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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE YEAR ENDED: SEPTEMBER 30, 2004

0-15066
COMMISSION FILE NUMBER
VERTEX INTERACTIVE, INC.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)

NEW JERSEY 22-2050350
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)

3619 KENNEDY ROAD, SOUTH PLAINFIELD, NJ 07080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE: (908) 756-2000

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.005 PER SHARE

INDICATE BY CHECK MARK WHETHER THE COMPANY (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 COMPANY 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 IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE COMPANY'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. ( )

INDICATE BY CHECK MARK WHETHER THE COMPANY IS AN ACCELERATED FILER (AS DEFINED
IN RULE 12B-2 OF THE ACT.

YES ___ NO X

AS OF DECEMBER 28, 2004 THE AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK
HELD BY NON-AFFILIATES OF THE COMPANY WAS $5,782,928 BASED UPON THE CLOSING
PRICE OF THE COMMON STOCK AS REPORTED ON THE OTC ON THAT DATE. FOR PURPOSES OF
THIS CALCULATION ONLY, DIRECTORS, EXECUTIVE OFFICERS AND THE PRINCIPAL
CONTROLLING STOCKHOLDER OF THE REGISTRANT ARE DEEMED TO BE AFFILIATES OF THE
REGISTRANT.


AS OF DECEMBER 28, 2004 THE COMPANY HAD 72,970,622 SHARES OF COMMON STOCK
OUTSTANDING.

PREFERRED STOCK, SERIES "A", PAR VALUE $.01 PER SHARE: 1,356,852 SHARES
OUTSTANDING AS OF DECEMBER 28, 2004.

PREFERRED STOCK, SERIES "B", PAR VALUE $.01 PER SHARE: 1,000 SHARES OUTSTANDING
AS OF DECEMBER 28, 2004.

PREFERRED STOCK, SERIES "C-1", PAR VALUE $.01 PER SHARE: 997 SHARES OUTSTANDING
AS OF DECEMBER 28, 2004.

PREFERRED STOCK, SERIES "D"(redeemable and non-redeemable), PAR VALUE $.01 PER
SHARE: 7,615 SHARES OUTSTANDING AS OF DECEMBER 28, 2004.


DOCUMENTS INCORPORATED BY REFERENCE:

NONE.

2


PART I

ITEM 1. BUSINESS

General

Vertex Interactive, Inc. ("Vertex" or "we") is a provider of supply chain
management ("SCM") technologies, including enterprise software systems and
applications, and software integration solutions, that enable our customers to
manage their order, inventory and warehouse management needs, consultative
services, and software and hardware service and maintenance. We serve our
clients through three general product and service lines: (1) enterprise
solutions; (2) point solutions; and, (3)service and maintenance for our products
and services, including service and maintenance of software and hardware we
resell for third parties. Our enterprise solutions include a suite of
Java-architected software applications, applications devoted to the AS/400
customer base, as well as a portfolio of "light-directed" systems for inventory,
warehouse and distribution center management. Our point solutions provide an
array of products and services designed to solve more specific customer needs
from managing a mobile field workforce, mobile data collection, distributed bar
code printing capabilities, compliance labeling applications, automated card
devices, software development tools and proprietary software serving SAP R/3
users. We provide a full range of software and hardware services and maintenance
on a 24-hour, 7-days a week, 365-days a year basis, including the provision of
wireless and wired planning and implementation services for our customers'
facilities.

We have achieved our current focused product and service portfolio as a result
of various acquisitions over the past five years, with the more recent ones
being described in the "Acquisitions" section of Note 2 to the Consolidated
Financial Statements and through the sale and/or disposal of certain businesses
no longer core to the Company's strategy over the past three years as described
in the "Disposals" Section of Note 2 to the Consolidated Financial Statements.
Our customers are able to maximize the efficiency of the flow of inventory
through their supply chains, by implementing our integrated systems. Our
customers use our software to reduce procurement and distribution costs, and
manage and control inventory along the supply chain, thereby increasing sales
and improving customer satisfaction and loyalty. We also resell third party
software and hardware as part of our integrated solutions. We provide service
and support for all of our software and systems from established facilities in
North America.

We have sold our products and services worldwide, but now operate primarily in
North America, through a direct sales force and through strategic reseller
alliances with complementary software vendors and consulting organizations. We
target customers with a need to manage high volumes of activity along their
supply chains from order intake and fulfillment, through inventory, warehouse
and distribution center management to the ultimate delivery of goods to end
users.

We operate in one business segment, which is the design, development, marketing
and support of supply chain management solutions.

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Our total revenues for the fiscal years ended September 30, 2004 and 2003 were
$2,567,000 and $4,226,000, respectively, all of which were generated by our
North American operations. For the comparable period ended September 30, 2002 we
reported $36,135,000 in revenues, approximately 43% of which were generated by
our North American operations.

During 2004, the Company had 2 customers whose sales during the fiscal year were
individually greater than 10% of the Company's total revenues. One customer
totaled approximately $611,000, and the second one totaled approximately
$294,000.

Our principal executive offices are located at 3619 Kennedy Road, South
Plainfield, New Jersey and its telephone number is (908) 756-2000. The Company
was organized in the State of New Jersey in November 1974.

Outlook

The successful implementation of our business plan has required, and will
require on an ongoing basis, substantial funds to finance (i) continuing
operations, (ii) the further development of our enterprise software
technologies, (iii) expected future operating losses, (iv) the settlement of
existing liabilities, including past due payroll obligations to our employees,
officers and directors, and (v) from time to time, selective acquisitions. In
order to meet future cash flow needs, we are aggressively pursuing additional
equity and debt financings including through our enterprise software subsidiary
XeQute Solutions, Inc., and continued cost cutting measures. Historically, we
have financed these activities through both equity and debt offerings. There can
be no assurance that we will continue to be successful in these efforts. As a
result there is substantial doubt as to our ability to continue as a going
concern. (See Management's Discussion and Analysis, Liquidity and Capital
Resources.)

Throughout 2004, the Company experienced continued weakness in its core markets,
continued operating losses and a consistent shortfall in working capital. In
order to survive in these circumstances, the Company continued its strategy to
focus on its core enterprise level products, while continuing to reduce costs.

By the summer of 2002, it became apparent that the sharp downturn in capital
spending in the Company's major markets was likely to continue for the
foreseeable future. This factor combined with the continuing working capital
shortfall (which had already caused the Company to focus on its enterprise level
software and sell off non-core businesses to raise cash to fund current
operations as mentioned above) required the Company to look anew at its
operations with a view to raising additional working capital and to reducing
costs further. In light of the depressed price of the Company's common stock and
the related shrinking trading volumes, the Company elected to fund its
enterprise software group separately from the Company in order to achieve better
values than could be obtained by funding through Vertex directly. At the same
time as mentioned above, the Company needed to further contain costs and
streamline operations.

4


In August 2002, the Company formed a wholly owned subsidiary, XeQute Solutions,
Inc., ("XeQute") into which, effective October 1, 2002, the Company transferred
all of the assets and certain of the liabilities of its Enterprise Software
Division. This action was intended to consolidate all of the enterprise level
products and services in one entity, under a single brand, namely XeQute
Solutions, to streamline operations, reduce costs, provide a more effective
route to market, and also to provide a new platform for hiring.

The Supply Chain Management Industry

The term "supply chain management" refers to a wide spectrum of software
applications, consulting services, maintenance services and hardware products
intended to enable businesses to manage their chains of supply. The primary
goals of successful supply chain planning and execution are to reduce the costs
of sales, recognize early opportunities and act on them to increase sales and to
detect problems as they emerge to address them promptly to reduce their impact
on the operations of the business. The SCM industry is evolving toward a more
software-driven model as enterprises increasingly seek ways to manage their
supply chains in real-time at a lower cost and in a more decentralized
environment.

SCM spending falls within the Information Technology industry. Because SCM
technologies and services enable enterprises to manage a critical aspect of
their operations, namely the chain of supply of components into products to be
manufactured, sold and delivered to end customers, the Company believes that,
despite some cyclicality that may always characterize investment in software,
over the long-term, SCM solutions are likely to remain significant factors in
corporate IT budgeting. Management believes that applications and value-added
services such as implementation and consulting will play a more significant role
in the overall IT investment of companies in our target market, as enterprises
increasingly focus on generating the highest return possible on their asset
base-the primary focus of SCM technology.

5


The Opportunity

Globalization and the rise of the Internet are working in conjunction as
catalysts for the emergence of supply chain technologies designed not only to
reduce the costs inherent in the global economy, but to give enterprises
unprecedented visibility into and dynamic control over their supply chains. The
Company's strategy is grounded in the conviction that supply chain optimization
and management, driven by software applications and integrated systems is a
long-term growth industry still in its early stages of development, in which
there is an attractive opportunity for companies with sufficient scale and the
right product set to emerge as global leaders in this industry.

AMR Research had forecasted the worldwide SCM industry to reach $21 billion by
2005, a five year compound annual growth rate of approximately 32%. Application
software license revenues, which in 2001 comprised an estimated 41% of total SCM
industry sales, according to AMR, are forecast to continue to grow at a 29%
compound annual growth rate and to reach nearly $8 billion by 2005. Software
maintenance, which AMR estimated to generate nearly $1 billion in industry
revenues in 2001, is expected to grow at a 36% compound annual growth rate and
to reach $3 billion by 2005.

The two largest geographic markets for SCM technology and services are North
America and Europe. AMR estimated that in 2001 these two markets accounted for
roughly 86% of worldwide sales, with the North American market expected to grow
at a 28% annual compound growth rate through 2005 and Europe expected to grow at
a 38% annual compound growth rate over the same period. In light of the
continuing impact of the recessionary economies in North American and Europe,
management believes that AMR's industry growth forecast will prove to be
aggressive. Asia/Pacific and Central and South America are forecast to grow more
rapidly over this period, but as of December 10, 2004 these markets account only
for an estimated 13% of industry sales and are forecast to reach about 17% by
2005.

6


The industry opportunity is being defined by three worldwide trends:

Two Major Catalysts: Global Competition and the Internet

Many observers point to two fundamental drivers of long-term growth in the SCM
industry: (i) the increase in globalization and the competitive pressures that
trend is creating for businesses; and (ii) the rise of the Internet as a medium
for commerce at virtually every level of the economy.

As competitive barriers fall around the world, we believe that there is a
secular trend toward more open global commerce that has the potential to impact
businesses of nearly every size. This may create opportunities for the Company's
products in large as well as in small enterprises.

Coincidental with the increase in the pressures of global competition, has been
the arrival of the Internet. Electronic commerce is characterized by more
interdependent relationships among companies, their vendors and their customers.
Managing the supply chain in an e commerce environment lies at the heart of the
Company's suite of products.

An Industry Evolving

Despite billions of dollars of capital investment in new software systems in the
decade of the nineties, the benefits of this investment have been achieved more
slowly than corporate buyers had expected. As corporate buyers began only
recently to return to their technology needs, their approach is a more modest
one, seeking affordable solutions targeted at specific problems and whose
projected return on investment can be more rigorously assessed.

The Company is focusing the marketing of its product portfolio to meet such
buyer expectations and is seeking to offer specific supply chain products, at a
predictable total cost of ownership, with predictable time to complete
implementation.

Beyond the "Four Walls"

Traditionally, companies have viewed their supply chains as a series of discrete
activities that could be managed largely independently of each other and almost
certainly independently of a company's vendors and customers. This approach is
changing. Corporate buyers are understanding the interdependence of each stage
and of each participant in the supply chain and are seeking "visibility" into
their supply chain.

