CYBERSTAR COMPUTER CORP, 10KSB, 2000-05-30

CYBERSTAR COMPUTER CORP
10KSB, 2000-05-30
COMPUTER & OFFICE EQUIPMENT

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FORM 10-KSB

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended: February 29, 2000

|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from ________________ to _________________

Commission file number: 000-27225
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CYBERSTAR COMPUTER CORPORATION
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(Name of small business issuer in its charter)

Minnesota 41-1427445
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

6825 Shady Oak Road, Eden Prairie, Minnesota 55344
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(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (952) 943-1598

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, par value $.01 per share
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(Title of Class)

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 |_|

Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. |_|

<PAGE>

State issuer's revenues for its most recent fiscal year: $ 4,393,068.
-----------

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $8,965,672 based on shares held by non-affiliates as of May 22, 2000, and
the closing sale price for said shares in the OTC Bulletin Board ("OTCBB") as of
such date.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 4,333,095 shares of Common Stock, par
value $.01 per share as of May 22, 2000.

DOCUMENTS INCORPORATED BY REFERENCE
None

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TABLE OF CONTENTS

Page
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PART I 1

Item 1. Description of Business 1

Item 2. Description of Property 7

Item 3. Legal Proceedings 7

Item 4. Submission of Matters to a Vote of Security Holders 7

PART II 8

Item 5. Market for Common Equity and Related Stockholder Matters 8

Item 6. Management's Discussion and Analysis or Plan of Operation 9

Item 7. Financial Statements 11

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 11

PART III 12

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 12

Item 10. Executive Compensation 13

Item 11. Security Ownership of Certain Beneficial Owners and Management 14

Item 12. Certain Relationships and Related Transactions 15

Item 13. Exhibits and Reports on Form 8-K 16

SIGNATURES 17

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

CyberStar Computer Corporation (the "Company" or "CyberStar")
specializes in e-commerce for online PC configuration, delivery, and fulfillment
on the Internet. Its products are sold throughout the country and the Company
provides 24-hour, 7-days a week on-site service, a dedicated web site, technical
support and network integration services.

CyberStar also designs and manufactures a wide range of computer
systems and products, including desktops, midtowers, minitowers, notebooks,
workstations, monitors and file servers based on the latest technologies by
Intel Corporation, Microsoft Corporation and Linux and markets them under the
CyberStar brand name. The Company markets, services and supports its products
through a nationwide network of approximately 150 authorized resellers who sell
the Company's products to end-users, which are typically businesses purchasing
multi-computer office systems. Through its buildtoorderpc.com division, the
Company resells branded computers and various branded and non-branded peripheral
products to end-users.

The Company was founded in 1982 under the laws of the State of
Minnesota as Command Small Computer Learning Center, Inc., a computer training
company. In 1987, the Company changed its name to Command Electronics, Inc. In
February 1995, the Company acquired CyberStar Computer Systems, a manufacturer
and marketer of microcomputers and servers, and in 1997 it changed its name to
CyberStar Computer Corporation. The Company's offices are located at 6825 Shady
Oak Road, Eden Prairie, Minnesota 55344, and its telephone and facsimile numbers
are (952) 943-1598 and (952) 943-1599, respectively. The Company's Internet
addresses are cyberstarpc.com, eNetpc.com and buildtoorderpc.com.

INDUSTRY OVERVIEW

The PC hardware market is generally thought to consist of three tiers
of manufacturers, based primarily upon the manufacturers' size and ability to
set industry standards. Tier one consists of five companies (IBM Corporation,
Compaq Computer Corporation, Dell Computer Corporation, Hewlett-Packard Company
and Apple Computer, Inc.), which have the research and development capabilities
and reputation to set the standards for the PC manufacturing industry. Tier two
consists of companies such as Micron Technology, Inc., Gateway, Inc., and Acer
Group. These tier two companies create certain products of their own, but more
frequently create clones of tier one products. Tier three consists of all other
computer manufacturers. Tier three manufacturers are clone makers that follow
the technology trends set by tier one manufacturers. Because all manufacturers
generally have access to the same components, they can produce identical systems
of various configurations. The ability of tier three manufacturers to compete
with tier one and tier two manufacturers and with each other depends on the
pricing of systems, the services offered in connection with a system, and the
marketing and sales capability of the tier three manufacturer or its dealers.
The Company is considered a tier three manufacturer.

The computer industry is one of the fastest changing industries today,
subject to constant fluctuation in price, technology and products offered.
Although tier one manufacturers once dominated

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the market, resellers report that non-branded, or white-box systems are their
best selling "brands". In a poll published in August 1999 by COMPUTER RESELLER
NEWS ("CRN"), resellers reported that sales of white-box systems exceeded the
sales of the next top three branded vendors (Compaq, Dell, and Hewlett Packard)
combined - citing price, flexibility in configuration, the ability to upgrade
and the ability to provide complete packages of products and support as the
reasons for sales of non-branded systems.

As white-box systems have become more popular with end-users, tier
three manufacturers have become able to offer their products at a variety of
price points. According to CRN (August 16, 1999), the retail prices of 60% of
white-box systems, i.e., systems without nationally-recognized brand names, were
under $1,400. Substantially all of the systems sold by the Company range in
price between $550 and $2,500.

Recently, the PC industry has undergone a fundamental shift in
distribution processes and methods. Traditionally, manufacturers of branded
products, such as IBM, manufactured computers and shipped them to distributors
and dealers who, in turn, shipped them to dealers and end-users, respectively.
End-users, under this distribution process, purchased systems from dealers in
whatever format the original manufacturer provided. Consequently, limited
opportunities existed for end-users to custom-configure their computer systems.
Further, this method required dealers to stockpile considerable inventory
levels, which often could not be sold out before an announced or expected change
in technology. Thus, dealers were forced, in many cases, to sell obsolete
systems. As a result, the traditional distribution method created inefficiencies
and additional costs, as well as consumer dissatisfaction.

While traditional distribution methods persist in certain parts of the
computer industry, in particular in the retail segment, the trend is toward
build-to-order and custom-configured computer systems. Dell and Gateway
pioneered this shift when they began offering custom-built PCs to consumers
primarily for home use. Today, many of the tier one manufacturers, such as IBM
and Compaq, also use channel assembly methods. These manufacturers ship products
that are not completely assembled to their distributors and rely on the
distributor for final assembly and shipment. This distribution method provides
only limited build-to-order benefits and does not provide the advantage of a
direct contact person to whom the end-user may direct technical and support
questions.

