. The vesting and expiration terms of stock
options granted outside of the Plan are determined by the Board of Directors at
the time of grant. A summary of selected information regarding the stock option
activity not granted under the Plan during each of the three years in the period
ended January 31, 2000, is as follows:

<TABLE>
<CAPTION>
                                                                     WEIGHTED AVERAGE
                                                                      EXERCISE PRICE
                                                         OPTIONS        PER OPTION
                                                         -------     ----------------
<S>                                                     <C>          <C>
Balance at January 31, 1997.........................      520,000         $1.67
  Granted...........................................      298,000         $1.00
                                                        ---------         -----
Balance at January 31, 1998.........................      818,000         $1.43
  Granted...........................................      190,000         $0.65
  Cancelled.........................................     (350,000)        $2.00
                                                        ---------         -----
Balance at January 31, 1999.........................      658,000         $0.90
  Granted...........................................      831,950         $1.28
                                                        ---------         -----
Balance at January 31, 2000.........................    1,489,950         $1.11
                                                        ---------         -----
</TABLE>

                                      F-22
<PAGE>   50
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The weighted average fair value of options granted outside of the Plan
during fiscal 2000, 1999 and 1998 were $1.12, $0.08 and $0.90, respectively.

     The following table summarizes information about all stock options
outstanding and exercisable at January 31, 2000.

<TABLE>
<CAPTION>
                                                OUTSTANDING                                    EXERCISABLE
                              ------------------------------------------------         ----------------------------
                                                        WEIGHTED AVERAGE
                                                  ----------------------------                             WEIGHTED
                                                   REMAINING                                               AVERAGE
      RANGE OF                  NUMBER            CONTRACTUAL         EXERCISE           NUMBER            EXERCISE
   EXERCISE PRICES            OUTSTANDING         LIFE-YEARS           PRICE           EXERCISABLE          PRICE
   ---------------            -----------         -----------         --------         -----------         --------
<S>                           <C>                 <C>                 <C>              <C>                 <C>
    $0.05 - $0.25                356,950              .86              $0.10              356,950           $0.10
    $1.00 - $1.94              3,040,000             7.60              $1.29            1,708,000           $1.04
    $2.22 - $3.50                281,000             8.62              $2.39              252,200           $2.41
    $3.75 - $4.75              1,165,000             9.21              $4.53              421,250           $4.45
</TABLE>

     WARRANTS

     As of January 31, 2000, the Company had outstanding and exercisable
warrants to purchase 9,474,552 shares of the Company's common stock at prices
ranging from $0.50 to $9.00 per share. The warrants expire at various dates
through December of 2004. The following table summarizes information about all
common stock warrants outstanding and exercisable at January 31, 2000:

<TABLE>
<CAPTION>
                                                OUTSTANDING                                    EXERCISABLE
                              ------------------------------------------------         ----------------------------
                                                        WEIGHTED AVERAGE
                                                  ----------------------------                             WEIGHTED
                                                   REMAINING                                               AVERAGE
      RANGE OF                  NUMBER            CONTRACTUAL         EXERCISE           NUMBER            EXERCISE
   EXERCISE PRICES            OUTSTANDING         LIFE-YEARS           PRICE           EXERCISABLE          PRICE
   ---------------            -----------         -----------         --------         -----------         --------
<S>                           <C>                 <C>                 <C>              <C>                 <C>
    $0.50 - $1.68              7,999,552             3.62              $0.81            7,999,552           $0.81
    $2.00 - $3.00                775,000             3.07              $2.17              775,000           $2.17
    $6.29 - $9.00                700,000             1.82              $7.06              700,000           $7.06
</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 issued to employees. 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.

     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 granted to employees based upon their fair values. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                             PERIOD ENDED JANUARY 31,
                                               -----------------------------------------------------
                                                   2000                1999                1998
                                                   ----                ----                ----
<S>                                            <C>                 <C>                 <C>
Dividend yield.............................         0%                  0%                  0%
Volatility factor..........................     99% - 253%          240% - 307%             0%
Risk-free interest rates...................    5.53% - 6.24%       4.46% - 5.62%       5.48% - 5.66%
Expected lives -- years....................      0.8 - 8.0           1.6 - 8.0           1.1 - 4.8
</TABLE>

                                      F-23
<PAGE>   51
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     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,
                                                         ------------------------------------------
                                                             2000           1999           1998
                                                             ----           ----           ----
<S>                                                      <C>             <C>            <C>
Net Loss:
  As reported........................................    $(28,166,026)   $(4,357,088)   $(2,539,161)
  Pro forma..........................................     (30,952,980)    (4,765,848)    (2,781,841)
Net loss per common share -- basic and diluted:
  As reported........................................           (0.95)         (0.26)         (0.36)
  Pro forma..........................................           (1.04)         (0.28)         (0.39)
</TABLE>

11. INCOME TAXES

     The Company provides for 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. Net deferred tax assets have been offset by a valuation
allowance because management has concluded, based upon the Company's history of
net operating losses, that realization is not presently likely. No income taxes
are currently payable due to the Company's net operating losses.