7


This transition to a new operating model poses challenges for corporate managers
because few internal IT systems or business practices are yet fully capable of
taking advantage of the new opportunity to access and manage enterprise
information in a decentralized environment. Increasingly, corporations are
taking advantage of opportunities to add value at many more places along the
supply chain. This is placing a more complex set of functional needs on legacy
supply chain management practices and technologies. These challenges include:

Implementing and managing more dynamic, customer-driven fulfillment processes;

Supporting a new array of relationships with partners, vendors, trading partners
and customers;

Enhancing visibility into order, inventory, warehouse and transportation status;

Improving real-time co-ordination among enterprise facilities; Extending supply
chain visibility beyond the enterprise;

Permitting dynamic scalability to address unpredictable increases in transaction
volumes;

Allowing least-cost routing;

Enabling the application of value-added services along the supply chain;

Providing means to monitor activity along the supply chain; and Managing events
in the supply chain in the optimum time to take advantage of revenue
opportunities and avoid costs.

A premium is developing on SCM systems and software that are more integrated,
scaleable, offering real-time capabilities and that can support a more complex
and dynamic web of business relationships with vendors, partners and customers.
Management believes that the Company's software and services, coupled with its
expertise in the areas of order fulfillment, inventory, warehouse and
transportation management offer important value-added in the evolving SCM
marketplace.

The Business and Products of the Company

The Company is a provider of products designed to meet the emerging opportunity
described above. These products principally involve the provision of services
and enterprise level software for order fulfillment comprising order management,
warehouse and inventory management and distribution management. This market is
sometimes referred to as supply chain "execution management" software. The
business benefits from an established, revenue-producing suite of proven
products which have been sold to a client base consisting principally of Fortune
500 clients in the United States, in the Company's target vertical markets.
These vertical markets are pharmaceuticals; consumer packaged goods, third party
logistics providers; and bulk food distributors.

8


The following summary relates to the product lines currently offered by the
Company, principally through its wholly-owned subsidiary, XeQute:

1. Warehouse Management Systems (WMS) Products - the eSuite Software Products

The Company's core product offerings are its Java-architected, enterprise level,
supply chain execution systems which include order management (eOMS)and
warehouse management(eWMS) applications. Vertex's eSuite of products promotes
collaboration and the exchange of "real-time" critical information among users
within their trading environment, including employees, distributors,
manufacturers, suppliers and customers. Portable by design, the eSuite of
products can operate across multiple operating and hardware environments,
incorporate the ability to utilize various database options, and can easily be
integrated with existing IT infrastructure and third party applications.

eWMS is a Java architected warehouse management system that provides companies
with real-time insight into warehouse operations and inventory availability.
eWMS is a true multi-warehouse/owner system that can be deployed across
industries and has specific functionality for food and third party
warehouse/logistics environments. eWMS can be implemented to interface with
existing enterprise applications or as an integrated component of eOMS to
facilitate a complete supply chain execution solution.

eOMS is a web-based order management system that integrates all users in a
real-time environment: internal employees, external sales force, distributors,
and customers, through any means of deployment: Internet, Intranet, or Extranet.
eOMS provides companies with maximized selling opportunities by capturing
valuable buying pattern information and then uses this information to broadcast
suggestive selling and promotional opportunities as well as many other benefits.
The eOMS market is potentially the single largest of the Company's products
because order management is a function performed by every business irrespective
of whether they operate a warehousing and distribution facility. The importance
of this market is highlighted by the fact that over the past eighteen months two
of the larger ERP vendors, PeopleSoft and JD Edwards, among others have entered
this segment of the market. The Company is intending to devote marketing
resources to exploit this opportunity.

eOMS represents one of the largest, new market opportunities for the Company.
Every business has a requirement to manage its customers' orders properly.
Ideally, the order management system should ensure accurate order entry and
timely fulfillment while providing readily available information to customers on
progress in meeting their respective orders. Very few existing order management
systems provide all of this functionality, or all of this functionality in an
easily accessible form. In contrast, eOMS addresses these needs in a single
complete package.

9


First, the system allows customers to enter their orders directly through a
browser-based solution. This permits customers to not only self enter their
orders, but also to track the progress of, and if required change, such orders
during the fulfillment process in real time over the internet. Again, being
internet based allows for access to, and collaborative trading among, all of the
participants in the chain of supply, namely customers, employees and vendors.

The Company has commenced a sales campaign targeted at its existing customer
base initially, with plans to reach the broader market after implementing the
system in certain existing accounts.

In conjunction with the sale of the WMS product suite, the Company also provides
customers with software maintenance support, business and warehouse consulting,
and other implementation services, including system design and analysis, project
management, and user and technical training.

The eSuite product line was recently rewritten in JAVA. Management believes that
the eSuite product line is presently one of the few completely integrated
internet-based order fulfillment systems in the world. The competitive
importance of this was recently highlighted by SAP's announcement that its web
strategy would center around a new JAVA version of its SAP R/3 operating system.
The JAVA language is critically important to the future of the Company's
development in that it is the first software language to be independent of both
operating platforms and databases; that is to say this software can run in any
IT environment without extensive modifications.

iSeries WMS

The original product developed by Renaissance was a warehouse management system,
iWMS, developed exclusively for use in an AS/400 environment. iWMS provides the
stability, security and ease-of-implementation that AS/400 users have learned to
expect and mandate. iWMS is a well established, highly functional, warehouse
management system, that is currently installed worldwide in a variety of
industries including, third part logistics (3PL), pharmaceutical, cosmetic and
fragrance, food, office supplies, furniture, fast moving consumer goods among
others.

10


2. Light-Directed Picking and Put Away Systems

The terms "light-directed" or "light-prompted" systems refer to the stock
picking (or put away) functions in warehousing management systems whereby a
light automatically shines in the sector where stock needs to be picked. Such
"light-directed" stock picking systems have a proven track record for making the
order fulfillment process dramatically more efficient with a very significant
reduction in the error rate in the stock picking function and a measured
improvement in productivity.

The Company's light-directed family of software picking systems was originally
developed by our subsidiary, Data Control Systems. The products offer a design
and implementation of state-of-the-art, IT-based solutions that dramatically
improve productivity for the order fulfillment and warehouse management
functions in manufacturing and distribution companies.

The Company's light-directed picking solutions interface with a number of ERP
systems and can be modified to work with almost any system. The order
control/fulfillment systems represent an important facet of the complete
E-commerce system. While E-commerce marketing and order taking engines can
generate substantial sales, without an optimized order fulfillment process, the
promise of E-commerce will not be fully realized by companies. The Company is
recognized as a leader in electronic warehouse management systems in real-time,
and in light-directed order processing.

Our product line includes a mobile cart based system that appeals to a broader
customer base. This system, CartRite, utilizes light panels and advanced
wireless communications in its warehouse management application.

The Company believes that it is the only supplier in its industry to develop,
engineer, assemble, and install its own systems, in contrast to other companies
which provide some, but not all, of the systems and services that the Company is
able to provide as a one-stop shop. In-house personnel implement turn-key
solutions that have yielded to clients the immediate benefit of increased
operating efficiencies, an improved competitive edge and have offered a platform
for future growth.

The Company has documented that its light-directed products achieve dramatic
improvements in operating efficiency for clients. Typically, after introduction
of the Company's light-directed order fulfillment system, clients eliminate a
portion of the staff they previously required to fill warehouse orders. This is
achieved by automating and optimizing the scheduling, method and the order of
picking items without any paper. The system thus, among other things, eliminates
the multiple steps associated with paper handling and manual reconciliation.

11


The software products automate the process from order receipt to final shipment.
The Company has developed standard communication interfaces with the leading ERP
vendors including SAP, JD Edwards, Oracle, Peoplesoft and Microsoft Great Plains
Resources, and other enterprise level systems. The Company is an authorized
software provider for all the major shippers in the US which includes
UPS/FedEx/RPS/USPS. The software is capable of simultaneous production of
shipping bar codes when labels are generated.

Hundreds of the Company's installations of its WareRite Warehouse Management
Systems ("WMS"), PicRite, TurnRite, and PutRite light-prompt systems are
providing results in a wide range of industries, including: pharmaceuticals,
cosmetics, publishing, mail order industries, automotive, electronics, direct
selling associations, retail and wholesale distribution. The above product lines
along with the CartRite system have the potential to enhance its clients'
E-commerce related processes. Customers include Merck Pharmaceutical, Pfizer,
Wyeth, Estee Lauder, OfficeMax, Rite Aid, Braun Electronics (a wholly owned
subsidiary of Gillette) and Dr. Mann Pharma in Germany.

3. Integration Applications

This line of business is involved in the design, development and implementation
of software that connects applications on handheld devices used in the
distribution system to the base ERP system and in particular to the SAP R/3
operating systems.

This product family includes proprietary, patented products and services that
allow companies to leverage their existing investment in SAP R/3 by extending
its functionality to the warehouse floor. To assist in ease-of-implementation,
the Company has developed tools for SAP Console implementation including the
Universal Starter Transaction Set which allows transactions to be easily
modified by new users of ABAP, BC2SAP for rapid bar code label design, Z-Builder
which develops transactions in hours. The Company's UMDC is shrink-wrapped
software that enhances SAP R/3 functionality. In addition, Vertex has
professional services to complete its SAP R/3 practice offering including
SAPConsole technical training, ABAP coding for data collection, bar code design,
implementation, training and on-going support. Customers include Mercedes-Benz
U.S. International, Colgate, Bristol Myers Squibb, Oceanspray, Bodek & Rhodes,
Rexam, SAATI in Italy, among others.

Competition

The industry today is marked by competition in two industry segments: SCM
planning and SCM execution. Vertex competes primarily in the execution segment.
In this segment, the Company faces competition from numerous foreign and
domestic companies of various sizes. Competition in these areas is further
complicated by possible shifts in market share due to technological innovation,
changes in product emphasis and applications and new entrants with greater
capabilities or better prospects.

12


Order Management

The order management market is becoming a center of focus for every business in
the world whether or not they run distribution centers. As a result this market
segment could become the largest part of the Company's business in the future.
The importance of this emerging opportunity is highlighted by the recent entry
of JD Edwards, PeopleSoft, i2 and Manugistics into this market. The competition
for the Company's eOrder product is believed to be as follows: PeopleSoft, an
ERP vendor with revenues of $2 billion. The Company believes that PeopleSoft has
a Java-based product offering which is very competitive with that offered by the
Company.

JD Edwards & Co Inc, an ERP vendor with revenues of approximately $900 million
with a presence in the order management segment.

i2 Technologies, the largest planning supply chain vendor in the US based on
revenues, with sales of approximately $500 million.

Execution Management

In the execution management segment in the United States there are approximately
275 companies offering a WMS product, of which only a small number have a top
tier product (defined as able to handle warehouse space in excess of 250,000
square feet and at least 100 simultaneous users of wireless devices at any one
time) and revenues in excess of $10 million. The Company believes that it is one
of few suppliers with a complete JAVA based cross-platform solution for Supply
Chain Management. In this segment of the industry the Company's major
competitors for the warehouse and inventory management components and the
transportation and logistics components of its e Suite product are:

EXE Technologies, with revenues of approximately $70 million, competes most
directly with the Company in warehouse management in the Company's main vertical
markets.

Manhattan Associates, the largest warehouse management software vendor in the
world with annual revenues of approximately $170 million. They focus principally
on the AS/400 market in retail distribution and fast moving consumer goods.

Catalyst International, with revenues of $33 million, provides principally UNIX
solution solutions in the Company's vertical markets.

13


Light-Directed Systems

In the "Pick-to-light" business, the Company believes that there are some 25
competitors, of which the largest are Real Time Solutions, Rapistan, Kingsway
and Haupt of Austria, all privately held companies. These companies compete with
aggressive pricing and turn key solutions. However, the Company's competitive
advantage centers around its product's flexibility and software capabilities.

The Company believes that it has a strong market share in the pharmaceutical
vertical market.

Research and Development

The Company's research and development ("R&D") initiatives focused on enhancing
the product set with additional functionality aimed at the Company's core
vertical markets. For the years ended September 30, 2004 and 2003, there was no
R&D spending as the Company suspended R&D to focus its resources on customer
support. For the year ended September 30, 2002, R&D expense was $4,180,000
(representing 11.6% of revenues).