Generally, the number of purchasers and the amount spent for goods on
the Internet is increasing. Forrester Research, Inc. has estimated that the
total e-commerce purchases made in 1998 were $51 billion, of which $43 billion
was business-to-business and $8 billion was consumer. Forrester estimates that
the total will increase to an estimated $551 billion in the year 2001.
Increasingly businesses have been developing electronic commerce sites in
response to this trend. Computer resellers are spending substantial time on the
Internet conducting their business. According to CRN, as of June 1999, 54% of
resellers polled reported that they spent between 11 and 30 hours per week
conducting their business on the Internet. This same poll reported that an
additional 13% of resellers spent 31 hours or more conducting their business on
the Internet. The Company believes that as resellers and end-users become more
comfortable with the Internet they will rely on it more and that this increased
reliance will translate into a desire on the part of resellers to offer their
various computer systems via electronic commerce.

ENETPC.COM

eNetpc is an on-line configuration package that enables any computer
reseller to offer custom-

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built CyberStar PCs, notebooks, and fileservers to their customers on the
Internet. CyberStar will license eNetpc to web retailers, mail order houses,
value added resellers, retailers, and computer dealers. CyberStar will also
customize the software to coexist with the licensee's present web site. Upon
final design, the software will provide eNetpc licensees and their customers an
easy to use method of configuring, ordering, and tracking customized CyberStar
PCs, notebooks, and fileservers.

eNetpc will contain many attributes to allow the customer to easily
build a system, including real-time pricing, complete product specifications,
on-line help menus, technical specifications of each component, order tracking,
secure ordering and automated cost updates. eNetpc will offer complete order
fulfillment and tracking, on-site warranty and 24-hour technical support.

eNetpc uses an email system that sends an email of each order to a
CyberStar employee(s). The employee(s) then enters the data into an accounting
package to process the order. The current system can handle a limited number of
orders. CyberStar plans to upgrade the system in order to handle a higher volume
of orders.

CYBERSTAR DIVISION

The CyberStar division currently offers a number of products,
substantially all of which are based on Intel's microprocessors. Currently, the
Company's products target a broad range of performance and functionality for
each of the high-end, midrange and entry-level segments of the PC market. The
Company's current products include the Alliance Series of desktop computers, the
FilePro SHV Series of fileservers, the CyberBook Series of notebooks and
CyberStar line of monitors. For compatibility with a wide range of applications
software, the Company's products utilize the major industry standard operating
systems and current leading network protocols developed by Microsoft and Linux.
The Company intends to maintain compatibility with other major standards as they
evolve.

CyberStar offers three classes of computer lines:

The Alliance Series - a complete line of desktop PCs ranging from
entry level, home user models to high performance models for business. The
Alliance Series, available in several configurations, is designed to provide
maximum performance at the lowest possible price point without sacrificing
quality.

The CyberBook Series - a complete line of notebooks, including 12", 14"
and 15" models with complete communication and multimedia functionality. The
CyberBook Series of notebooks is designed to offer full functionality to mobile
users, including high performance graphic capabilities, large active matrix
screens and full multimedia capabilities. The CyberBook Series is available with
all current Intel mobile processors.

The FilePro Series - a complete line of fileservers that includes small
business servers, large-scale Internet servers and scalable rack mount servers.
The FilePro Series is designed to be a tier one file server alternative. The
Company's server line is available in single to quad Pentium III Xeon processor
configurations and all are based on Intel platforms. Designed for current
networking platforms, the FilePro SHV servers are certified compatible with
various operating systems, including Microsoft NT and Linux.

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BUILDTOORDERPC.COM

The Company developed buildtoorderpc.com, a proprietary Internet-based
development tool, to capitalize on two significant trends: e-commerce and the
desire for custom-built, custom-configured computer systems. Through
buildtoorderpc.com, the Company provides end-users with the ability to
custom-configure, price and order CyberStar or name brand products directly
on-line. This division offers over 62,000 products from all major manufacturers.
This includes all tier one manufacturers and all computer categories such as
printers, scanners, digital cameras, high-end video equipment and accessories.

The heart of buildtoorderpc.com is the Company's innovative and
proprietary configurator. The Company designed the configurator to link
buildtoorderpc.com and eNetpc licensed web sites directly to the Company. The
configurator is designed to act as an invisible window that will route orders
placed with individual customers to the Company for processing and fulfillment.
The Company's configurator is designed to test compatibility of the various
component and system choices made by end-users, thus prohibiting end-users from
making incompatible software, hardware and component choices.

CyberStar manufactures the custom built products ordered via the
configurator. The Company believes that custom-built, custom-configured
computers provide solutions that are relevant to the needs of end-users. While
the Company will maintain proprietary rights in buildtoorderpc.com and its
configurator, the Company will provide them to its customers for their use,
through eNetpc licensing. The Company believes that eNetpc will allow customers
to meet their needs in a flexible and efficient manner, and in a manner that
allows customers to provide cutting-edge technological choices without having to
maintain significant inventory levels.

Development of buildtoorderpc.com has been completed for end-user
customers and was launched in October 1999 under the Company's own end-user
site. The Company has completed version 1.0 of eNetpc for Internet resellers.
The Company is currently testing version 1.5 with a limited number of resellers.
During testing, the Company will also continue internal refinements of eNetpc.
The Company commenced beta tests of version 2.0 on May 1, 2000 and expects to
complete beta testing by the end of the second quarter of fiscal year 2001
(August 31, 2000).

MAJOR CUSTOMERS

Two customers represented 31% of CyberStar's sales in 1999 and 17% of
its sales in 2000.

DISTRIBUTION

CyberStar currently distributes its products through a nationwide
network of approximately 150 authorized dealers consisting of qualified VARs,
systems integrators, and office equipment dealers. It also uses its websites to
sell through the Internet both through dealers and directly to customers.

MANUFACTURING AND SUPPLIERS

The Company's manufacturing operations are currently located at its
executive offices and include facilities to (i) procure, inspect and test
circuit boards and (ii) assemble, test and package finished products. All
components are tested before undergoing final assembly. Once assembled, all
systems undergo a series of diagnostic tests for up to 24 hours. The Company
performs various levels of

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assembly on all of the products marketed under the CyberStar name, except for
monitors, which are delivered fully assembled and branded as CyberStar.

The Company currently procures all of its components from outside
suppliers. The Company generally utilizes standard parts and components
available from multiple vendors. However, the Company is technologically
dependent on Microsoft to provide Microsoft NT and Windows. From time to time,
increases in demand for PCs have created industry-wide shortages of key
components, such as microprocessors. Pursuant to the Company's arrangement with
Intel, Intel microprocessors are available to the Company in quantities that the
Company believes will be adequate to meet its anticipated requirements. In
addition to microprocessors, the Company purchases file server components,
network interface cards and motherboards from Intel for use in the Company's
branded products. The Company is, and will continue to be, heavily dependent on
Intel, not only for microprocessors and other components, but also for
manufacturing, research and development and marketing support.