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

<TABLE>
<CAPTION>
                                                           JANUARY 31,
                        ---------------------------------------------------------------------------------
                                          2000                                      1999
                        -----------------------------------------   -------------------------------------
                           TOTAL         FEDERAL         STATE         TOTAL        FEDERAL       STATE
                           -----         -------         -----         -----        -------       -----
<S>                     <C>            <C>            <C>           <C>           <C>           <C>
Deferred tax assets:
  Net operating loss
     carryforwards...   $ 13,652,700   $ 10,337,900   $ 3,314,800   $ 2,485,000   $ 1,929,000   $ 556,000
  Write-off of VTL...        457,600        355,200       102,400       457,600       355,200     102,400
                        ------------   ------------   -----------   -----------   -----------   ---------
                          14,110,300     10,693,100     3,417,200     2,942,600     2,284,200     658,400
Valuation
  allowance..........    (14,110,300)   (10,693,100)   (3,417,200)   (2,718,800)   (2,060,400)   (658,400)
                        ------------   ------------   -----------   -----------   -----------   ---------
                                                                        223,800       223,800
Deferred tax
  liabilities:
  Other..............                                                   223,800       223,800
                        ------------   ------------   -----------   -----------   -----------   ---------
Net..................   $         --   $         --   $        --   $        --   $        --   $      --
                        ============   ============   ===========   ===========   ===========   =========
</TABLE>

     Approximately $437,000, $949,000, $4,165,000, and $25,845,000 of the net
operating losses expire in 2012, 2013, 2019 and 2020 respectively.

     Certain changes in ownership resulting from the sales of common stock and
the issuance of common stock options and warrants 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 AND CONTINGENCIES

     The Company has an agreement with a consultant. Under the terms of the
agreement, if certain performance measures are met the consultant is entitled to
a bonus consisting of warrants to purchase 100,000 shares of the Company's
common stock for three years at an exercise price of $1.00 per share. No

                                      F-24
<PAGE>   52
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

compensation has been recorded related to the bonus because management does not
consider it probable that the performance measures will be met.

     In October 1999, the Company entered into a three-year E-Commerce Agreement
with Lycos, Inc. for comprehensive Internet marketing activities, including
co-branding of a Company web site on the Lycos network. Under the agreement, the
Company has paid Lycos $1,125,000 and is obligated to pay an additional
$5,875,000 in fiscal 2001, $5,000,000 in fiscal 2002 and $2,500,000 in fiscal
2003. Although the Company has included all amounts due through January 31, 2000
in the fiscal 2000 financial statements, the Company believes that Lycos has
breached the underlying contract and has suspended payments on the agreement and
is currently negotiating with Lycos to amend or terminate the agreement.

     In March 1999, the Company entered into a nine-month agreement with Cnet,
Inc. to provide advertising and lead generating services through links to the
Company's web site. Under the agreement, the Company agreed to pay a base
monthly fee plus additional fees based upon traffic at the Company's web site.
Although the Company has included all amounts due through the end of the
contract in its fiscal 2000 financial statements, the Company suspended payments
to Cnet in October 1999 because of dissatisfaction with the services provided.
In December 1999, Cnet initiated a lawsuit seeking to recover approximately
$1,600,000 plus interest and costs. The Company believes it has adequately
provided for any amount that may be due as a result of this action.

13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                     PERIOD ENDED JANUARY 31,
                                                                ----------------------------------
                                                                   2000          1999        1998
                                                                   ----          ----        ----
<S>                                                             <C>           <C>           <C>
Cash paid for interest......................................    $  714,743    $   74,451    $3,835
Noncash investing and financing activities:
  Capital lease obligation incurred for equipment
     purchase...............................................        15,831        61,418
  Note payable issued for prior year accrued expenses.......                     130,000
  Note payable issued for insurance.........................        52,092        27,357
  Stock subscriptions.......................................                   3,601,436
  Stock and warrants issued for prepaid consulting and
     service agreements.....................................     3,443,625     2,650,226
  Debt converted to common stock............................                     426,355
  Stock issued for consulting agreement.....................                   1,042,115
  Note payable, Softdisk acquisition........................       104,215
  Stock issued for Softdisk acquisition.....................       465,200
  Warrants issued for loan fees.............................     3,372,500
</TABLE>

                                      F-25
<PAGE>   53
                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. OPERATING SEGMENTS AND RELATED INFORMATION

     Prior to January 28, 1999, the Company operated in one segment, retail
sales. As a result of the acquisition of GTI and Tech Squared, the Company now
operates in two segments, retail sales and distribution sales to retail and
wholesale outlets.

<TABLE>
<CAPTION>
                                                                  AS OF AND FOR THE
                                                             YEAR ENDED JANUARY 31, 2000
                                               --------------------------------------------------------
                                                 RETAIL       DISTRIBUTION    CORPORATE        TOTAL
                                                 ------       ------------    ---------        -----
<S>                                            <C>            <C>             <C>           <C>
Identifiable assets........................    $11,279,841    $22,355,385     $1,031,557    $34,666,783
                                               ===========    ===========     ==========    ===========
Net sales to external customers............    $17,115,510    $64,203,265                   $81,318,775
Cost of goods sold.........................     15,996,899     60,427,846                    76,424,745
                                               -----------    -----------     ----------    -----------
  Gross profit.............................    $ 1,118,611    $ 3,775,419     $       --    $ 4,894,030
                                               ===========    ===========     ==========    ===========
</TABLE>

                                      F-26
<PAGE>   54

                          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, 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
schedule of Virtual Technology Corporation and Subsidiaries, listed in Item 14
for each of the two years in the period ended January 31, 1999. The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