The Company's research and development timetable, over the next 24 months for
the eWMS product includes a number of features and enhancements which will begin
development in mid-2005. However the extent and timing of resuming this
development is dependent upon the Company's ability to raise the required funds

INTELLECTUAL PROPERTY

We have seven trademarks registered with the United States Patent &
Trademark Office. The marks that we have filed and received trademark
registration for are as follows:

Application or Registration or
Trademark Registration No. Filing Date
--------- ---------------- -----------

CARTRITE Reg. No. 2,274,410 August 31, 1999
WARERITE Reg. No. 2,054,680 April 22, 1997 (renewed Mar, 2003)
TURNRITE Reg. No. 2,060,888 May 13, 1997 (renewed Mar, 2003)
SHIPRITE Reg. No. 2,052,389 April 15, 1997 (renewed Mar, 2003)
SCALERITE Reg. No. 2,050,615 April 8, 1997 (renewed Mar, 2003)
PUTRITE Reg. No. 2,054,679 April 22, 1997 (renewed Mar, 2003)
PICRITE Reg. No. 1,659,547 October 8, 1991(renewed June 4, 2001)

Employees

At September 30, 2004, we had approximately 17 employees, with approximately 70%
in Installation and Implementation, 10% in Sales and Marketing (including sales
support) and the balance in Executive/Administrative.

Designing and implementing the Company's software solutions requires substantial
technical capabilities in many disparate disciplines, from mechanics and
computer science to electronics and mathematics. While the Company believes that
the capability and experience of its technical employees compare favorably with
other similar companies, there is no guarantee that it can retain existing
employees or attract and hire capable technical employees it may need in the
future, or if it is successful, that such personnel can be secured on terms
deemed favorable to the Company.

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ITEM 2. PROPERTIES

Vertex and its subsidiaries occupy approximately 15,000 square feet of office &
warehouse space in a building in South Plainfield, New Jersey under a lease
expiring in April 2008. The monthly rent is $10,500. In addition, the Company
leases approximately 2,000 square feet of office space in Paramus, New Jersey
which has been subleased. The lease expires in May 2008, and we pay $4,100 a
month and receive $3,100 per month from the sub-leasee. The Company believes
that its current office space and facilities are sufficient to meet its present
needs and does not anticipate any difficulty securing alternative or additional
space, as needed, on terms acceptable to the Company.


ITEM 3. LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
disclosed below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.

Pending Litigation

We are party to a number of claims, which have been previously disclosed by the
Company, and claims by vendors, landlords and other service providers seeking
payment of balances owed. Since such amounts have already been recorded in
accounts payable or accrued liabilities, these claims are not expected to have a
material affect on the stockholders' deficiency of the Company. However, they
could lead to involuntary bankruptcy proceedings.

a) On or about March 22, 2004, an action against Vertex and its subsidiary
Renaissance Software, Inc. was commenced in New York State Supreme Court,
Nassau County, captioned Great Oak LLC vs. Vertex Interactive, Inc. et.
al., Index no. 03-7270 The action, which demands $327,676, alleges two
months rent totaling $23,737 and an early termination fee of $303,929 to
be due Great Oak LLC, the landlord of premises leased to Renaissance
Software LLC. Vertex is vigorously defending the action.

b) On April 16, 2003, an action was commenced in the Supreme Court of the
State of New York, County of Suffolk, entitled Bautista v. Vertex
Interactive, Inc and Renaissance Software, Inc. The action, which demands
$394,000, was brought by a former employee claiming breach of his
employment agreement. On March 29, 2004, a judgment was granted against
the Company in the amount of $350,482. As of the date of this filing, the
judgment has not been paid.

c) On October 31, 2001, an action was commenced in the United States District
Court, Southern District of New York entitled Edgewater Private Equity
Fund II, L.P. et al. v. Renaissance Software, Inc. et al. The action,
brought against Renaissance Software, Inc., a subsidiary of Vertex, and
Vertex, alleged the default by Renaissance Software, Inc. in payment of
certain promissory notes in the principal aggregate sum of $1,227,500.
Vertex guaranteed the notes. The noteholders demanded $1,227,500, together
with interest accruing at the rate of 8% per annum from June 30, 2001. On
March 12, 2002, the noteholders were successful in obtaining a judgment
against Renaissance Software, Inc. in the aggregate amount of $1,271,407
including interest, late charges and attorneys' fees. However given the
Company's current cash position, we have been unable to pay the judgment.
As of the date of this filing, the judgment has not been paid.


15


d) As part of the settlement entered into between the Company and three
former principals of a company acquired by Vertex in 2000, consent
judgments in the amount of approximately $1,000,000 each were entered
against Vertex on July 19, 2002. The incremental liability has been
included in other expense (provision for litigation) for the year ended
September 30, 2003. The Company is currently negotiating with the former
owners to accept forms of payment other than cash. However, there can be
no assurance that a non-cash settlement will be concluded. In July 2002,
the former owners obtained a court levy upon several of the Company's bank
accounts, placing a hold on approximately $70,000 of the Company's funds.
The Company, together with its secured lenders, objected to the turnover
of these funds, however a turnover order was granted by the court in
October 2002. As of the date of this filing, the judgments have not been
paid.

e) On February 9, 2003, in the matter captioned Scansource, Inc. vs. Vertex
Interactive, Inc., Superior Court of New Jersey, Essex County, a judgment
was granted against the Company in the amount of $142,155. The action
alleged non payment by the Company for computer hardware. As of the date
of this filing, the judgment has not been paid.

Settled Litigation

a) On June 25, 2003, an action was commenced in the United States District
Court, District of New Jersey, entitled CPG International, N.V. vs. Vertex
Interactive, Inc. The action, which demands $406,342, alleges the
Company's breach of an Asset Sale and Purchase Agreement pursuant to which
the Company acquired various assets related to CPG International's Service
business. On March 3, 2004, the action was settled for the sum of $125,000
which was paid on April 30, 2004. The gain on settlement is included in
the 2004 consolidated statement of operations.

b) On or about October 29, 2004, an action against Vertex was commenced in
New York State Supreme Court, New York County, captioned NautaDutilh vs
Vertex Interactive, Inc., Index no. 04-603577 The action, which demands
$434,189, alleges nonpayment by Vertex of attorneys fees allegedly
incurred by Vertex in connection with a potential acquisition transaction
and the reorganization of Vertex's foreign business operations. This
action has been settled in December, 2004, for $300,000. The gain on
settlement would be included in the consolidated statement of operations
for the three months ended December 31, 2004.

PAYROLL OBLIGATIONS

As a result of its severe cash constraints (see Note 1 - Going Concern section),
the Company had fallen as much as two to three months behind in meeting its
payroll obligations to its employees. Subsequent to September 30, 2002, the
Company has been meeting its current payroll obligations, and has attempted to
pay overdue employee payroll obligations as cash resources become available.
However, in a letter dated April 3, 2003 the New Jersey Department of Labor
(N.J.D.O.L.) has assessed the Company a penalty of $154,000 for failure to pay
payroll on a timely basis. The Company entered into Consent Order and Agreement
with the N.J.D.O.L. to pay down this obligation, starting with an initial
payment on April 30, 2004 of $18,000, which the Company has made, and then
monthly payments of $30,000 starting on June 1, 2004, which the Company has
made, until the balance of the payroll obligations are paid.


16


In addition, a number of former employees of a California based division of
Vertex had filed claims with the California Department of Labor for non payment
of wages for the second half of July 2002; the final payroll prior to the
closing of the division. The Company had disputed the claims, primarily on the
basis of the lack of documentation for hours worked during the period. However
in July 2003, these claims were heard by the California DOL and the amounts
claimed, together with interest and penalties aggregating approximately $100,000
which remain unpaid as of September 30, 2004, were granted to these former
employees. As of the date of this filing, the judgment has not been paid.

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

Pursuant to a written consent of a majority of stockholders dated June 30, 2004,
in lieu of a special meeting of the stockholders, the majority of stockholders
approved the following actions:

1. Amending the Company's Articles of Incorporation, as amended, to
increase the number of authorized shares of common stock, par value $.005 per
share of the Company from 75,000,000 shares to 400,000,000 shares;

2. Ratifying the selection of J.H. Cohn LLP as Independent Registered
Public Accounting Firm of the Company for the year ending September 30, 2004;
and

3. Adopting the Company's 2004 Stock Incentive Plan.


17



PART II


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

Market for Company's Common Equity

Until August 20, 2002, the principal market for the Company's shares of Common
Stock, par value $.005 per share was the NASDAQ National Market System under the
symbol VETX. From August 21, 2002 until February 17, 2003 the Company's Common
Stock was traded on the NASDAQ Bulletin Board. From February 18, 2003 through
March 28, 2004 the Company's Common Stock traded on the Pink Sheets under the
symbol "VETXE". On March 29, 2004 the Company's Common Stock once again began
trading on the NASDAQ Bulletin Board and currently remains the principal market
for the Company's shares of Common Stock under the VETX symbol. (See Note 1 -
Recent Developments to the Consolidated Financial Statements).

The following table sets forth, for the periods shown, the high and low sale
prices concerning such shares of Common Stock for the last two years:

High Low
2003
First Quarter $0.10 0.04
Second Quarter 0.06 0.02
Third Quarter 0.07 0.01
Fourth Quarter 0.15 0.04

2004
First Quarter 0.09 0.04
Second Quarter 0.16 0.04
Third Quarter 0.25 0.10
Fourth Quarter 0.20 0.08

The approximate number of holders of record of the Company's shares of Common
Stock as of December 2, 2004 was 429. This number includes numerous brokerage
firms that hold such shares in street name. The Company estimates that there are
more than 3,000 beneficial shareholders as of December 2, 2004. The Company's
shares of Series A Preferred Stock par value $.01 per share are held by one
holder of record. The Company's shares of Series B Preferred Stock par value
$.01 per share are held by one holder of record. The Company's shares of Series
C-1 Preferred Stock par value $.01 per share are held by six holders of record.
The Company's shares of Series D Preferred Stock par value $.01 per share are
held by one holder of record.

The Company has not paid any cash dividends on its Common Stock and does not
intend to do so in the foreseeable future.


18

Securities authorized for issuance under equity compensation plans.




Number of securities to be
issued upon exercise of Weighted average exercise Number of securities
outstanding options, price of outstanding options, remaining available for
Plan category warrants and rights warrants and rights future issuance
- -------------- ------------------------ ----------------------------- ---------------------
(a) (b) (c)
------------------------ ----------------------------- --------------------

Equity compensation
plans approved by
security holders 1,828,000 $3.37 3,835,032

Equity compensation
plans not approved
by security holders 0 0 0
---------- -------- ----------
Total 1,828,000 $3.37 3,835,032
---------- -------- ----------



Recent Sales of Unregistered Securities

We have issued unregistered securities to (a) employees and (b)other individuals
and institutional investors. Each such issuance was made in reliance upon the
exemptions from registration requirements of the Securities Act of 1933,
contained in Section 4(2) and/or Regulation D promulgated there under, or Rule
701 promulgated there under on the basis that such transactions did not involve
a public offering. When appropriate, we determined that the purchasers of
securities described below were sophisticated investors who had the financial
ability to assume the risk of their investment in our securities and acquired
such securities for their own account and not with a view to any distribution
thereof to the public. At the time of issuance, the certificates evidencing the
securities contained legends stating that the securities are not to be offered,
sold or transferred other than pursuant to an effective registration statement
under the Securities Act of 1933 or an exemption from such registration
requirements. The following is a summary of transactions which were made during
the quarter ended September 30, 2004 involving sales and issuances of securities
that were not registered under the Securities Act of 1933 at the time of such
issuance or transfer.

Recent Issuances of Unregistered Securities

On June 25, 2004, as part of an Investment Restructuring Agreement, we exchanged
class C preferred stock for class C-1 convertible preferred stock on a 1:1
basis. Each share of Series C-1 convertible preferred stock is convertible into
$1,000 worth of our common stock, at the selling stockholders' option, at the
lower of (i) $0.30 or (ii) 60% of the average of the three lowest intraday
trading prices for the common stock on a principal market for the 20 trading
days before but not including the conversion date.