The Company purchases notebook products from Taiwanese manufacturers.
The Company resells these notebooks under the CyberStar name to dealers and
end-users.

The Company recently improved its inventory controls and purchasing
systems by making software upgrades. The Company's business model provides it
with the ability to operate with reduced levels of component and finished goods
inventories, and the Company's limited success to date has been due in part to
its asset management practices, including its ability to achieve rapid inventory
turns. The Company's ability to aggressively manage its inventory has been
enhanced by favorable supply conditions in the computer industry.

COMPETITION

The microcomputer industry is intensely competitive and characterized
by dynamic customer demand patterns, frequent introduction of new products,
technological advances and product obsolescence. In addition, the pricing
environment is extremely competitive, and there is a variety of competing
distribution channels. The Company anticipates that the microcomputer industry
will continue to experience intense price competition and dramatic price
reductions, as well as intense competition among distribution channels. In
addition to pricing, the principal elements of competition among manufacturers
are product quality and usability, performance characteristics, distribution
capability, ability to customize, service and support and reputation. The
Company competes with a number of large tier one and tier two manufacturers,
including Compaq, IBM, Hewlett-Packard, Apple, Dell, and Gateway. The Company
competes with the larger name manufacturers mostly on the basis of quality,
price and performance. Substantially all of the Company's competitors have
significantly greater financial, marketing and technological resources than the
Company.

INTELLECTUAL PROPERTY

CyberStar owns no patents, nor has it applied for any patents covering
its products. CyberStar is subject to risks related to misappropriation of the
proprietary technology upon which buildtoorderpc.com is being designed. While
CyberStar believes that it is designing buildtoorderpc.com to be secure,
computer "hackers" are becoming increasingly sophisticated. Any misappropriation
of CyberStar's technology could subject CyberStar to increased competition and
the loss of its perceived advantage over other competitors.

CyberStar owns the rights to the registered trademark "CyberStar(R)".
CyberStar's use of the

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"CyberStar" mark is limited to products within the class of electronic and
scientific apparatus. Any use of the mark by others on products in other classes
may cause dilution of the mark and the goodwill CyberStar has created in the
mark. CyberStar has applied for federal trademark protection on enetpc.com(TM).
CyberStar claims common law trademark rights in FilePro(TM) file server and
CyberBook(TM) notebook.

SERVICE AND PRODUCT WARRANTY

CyberStar provides dealers with access to its technical support line
for answers to questions that require immediate attention. CyberStar maintains a
database of technical information that it can easily access in response to
customer inquiries in order to provide quick and accurate answers to its
dealers. CyberStar also provides file access for its dealers, featuring a secure
Internet site equipped to provide access to up-to-date support and technical
information. CyberStar also provides its dealers with current product
information, including manuals, specifications and product change notifications.

To support its end-users, CyberStar contracts with Micro Warranty
Services L.L.C. ("MWS") of Irving, Texas to provide all CyberStar desktops,
workstations, notebooks, and file servers with on-site warranty service.
End-users are provided with 24-hour, 7-days per week toll-free help desk support
and an on-site repair program. The help desk and parts dispatch are handled by
MWS through its toll-free service line, while parts are shipped via overnight
service by CyberStar. Similar to tier one manufacturers, an authorized CyberStar
dealer performs the repair work and is reimbursed for its services.

CyberStar utilizes what it believes is an effective product tracking
system which allows it to track product failure history from initial quality
control testing to customer arrival and up to twelve months thereafter. Each
CyberStar product is sold with a one-year warranty for the benefit of the
end-user. The warranty can be upgraded to either a one- or three-year on-site
warranty for a modest upgrade price.

GOVERNMENT REGULATION

In the United States, the Federal Communications Commission (the "FCC")
regulates the radio frequency emissions of computing equipment. The FCC has
established two standards for computer products, Class A and Class B. Only Class
B products may be sold for use in a residential environment. Both Class A and
Class B products may be sold for use in a commercial environment. All of
CyberStar's current desktop, notebook, workstation and network server systems
are sold under the more restrictive Class B certification.

CyberStar's business also is subject to regulation by various other
federal and state governmental agencies. Such regulation includes the antitrust
regulatory activities of the U.S. Federal Trade Commission and Department of
Justice, the import/export regulatory activities of the U.S. Department of
Commerce and the product safety regulatory activities of the U.S. Consumer
Products Safety Commission.

CyberStar also is required to obtain regulatory approvals in other
countries prior to the sale or shipment of products. In certain jurisdictions,
such requirements are more stringent than in the United States. Many developing
nations are just beginning to establish safety, environmental and other
regulatory requirements, which may vary greatly from U.S. requirements.

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EMPLOYEES

As of May 15, 2000, CyberStar had 15 employees, of which 14 were
full-time employees. None of these employees is represented by a union.
CyberStar believes that its relations with its employees are good.

ITEM 2. DESCRIPTION OF PROPERTY

CyberStar leases approximately 14,265 square feet of space used for
offices, assembly, manufacturing and packaging at 6825 Shady Oak Road, Eden
Prairie, Minnesota 55344 at a monthly rent of $10,700. This lease expires on
April 30, 2001. The Company believes that these premises will meet its
requirements for facilities for the remainder of the lease term.

ITEM 3. LEGAL PROCEEDINGS

On July 22, 1999, Martin J. McIntyre commenced an action against
CyberStar in the Circuit Court of Cook County, Illinois, alleging that he is
entitled to compensation for providing services to CyberStar in connection with
obtaining financing. Mr. McIntyre claims that he is entitled to $200,000 in
commissions (based on his assumption that CyberStar received at least $5,000,000
of financing) and warrants to purchase a number of shares of Common Stock equal
to 5% of the shares sold in the offering.

On October 20, 1999, CyberStar filed a motion seeking an order to
dismiss based on an arbitration clause in the agreement with Mr. McIntyre. The
Court granted this motion on December 20, 1999, without prejudice and
arbitration was filed with the American Arbitration Association on April 27,
2000. No discovery has been undertaken as of May 30, 2000.

CyberStar is, from time to time, a party to litigation arising in the
normal course of its business. CyberStar believes that none of these actions
will have a material adverse effect on its financial condition or results of
operations.