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

Minneapolis, Minnesota
April 23, 1999

                                      F-27
<PAGE>   55

                                                                     SCHEDULE II

                VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
              COLUMN A                    COLUMN B                COLUMN C                 COLUMN D         COLUMN E
              --------                   ----------    ------------------------------    ------------      ----------
                                                                 ADDITIONS
                                                       ------------------------------
                                         BALANCE AT    CHARGED TO       CHARGED TO                         BALANCE AT
                                         BEGINNING     COSTS AND     OTHER ACCOUNTS -    DEDUCTIONS-         END OF
             DESCRIPTION                 OF PERIOD      EXPENSES         DESCRIBE          DESCRIBE          PERIOD
             -----------                 ----------    ----------    ----------------    -----------       ----------
<S>                                      <C>           <C>           <C>                 <C>               <C>
Year Ended January 31, 1998
Deducted from asset accounts:
  Allowance for doubtful accounts....     $     --      $     --        $       --       $         --       $     --
  Allowance for returns..............     $     --      $     --        $       --       $         --       $     --
  Allowance for obsolete inventory...     $     --      $     --        $       --       $         --       $     --
Year Ended January 31, 1999
Deducted from asset accounts:
  Allowance for doubtful accounts....     $     --      $157,780        $   75,000(1)    $    (69,780)(4)   $163,000
  Allowance for returns..............     $     --      $     --        $  100,000(1)    $         --       $100,000
  Allowance for obsolete inventory...     $     --      $     --        $  350,000(1)    $         --       $350,000
Year Ended January 31, 2000
Deducted from asset accounts:
  Allowance for doubtful accounts....     $163,000      $292,528        $  523,500(2)    $   (312,506)(4)   $666,522
  Allowance for returns..............     $100,000      $     --        $  557,168(3)    $    (85,559)(5)   $571,609
  Allowance for obsolete inventory...     $350,000      $ 48,853        $  129,000(2)    $   (192,853)(6)   $335,000
</TABLE>

-------------------------
(1) Allowances recorded as part of the acquisition of Herold Marketing
    Associates, Inc.

(2) Allowances recorded as part of the acquisition of Tech Squared, Inc.

(3) Comprised of $25,000 of allowances recorded as a part of the acquistion of
    Tech Squared, Inc. and $532,168 charged against net sales

(4) Uncollectable accounts written off, net of recoveries

(5) Returns received

(6) Disposal of obsolete inventories

                                      F-28
<PAGE>   56

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

     In October 1999, we engaged PricewaterhouseCoopers LLP as our independent
public accountants to audit our financial statements as of January 31, 2000 and
for the year then ended. Our Board of Directors approved the decision to dismiss
Lurie, Besikof, Lapidus & Co., LLP and to engage PricewaterhouseCoopers LLP as
our independent public accountants. The reports of Lurie, Besikof, Lapidus &
Co., LLP as of January 31, 1998 and 1999 and for the fiscal years then ended do
not contain an adverse opinion or a disclaimer of opinion nor a qualification
with respect to our ability to continue operations as a going concern. Those
reports also were 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
our former auditor's satisfaction, would have caused them to make reference to
the subject matter in their reports. Prior to retaining PricewaterhouseCoopers
LLP, we did not consult with them regarding the application of accounting
principles to a specified transaction, the type of audit opinion that might be
rendered on our financial statements or any other matter.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     James D. Ross, age 51, became a member of our Board of Directors in
December 1999 and was elected as Chairman in January 2000. Since 1998, Mr. Ross
has been Managing Director of FIMG Capital Management, a private corporate
advisory organization. Between 1995 and 1998, Mr. Ross was Executive Vice
President of Aegon, USA, an insurance company. Mr. Ross was Vice President and
Chief Investment Officer of Shenandoah Life Insurance Company between 1991 and
1995. From 1975 to 1985, Mr. Ross served in various management capacities with
Maccabees Mutual Life Insurance Company, most recently as Vice President and
Treasurer.

     Gregory A. Appelhof, age 38, joined us in October 1998 as our President and
a director. He was additionally elected as Chief Executive Officer in November
1998. Prior to joining us, Mr. Appelhof was employed by Herold Marketing
Associates, Inc. (the entity constituting GTI) for over 11 years until its
acquisition by us, most recently as Vice President of Sales.

     Kenneth M. Israel, age 46, has been our Chief Strategy Officer since
January 2000 and a director since February 1996. Mr. Israel was our Chairman
between February 1996 and January 2000 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.

     John L. Harvatine, age 49, became our Chief Financial Officer 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, age 55, has been our Executive Vice President of
Technology and a director since February 1996. Between 1993 and 1996, Mr.
Maynard was the Chief Executive Officer of Secure Backup
                                       27
<PAGE>   57

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, age 54, has served as a director since April 1999. Since
1982, Mr. Lacerte has been Executive Vice President of Lacerte Software
Corporation. Between 1971 and 1975, Mr. Lacerte held a management position with
Data Processing, Inc. Between 1994 and 1998 he 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.