On September 27, 2004, we issued 7,615 shares of class D convertible preferred
stock to MidMark Capital, L.P. in exchange for $7,614,708 of debt owed by our
subsidiaries and us to MidMark Capital II, L.P. In addition, on September 27,
2004, we issued 5,569,980 shares of common stock to MidMark Capital, L.P. upon
exercise of warrants by MidMark Capital, L.P. The exercise price for the
warrants was exchanged for the retirement of $315,309 in debt owed by us to
MidMark Capital, L.P. As well, on September 27, 2004, we issued 240,000 shares
of common stock to MidMark Capital II, L.P. upon exercise of warrants by MidMark
Capital II, L.P. The exercise price for the warrants was exchanged for the
retirement of $2,400 in debt owed by us to MidMark Capital II, L.P. Each share
of the class D convertible preferred stock is convertible into $1,000 worth of
our common stock, at MidMark Capital's option, at the lower of (i) $0.30 or (ii)
60% of the average of the three lowest intraday trading prices for the common
stock on a principal market for the 20 trading days before but not including the
conversion date.

19


ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data of the Company should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto appearing on pages beginning on F-1. Also, as discussed in Item 7 and
Note 2 to the Consolidated Financial Statements, the Company has completed
various acquisitions and disposals between 2000 and 2002, however there were no
acquisitions in 2003 or 2004. Consequently, the amounts shown in selected
financial data are not directly comparable.




SUMMARY OF SELECTED FINANCIAL DATA

2004 2003 2002 2001 2000
OPERATIONS FOR THE YEAR:


Revenues $2,566,520 $4,226,187 $36,135,217 $59,087,470 $47,769,311

Loss before amortization,
impairment of goodwill and
other intangible assets
and in-process research and
development write-off (2,069,236) (3,534,596) (25,383,385) (21,568,546) (198,157)

Amortization of intangible assets 115,756 115,757 417,162 14,571,510 1,063,775
Impairment of goodwill and
other intangible assets(2) - - 18,973,832 78,364,560 -
In-process research and
development write-off(1) - - - 3,600,000 7,500,000
Net loss $(2,184,992) $(3,650,353) $(44,774,379)$(122,952,102) $(9,412,424)
Basic Net Loss Per Share $ (.12) $ (.09) $ (1.26) $ (3.95) $ (0.46)

FINANCIAL POSITION
AT END OF YEAR:
Total Assets $1,748,054 $1,519,191 $2,800,431 $53,439,283 $110,219,476
Long-Term Debt $2,549,724 - - $7,129,260 $1,927,943
Stockholders' Equity
(Deficiency) $(23,656,480) $(31,661,190) $(26,835,525) $11,950,527 $ 84,407,725



(1) For fiscal years 2001 and 2000, the in-process research and development
write-off is associated with the acquisitions of Transcape assets from Pitney
Bowes in February 2001 and the enterprise software applications of Renaissance
Software, Inc., effective September 30, 2000, respectively.

(2) In fiscal years 2002 and 2001, the Company wrote down intangible assets
(primarily goodwill) to their estimated fair value (See Note 4 to the
Consolidated Financial Statements).

20


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

This Annual Report on Form 10K contains, in addition to historical information,
certain forward-looking statements that involve significant risks and
uncertainties. Such forward-looking statements are based on management's belief,
as well as assumptions made by and information currently available to,
management pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Our actual results could differ materially from
those expressed in or implied by the forward-looking statements contained
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed herein and in Item 1: "Business", and
elsewhere in this Annual Report on Form 10-K. Vertex undertakes no obligation to
release publicly the result of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date of this
Annual Report or to reflect the occurrence of other unanticipated events.

This discussion and analysis should be read in conjunction with the Selected
Financial Data and the audited consolidated financial statements and related
notes of the Company contained elsewhere in this report. In this discussion, the
years "2004", "2003" and "2002" refer to fiscal years ended September 30, 2004,
2003 and 2002, respectively.

Overview

Purchase Acquisitions:

As discussed in Note 2 to the Consolidated Financial Statements, we had
completed a number of acquisitions through October 2001, which had substantially
expanded our portfolio of products and services, as well as our geographic reach
throughout North America and into Europe. The following summary of the more
significant purchase acquisitions closed during fiscal 2002 ("Fiscal 2002
Acquisitions"). There were no acquisitions in fiscal 2003 or 2004.

Fiscal 2002 Acquisitions:

Effective September 30, 2001, we acquired all of the outstanding stock of
DynaSys, a software developer of enterprise level advance planning and
scheduling applications.

In October 2001, Vertex acquired Euronet Consulting S.r.l ("Euronet"), an
Italian software applications consulting firm that expanded our professional
services capabilities in Europe.

Vertex has accounted for each of these acquisitions using the purchase method of
accounting in accordance with Statement of Financial Accounting Standards 141
for DynaSys and Euronet. Accordingly, the financial statements include the
results of operations from October 1, 2001 for both DynaSys and Euronet
(collectively, the "Purchase Acquisitions").

Critical Accounting Policies and Estimates

The preparation of the consolidated financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent
assets and liabilities. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Management continuously evaluates its
estimates and judgments, and actual results may differ from these estimates
under different assumptions or conditions.


21


Those estimates and judgments that were most critical to the preparation of the
financial statements involved the allowance for doubtful accounts, inventory
reserves, recoverability of intangible assets and the estimation of the net
liabilities associated with subsidiaries in liquidation.

a) We estimate the collectibility of our trade receivables. A considerable
amount of judgment is required in assessing the ultimate realization of these
receivables including analysis of historical collection rates and the current
credit-worthiness of significant customers. Significant changes in required
reserves have been recorded in recent periods and may occur in the future due to
the current market and economic conditions.

22


b) We establish reserves for estimated excess or obsolete inventory equal to the
difference between the cost of inventory and the estimated fair value based upon
assumptions about future demand and market conditions. Inventory reserves have
increased as a result of the decision to discontinue or significantly reduce
certain non-core product lines. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required.

c) During 2002 we have recorded significant impairment charges related to the
carrying value of goodwill and other intangibles. In assessing the
recoverability of our goodwill and other intangibles, we have made assumptions
regarding estimated future cash flows and considered various other factors
impacting the fair value of these assets, as more fully described below in the
discussions of the results of operations- provision for impairment of goodwill.
However, as of September 30, 2003, our only remaining intangible asset, software
development costs, became fully amortized in fiscal 2004.

d) We regularly evaluate our ability to recover the reported amount of our
deferred income taxes considering several factors, including our estimate of the
likelihood that we will generate sufficient taxable income in future years in
which temporary differences reverse. Due to the uncertainties related to, among
other things, the extent and timing of future income and the potential changes
in the ownership of the Company, which could subject our net operating loss
carry forwards to substantial annual limitations, we offset our net deferred tax
assets by an equivalent valuation allowance as of September 30, 2004.

e) As described in the Sales or Divestitures of Non-Core Businesses section of
Note 2 to the Consolidated Financial Statements we have sought the protection of
the respective courts in three European countries, which have agreed to orderly
liquidations of five of our European subsidiaries. We have used a liquidation
accounting model in the establishment of the net liabilities associated with
these entities at September 30, 2004 and 2003. This accounting model required
the estimation of the fair value of the assets of these entities. A considerable
amount of judgment was used in determining the amount of cash to be recovered
through the collection of receivables or the sale of inventory and equipment in
a liquidation environment, that will then be available for the respective
creditors. If actual market conditions are less favorable than those projected
by management, the net assets available for creditors may be less than
estimated. However, since the liabilities of these entities remain on our
balance sheet at historical values (and exceed the fair value of their net
assets by approximately $7,715,000 at September 30, 2004), we expect to
recognize a gain upon legal resolution of the liquidations. The amount and
timing of such gain is totally dependent upon the decisions to be issued by the
respective court appointed liquidators. We received notice that the liquidation
of the UK companies, which were under liquidation as of September 30, 2003 and
2002, has been approved and finalized by the UK creditors as of January 5, 2004.
Based on such notice, management reduced the Company's net liabilities
associated with subsidiaries in liquidation by approximately $1,400,000,
reclassed approximately $1,073,000 of translation loss from accumulated other
comprehensive loss to the consolidated statement of operations, and recognized a
gain of approximately $320,000 in fiscal 2004.

23


f) Revenue related to software license sales is recorded at the time of shipment
provided that (i) no significant vendor obligations remain outstanding at the
time of sale; (ii) the collection of the related receivable is deemed probable
by management; and (iii) vendor specific objective evidence ("V.S.O.E.") of fair
value exists for all significant elements, including post-contract customer
support ("PCS") in multiple element arrangements.

g) Where the services relate to arrangements requiring significant production,
modification or customization of software, and the service element does not meet
the criteria for separate accounting, the entire arrangement, including the
software element, revenue is accounted for in conformity with either the
percentage-of-completion or completed contract accounting method.
Percentage-of-completion generally uses input measures, primarily labor costs,
where such measures indicate progress to date and provide a basis to estimate
completion.

Results of Operations

Year ended September 30, 2004("2004")compared to year ended September 30, 2003
("2003").

Operating Revenues:

Operating revenues decreased by approximately $1,660,000 (or 39.3%) to
approximately $2,567,000 in 2004.

Revenues were negatively impacted by the continued weak demand in its key
markets and exacerbated by the Company's lack of financial condition.

Products and Services

Sales to customers by the two significant product and service line
groupings for the years ended September 30, 2004 and 2003 (in thousands) are as
follows:

September 30
---------------------------
2004 2003
---------- ---------
Enterprise Solutions $ 84 $ 889
Service, Maintenance and Other 2,483 3,337
-------- -------
$ 2,567 $ 4,226
======== =======

Enterprise solutions revenues decreased to $84,000 in 2004 from $889,000 in
2003. The decrease was a result of our strategy of de-emphasizing lower margin
product sales, together with the impact of the downturn in the economy,
especially post-September 11, in North America and our lack of financial
condition.

24


Service, maintenance and other revenues have decreased approximately $854,000
from 2003. The decrease was a result of our strategy of de-emphasizing lower
margin product sales, together with the impact of the downturn in the economy,
especially post-September 11, in North America and our lack of financial
condition.

We anticipate that our revenues will, at a minimum, stabilize at these levels or
improve slightly as we continue to restructure the Company and look for target
acquisitions.

Gross Profit:

Gross profit decreased by approximately $808,000 (or 38.7%) to $1,279,085 in
2004. As a percent of operating revenues, gross profit was 49.8% in 2004 as
compared to 49.4% in 2003. The gross profit percentage was flat when compared to
last year.

Operating Expenses:

Selling and administrative expenses decreased approximately $1,717,000 (or 37%)
to $2,925,000 in 2004. During 2004 we continued various cost reduction measures,
including reduction in the number of our employees, facilities consolidations,
as well as reductions in other expenses deemed redundant such as marketing and
advertising and other headcount-related expenses. We expect our selling and
administrative expenses to remain at these levels until which time our financial
condition improves.

There were no research and development ("R&D") expenses in 2004 or in 2003. As a
result of the slow economy and our cost cutting efforts, we suspended R&D,
focusing our technical resources on maintenance services, until which time
additional financing is received. It is anticipated that R&D spending will
recommence in 2005.

The decrease in the depreciation and amortization to $154,694 in 2004, as
compared to $235,363 in 2003, is the direct result of certain of our assets
becoming fully depreciated and or amortized during the period.

As a result of the aforementioned, our operating loss decreased by approximately
$989,000 to approximately $1,801,000 for fiscal 2004 as compared to our
operating loss of approximately $2,790,000 for fiscal 2003.

Interest expense increased by approximately $1,117,000 to $1,969,000 in 2004.
This increase is due to a non-cash charge for the beneficial conversion feature
for long-term convertible debt. [See Note 11 of our consolidated financial
statements.]

During 2004 we settled certain of our liabilities and recognized a gain of
$1,072,000, mainly due to our ability to settle $1,564,500 in debts and
obligations for $492,500.