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

None

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS [REVISE]

CyberStar's Common Stock has been traded on the OTC Bulletin Board
("OTCBB") since June 12, 1998. The following table sets forth the quarterly high
and low bid prices as reported by the OTCBB during the fiscal years ended
February 28, 1999 and February 29, 2000.

FISCAL YEAR 1999 LOW HIGH
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First Quarter n/a n/a
Second Quarter $2.50 $3.625
Third Quarter 1.50 3.375
Fourth Quarter 1.00 2.125

FISCAL YEAR 2000 LOW HIGH
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First Quarter $1.50 $2.75
Second Quarter 2.00 2.875
Third Quarter 1.25 3.625
Fourth Quarter 2.75 9.25

These quotations represent interdealer prices, without retail markup,
markdown, or commission, and may not reflect actual transactions. As of April
14, 2000, there were approximately 207 record holders of CyberStar's Common
Stock. CyberStar has paid no cash dividends in its Common Stock.

DIVIDEND POLICY

The Company has never paid cash dividends on any of its securities. The
Company currently intends to retain any earnings for use in its operations and
does not anticipate paying cash dividends in the foreseeable future. Future
dividend policy will be determined by the Company's Board of Directors based
upon the Company's earnings, if any, its capital needs and other relevant
factors.

RECENT SALE OF UNREGISTERED SECURITIES

At the end of fiscal year 2000 the Company completed a $1,000,000
private placement offering of units consisting of its common stock and warrants
to purchase its common stock. The Company sold 400,000 units, at a placement
price of $2.50 per unit. Each unit consisted of one share of Common Stock, $.01
par value per share, and one warrant to purchase, at an exercise price of $7.50
per share, one share of the Company's Common Stock, par value $.01 per share,
such warrant to become exercisable one year after the date of issuance and to
expire four years thereafter. The units were offered by the Company through the
officers and directors only to investors who are "accredited" as defined in
Regulation D under the Securities Act of 1933, as amended. The Company also
offered the units through one or more registered broker-dealers. The
broker-dealer was paid a commission of 10% of the placement price of the units
sold. In addition, the broker-dealer received five-year warrants to purchase
30,000 shares of Common Stock, at an exercise price of $3.00 per share, and may
receive an additional 30,000 five-year warrants, at an exercise price of $9.00,
based on the number of warrants exercised by the unitholders.

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In connection with this offering, CyberStar relied upon the exemption
from the registration provided by Section 4(6) of the Securities Act.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

CyberStar has two operating divisions, the CyberStar division and the
VAR division. Revenues from CyberStar operations are generated through the sale
of a wide range of computer systems and products, including personal computers,
work stations and file servers, under the CyberStar brand name. The VAR division
is an authorized reseller of products from Compaq, CyberStar, IBM,
Hewlett-Packard and Apple, among others, as well as non-branded products.

CyberStar incurred net losses in both fiscal 1999 and 2000. In fiscal
1999, losses resulted from decreased sales and increased operating expenses. In
fiscal 2000, losses resulted from decreased sales that were partially offset by
an increase in the gross profit margin and a decrease in operating expenses.

In fiscal 1999, operating expenses increased as CyberStar prepared for
the growth that was anticipated from increased sales volume. CyberStar added
staff, primarily in sales and marketing but also in development of an e-commerce
site. During fiscal 1999, significant investments in equipment were also made.

In the first quarter of fiscal 2000, desired sales volumes were not
realized. In response, staff levels were reduced and gross profit margins were
increased, widening the gross profit margin. CyberStar began forming
relationships with outside sales and marketing organizations to increase and
expand sales volume. The e-commerce site was launched in September 1999, and
CyberStar has begun to make sales through the site. CyberStar believes that the
outside sales and marketing relationships that it has formed and the potential
to utilize the e-commerce site engine in forming new relationships will have a
positive impact on future sales.

RESULTS OF OPERATIONS

YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999

Sales decreased by 9%, or $461,231, to $4,393,068 in fiscal 2000 from
$4,854,299 in fiscal 1999. This decrease was due primarily to reduced volume of
sales to major customers (from 31% of total sales to 17%) and price decreases on
the entire product line following general industry wide reductions in the costs
of computer hardware. In fiscal 2000 and fiscal 1999, CyberStar division sales
accounted for 65%, or $2,854,097, and 66%, or $3,203,837, respectively, of total
sales. Sales for the VAR division decreased by $111,491 to $1,538,971 in fiscal
2000 from $1,650,462 in fiscal 1999.

Gross profit increased by 21%, or $132,029, to $770,488 in fiscal 2000
from $638,459 in fiscal 1999. Gross profit as a percentage of sales was 17% in
fiscal 2000 as compared to 13% in fiscal 1999. The increase in gross profit
percentage was primarily due to lower cost of computer hardware components used
in the manufacturing process, a $23,909 decrease in the cost of consumables, a
$5,463 decrease in warehouse supplies and a $76,155 decrease in freight expense.

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Selling, general and administrative expenses decreased by 20%, or
$321,715, to $1,245,439 in fiscal 2000 from $1,567,154 in fiscal 1999, and, as a
percentage of sales, were 28% in fiscal 2000 as compared to 32% in fiscal 1999.
This decrease was primarily due to decreases in advertising and promotion
expenses ($45,828), decreases in employee related expenses ($379,488), offset by
an increase in professional fees ($33,574), an increase in bad debts ($54,495)
and an increase in depreciation and amortization expense ($12,183). Staff
decreases were primarily in sales and marketing in anticipation of e-commerce
site sales and also as a result of outside sales and marketing relationships
formed in fiscal 2000.

The loss from operations decreased by $453,744 to $(474,951) in fiscal
2000 from $(928,695) in fiscal 1999, reflecting both the increase in gross
profit of $132,029 and the decrease in operating expenses of $321,715.

Interest expense increased by 143%, or $8,242, to $14,001 in fiscal
2000 from $5,759 in fiscal 1999 primarily as a result of increased average
borrowings in fiscal 2000.

As a result of the foregoing factors, net loss decreased by $452,884 to
$(467,173) in fiscal 2000 from $(920,057) in fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

CyberStar's cash position at February 29, 2000 was $496,486, an
increase of $423,295 from $73,191 at February 28, 1999. During the twelve months
ended February 29, 2000, net cash used in operating activities was $287,171
primarily due to the net loss of $467,173.

Net cash from financing activities of $747,070 in the twelve months
ended February 29, 2000 consisted primarily of net proceeds of $897,070 from the
sale of common stock, which was offset by payments of $150,000 on outstanding
borrowings under CyberStar's revolving credit facility.

Net cash used in investing activities in the twelve months ended
February 29, 2000 was $36,604 due to the purchases of property and equipment.