     Maceo K. Sloan, age 50, has served as a director since May 1999. Mr. Sloan
has been the Chairman, President and Chief Executive Officer of Sloan Financial
Group, Inc. since 1991, the Chairman, President and Chief Executive Officer and
Chief Financial Officer of NCM Capital Management Group, Inc. since 1986 and
Chairman of New Africa Advisers, Inc. since 1993. Mr. Sloan has served as the
Chairman of Sloan Communications, Inc. and CONXUS Communications since 1994.
Between 1973 and 1986, Mr. Sloan served North Carolina Mutual Life Insurance
Company, where he was employed in various positions including Vice
President -- Treasurer and Chief Investment Officer. Mr. Sloan has also been a
member of the Board of Trustees of the College Retirement Equities Fund since
1991, the Board of Directors of SCANA Corporation since 1997, and the Board of
Directors of Mechanics and Farmers Bank since 1979.

     James P. Secord, age 63, has served as a director since May 1999. Mr.
Secord has been President of Lakewood Publications since 1976, and Chief
Executive Officer since 1986. Upon Lakewood's acquisition by Bill
Communications, Inc. in 1995 and until his retirement in February 2000, Mr.
Secord served as Division President of Bill Communications, Inc. He has been a
member of the Board of Governors for Minnesota Magazine Publishers Association
since 1997, and a member of the Board of Advisors for Catholic Digest since
1996. Mr. Secord served BPA International on the Board of Directors between 1992
and 1998, and on the Executive Committee between 1994 and 1997. Between 1985 and
1991, Mr. Secord served on the Board of Directors of American Business Press. He
is an Executive Fellow of the University of St. Thomas Graduate School of
Business.

     Committees. Messrs. Appelhof, Ross and Sloan serve on our executive
committee. Messrs. Lacerte, Secord and Sloan serve on our audit and compensation
committees.

     Section 16(a) Beneficial Ownership Compliance. Based solely upon a review
of Forms 3 and 4 and amendments to them furnished to us during fiscal 2000 and
Forms 5 and amendments to them furnished to us for fiscal 2000, the following
directors, officers and 10% beneficial shareholders failed to timely file those
forms with the SEC during fiscal 2000:

     - Messrs. Israel, Appelhof, Ross and Lacerte failed to file a required Form
       4;

     - Messrs. Israel, Harvatine, Appelhof, Sloan, Maynard and Ross failed to
       timely file a required Form 5; and

     - Messrs. Lacerte and Secord failed to file a required Form 5.

                                       28
<PAGE>   58

ITEM 11. EXECUTIVE COMPENSATION.

     The following table summarizes the amount of compensation paid and accrued
to our executive officers for the fiscal years ended January 31, 1998, 1999 and
2000. No other executive officers had aggregate salaries and bonuses that
exceeded $100,000.

<TABLE>
<CAPTION>
                             ANNUAL COMPENSATION                                LONG-TERM COMPENSATION
                          --------------------------    ----------------------------------------------------------------------
                                                                  AWARDS                              PAYOUTS
                                                        --------------------------    ----------------------------------------
                                                           OTHER        RESTRICTED     SECURITIES
       NAME AND                                            ANNUAL         STOCK        UNDERLYING       LTIP       ALL OTHER
      PRINCIPAL                   SALARY      BONUS     COMPENSATION      AWARD       OPTIONS/SAR'S    PAYOUTS    COMPENSATION
       POSITION           YEAR      ($)        ($)          ($)            ($)             (#)           ($)          ($)
      ---------           ----    ------      -----     ------------    ----------    -------------    -------    ------------
<S>                       <C>     <C>        <C>        <C>             <C>           <C>              <C>        <C>
Greg Appelhof,........    1999     86,115          0       2,000               0        1,250,000         0            0
Chief Executive
  Officer                 2000    155,000    223,333       6,000               0          165,000         0            0
Kenneth Israel,.......    1997          0          0           0         909,091          280,000         0            0
Chairman                  1998          0          0           0         600,000           56,000         0            0
                          1999    163,750          0       6,000          10,000           30,000         0            0
                          2000    200,000          0       6,000                          227,500         0            0
John Harvatine,.......    1999      8,334          0         400         250,000                0         0            0
Chief Financial
  Officer                 2000    100,000     25,000       4,800          30,000                0         0            0
</TABLE>

                     OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

     The following table sets forth information as of January 31, 2000 regarding
outstanding options to executive officers and directors granted for the year
ended January 31, 2000:

<TABLE>
<CAPTION>
                                                                                           POTENTIAL REALIZABLE VALUE
                                                                                            AT ASSUMED ANNUAL RATES
                                                                                                 OF STOCK PRICE
                                                                                                APPRECIATION FOR
                                                 INDIVIDUAL GRANTS                                OPTION TERM
                            -----------------------------------------------------------    --------------------------
                                              PERCENT OF
                                                 TOTAL
                              NUMBER OF      OPTIONS/SAR'S
                             SECURITIES       GRANTED TO
                             UNDERLYING      EMPLOYEES IN     EXERCISE OF
                            OPTIONS/SAR'S     FISCAL YEAR     BASE PRICE     EXPIRATION
          NAME                 GRANTED           2000           ($/SH.)         DATE         5%($)          10%($)
          ----              -------------    -------------    -----------    ----------      -----          ------
<S>                         <C>              <C>              <C>            <C>           <C>           <C>
Kenneth Israel..........       135,000           6.7%            $4.75         5/13/09      $403,279      $1,021,987
                                62,500            3.1             2.22         9/15/09        87,259         221,132
                                30,000            1.5             1.94        10/29/09        36,602          92,756
Greg Appelhof...........       135,000            6.7             4.75         5/13/09       403,279       1,021,987
                                30,000            1.5             1.94        10/29/09        36,602          92,756
John Harvatine..........        30,000            1.5             4.75         5/13/09        89,617         227,108
Jeff Maynard............        75,000            3.7             4.75         5/13/09       224,044         567,771
                                62,500            3.1             2.22         9/15/09        87,259         221,132
                                30,000            1.5             1.94        10/29/09        36,602          92,756
James Ross..............        30,000            1.5             1.78        12/13/09        33,583          85,106
Maceo Sloan.............        30,000            1.5             4.75         5/13/09        89,617         227,108
                                20,000            1.0             2.22         9/15/09        27,923          70,762
Philip Lacerte..........        30,000            1.5             4.75         5/13/09        89,617         227,108
                                20,000            1.0             2.22         9/15/09        27,923          70,762
James Secord............        30,000            1.5             4.75         5/13/09        89,617         227,108
                                20,000            1.0             2.22         9/15/09        27,923          70,762
</TABLE>