25


Gain on liquidation of foreign subsidiaries increased due to $320,000 gain on
liquidation of the UK operations.

The income tax provision is negligible in both years due primarily to operating
losses.

Year ended September 30, 2003("2003") compared to year ended September 30, 2002
("2002").

Operating Revenues:

Operating revenues decreased by approximately $31,909,000 (or 88.3%) to
approximately $4,226,000 in 2003.

Revenues were negatively impacted by the asset sales or disposals of all of the
Company's European businesses and certain of its non-core US operations, as well
as continued weak demand in its key markets and exacerbated by the Company's
lack of financial condition.

Products and Services

Sales to external customers by the three significant product and service line
groupings for the years ended September 30, 2003 and 2002 (in thousands) are as
follows:

September 30
---------------------------
2003 2002
---------- ----------
Point Solutions $ 0 $15,022
Enterprise Solutions 889 6,926
Service, Maintenance And Other 3,337 14,187
-------- --------
$ 4,226 $36,135
======== ========

There were no Point Solutions products and services revenues as a result of our
decision to sell and/or liquidate all of our European operations effective June
30, 2002, and our strategy of de-emphasizing lower margin product sales,
together with the impact of the downturn in the economy, especially
post-September 11, in North America.

Enterprise solutions revenues decreased to $889,000 in 2003 from $6,926,000 in
2002. The decrease was also a result of our decision to sell and/or liquidate
all of our European operations effective June 30, 2002, our strategy of
de-emphasizing lower margin product sales, together with the impact of the
downturn in the economy, especially post-September 11, in North America.


26


Service, maintenance and other revenues have decreased approximately $10,850,000
from 2002. The decrease was a result of our decision to sell and/or liquidate
all of our European operations effective June 30, 2002, our strategy of
de-emphasizing lower margin product sales, together with the impact of the
downturn in the economy, especially post-September 11, in North America.

Gross Profit:

Gross profit decreased by approximately $10,153,000 (or 82.9%) to $2,087,000 in
2003. As a percent of operating revenues, gross profit was 49.4% in 2003 as
compared to 33.9% in 2002. The gross profit percentage was favorably impacted by
our emphasis on higher margin service and maintenance revenues.

Operating Expenses:

Selling and administrative expenses decreased approximately $17,861,000 (or
79.4%) to $4,642,000 in 2003. During 2003 we continued various cost reduction
measures, including reduction in the number of our employees, facilities
consolidations, as well as reductions in other expenses deemed redundant such as
marketing and advertising and other headcount-related expenses.

Research and development ("R&D") expenses decreased approximately $4,180,000 (or
100%) from 2002. As a result of the slow economy and our cost cutting efforts,
we suspended R&D, focusing our technical resources on maintenance services,
until which time additional financing is received.

The decrease in the depreciation and amortization of intangibles to $235,000 in
2003, as compared to approximately $1,237,000 in 2002, is the direct result of
the disposal of these assets in 2002. These intangibles were being amortized
over their estimated lives ranging from 2 to 25 years. In 2002, we recorded an
impairment charge of approximately $18,974,000.

In 2002, we also made a provision of approximately $1,103,000 relating to
various leases we terminated.

As a result of the aforementioned, our operating loss decreased by approximately
$32,966,000 to approximately $2,790,000 for fiscal 2003 as compared to
approximately $35,756,000 for fiscal 2002.

Interest expense decreased by approximately $2,023,000 to $852,000 in 2003. This
decrease is due to decreased working capital borrowings at the end of fiscal
2001, carrying through in fiscal 2002 and liquidating our foreign operations in
fiscal 2002. In fiscal 2002, we also recorded a loss on sale or liquidation of
our non-core assets of approximately $3,081,000 and an increase in our
litigation reserve of approximately $2,654,000 relating to our ongoing
litigation (Refer to Item 3 - Legal Proceedings).

27


The income tax provision (credit) is negligible in both years due primarily to
operating losses and a valuation allowance established against the related
deferred tax assets.

Liquidity and Capital Resources

Based upon our substantial working capital deficiency ($21,663,000) and
stockholders' deficiency ($23,656,000), at September 30, 2004 our current rate
of cash consumption, the uncertainty of liquidity related initiatives described
in detail below, and the reasonable possibility of on-going negative impacts on
our operations from the overall economic environment for a further unknown
period of time, there is substantial doubt as to our ability to continue as a
going concern.

The successful implementation of our business plan has required, and will
require on a going forward basis, substantial funds to finance (i) continuing
operations, (ii) further development of our enterprise software technologies,
(iii) settlement of existing liabilities including past due payroll obligations
to its employees, officers and directors, and (iv) possible selective
acquisitions to achieve the scale we believe will be necessary to remain
competitive in the global SCM industry. There can be no assurance that we will
be successful in raising the necessary funds.

Fiscal 2004

In fiscal 2004, the continued softness in the enterprise applications software
and telecommunications industries continued to have a substantial negative
impact on our results of operations. These factors, in combination with our
continuing negative operating cash flows, placed significant pressures on our
financial condition and liquidity and negatively impacted our operations.

28


Operating activities resulted in cash consumption of $2,352,000 in 2004. During
fiscal 2004 we raised approximately $3,100,000, before cash transaction costs.
At September 30, 2004, the above activities resulted in a net cash balance of
$101,000 (an increase of $76,000).

Outlook

In light of current economic conditions, we may now anticipate, but cannot
assure, reaching the point at which we generate cash in excess of our operating
expenses in the quarter ending June 2005. However, the Company has accrued
significant obligations during the past several years that exceeded our current
assets and, to the extent we cannot settle existing obligations in stock or
defer our obligations until we generate sufficient operating cash, we will
require significant additional funds to meet accrued non-operating obligations,
to fund operating losses, if required, short-term debt and related interest,
capital expenditures, expenses related to cost-reduction initiatives, and
potential liabilities that could arise from litigation claims and judgments.

Our sources of ongoing liquidity include the cash flows of our operations,
potential new credit facilities, and potential additional equity investments.
Consequently, Vertex continues to aggressively pursue additional debt and equity
financing, the restructuring of certain existing debt obligations and the
reduction of its operating expenses. In addition, Vertex has structured its
overall operations and resources around high margin enterprise products and
services. However, in order to remain in business, the Company must raise
additional cash in a timely fashion.

The following initiatives have been completed or are in process to raise the
required funds, settle liabilities and/or reduce expenses:

(i) To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on April 28, 2004 for the sale
of (i) $3,000,000 in secured convertible notes and (ii) warrants to buy
3,000,000 shares of our common stock.

(ii) On September 27, 2004, we completed the terms and conditions of an
Investment Restructuring Agreement that we entered into on May 26, 2004 with six
accredited investors: MidMark Capital L.P., MidMark Capital II, L.P., Paine
Webber Custodian F/B/O Wayne Clevenger, Joseph Robinson, O'Brien Ltd.
Partnership and Matthew Finlay and Teresa Finlay JTWROS, who are also our
principal stockholders.

On June 25, 2004, as part of the Investment Restructuring Agreement, we
exchanged series C preferred stock for newly authorized series C-1 convertible
preferred stock on a 1:1 basis. On September 27, 2004, we issued 7,615 shares of
newly authorized series D nonredeemable and mandatory redeemable convertible
preferred stock to MidMark Capital, L.P. in exchange for $7,614,708 of debt,
including accrued interest, owed by our subsidiaries and us to MidMark Capital
II, L.P. In addition, on September 27, 2004, we issued 5,569,980 shares of
common stock to MidMark Capital, L.P. upon exercise of warrants by MidMark
Capital, L.P. The exercise price for the warrants was exchanged for the
retirement of $315,309 in debt owed by us to MidMark Capital, L.P. As well, on
September 27, 2004, we issued 240,000 shares of common stock to MidMark Capital
II, L.P. upon exercise of warrants by MidMark Capital II, L.P. The exercise
price for the warrants was exchanged for the retirement of $2,400 in debt owed
by us to MidMark Capital II, L.P.

(iii) The Company completed the sale of certain entities and assets during
fiscal 2002. After being unsuccessful in attempting to sell its five remaining
European operations (Vertex UK, Vertex Service and Maintenance Italy, Vertex
Italy, Euronet and Vertex France), and based on the continuing cash drain from
these operations, during fiscal 2002 the respective boards of directors
determined that in the best interest of their shareholders that they would seek
the protection of the respective courts in each country, which have agreed to an
orderly liquidation of these companies for the benefit of their respective
creditors. Upon legal resolution of approximately $7,715,000 of net liabilities
of these remaining European entities recorded as of September 30, 2004, we
expect to recognize a non-cash gain (and no significant cash outlay); however
the amount and timing of such gain and cash outlay, if any, is totally dependent
upon the decisions to be issued by the respective court appointed liquidators.
We received notice that the liquidation of the UK companies, which were under
liquidation as of September 30, 2003 and 2002, has been approved and finalized
by the UK creditors as of January 5, 2004. Based on such notice, management
reduced the Company's net liabilities associated with subsidiaries in
liquidation by approximately $1,400,000, reclassed approximately $1,073,000 of
translation loss from accumulated other comprehensive loss to the consolidated
statement of operations, and recognized a gain of approximately $320,000 in
fiscal 2004

29


(iv) We have continued to reduce headcount (to approximately 17 employees in our
continuing North American business at September 30, 2004 of whom 3 are currently
furloughed until additional funds are raised), consolidate facilities, and
generally reduce costs.

(v) The Company is negotiating with vendors to settle balances at substantial
discounts. In addition, the Company is negotiating to settle certain notes
payable and approximately $3,700,000 of litigation accruals at a discount or
with the issuance of shares of either Vertex or XeQute.

(vi) During the year ended September 30, 2004, we realized net gains of
$1,072,000 from settlements of liabilities totaling $1,564,500 through payments
of $492,500 in cash.

While we are continuing our efforts to reduce costs, increase revenues, resolve
lawsuits on favorable terms and settle certain liabilities on a non-cash basis
there is no assurance that we will achieve these objectives. In addition, we
will continue to pursue strategic business combinations and opportunities to
raise both debt and equity financing. However, there can be no assurance that we
will be able to raise additional financing in the timeframe necessary to meet
our immediate cash needs, or if such financing is available, whether the terms
or conditions would be acceptable to us.

Basis of Presentation:

The financial statements have been prepared on a basis that contemplates our
continuation as a going concern and the realization of assets and liquidation of
liabilities in the ordinary course of business. The financial statements do not
include any adjustments, with the exception of the provision to reduce the
carrying values of the assets of the subsidiaries in liquidation to their
estimated net realizable value, relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should we be unable to continue as a going
concern. If we fail to raise capital when needed, the lack of capital will have
a material adverse effect on our business, operating results and financial
condition.

30


Contractual Obligations

The table below summarizes our known contractual obligations, consisting of our
debt agreements, our operating lease commitments and our employment agreements,
as of September 30, 2004:

Payments due by period
----------------------------------
Less than 1-3 3-5
Total one year Years Years
-------------------------------------------
Debt(A) $3,777,224 $1,227,500 $2,549,724

Operating lease 782,332 176,000 541,125 $ 65,207

Employment agreements 495,000 495,000
-------------------------------------------

Total $5,054,556 $1,898,500 $3,090,849 $ 65,207
===========================================

(A) Of this amount, $1,227,500 currently in default or due on demand.

New Accounting Pronouncements

For information as to the effects of new accounting pronouncements, see Note 3
to the consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
market prices and rates.

The Company is exposed to market risk because of changes in foreign currency
exchange rates as measured against the U.S. dollar and currencies of the
Company's subsidiaries in Europe which are currently in liquidation. The Company
does not anticipate that near-term changes in exchange rates will have a
material impact on future earnings, fair values or cash flow of the Company,
especially now that all of the European operations have been either sold or
placed into liquidation. However, there can be no assurance that a sudden and
significant change in the value of European currencies would not have a material
adverse effect on the Company's financial condition and results of operations.