During 1999, CyberStar had a revolving line of credit of $150,000 with
a bank. Borrowings under the line accrued interest at a rate of 1.5% over prime.
The line of credit expired on April 25, 1999 and was not renewed.

In April 2000, the Company entered into a revolving line of credit that
provides for borrowings up to $100,000. Borrowings under the line of credit bear
interest at 1.0% plus prime. The line of credit is secured by substantially all
assets of the Company and the personal guaranty of the majority shareholder.

In fiscal 1999 several CyberStar sales representatives knowingly booked
sales and shipped products to fictitious customers. Upon discovery, the sales
and accounts receivable resulting from these transactions were reversed in
CyberStar's records. A claim was filed under CyberStar's insurance policy and an
insurance receivable was recorded in an amount equal to the value of inventory
lost. During the second quarter of fiscal 2000, CyberStar received payment of
the insurance receivable in the amount of $246,380.

During April and May, 2000, CyberStar borrowed $900,000 from a private
investor. The notes are due March 2001 and bear interest on the unpaid balance
at a fluctuating annual rate equal to 4 points above the rate of interest
established by Wells Fargo Bank, National Association, f/k/a Norwest Bank
Minnesota, National Association, as its base rate.

10
<PAGE>

Management believes that cash on hand, together with funds available
under the loans, will be sufficient to satisfy fiscal 2001 operating
requirements.

FORWARD-LOOKING INFORMATION

Any statements contained herein related to future events are
forward-looking statements and are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. These statements are
based upon management's current expectations and judgments about future
developments in CyberStar's business and may be affected by several factors,
including, without limitation, the ability to respond to customer demands, the
success of the e-commerce site, the ability to sell products at a profitable
price, and other factors affecting the computer industry in general. Readers are
cautioned not to place undue reliance on forward-looking statements. CyberStar
undertakes no obligation to update any such statements to reflect actual events.

ITEM 7. FINANCIAL STATEMENTS

Report of Independent Auditors.......................................19

Financial Statements

Balance Sheets.......................................................20
Statements of Operations.............................................21
Statement of Changes in Shareholders' Equity.........................22
Statements of Cash Flows.............................................23
Notes to Financial Statements........................................24

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

11
<PAGE>

PART III

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

Set forth below is certain information concerning each of the
directors and executive officers of CyberStar.

NAME AGE POSITION
-----------------------------------------------------------------------
Richard A. Pomije 44 Chairman, President, CEO, Secretary,
Treasurer and Director
James T. Greenfield 54 Director
Ed Havlik 43 Director

RICHARD A. POMIJE has been with CyberStar since 1982 and has served as
President, CEO, Secretary, Treasurer, and a director since 1996. He had
previously served in such positions from 1983 through 1992.

JAMES T. GREENFIELD has been a director since December 1997. Mr.
Greenfield had previously served as Secretary and Treasurer of CyberStar from
1992 to 1996. From 1982 through the present, Mr. Greenfield has served as the
President of Stone Fabrics, Inc., a wholesaler of fabrics. Mr. Greenfield is the
brother-in-law of Mr. Pomije.

ED HAVLIK has been a director since February 1998. Since 1990, Mr.
Havlik has served as National Sales Manager for Panasonic Multimedia Division.

Directors are elected at the annual meeting of the shareholders and
serve until their successors are elected and qualified. Officers are elected by
the Board of Directors and serve at the discretion of the Board of Directors or
until their earlier resignation or removal.

12
<PAGE>

Section 16 Beneficial Ownership Reporting Compliance

Section 16 of the Securities Exchange Act of 1934, as amended, and the
rules promulgated thereunder require the Company's officers, directors, and
holders of 10% or more of its outstanding common stock to file certain reports
with the Securities and Exchange Commission (the "Commission"). To the Company's
best knowledge, based solely on information provided by the reporting
individuals, all of the reports required to be filed by these individuals were
filed.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid for services
rendered during the last three fiscal years to the Chief Executive Officer (the
"Named Executive Officer"). No other officer earned cash compensation in excess
of $100,000 in fiscal 2000.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
ALL OTHER
ANNUAL
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY COMPENSATION(1)
------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard A. Pomije 2000 $102,655 $18,757
Chief Executive officer 1999 69,615 15,094
1998 112,692 19,451
</TABLE>

(1) Automobile expenses.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information regarding options granted to
the Named Executive Officer during the 2000 fiscal year.

<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF SHARES OPTIONS GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN FISCAL EXERCISE PRICE
NAME GRANTED YEAR ($/SHARE) EXPIRATION DATE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Richard A. Pomije -- -- -- --
</TABLE>

13
<PAGE>

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

The following table provides information relating to option exercises
during fiscal 2000 and the number and value of shares of Common Stock subject to
options held by the Named Executive Officer as of February 29, 2000.

<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON FISCAL YEAR-END FISCAL YEAR-END
NAME EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard A. Pomije -- -- -- --
</TABLE>

DIRECTORS' COMPENSATION

To date, CyberStar has not paid any cash compensation to its directors
for their services as directors, but may pay fees to its outside directors when
it becomes profitable.

In July 1999, CyberStar issued 5,000 shares of its Common Stock to Ed
Havlik as partial consideration for his service on the Board. Such shares were
valued at $12,500 as of the date of issuance.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of February 29, 2000 with
respect to the number of shares of Common Stock beneficially owned by (i) each
person known by CyberStar to own beneficially 5% or more of the Common Stock;
(ii) each director; (iii) the Named Executive Officer, and (iv) all

14
<PAGE>

directors and executive officers as a group. Unless otherwise noted, each person
listed below has sole voting and investment power with respect to his shares.
The address for each individual set forth below is 6825 Shady Oak Road, Eden
Prairie, Minnesota 55344.

<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER (1) NUMBER OF SHARES PERCENTAGE OF OUTSTANDING SHARES
-------------------------------------------------------------------------------------------
<S> <C> <C>
Richard A. Pomije 3,112,386 71.9%
James T. Greenfield 100,000(2) 2.3
Ed Havlik 5,000 *
All directors and executive officers
as a group (3 persons) 3,217,386(2) 72.6
</TABLE>

* Indicates an amount less than 1%

(1) The securities "beneficially owned" by a person are determined in accordance
with the definition of "beneficial ownership" set forth in the regulations of
the Commission and, accordingly, may include securities owned by or for, among
others, the spouse, children or certain other relatives of such person as well
as other securities as to which the person has or shares voting or investment
power or has the right to acquire within 60 days.