                                       29
<PAGE>   59

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

<TABLE>
<CAPTION>
                                                               NUMBER OF SECURITIES
                                                              UNDERLYING UNEXERCISED      VALUE OF UNEXERCISED
                                                                 OPTIONS/SAR'S AT        IN-THE-MONEY OPTIONS/
                                                                      FY-END                 SARS AT FY-END
                               SHARES ACQUIRED     VALUE         (#) EXERCISABLE/           ($) EXERCISABLE/
           NAME                  ON EXERCISE      REALIZED        UNEXERCISABLE              UNEXERCISABLE
           ----                ---------------    --------    ----------------------     ---------------------
<S>                            <C>                <C>         <C>                       <C>
Greg Appelhof..............           0              0          1,663,333/405,000        $2,161,850/$284,950
Kenneth Israel.............           0              0            900,500/155,000         $1,155,850/$3,700
John Harvatine.............           0              0            125,000/155,000               $0/$0
</TABLE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets forth information as of May 10, 2000 regarding the
ownership of our Common Stock by our officers and directors and other persons
known by us to beneficially own 5% or more of our 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>
                          NAME                              NUMBER OF SHARES(1)     PERCENTAGE OWNERSHIP
                          ----                              -------------------     --------------------
<S>                                                         <C>                     <C>
James D. Ross(2)........................................           241,250(3)                  *
Gregory A. Appelhof(2)..................................         1,753,616(4)               4.6%
Kenneth M. Israel(2)....................................         2,604,348(5)               7.0%
John L. Harvatine(2)....................................           132,500(6)                  *
Jeffrey Maynard(2)......................................           987,500(7)               2.7%
Maceo K. Sloan(2).......................................           784,100(8)               2.1%
Philip Lacerte(2).......................................         3,891,041(9)              10.4%
James P. Secord(2)......................................           44,000(10)                  *
All officers and directors as a group...................       10,458,355(11)              25.2%
Harry Lowell............................................        9,060,029(12)              24.6%
Stephen Antebi..........................................        3,483,000(13)               9.4%
Stephan G. Herold.......................................        1,985,570(14)               5.5%
</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
     Netdirect, 6690 Shady Oak Road, Eden Prairie, Minnesota 55344.

 (3) Includes options and warrants to purchase 210,000 shares.

 (4) Includes options and warrants to purchase 1,697,083 shares.

 (5) Includes options and warrants to purchase 934,250 shares, 62,000 of which
     are owned by companies under Mr. Israel's control. Also includes 11,850
     shares owned by Mr. Israel's wife.

 (6) Includes options to purchase 132,500 shares.

 (7) Includes options and warrants to purchase 477,500 shares.

 (8) Includes options and warrants to purchase 140,000 shares. Also includes
     100,000 shares and warrants to purchase an additional 500,000 shares held
     by Sloan Financial, a company under Mr. Sloan's control.

                                       30
<PAGE>   60

 (9) Includes options to purchase 40,000 shares. Also includes 2,651,041 shares
     and warrants to purchase an additional 1,200,000 shares held by Euro Realty
     Development Ltd., a company controlled by Mr. Lacerte.

(10) Includes options to purchase 40,000 shares.

(11) Includes options and warrants to purchase 5,371,333 shares.

(12) Includes warrants to purchase 554,886 shares. Also includes 610,700 shares
     and warrants to purchase 200,000 shares of Common Stock held by Laurel
     Center Management Co., a company controlled by Dr. Lowell.

(13) Includes 1,983,000 shares and warrants to purchase 1,000,000 shares owned
     by Fontenelle, LLC, of which Mr. Antebi is the sole equity owner and
     manager. Also includes 300,000 shares owned by Novante Communication Corp.
     Money Pension Plan, of which Mr. Antebi is the trustee. Also includes
     200,000 shares owned by the Antebi Family Foundation, of which Mr. Antebi
     is the trustee. Excludes 300,000 shares and 300,000 shares held by the 1995
     Antebi Children's Insurance and Other Trust, and the 1997 Antebi Children's
     Insurance and Other Trust, respectively, of which Mr. Antebi disclaims
     beneficial ownership.