The Company's short-term debt bears interest at variable rates; therefore, the
Company's results of operations would only be affected by interest rate changes
to the short-term debt outstanding. An immediate 10 percent change in interest
rates would not have a material effect on the Company's results of operations
over the next fiscal year.

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information called for by this "Item 8" is included following the "Index to
Financial Statements and Schedules" appearing at the end of this Form 10-K. 31

31


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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures: As of September 30, 2004, the
Company's management carried out an evaluation, under the supervision of the
Company's Chief Executive Officer and the Chief Financial Officer of the
effectiveness of the design and operation of the Company's system of disclosure
controls and procedures pursuant to the Securities and Exchange Act, Rule
13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective, as of the date of their
evaluation, for the purposes of recording, processing, summarizing and timely
reporting material information required to be disclosed in reports filed by the
Company under the Securities Exchange Act of 1934.

Based on the evaluation, which disclosed no significant deficiencies or material
weaknesses that are not being addressed in the actions currently being taken to
improve its disclosure controls and procedures, the Company has identified
certain deficiencies and issues with its internal controls that occurred in the
fiscal year ended September 30, 2004. These deficiencies and issues include, but
are not limited to:

o During the fourth quarter of 2004 the Company identified that it had
not timely considered certain issuances of equity securities and the
beneficial conversion features imbedded within the convertible debt
instruments and preferred stock issued in the fourth quarter.
Management has put in place appropriate controls to mitigate this
type of event from occurring in future periods.

o Deficiencies related to the internal control environment. The
Company has determined that for the period ended September 30, 2004,
it had deficiencies due to inadequate staffing in its accounting
department and the lack of a full-time Controller. The Company has
hired a Controller subsequent to year end, and expects these
controls will improve during the fiscal year ending September 30,
2005.

Changes in internal controls: There were no changes in internal controls over
financial reporting, known to the Chief Executive Officer or Chief Financial
Officer that occurred during the period covered by this report that has
materially affected, or is likely to materially effect, the Company's internal
control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

32


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Certain information about directors and officers of the Company is contained in
the following table as of September 30, 2004.

Director
Name of Director Age Position Since
- ----------------- ---- ---------------------- --------
Hugo H. Biermann 55 Executive Chairman 1999


Nicholas R. H. Toms 56 Chief Executive Officer and 1999
Chief Financial Officer


Otto Leistner 60 2000


Barbara H. Martorano 47 Secretary

There is no family relationship between any of the foregoing directors or
between any of such directors and any of the Company's executive officers. The
Company's executive officers serve at the discretion of the Board of Directors.

Hugo H. Biermann has served as Executive Chairman of the Board of Directors
since July 2001 and served as Joint Chairman and Joint Chief Executive Officer
and a Director of the Company from September 1999 through June 2001. Mr.
Biermann has been a principal in Edwardstone & Company, Incorporated
("Edwardstone"), an investment management company, since 1986 as well as serving
as President of Edwardstone since 1989. From 1988 to 1995 Mr. Biermann served as
Director and Vice Chairman of Peak Technologies Group, Incorporated ("Peak
Technologies"), a company involved in automated data capture technologies.

Nicholas R. H. Toms has served as Chief Executive Officer since July, 2001, as
Chief Financial Officer since August, 2003, and served as Joint Chairman of the
Board of Directors, Joint Chief Executive Officer and a Director of the Company
from September 1999 through June 2001. Mr. Toms has been a principal of
Edwardstone, an investment management company, since 1986 and Chairman and Chief
Executive Officer of Edwardstone since 1989. From 1988 to 1997, Mr. Toms served
as Chairman, President and Chief Executive Officer of Peak Technologies.

Otto Leistner has been a Director since April 2000. He has been a Partner since
1995 in Leistner Pokoj Schnedler, a midsize accounting and consulting firm in
Frankfurt, Germany with a staff of approximately 100.

Barbara H. Martorano joined the Company in June 1990 and has served in a variety
of positions, including Sales Order Processing Coordinator, Office
Administrator, Executive Assistant to the President, CEO and Chairman of the
Board, as well as Corporate Secretary as of January 17, 1996.


33


Operation of Board of Directors and Committees

The Board of Directors met 18 times during the fiscal year ended September 30,
2004. Standing committees of the Board include an Audit Committee and a Stock
Option/Compensation Committee. The Company does not have a Nominating Committee.
During the time in which they were members, all directors attended in excess of
75% of the meetings.

During the year 2004 , the Audit Committee was solely comprised of Messr.
Leistner, a non-employee director. Pursuant to the Audit Committee Charter, the
Committee's primary duties and responsibilities are to 1) serve as an
independent and objective party to monitor the Corporation's financial reporting
process and internal control system; 2) review and appraise the audit efforts of
the Corporation's independent registered public accounting firms; and 3) provide
an open avenue of communication among the independent registered public
accounting firms, financial and senior management and the Board of Directors.
Audit Committee Meetings primarily were combined with regular Board Meetings and
included full Board participation. There were no meetings during the 2004 fiscal
year during which Audit Committee agenda items were addressed.

As of September 30, 2004 the Stock Option/Compensation Committee was comprised
solely of Messr. Leistner. The Committee's primary functions are to determine
remuneration policies applicable to the Company's executive officers and to
determine the bases of the compensation of the Chief Executive Officer,
including the factors and criteria on which such compensation is to be based.
The Committee also administers the Company's Stock Option Plan. Stock
Option/Compensation Committee Meetings primarily were combined with regular
Board Meetings and included full Board participation.

Compensation of Directors

During fiscal year 2004, no compensation was received by its non-employee
Director, Otto Leistner for services provided due to the financial condition of
the Company. No options were granted to directors in fiscal year 2004. The
Company reimburses directors for their reasonable out-of-pocket expenses with
respect to board meetings and other Company business.

34


ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information concerning the annual and long-term
compensation for services in all capacities to the Company for the fiscal years
ended September 30, 2004, 2003, and 2002 of the five highest compensation
persons who were, at September 30, 2004, executive officers of the Company and
earned $100,000 or more in any of the respective fiscal years:



SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION

Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards($) (#) ($) Compensation
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------

Hugo H. Biermann 2004 0 0 0 - - - -
Executive Chairman of 2003 0 0 0 - - - -
the Board of Directors 2002 300,000 0 0 - - - -
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------

Nicholas R. H. Toms 2004 50,000 0 0 - - - -
Chief Executive Officer 2003 91,667 0 0 - - - -
Chief Financial Officer 2002 300,000 0 0 - - - -
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Mark A. Flint 2004 0 0 0 - - - -
Chief Financial Officer 2003 218,589 (1) 0 0 - - - -
2002 275,000 100,000 (2) 0 - - - -
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Donald W. Rowley 2004 0 0 0 - - - -
Executive VP - 2003 101,667 (3) 0 0 - - - -
Strategic Development 2002 225,000 0 0 - - - -
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Robert Schilt 2004 100,000 0 0 - - - -
Chief Technology Officer2003 214,475 0 0 - - - -
XeQute Solutions, Inc. 2002 235,828 105,000 0 - - - -
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Timothy Callahan 2004 50,000 0 0 - - - -
Vice President 2003 198,750 0 0 - - - -
Sales and Marketing 2002 170,625 0 0 - - - -


(1) Mr. Flint was laid off in August, 2003.
(2) Such amount is accrued however unpaid as of June 16, 2004.
(3) Mr. Rowley resigned as an officer in February, 2003, and was laid off in
June, 2003.

35


Employment Agreements

The Company has employment agreements with certain key employees, which
automatically renew on an annual basis, unless otherwise terminated by either
party. Such agreements provide for salary levels (approximately $495,000 as of
September 30, 2004) as well as for incentive bonuses. As of September 30, 2004,
two employees who have employment agreements, are on furlough from the Company,
and are not receiving salaries while on furlough, but are receiving company
benefits, with the expectation that they can return when the company has the
financial capability for them to do so. One employee has verbally agreed to
accept a lower salary until such time that the company has the financial
capability to increase their salary.

Stock Option Grants in Last Fiscal Year

The following table describes certain information regarding stock options
granted to each of the named executive officers in the fiscal year ended
September 30, 2004, including the potential realizable value over the ten-year
term of the options, based on assumed rates of stock appreciation of 5% and 10%,
compounded annually. These assumed rates of appreciation comply with the rules
of the Securities and Exchange Commission and do not represent Vertex's estimate
of future stock price. Actual gains, if any, on stock option exercises will be
dependent on the timing of such exercises and the future performance of Vertex's
common stock.

Potential
Percent realizable
of total value at assumed
options annual rates of
Number of granted to stock price
Securities employees appreciation for
Underlying in Exercise options terms
Options fiscal Price Expiration ---------------
Granted year ($/share) Date 5% 10%
---------- ---------- ---------- ---------- ----- ------
None in 2004

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

The following table describes for the named executive officers, the exercisable
and unexercised options held by them as of September 30, 2004. No options were
exercised by the named executive officers in fiscal 2004. The "Value of
Unexercised In-the-Money Options at Fiscal Year End" is based on a value of $.09
per share, the closing price of Vertex's common stock on The Nasdaq Stock
Market's National Market, on September 30, 2004, less the per share exercise
price, multiplied by the number of shares to be issued upon exercise of the
options.

Number of Securities Value of unexercised
Underlying unexercised in-the-money options
Options at fiscal year end at fiscal year end
--------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Hugo Biermann 475,000 - n/a n/a
Nicholas Toms 475,000 - n/a n/a
Mark Flint 280,000 120,000 n/a n/a


36


401(k) Savings And Retirement Plan

Vertex maintains a 401(k) savings plan (the "401(k) Plan") for the benefit of
all U.S. based employees age 18 or over who have worked for at least three
months and who are not covered by a collective bargaining agreement. The 401(k)
Plan is qualified under Section 401(a) of the Code and is intended to qualify
under Section 401(k) of the Code. The assets accumulated by the 401(k) Plan are
held in a trust.

Under the current terms of the 401(k) Plan, employees may elect to defer from
Federal income tax up to 17% of their annual compensation, not to exceed
Internal Revenue Code limits and have it contributed to the 401(k) Plan on their
behalf. Beginning January 1, 2001, the Company contributed 50% of an employee's
salary deferral up to 6% or a 3% match. The Company's contribution is funded
after each calendar year end, with either cash or Vertex common stock, at the
Company's option. The salary deferrals are fully vested, while the Company's
contributions vest 20% upon the completion of the first year of service and 20%
each successive year thereafter, until completion of the fifth year of service
or, if earlier, upon the death, disability or retirement of the participant.
Benefits under the 401(k)Plan are generally distributed in a lump sum following
the participant's retirement, death, disability or termination of employment, or
in a case of hardship, prior to the termination of the participant's employment.

The Company contributions for the years ended September 30 were $59,000 for
2004, $80,000 for 2003 and $202,000 for 2002.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and holders of more
than 10% of the Company's Common Stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Such
executive officers, directors and 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.

Based on its review of such forms that it received, or written representations
from reporting persons that no Forms 5s were required for such persons, the
Company believes that, during fiscal 2004, all Section 16(a) filing requirements
have not been satisfied on a timely basis for members of the Board of Directors
and Executive Officers.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

General

Notwithstanding any statement to the contrary in any of the Company's previous
or future filings with the Securities and Exchange Commission, this Report shall
not be incorporated by reference into any such filings.

37


The Stock Option/Compensation Committee of the Company's Board of Directors (the
"Committee") has furnished the following report on Executive Compensation in
accordance with the rules and regulations of the Securities and Exchange
Commission. This report outlines the duties of the Committee with respect to
executive compensation, the various components of the Company's compensation
program for executive officers and other key employees, and the basis on which
the 2004 compensation was determined for the executive officers of the Company,
with particular detail given to the compensation for the Company's Chief
Executive Officer.

Compensation of Executive Officers Generally

The Committee is responsible for establishing compensation levels for the
executive officers of the Company, including the annual bonus plan for executive
officers and for administering the Company's Stock Option Plan. The Committee is
comprised of one non-employee director: Mr. Leistner.