(2) Includes 100,000 shares of Common Stock purchasable pursuant to the exercise
of a currently exercisable option.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CyberStar has entered into a Stock Exchange Agreement with the
shareholders of International Trade Center, Inc., an Arizona corporation
("ITC"), to acquire all of the issued and outstanding stock of ITC. Under the
Stock Exchange Agreement, CyberStar will exchange the stock of ITC held by the
shareholders for common stock, $.01 par value per share, of CyberStar. CyberStar
expects to complete this transaction on or around June 1, 2000. It is
anticipated that Jonathan J. Bumba, President, Chief Executive Officer and a
shareholder of ITC, will become the Chief Executive Officer and President of
CyberStar following completion of this transaction. Mr. Bumba is currently an
employee of CyberStar and has been granted options to purchase 300,000 shares of
CyberStar's Common Stock. The options become exercisable beginning in January
2001.

The shareholders of ITC will receive a number of shares of CyberStar
stock equal to two times the book value of ITC on the date the transaction
closes, divided by a per share price of $5.50 for the CyberStar stock. For
example, if the book value of ITC as of the closing date were $50,000, the
number of CyberStar shares exchanged would be 18,182 [($50,000 x 2) / $5.50].

Each of the four shareholders of ITC will also be granted options to
purchase 25,000 shares of CyberStar Common Stock at $1.75 per share. The options
are exercisable five years after their issuance and may be exercised three years
after their issuance, if certain performance criteria are met.

The closing of the above Stock Exchange Agreement is conditioned upon
ITC redeeming 60% of the issued and outstanding stock from the certain
shareholders.

15
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws (1)
10.1 Lease for facility at 6825 Shady Oak Road (1)
10.2 1996 Employee Stock Option Plan, as amended to date (1)(2)
27 Financial Data Schedule

(1) Incorporated by reference to exhibit filed as a part of Registration
Statement on Form 10-SB (Commission File No. 000-27225).

(2) Management contract or compensation plan or arrangement required to be
filed as an exhibit to this Report.

(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed by the Company during the last
quarter of the fiscal year ended February 29, 2000.

16
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

CYBERSTAR COMPUTER CORPORATION

Dated: May 30, 2000 By: /s/ Richard A. Pomije
---------------------------------------------
Richard A. Pomije, Chief Executive Officer
(duly authorized officer)

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
Company and in the capacities and on the dates indicated.

Dated: May 30, 2000 By: /s/ Richard A. Pomije
---------------------------------------------
Richard A. Pomije, Director, Chairman of the
Board, Chief Executive Officer and
Chief Financial Officer

Dated: May 30, 2000 By: /s/ James T. Greenfield
---------------------------------------------
James T. Greenfield, Director

Dated: May 30, 2000 By: /s/ Ed Havlik
---------------------------------------------
Ed Havlik, Director

17
<PAGE>

CyberStar Computer Corporation

Index to

Financial Statements

Years ended February 28, 1999 and February 29, 2000

CONTENTS

Report of Independent Auditors................................................19

Financial Statements

Balance Sheets................................................................20
Statements of Operations......................................................21
Statement of Changes in Shareholders' Equity..................................22
Statements of Cash Flows......................................................23
Notes to Financial Statements.................................................24

18
<PAGE>

Report of Independent Auditors

Board of Directors
CyberStar Computer Corporation

We have audited the accompanying balance sheets of CyberStar Computer
Corporation as of February 28, 1999 and February 29, 2000, and the related
statements of operations, changes in shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CyberStar Computer Corporation
at February 28, 1999 and February 29, 2000, and the results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States.

ERNST & YOUNG LLP

April 14, 2000

19
<PAGE>

CyberStar Computer Corporation

Balance Sheets

<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1999 2000
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 73,191 $ 496,486
Accounts receivable, less allowance for doubtful
accounts - 1999--$16,700 and 2000--$80,500 693,490 574,506
Inventories 463,303 295,511
Insurance receivable 246,380 --
Deferred financing costs 25,000 --
Prepaid expenses 15,680 30,216
---------------------------------
Total current assets 1,517,044 1,396,719

Property and equipment:
Office equipment and furniture 224,404 260,949
Leasehold improvements 37,270 37,270
Production equipment 46,857 46,915
---------------------------------
308,531 345,134
Accumulated depreciation (133,988) (222,656)
---------------------------------
174,543 122,478
---------------------------------
Total assets $ 1,691,587 $ 1,519,197
=================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 150,000 $ --
Accounts payable 647,152 239,329
Accrued payroll and payroll taxes 34,273 39,874
Accrued liabilities 125,871 38,176
---------------------------------
Total current liabilities 957,296 317,379

Shareholders' equity:
Common stock, $.01 par value
Authorized shares - 20,000,000
Issued and outstanding shares - 1999--3,928,095 and
2000--4,333,095 39,281 43,331
Additional paid-in capital 1,901,029 3,069,049
Deferred compensation -- (237,370)
Accumulated deficit (1,206,019) (1,673,192)
---------------------------------
Total shareholders' equity 734,291 1,201,818
---------------------------------
Total liabilities and shareholders' equity $ 1,691,587 $ 1,519,197
=================================
</TABLE>

SEE ACCOMPANYING NOTES.

20
<PAGE>

CyberStar Computer Corporation

Statements of Operations

<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28, FEBRUARY 29,
1999 2000
----------------------------------
<S> <C> <C>
Sales $ 4,854,299 $ 4,393,068
Cost of sales 4,215,840 3,622,580
----------------------------------
Gross profit 638,459 770,488

Operating expenses:
General and administrative 1,412,754 1,206,150
Sales and marketing 154,400 39,289
----------------------------------
1,567,154 1,245,439
----------------------------------
Loss from operations (928,695) (474,951)

Other income (expense):
Interest income 17,824 2,369
Interest expense (5,759) (14,001)
Other (expense) income (3,427) 19,410
----------------------------------
8,638 7,778
----------------------------------
Net loss $ (920,057) $ (467,173)
==================================

Basic and diluted net loss per share $ (.24) $ (.12)

Weighted average shares outstanding 3,880,083 3,964,300
</TABLE>

SEE ACCOMPANYING NOTES.