(14) Includes warrants to purchase 213,333 shares. Also includes 228,571 shares
     issued to Herold Marketing Associates, Inc., of which Mr. Herold is the
     sole shareholder, in connection with the acquisition of the assets of GTI.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

GTI ACQUISITION

     Gregory A. Appelhof, our President and Chief Executive Officer, formerly
was with Herold Marketing Associates, Inc. for 11 years, most recently as Vice
President of Sales. Herold Marketing did business as GTI. We acquired
substantially all of the assets and assumed certain liabilities of Herold
Marketing in January 1999 for an aggregate purchase price of $17.1 million. Mr.
Appelhof owned the right to be treated as though he were a 20% owner of Herold
Marketing's stock in the event of a sale of Herold Marketing for purposes of
distributing the proceeds of the sale to Herold Marketing's shareholders. Mr.
Appelhof entered into this agreement with Herold Marketing's sole shareholder,
Stephan G. Herold. As of April 28, 2000, Mr. Appelhof had received $1.4 million
of cash distributions from Herold Marketing. We understand that final
distribution of cash received by Herold Marketing for the sale of Herold
Marketing's assets to us is due to Mr. Appelhof at the time the last payment is
received by Herold Marketing from us.

EMPLOYMENT AGREEMENTS

     Effective as of October 1998, Mr. Appelhof entered into an employment
agreement with us to receive an annual salary of $150,000, with a quarterly
guaranteed $25,000 bonus and a quarterly performance bonus award paid at a rate
of .15% of net sales. This award amounted to approximately $120,000 in fiscal
2000. Under the agreement, we granted Mr. Appelhof options to purchase 1,250,000
shares of our Common Stock at $1.00 per share. 500,000 of these options vested
in April 1999, 500,000 of these options vested 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 us. Mr. Appelhof may exercise
all vested options until October 2008. In addition, in October 1999, we granted
30,000 options to Mr. Appelhof for serving as a director. We also agreed to
provide Mr. Appelhof with a monthly vehicle allowance of $500. Under Mr.
Appelhof's employment agreement, if we had terminated his employment
involuntarily for reasons other than cause in the first year of employment, he
would have received severance pay equal to six months of base salary. If we
terminate his employment 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 we terminate his employment involuntarily after the second year of
employment, he will receive severance pay equal to 18 months of base salary.

     Effective as of January 1999, Mr. Harvatine entered into an employment
agreement with us to receive an annual salary of $100,000, with an annual
$25,000 bonus awarded based upon Mr. Harvatine reaching
                                       31
<PAGE>   61

certain performance goals. Under the agreement, we granted Mr. Harvatine options
to purchase 250,000 shares of our Common Stock at $3.75 per share. 62,500 of
such options vested immediately upon Mr. Harvatine's employment, 62,500 options
vested 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
us. All vested options are exercisable until January 2009. We also agreed to
provide Mr. Harvatine with a monthly vehicle allowance of $400. Under the
agreement, if we had terminated Mr. Harvatine's employment involuntarily for
reasons other than cause in the first year of employment, he would have received
severance pay equal to three months of base salary. If we terminate his
employment involuntarily after the first year of employment, he will receive
severance pay equal to six months of base salary.

LOANS FROM RELATED PARTIES

     Between March 1997 and June 1998, we received from Kenneth Israel, then our
Chief Executive Officer, Kate Israel, his daughter and companies under his
control loans in the total amount of $371,543. These loans bear interest at 10%
per annum and were due in fiscal year 2001. However, as of April 20, 2000, we
had repaid all of the amount due, including interest. In January 2000, we
borrowed $200,000 from Mr. Israel and repaid him without interest in February
2000.

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

LOANS TO RELATED PARTIES

     Between February and April 1999, we loaned Mr. Israel an aggregate of
$123,750. Mr. Israel used the proceeds of these loans and $25,000 of his
personal money to form VTCO, LLC, a start-up company to compete in the direct
response informercial market. In March 1999, we incorporated VTC TV, Inc. ("VTC
TV") our wholly owned subsidiary to acquire the assets of VTCO, LLC in exchange
for $148,750. In November 1999, we loaned VTC TV the $148,750 for this purpose.
In November 1999, Mr. Israel repaid the $123,750 of loans to us, without
interest.

CONSULTING AGREEMENTS WITH RELATED PARTIES

     In February 1999, we entered into a one-year Consulting Agreement with
Fontenelle, LLC ("Fontenelle"), an affiliate of Stephen Antebi, a principal
stockholder, to provide business consulting services to the Company. In exchange
for Fontenelle's services, we issued 1,000,000 shares of 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. The Consulting
Agreement was mutually terminated effective July 20, 1999. Fontenelle accepted
333,300 shares for services performed prior to the date of termination and
returned the remaining 666,700 shares to the Company.

     In August 1999, we entered into a one-year Consulting Agreement with
Fontenelle whereby Fontenelle agreed to assist us in developing a financial
strategy and in identifying potential investors. In exchange for Fontenelle's
services, we issued 1,500,000 shares of Common Stock valued at $1.812 per share,
for a total consideration of $2,718,750.

ADDITIONAL ISSUANCES OF SECURITIES

     In fiscal 2000, Mr. Lacerte and his affiliates purchased 1,651,041 shares
of Common Stock for $3,500,000 cash. Also in fiscal 2000, Mr. Lacerte received,
as directors' compensation, options to purchase 30,000 shares of Common Stock,
exercisable for 10 years at $4.75 per share. Also in fiscal 2000, Mr. Lacerte
received, as directors' compensation, options to purchase 20,000 shares of
Common Stock, exercisable for 10 years at $2.22 per share. Also in fiscal 2000,
Mr. Lacerte purchased 400,000 redeemable warrants, exercisable for five years at
$.50 per share, for $100,000 cash. Under the terms of the warrants, Mr. Lacerte
subsequently elected to require us to redeem 200,000 warrants for $100,000. The
remaining
                                       32
<PAGE>   62

200,000 warrants will double in amount if we fail to file a registration
statement and achieve effectiveness by May 31, 2000.