The Committee's overall objective is to establish a compensation policy that
will (i) attract, retain and reward executives who contribute to achieving the
Company's business objectives; (ii) motivate executives to obtain these
objectives; and (iii) align the interests of executives with those of the
Company's long-term investors. The Company compensates executive officers with a
combination of salary and incentives designed to focus their efforts on
maximizing both the near-term and long-term financial performance of the
Company. In addition, the Company's compensation program rewards individual
performance that furthers Company goals.

The executive compensation program includes the following: (i) base salary; (ii)
incentive bonuses; (iii) long-term equity incentive awards in the form of stock
option grants; and (iv) other benefits. Each executive officer's compensation
package is designed to provide an appropriately weighted mix of these elements,
which cumulatively provide a level of compensation roughly equivalent to that
paid by companies of similar size and complexity engaged in the same or similar
business.

Base Salary. Base Salary levels for each of the Company's executive officers,
including the Executive Chairman and the Chief Executive Officer, are generally
set within a range of base salaries that the Committee believes are paid to
similar executive officers at companies deemed comparable based on the
similarity in revenue level, industry segment and competitive employment market
to the Company. In addition, the Committee generally takes into account the
Company's past financial performance and future expectations, as well as the
performance of the executives and changes in the executives' responsibilities.
There were no increases in the base salary for any of the Executive Officers of
the Company during fiscal 2004, 2003 or 2002, reflecting the Company's
objectives of cash preservation.

38


Incentive Bonuses. The Committee recommends the payment of bonuses to provide an
incentive to executive officers to be productive over the course of each fiscal
year. These bonuses are awarded only if the Company achieves or exceeds certain
corporate performance objectives. The incentive bonus to each executive officer
is based on the individual executive's performance as it relates to the
Company's performance. With the exception of the Chief Financial Officer and the
Chief Operating Officer - Europe (which bonuses were guaranteed bonuses), there
were no incentive bonuses granted to any of the executive officers of the
Company in 2004, 2003 or 2002, reflective of the operating losses and the desire
to preserve cash.

Equity Incentives. Stock options are used by the Company for payment of
long-term compensation to provide a stock-based incentive to improve the
Company's financial performance and to assist in the recruitment, retention and
motivation of professional, managerial and other personnel. Generally, stock
options are granted to executive officers upon commencement of employment with
the Company and from time to time thereafter, based primarily upon the
individual's actual and/or potential contributions to the Company and the
Company's financial performance. Stock options are designed to align the
interests of the Company's executive officers with those of its shareholders by
encouraging executive officers to enhance the value of the Company, the price of
the Common Stock, and hence, the shareholder's return. In addition, the vesting
of stock options over a period of time is designed to create an incentive for
the individual to remain with the Company. The Company has granted options to
the executives on an ongoing basis to provide continuing incentives to the
executives to meet future performance goals and to remain with the Company. No
options were granted in 2004.

Other Benefits. Benefits offered to the Company's executive officers are
provided to serve as a safety net of protection against the financial
catastrophes that can result from illness, disability, or death. Benefits
offered to the Company's executive officers are substantially the same as those
offered to all of the Company's regular employees. The Company also maintains a
tax-qualified deferred compensation 401(k) Savings and Retirement Plan covering
all of the Company's eligible U.S. based employees.

Compensation of the Chief Executive Officer

The Committee annually reviews the performance and compensation of the Chief
Executive Officer based on the assessment of his past performance and its
expectation of his future contributions to the Company's performance. Mr. Toms
compensation for 2004 was $50,000

Policy with Respect to Qualifying Compensation for Deductibility Section 162(m)
of the Internal Revenue Code imposes a limit on tax deductions for annual
compensation (other than performance-based compensation) in excess of one
million dollars paid by a corporation to its Chief Executive Officer and the
other four most highly compensated executive officers of a corporation. The
Company has not established a policy with regard to Section 162(m) of the Code,
since the Company has not and does not currently anticipate paying cash
compensation in excess of one million dollars per annum to any employee. None of
the compensation paid by the Company in 39 2003 was subject to the limitations
on deductibility. The Board of Directors will continue to assess the impact of
Section 162(m) on its compensation practices and determine what further action,
if any, is appropriate.


39


Stock Option/Compensation Committee
Otto Leistner

STOCK PERFORMANCE GRAPH

The following line-graph provides a comparison of the cumulative total
shareholder return on our Common Stock for the period September 30, 2000 through
September 30, 2004, against the cumulative shareholder return during such period
achieved by The Nasdaq Stock Market (U.S. Companies) ("Nasdaq US") and the "RDG
Software Composite Index"). The graph assumes that $100 was invested on
September 30, 1998 in our Common Stock and in each of the comparison indices,
and assumes reinvestment of dividends.

NASDAQ Stock RDG Software
Measurement Period Vertex Market (U.S. Composite
(Fiscal Year Covered) Interactive Companies) Index
- ---------------------- ----------- --------------- ------------
September 30, 2000 636.97 159.85 131.11
September 30, 2001 35.83 56.32 57.79
September 30, 2002 2.43 49.18 44.75
September 30, 2003 2.47 58.43 58.88
September 30, 2004 4.52 65.29 63.79

The Stock Performance Graph shall not be deemed incorporated by reference
by any general statement incorporating by reference this proxy statement into
any filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended (collectively, the "Acts"), except to the
extent that the Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under such Acts.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG VERTEX INTERACTIVE, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX,
AND THE RDG SOFTWARE COMPOSITE INDEX

PERFORMANCE GRAPH AVAILABLE UPON REQUEST

* $100 invested on 9/30/99 in stock or index-including reinvestment of
dividends.

40


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the amount and percent of shares of each class of
stock that, as of December 10, 2004 are deemed under the rules of the Securities
and Exchange Commission (the "Commission") to be "beneficially owned" by each
member of the Board of Directors of the Company, by each Named Executive Officer
of the Company, by all Directors and Executive Officers of the Company as a
group, and by any person or "group" (as that term is used in the Securities Act
of 1934, as amended) known to the Company as of that date to be a "beneficial
owner" of more than 5% of the outstanding shares of the respective class of
stock.

NUMBER OF
SHARES
NAME AND ADDRESS BENEFICIALLY PERCENTAGE OF
OF OWNER TITLE OF CLASS OWNED(1) CLASS (2)
- --------------------------------------------------------------------------------

Hugo H. Biermann Common Stock 1,863,010 (3) 2.54%
3619 Kennedy Road
South Plainfield, NJ 07080

Nicholas R. H. Toms Common Stock 2,563,418 (4) 3.49%
3619 Kennedy Road
South Plainfield, NJ 07080

Otto Leistner Common Stock 1,672,875 (5) 2.29%
3619 Kennedy Road
South Plainfield, NJ 07080

Barbara Martorano Common Stock 19,000 (6) *
3619 Kennedy Road
South Plainfield, NJ 07080

All Officers and Directors Common Stock 6,118,303 (7) 8.38%
As a Group (4 persons)

- ----------------------------
American Marketing Complex Common Stock 9,455,000 12.96%
330 East 33rd Street, Suite 15M
New York, NY 10016

MidMark Capital II L.P. Common Stock 293,234,996 (8) 80.07%
177 Madison Avenue
Morristown, NJ 07960

================================================================================

Pitney Bowes, Inc. Preferred A 1,356,852 100%
One Elmcroft Road
Stamford, CT 06926

================================================================================

Pitney Bowes, Inc. Preferred B 1,000 100%
One Elmcroft Road
Stamford, CT 06926

================================================================================


41



MidMark Capital II L.P. Preferred C-1 805 80.74%
177 Madison Avenue
Morristown, NJ 07960

Paine Webber Custodian Preferred C-1 50 5.02%
F/B/O Wayne Clevenger
177 Madison Avenue
Morristown, NJ 07960

Joseph Robinson Preferred C-1 50 5.02%
177 Madison Avenue
Morristown, NJ 07960

O'Brien Ltd Partnership Preferred C-1 50 5.02%
177 Madison Avenue
Morristown, NJ 07960

================================================================================

MidMark Capital II, L.P. Preferred D 7,615 100%
177 Madison Avenue
Morristown, NJ 07960

(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of July 30, 2004 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.

(2) For purposes of calculating the percentage beneficially owned, the number of
shares of each class of stock deemed outstanding include 54,121,958 common
shares; 1,356,852 Preferred "A" Shares; 1,000 Preferred "B" Shares; 997
Preferred "C" Shares and 7,391 Preferred "D" Shares outstanding as of July 30,
2004.

(3) Includes 475,000 shares issuable pursuant to presently exercisable options
and 388,010 shares held in the name of Bunter BVI Limited of which Mr. Biermann
may be deemed to be a beneficiary. Mr. Biermann, however, disclaims such
beneficial ownership.

(4) Includes 475,000 shares issuable pursuant to presently exercisable options,
7,000 shares held by his wife, Caroline Toms, and 75,000 shares held in a trust
for the benefit of his daughter, Catherine Toms, of which Mr. Toms is the
trustee. Mr. Toms, however, disclaims such beneficial ownership of the shares
owned by his wife and in the trust.

(5) Includes 50,000 shares issuable pursuant to presently exercisable options,
and 1,100,000 shares held in the name of Partas AG of which Mr. Leistner may be
deemed to be a beneficiary. Mr. Leistner, however, disclaims such beneficial
ownership.

(6) Includes 19,000 shares issuable pursuant to presently exercisable options.

(7) Includes 1,019,000 shares issuable pursuant to presently exercisable options
and 388,010 shares held by a company for which by Mr. Biermann disclaims
beneficial ownership.

(8) Includes 253,833,333 shares issuable upon conversion of class D convertible
preferred stock, and 33,233,333 shares issuable upon conversion of class C-1
convertible preferred stock.

42


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On June 25, 2004, as part of an Investment Restructuring Agreement with six
shareholders, who are also our principal shareholders, we exchanged class C
preferred stock for class C-1 convertible preferred stock on a 1:1 basis. Each
share of Series C-1 convertible preferred stock is convertible into $1,000 worth
of our common stock, at the selling stockholders' option, at the lower of (i)
$0.30 or (ii) 60% of the average of the three lowest intraday trading prices for
the common stock on a principal market for the 20 trading days before but not
including the conversion date.

On September 27, 2004, we issued 7,615 shares of class D convertible preferred
stock to MidMark Capital, L.P. in exchange for $7,614,708 of debt, including
accrued interest, owed by our subsidiaries and us to MidMark Capital II, L.P. In
addition, on September 27, 2004, we issued 5,569,980 shares of common stock to
MidMark Capital, L.P. upon exercise of warrants by MidMark Capital, L.P. The
exercise price for the warrants was exchanged for the retirement of $315,309 in
debt owed by us to MidMark Capital, L.P. As well, on September 27, 2004, we
issued 240,000 shares of common stock to MidMark Capital II, L.P. upon exercise
of warrants by MidMark Capital II, L.P. The exercise price for the warrants was
exchanged for the retirement of $2,400 in debt owed by us to MidMark Capital II,
L.P. Each share of the class D convertible preferred stock is convertible into
$1,000 worth of our common stock, at MidMark Capital's option, at the lower of
(i) $0.30 or (ii) 60% of the average of the three lowest intraday trading prices
for the common stock on a principal market for the 20 trading days before but
not including the conversion date.

ITEM 14. Principal Accounting Fees and Services

Selection of the Independent Registered Public Accounting Firm for the Company
is made by the Audit Committee. J.H. Cohn LLP has been selected as the Company's
Independent Registered Public Accounting Firm for the current fiscal year. All
audit and non-audit services provided by J.H. Cohn LLP are pre-approved by the
Audit Committee which gives due consideration to the potential impact of
non-audit services on auditor independence.