21
<PAGE>

CyberStar Computer Corporation

Statement of Changes in Shareholders' Equity

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1998 3,416,666 $ 34,167 $ 989,262 $ -- $ (285,962) $ 737,467
Issuance of common stock, net of offering
costs 500,000 5,000 871,881 -- -- 876,881
Issuance of common stock for asset purchase 11,429 114 39,886 -- -- 40,000
Net loss -- -- -- -- (920,057) (920,057)
------------------------------------------------------------------------------------
Balance, February 28, 1999 3,928,095 39,281 1,901,029 -- (1,206,019) 734,291
Issuance of common stock, net of offering
costs 400,000 4,000 893,070 -- -- 897,070
Issuance of common stock for services
performed 5,000 50 12,450 -- -- 12,500
Deferred compensation related to stock
option grants -- -- 262,500 (262,500) -- --
Amortization of deferred compensation -- -- -- 25,130 -- 25,130
Net loss -- -- -- -- (467,173) (467,173)
------------------------------------------------------------------------------------
Balance, February 28, 2000 4,333,095 $ 43,331 $ 3,069,049 $ (237,370) $(1,673,192) $ 1,201,818
====================================================================================
</TABLE>

SEE ACCOMPANYING NOTES.

22
<PAGE>

CyberStar Computer Corporation

Statements of Cash Flows

<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28, FEBRUARY 29,
1999 2000
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (920,057) $ (467,173)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 76,484 88,668
Stock compensation expense -- 37,630
Changes in operating assets and liabilities:
Accounts receivable 320,918 118,984
Insurance receivable (246,380) 246,380
Inventories (26,002) 167,792
Deferred financing costs 22,600 25,000
Prepaid expenses (13,773) (14,536)
Accounts payable 26,042 (407,823)
Accrued liabilities 65,608 (82,093)
-------------------------------
Net cash used in operating activities (694,560) (287,171)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (88,138) (36,604)
-------------------------------
Net cash used in investing activities (88,138) (36,604)

CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock 876,881 897,070
Net payments on line of credit (125,000) (150,000)
-------------------------------
Net cash provided by financing activities 751,881 747,070
-------------------------------

(Decrease) increase in cash (30,817) 423,295
Cash at beginning of year 104,008 73,191
-------------------------------
Cash at end of year $ 73,191 $ 496,486
===============================

Supplemental information:
Cash paid during the year for interest $ 5,759 $ 14,001
Property and equipment acquired with common
stock issuance 40,000 --
</TABLE>

SEE ACCOMPANYING NOTES.

23
<PAGE>

CyberStar Computer Corporation

Notes to Financial Statements

February 29, 2000

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

The Company currently has two operating divisions, Cyberstar and VAR. The
Cyberstar Division manufactures and markets a line of microcomputers, including
personal computers, workstations and file servers under the Cyberstar brand
name. The VAR Division currently is an authorized reseller of products from
Compaq, IBM, Digital Equipment, and Hewlett-Packard, among others.

NET LOSS PER SHARE

Basic and diluted net loss per share is computed based on the weighted average
number of common shares outstanding during each period. Basic and diluted net
loss per share is equal because the effect of outstanding stock options and
warrants is anti-dilutive.

INVENTORIES

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

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided using
accelerated methods over the estimated useful lives of the assets ranging from
three to seven years. Leasehold improvements are amortized over the shorter of
the related lease term or estimated useful lives on a straight-line basis.

INCOME TAXES

The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between financial reporting
and the tax basis of assets and liabilities.

24
<PAGE>

CyberStar Computer Corporation

Notes to Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION

The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

The Company has elected to follow the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("Statement 123"). Accordingly, the Company has made pro forma disclosures of
what net loss would have been had the provisions of Statement 123 been applied
to the Company's stock options.

USE OF ESTIMATES

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

ADVERTISING COSTS

The Company expenses all advertising as incurred. Advertising costs charged to
operations were $53,853 and $8,025 for the years ended February 28, 1999 and
February 29, 2000, respectively.

2. NOTE PAYABLE TO BANK

During 1999, the Company had a revolving line of credit of $150,000 with a bank.
Borrowings under the line accrued interest at a rate of 1.5% over prime. The
line of credit expired April 25, 1999 and was not renewed.

25
<PAGE>

CyberStar Computer Corporation

Notes to Financial Statements (continued)

3. OPERATING LEASES

The Company leases vehicles and office space under operating leases that expire
at various times through February 2004.

Minimum lease payments on these leases for years after 2000 are as follows:

2001 $135,658
2002 26,941
2003 4,473
2004 3,355
------------
$170,427
============

Rent expense was $156,137 and $157,082 for the years ended February 28, 1999 and
February 29, 2000, respectively.

4. INCOME TAXES

At February 29, 2000, the Company had net operating loss carryforwards of
approximately $1,450,000. The net operating loss carryforwards are available to
offset future taxable income through 2020 and may be subject to the limitations
under Section 382 of the Internal Revenue Code if significant changes in the
equity ownership of the Company have occurred. Significant components of the
Company's deferred tax assets are as follows:

FEBRUARY 28, FEBRUARY 29,
1999 2000
----------------------------

Deferred tax assets:
Net operating loss carryforwards $426,300 $579,400
Allowance for doubtful accounts 5,700 27,400
Accrued vacation 1,300 2,200
----------------------------
Deferred tax assets before valuation allowance 433,300 609,000
Valuation allowance (433,300) (609,000)
----------------------------
Net deferred tax assets $ -- $ --
============================

26
<PAGE>

CyberStar Computer Corporation

Notes to Financial Statements (continued)

5. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

The Company extends unsecured credit to customers in the normal course of
business. The Company had two customers which represented 31% of sales in 1999
and one customer which represented 11% of sales in 2000. The accounts receivable
balance from these major customers was $226,662 and $10,128 at February 28, 1999
and February 29, 2000, respectively.

6. SHAREHOLDERS' EQUITY

COMMON STOCK AND WARRANTS

In April 1998, the Company sold 500,000 shares of common stock at $2.00 per
share from which the Company received proceeds of $876,881 net of direct
financing costs. In connection with the sale of shares, the Company issued
50,000 warrants to purchase common stock to the selling agent at an exercise
price of $2.20 per share. The warrants expire in April 2003.

In September 1998, the Company issued 11,429 shares of common stock at $3.50 per
share in exchange for certain assets.

In July 1999, CyberStar issued 5,000 shares of common stock to a director as
partial consideration for his service on the Board. Such shares were valued at
$12,500 as of the date of issuance.

In October 1999, the Company entered into a sales and marketing agreement with
International Trade Center, Inc. (ITC). As part of this agreement, the sales
representatives have the opportunity to earn a maximum of 100,000 warrants, once
certain gross profit targets are met. As of February 29, 2000, no targets were
met, thus no warrants were granted. In April 2000, the Company agreed to merge
with ITC (see Note 8).