     In fiscal 2000, Maceo Sloan purchased 100,000 shares of our Common Stock
and 100,000 two-year warrants exercisable for $1.00 per share, for $100,000
cash. Also in fiscal 2000, Mr. Sloan received, as directors' compensation,
options to purchase 30,000 shares of Common Stock, exercisable for 10 years at
$4.75 per share. Also in fiscal 2000, Mr. Sloan received, as directors'
compensation, options to purchase 20,000 shares of Common Stock, exercisable for
10 years at $2.22 per share. Also in fiscal 2000, Sloan Financial Group, Inc., a
company under Mr. Sloan's control, purchased 1,000,000 redeemable warrants,
exercisable for $.50 per share, for $250,000 cash. Under the terms of the
warrants, Sloan Financial subsequently elected to require us to redeem 500,000
warrants for $250,000. The remaining 500,000 warrants will double in amount if
we fail to file a registration statement and achieve effectiveness by May 31,
2000.

     In fiscal 2000, Greg Appelhof received, as directors' compensation, options
to purchase 30,000 shares of Common Stock, exercisable for 10 years at $2.22.
Also in fiscal 2000, Mr. Appelhof received options to purchase 135,000 shares of
Common Stock, exercisable for 10 years at $4.75 per share. Also in fiscal 2000,
Mr. Appelhof purchased 1,200,000 redeemable warrants, exercisable for $.50 per
share, for $300,000 cash. Under the terms of the warrants, Mr. Appelhof
subsequently elected to require us to redeem 600,000 warrants for $300,000. The
remaining 600,000 warrants will double in amount if we fail to file a
registration statement and achieve effectiveness by May 31, 2000.

     In fiscal 2000, Kenneth Israel received, as directors' compensation,
options to purchase 30,000 shares of Common Stock, exercisable for 10 years at
$1.94 per share. Also in fiscal 2000, Mr. Israel received, for services
rendered, options to purchase 62,500 shares of Common Stock exercisable for 10
years at $1.94 per share. Also in fiscal 2000, Mr. Israel received options to
purchase 135,000 shares of Common Stock, exercisable for 10 years at $4.75 per
share. Also in fiscal 2000, Mr. Israel purchased 800,000 redeemable warrants,
exercisable for $.50 per share, for $200,000 cash. Under the terms of the
warrants, Mr. Israel subsequently elected to require us to redeem 400,000
warrants for $200,000. The remaining 400,000 warrants will double in amount if
we fail to file a registration statement and achieve effectiveness by May 31,
2000.

     In fiscal 2000, James Ross received, as directors' compensation, options to
purchase 30,000 shares of Common Stock, exercisable for 10 years at $1.78 per
share. Also in fiscal 2000, Mr. Ross purchased 400,000 redeemable warrants,
exercisable for $.50 per share, for $100,000 cash. Under the terms of the
warrants, Mr. Ross subsequently elected to require us to redeem 200,000 warrants
for $100,000. The remaining 200,000 warrants will double in amount if we fail to
file a registration statement and achieve effectiveness by May 31, 2000.

     In fiscal 2000, Mr. Secord received, as directors' compensation, options to
purchase 30,000 shares of Common Stock, exercisable for 10 years at $4.75 per
share. Also in fiscal 2000, Mr. Secord was granted, as directors' compensation,
options to purchase 20,000 shares of Common Stock, exercisable for 10 years at
$2.22 per share.

     In fiscal 2000, Jeffrey Maynard received, as directors' compensation,
options to purchase 30,000 shares of Common Stock, exercisable for 10 years at
$1.94 per share. Also in fiscal 2000, Mr. Maynard received, for services
rendered, options to purchase 62,500 shares of Common Stock, exercisable for 10
years at $1.94 per share. Also in fiscal 2000, Mr. Maynard received options to
purchase 75,000 shares of Common Stock, exercisable for 10 years at $4.75 per
share.

     In fiscal 2000, Fontenelle LLC received 1,000,000 shares of our Common
Stock in connection with a Consulting Agreement. The Consulting Agreement was
subsequently terminated and Fontenelle accepted 333,300 shares for services
performed prior to the date of termination. Fontenelle returned 666,700 shares
to us. Also in fiscal 2000, we granted warrants to Fontenelle to purchase
750,000 shares because we failed to register securities previously issued to
Fontenelle. Fontenelle then exercised these 750,000 warrants for $750,000 cash.
Also in fiscal 2000 Fontenelle received 1,500,000 shares of our Common Stock in
connection with a Consulting Agreement. Also in fiscal 2000, Fontenelle
purchased 2,000,000 redeemable warrants, exercisable for $.50 per share, for
$500,000 cash. Under the terms of the warrants, Fontenelle

                                       33
<PAGE>   63

subsequently elected to require us to redeem 1,000,000 warrants for $500,000.
The remaining 1,000,000 warrants will double in amount if we fail to file a
registration statement and achieve effectiveness by May 31, 2000.

     In fiscal 2000, Harry Lowell and affiliates purchased $250,000 shares of
our Common Stock and 250,000 warrants for $250,000 cash.

                                       34
<PAGE>   64

                                    PART IV

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

     (a)(1) Consolidated Financial Statements

VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
<S>                                                             <C>
Report of Independent Accountants at January 31, 2000 and
  for the year then ended...................................     F-1
Independent Auditor's Report at January 31, 1999 and for the
  two years then ended......................................     F-2
Consolidated Balance Sheets at January 31, 2000 and 1999....     F-3
Consolidated Statements of Operations for the years ended
  January 31, 2000..........................................     F-4
Consolidated Statements of Comprehensive Income (loss) for
  the years ended January 31, 2000, 1999 and 1998...........     F-5
Consolidated Statements of Changes in Stockholders' Equity
  for the years ended January 31, 2000, 1999 and 1998.......     F-6
Consolidated Statements of Cash Flows for the years ended
  January 31, 2000, 1999 and 1998...........................    F-11
Notes to Consolidated Financial Statements for the years
  ended January 31, 2000, 1999 and
  1998......................................................    F-12
Independent Auditor's Report on Financial Statement
  Schedule..................................................    F-27
Financial Statement Schedule................................    F-28
</TABLE>

     (a)(2) See above.

                                       35
<PAGE>   65

     (a)(3) Exhibits.

     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.

<TABLE>
<CAPTION>
EXHIBITS                            DESCRIPTION
--------                            -----------
<S>         <C>
3.1         Articles of Incorporation of the Company, as amended.*
3.2         By-Laws of the Company, as amended.*
4.1         Form of Stock Certificate, form of Stock Purchase Warrant
            and Stock Option Agreement.*
4.2         Form of redeemable warrant for December 1999 private
            placement.
10.1        Asset Purchase Agreement dated January 28, 1999, by and
            among GTI Acquisition Corporation, Herald Marketing
            Associates, Incorporated, dba Graphics Technology, Inc. and
            Stephan G. Herold*
10.2        Consulting Agreement dated January 28, 1999, between GTI
            Acquisition Corporation and Stephan G. Herold*
10.3        Loan and Security Agreement dated February 11, 1999, by and
            among Virtual Technology Corporation, GTI Acquisition
            Corporation and Coast Business Credit.*
10.4        Employment Agreement with Gregory Appelhof. ***
10.5        Employment Agreement with John Harvatine.***
10.6        Asset Purchase Agreement dated November 8, 1999 among Tech
            Squared Inc., T2 Acquisition Corporation, Chareles E. Reese
            Jr. and Joel A Ronning.****
10.7        First and Second Amendments to the Loan and Security
            Agreement dated December 10, 1999 and December 15, 1999,
            respectively, by and among Virtual Technology Corporation,
            GTI Acquisition Corporation and T2 Acquisition Corporation.
10.8        Agreement dated effective September 1, 1999 between Virtual
            Technology Corporation and eSystems21 Corporation.
10.9        Electronic Commerce Agreement dated effective January 4,
            2000 between Virtual Technology Corporation dba Netdirect
            Corporation International and the University of Minnesota.
21.         List of subsidiaries
24.         Power of Attorney. Included in this 10-K under "Signatures."
27.         Financial Data Schedule
</TABLE>

-------------------------
(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.

***  Incorporated by reference from the Company's 10-K, filed with the SEC on
     May 6, 1999.

**** Incorporated by reference from the Company's 8-K, filed with the SEC on
     December 30, 1999.

                                       36
<PAGE>   66

                                   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.

                                          Virtual Technology Corporation

                                          By     /s/ GREGORY A. APPELHOF
                                            ------------------------------------
                                             Gregory A. Appelhof, President and
                                                  Chief Executive Officer

Date: May 15, 2000

                               POWER OF ATTORNEY

     Each person whose signature to this Annual Report on Form 10-K appears
below hereby appoints Gregory A. Appelhof and John L. Harvatine, 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 connection 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.

                                                /s/ GREGORY A. APPELHOF
                                          --------------------------------------
                                          Gregory A. Appelhof, President and
                                          Chief Executive Officer and Director
                                          (Principal Executive Officer)
                                          Date: May 15, 2000

                                                 /s/ JOHN L. HARVATINE
                                          --------------------------------------
                                          John L. Harvatine, Chief Financial
                                          Officer (Principal Financial and
                                          Accounting Officer)
                                          Date: May 15, 2000

                                                   /s/ JAMES D. ROSS
                                          --------------------------------------
                                          James D. Ross, Director
                                          Date: May 15, 2000

                                                 /s/ KENNETH M. ISRAEL
                                          --------------------------------------
                                          Kenneth M. Israel, Director
                                          Date: May 15, 2000

                                                  /s/ JEFFREY MAYNARD
                                          --------------------------------------
                                          Jeffrey Maynard, Director
                                          Date: May 15, 2000

                                       37
<PAGE>   67

                                                  /s/ MACEO K. SLOAN
                                          --------------------------------------
                                          Maceo K. Sloan, Director
                                          May 15, 2000

                                                  /s/ PHILIP LACERTE
                                          --------------------------------------
                                          Philip Lacerte, Director
                                          Date: May 15, 2000

                                                  /s/ JAMES P. SECORD
                                          --------------------------------------
                                          James P. Secord, Director
                                          Date: May 15, 2000

                                       38