27
<PAGE>

CyberStar Computer Corporation

Notes to Financial Statements (continued)

6. SHAREHOLDERS' EQUITY (CONTINUED)

In January 2000, the Company sold 400,000 shares of common stock at $2.50 per
share from which the Company received $897,070, net of offering costs. Each
share purchased has a companion warrant to purchase one share of common stock at
a price of $7.50 per share, which becomes exercisable in February 2001 and
expires four years thereafter. In connection with the sale of shares, the
Company issued 30,000 warrants to the selling agent, which have an exercise
price of $3.00. The selling agent may receive an additional 30,000 five-year
warrants with an exercise price of $9.00, based on the number of companion
warrants exercised.

STOCK OPTIONS

The Company has a stock option plan that includes both incentive and
non-statutory stock options granted to directors, officers, employees and
consultants of the Company. The maximum number of shares of Common Stock
reserved for issuance is 1,000,000 shares under the 1996 Stock Option Plan.
Option activity is summarized as follows:

<TABLE>
<CAPTION>
STOCK OPTION PLAN
------------------------------ NON PLAN WEIGHTED AVERAGE
SHARES AVAILABLE OPTIONS OPTIONS OPTIONS EXERCISE PRICE PER
FOR GRANT OUTSTANDING OUTSTANDING OUTSTANDING SHARE OUTSTANDING
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at February 28, 1998 478,828 -- --
Additional shares reserved 521,172 -- -- -- $ --
Options granted (338,684) 338,684 -- 338,684 1.86
------------------------------ ---------------------------
Balance at February 28,1999 661,316 338,684 -- 338,684 1.86
Options granted (173,000) 173,000 300,000 473,000 2.36
Options canceled 81,500 (81,500) -- (81,500) 1.85
------------------------------ ---------------------------
Balance at February 29, 2000 569,816 430,184 300,000 730,184 $2.19
============================== ===========================
</TABLE>

Exercise prices for options outstanding as of February 29, 2000 ranged from
$1.75 to $3.00. The Company had 260,001 exercisable options at February 29, 2000
with a weighted average exercise price of $1.87. The weighted average remaining
contractual life is 5.8 years at February 29, 2000.

In February 1999, the exercise price for certain outstanding options was
repriced from $3.00 to $1.75. The total number of repriced options was 308,334.
In addition, the Company has 23,850 options which vest on the one year
anniversary of the date at which the Company completes an initial public
offering, if ever.

28
<PAGE>

CyberStar Computer Corporation

Notes to Financial Statements (continued)

6. SHAREHOLDERS' EQUITY (CONTINUED)

The following is a summary of stock options granted during the year ended
February 29, 2000:

WEIGHTED
WEIGHTED AVERAGE
NUMBER OF AVERAGE EXERCISE
OPTIONS FAIR VALUE PRICE
----------------------------------

Stock price less than exercise price 40,000 $3.23 $3.75
Stock price equal to exercise price 133,000 2.02 2.19
Stock price greater than exercise price 300,000 2.93 2.25
-----------
Total 473,000 2.70 2.36
===========

All options granted during the year ended February 28, 1999 were granted with
the stock price equal to exercise price and a weighted average fair value of
$.39.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, if the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

Pro forma information regarding net loss is required by Statement 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of Statement 123. The fair value for these options
was estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions: risk-free interest rates of
5.0% in 1999 and 5.5% in 2000 and a weighted average expected life of the option
of five years in 1999 and four years in 2000.

29
<PAGE>

CyberStar Computer Corporation

Notes to Financial Statements (continued)

6. SHAREHOLDERS' EQUITY (CONTINUED)

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

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

1999 2000
-------------------------

Pro forma net loss $(1,004,336) $(731,689)
Basic and dilutive pro forma net loss per share $(.25) $(.18)

In January 2000, the Company granted 300,000 options to an employee of the
Company at an exercise price below the fair market value of the common stock. As
a result, the Company has recorded deferred compensation expense of $262,500.
The options vest over a five-year period; however, the vesting can be
accelerated if certain performance goals are obtained. The Company believes it
is more likely than not that the performance goals will be achieved and as a
result is amortizing the compensation expense over the performance period.
During the year ended February 29, 2000, the Company recognized $25,130 of
compensation expense related to these options.

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CyberStar Computer Corporation

Notes to Financial Statements (continued)

7. SEGMENT AND GEOGRAPHIC DATA

The Company has one reportable segment, computer systems and products. This
segment, which is comprised of the CyberStar and VAR divisions, distributes
branded and proprietary computer systems and peripheral equipment. CyberStar
distributes its products throughout the United States. The following table
presents sales information by division:

YEAR ENDED
FEBRUARY 28, FEBRUARY 29,
1999 2000
-------------------------------
Net sales:
CyberStar division $3,203,837 $2,854,097
VAR division 1,650,462 1,538,971
-------------------------------
$4,854,299 $4,393,068
===============================

8. SUBSEQUENT EVENTS (UNAUDITED)

In April 2000, the Company entered into a revolving line of credit that provides
for borrowing up to $100,000. Borrowings under the line of credit bear interest
at 1.0% plus prime. The line of credit matures July 20, 2000. The line of credit
is secured by substantially all assets of the Company and a personal guaranty of
the majority shareholder.

In April and May 2000, the Company entered into various notes totaling $900,000.
The notes bear interest at prime plus 4% and are due in April and May 2001. The
notes are unsecured.

In April 2000, the Company entered into a Stock Exchange Agreement (the
"Agreement") with the shareholders of International Trade Center, Inc., an
Arizona corporation ("ITC"), to acquire all of the issued and outstanding stock
of ITC. Under the Agreement, CyberStar will exchange the stock of ITC held by
shareholders for common stock, $.01 par value per share, of CyberStar. CyberStar
expects to complete this transaction on or around June 1, 2000. An employee of
Cyberstar is President, Chief Executive Officer and a shareholder of ITC.

The shareholders of ITC will receive a number of shares of CyberStar stock equal
to two times the book value of ITC on the date the transaction closes, divided
by a per share value of $5.50 for CyberStar stock. Each of the four shareholders
of ITC will also be granted options to purchase 25,000 shares of CyberStar
common stock at $1.75 per share. The options are exercisable five years after
their issuance; however, this may be accelerated if certain performance criteria
are met. The closing of the above Stock Exchange Agreement is conditioned upon
ITC redeeming 60% of the issued and outstanding stock from the certain
shareholders, which is expected to occur in June 2000.

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INDEX TO EXHIBITS

INDEX
NUMBER DESCRIPTION
--------------------------------------------------------------------------------

(1) Incorporated by reference to exhibit filed as a part of Registration
Statement on Form 10-SB (Commission File No. 000-27225).

(2) Management contract or compensation plan or arrangement required to be
filed as an exhibit to this Report.