In accordance with Independent Standard Board Standards No. 1 (Independence
Discussion with Audit Committees), the Company received a letter and verbal
communication from J.H. Cohn LLP that it knows of no state of facts which would
impair its status as the Company's independent public accountants. The Audit
Committee has considered whether the non-audit services provided by J.H. Cohn
LLP are compatible with maintaining its independence and has determined that the
nature and substance of the limited non-audit services have not impaired J.H.
Cohn LLP's status as the Company's Independent Registered Public Accounting
Firm.

43


AUDIT FEES

The aggregate fees billed by our auditors, for professional services rendered
for the audit of the Company's annual financial statements during the year ended
September 30, 2004, and for the reviews of the financial statements included in
the Company's Quarterly Reports on Form 10-Q and the registration statement
during the fiscal year then ended was approximately $267,000. No such fees were
billed for the year ended 2003.

TAX FEES

J.H. Cohn LLP billed the Company approximately $30,000 for tax related work
during fiscal years 2004 and none for 2003.

ALL OTHER FEES

J.H. Cohn LLP did not bill the Company for any other services during fiscal
years 2004 and 2003.


44


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed at the end of this report:

1. and 2. Financial Statements and Financial Statement Schedules:

1. Consolidated Financial Statements and Supplementary Data:

Index to Consolidated Financial Statements:

Reports of Independent Registered Public Accounting Firms F-1, F-2

Consolidated Balance Sheets
September 30, 2004 and 2003 F-3, F-4

Consolidated Statements of Operations
Years ended September 30, 2004, 2003 and 2002 F-5

Consolidated Statements of Changes in
Stockholders' Equity (Deficiency)
Years ended September 30, 2004, 2003 and 2002 F-6, F-7

Consolidated Statements of Cash Flows
Years ended September 30, 2004, 2003 and 2002 F-8


Notes to Consolidated Financial Statements F-9

2. Financial Statement Schedules:

Schedules for the years ended September 30, 2004, 2003 and 2002:

Schedule II - Valuation Qualifying Accounts F-44

Schedules other than those listed above have been omitted because they are
not applicable or the required information is shown in the financial
statements or notes thereto.


45


3. Exhibits:

Exhibit No. Description
- ----------- -----------

2.1 Form of Common Stock Certificate (incorporated by reference to
the Registration Statement on Form S-18 filed under the
Securities Act of 1933, as amended and effective June 2, 1986
(File No. 33-897-NY).

3.1 Certificate of Amendment to the Certificate of Incorporation
of Vertex Interactive, Inc. filed with the Secretary of State,
State of New Jersey on February 7, 2001, on October 18, 2001
and November 2, 2001 (incorporated by reference to the Form
10-Q filed May 20, 2002).

3.2 Amended By-laws, amended as of August 9, 2001 (incorporated by
reference to the Form 10-K filed January 25, 2002).

4.1 Common Stock Purchase Warrant with AJW Offshore, Ltd., dated
April 28, 2004 (incorporated by reference to the registration
statement on Form S-1 filed June 22, 2004).

4.2 Common Stock Purchase Warrant with AJW Partners, LLC, dated
April 28, 2004 (incorporated by reference to the registration
statement on Form S-1 filed June 22, 2004).

4.3 Common Stock Purchase Warrant with AJW Qualified Partners,
LLC, dated April 28, 2004 (incorporated by reference to the
registration statement on Form S-1 filed June 22, 2004).

4.4 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated April 28, 2004 (incorporated by
reference to the registration statement on Form S-1 filed June
22, 2004).

4.5 Convertible Note with AJW Offshore, Ltd., dated April 28, 2004
(incorporated by reference to the registration statement on
Form S-1 filed June 22, 2004).

4.6 Convertible Note with AJW Partners, LLC, dated April 28, 2004
(incorporated by reference to the registration statement on
Form S-1 filed June 22, 2004).

4.7 Convertible Note with AJW Qualified Partners, LLC, dated April
28, 2004 (incorporated by reference to the registration
statement on Form S-1 filed June 22, 2004).

4.8 Convertible Note with New Millennium Capital Partners II, LLC,
dated April 28, 2004 (incorporated by reference to the
registration statement on Form S-1 filed June 22, 2004).

4.9 Securities Purchase Agreement, dated as of April 28, 2004, by
and among Vertex Interactive, Inc., AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium
Capital Partners II, LLC (incorporated by reference to the
registration statement on Form S-1 filed June 22, 2004).

4.10 Security Agreement, dated as of April 28, 2004, by and among
Vertex Interactive, Inc., AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC (incorporated by reference to the
registration statement on Form S-1 filed June 22, 2004).

4.11 Intellectual Property Security Agreement, dated as of April
28, 2004, by and among Vertex Interactive, Inc., AJW Partners,
LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Capital Partners II, LLC (incorporated by reference
to the registration statement on Form S-1 filed June 22,
2004).

4.12 Registration Rights Agreement, dated as of April 28, 2004, by
and among Vertex Interactive, Inc., AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium
Capital Partners II, LLC (incorporated by reference to the
registration statement on Form S-1 filed June 22, 2004).

4.13 Escrow Agreement, dated as of April 28, 2004, by and among
Vertex Interactive, Inc., AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., New Millennium Capital
Partners II, LLC and Owen Naccarato (incorporated by reference
to the registration statement on Form S-1 filed June 22,
2004).

4.14 Guaranty and Pledge Agreement, dated as of April 28, 2004, by
and among Vertex Interactive, Inc., AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd., New Millennium
Capital Partners II, LLC and Nicholas Toms (incorporated by
reference to the registration statement on Form S-1 filed June
22, 2004).

4.15 Common Stock Purchase Warrant with AJW Offshore, Ltd., dated
May 28, 2004 (incorporated by reference to the registration
statement on Form S-1 filed June 22, 2004).


46


4.16 Common Stock Purchase Warrant with AJW Partners, LLC, dated
May 28, 2004 (incorporated by reference to the registration
statement on Form S-1 filed June 22, 2004).

4.17 Common Stock Purchase Warrant with AJW Qualified Partners,
LLC, dated May 28, 2004 (incorporated by reference to the
registration statement on Form S-1 filed June 22, 2004).

4.18 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated May 28, 2004 (incorporated by
reference to the registration statement on Form S-1 filed June
22, 2004).

4.19 Convertible Note with AJW Offshore, Ltd., dated May 28, 2004
(incorporated by reference to the registration statement on
Form S-1 filed June 22, 2004).

4.20 Convertible Note with AJW Partners, LLC, dated May 28, 2004
(incorporated by reference to the registration statement on
Form S-1 filed June 22, 2004).

4.21 Convertible Note with AJW Qualified Partners, LLC, dated May
28, 2004 (incorporated by reference to the registration
statement on Form S-1 filed June 22, 2004).

4.22 Convertible Note with New Millennium Capital Partners II, LLC,
dated May 28, 2004 (incorporated by reference to the
registration statement on Form S-1 filed June 22, 2004).

4.23 Escrow Agreement, dated as of May 28, 2004, by and among
Vertex Interactive, Inc., AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., New Millennium Capital
Partners II, LLC and Owen Naccarato (incorporated by reference
to the registration statement on Form S-1 filed June 22,
2004).

10.1 Incentive Stock Option Plan dated October 10, 1985, and
amended February 14, 2000 (incorporated by reference to the
Form 10-K filed on December 18, 2000).

10.2 Share Purchase Agreement, by and among Vertex Industries,
Inc., St. Georges Trustees Limited, as trustee on behalf of
the John Kenny Settlement and the Godfrey Smith Settlement,
John Kenny and Bryan J. Maguire and Godfrey Smith dated June
21, 1999, as amended September 27, 1999, (incorporated by
reference to the Form 8-K filed October 7, 1999).

10.3 Stock Purchase Agreement by and among Vertex Interactive, Data
Control Systems and The Stockholders of Data Control Systems,
Inc. dated March 31, 2000 (incorporated by reference to the
Form 8-K filed April 12, 2000).

10.4 Agreement and Plan of Merger, dated September 18, 2000, by and
among Vertex Interactive, Rensoft Acquisition Corp. and
Renaissance Software, Inc. (incorporated by reference to the
Form 8-K filed October 2, 2000).

10.5 Form of Note Purchase Agreement dated June 19, 2001 between
Vertex Interactive, Inc. and MidMark Capital II, LP with
respect to the Convertible Notes Payable (incorporated by
reference to the Form 10-Q filed August 14, 2001).

10.6 Agreement and Plan of Merger, dated December 29, 2000, between
Vertex Interactive and Applied Tactical Systems, Inc.
(incorporated by reference to the Form 8-K filed March 2, 2001
and Form 8-K filed March 14, 2001.)

10.7 Asset Purchase Agreement and Ancillary Agreements between
Vertex Interactive, Inc. and Finmek Holding N. V.-Genicom
S.p.A., Genicom Ltd., Genicom S.A. dated October 6, 2000
(incorporated by reference to the Form 10-K filed on January
25, 2002).

10.8 Stock Purchase Agreement by and between Pitney Bowes Inc. and
Vertex Interactive, Inc. dated October 18, 2001 for the
purchase of Series "B" Preferred Stock (incorporated by
reference to the Form 10-Q filed February 20, 2002).

10.9 Note Purchase Agreement by and among MidMark Capital II, L.P.
and Vertex Interactive, Inc. dated as of November 1, 2001 for
the purchase of 10% Convertible Notes Payable (incorporated by
reference to the Form 10-Q filed February 20,2002).

10.10 Form of Conversion Agreement between Vertex Interactive, Inc.
and MidMark dated March 7, 2002 and the Amended and Restated
Convertible Promissory Note dated March 7, 2002 (incorporated
by reference to the Form 10-Q filed May 20, 2002).


47


10.11 Asset Purchase Agreement between Vertex, Renaissance and
Pitney Bowes dated April 19, 2002 (incorporated by reference
to the Form 10-Q filed May 20, 2002).

10.12 Stock and Debt Purchase Agreement between MidMark Capital II,
L.P., MidMark Capital, L.P., DynaSys, S.A. and Vertex
Interactive, Inc. dated August 9, 2002 (incorporated by
reference to the Form 10-K filed August 4, 2003).

21.1 Subsidiaries of Vertex Interactive, Inc. (incorporated by
reference to the registration statement on Form S-1 filed June
22, 2004).

23.1 Consent of Independent Registered Public Accounting Firm
-- J.H. Cohn, LLP (filed herewith).

23.2 Consent of Independent Registered Public Accounting Firm
Withum Smith + Brown, P.C. (filed herewith).

31.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended

32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer and Chief Financial Officer)

48


SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

VERTEX INTERACTIVE, INC.

Date: December 29, 2004 /s/ Nicholas R. Toms
---------------------------------
Nicholas R. Toms
Chief Executive Officer and
Chief Financial Officer

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

December 29, 2004 /s/ Hugo H. Biermann
---------------------------------
Hugo H. Biermann
Executive Chairman and
Director

December 29, 2004 /s/ Nicholas R. Toms
---------------------------------
Nicholas R. Toms
Chief Executive Officer,
Chief Financial Officer and
Director

December 29, 2004 /s/ Otto Leistner
---------------------------------
Otto Leistner
Director

49


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Vertex Interactive, Inc.:

We have audited the accompanying consolidated balance sheets of Vertex
Interactive, Inc. and Subsidiaries as of September 30, 2004 and 2003, and the
related consolidated statements of operations, changes in stockholders' equity
(deficiency) 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 consolidated financial statements based on our
audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vertex Interactive,
Inc. and Subsidiaries as of September 30, 2004 and 2003, and their results of
operations and cash flows for the years then ended, in conformity with United
States generally accepted accounting principles.

The consolidated financial statements referred to above have been prepared
assuming that the Company will continue as a going concern. As further discussed
in Note 1 to the consolidated financial statements, among other things, the
Company's operations have generated recurring losses and it had working capital
and stockholders' deficiencies as of September 30, 2004. Such matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
accompanying consolidated financial statements as of and for the year ended
September 30, 2004 do not include any adjustments that might result from the
outcome of this uncertainty.

Our audits referred to above also included the information in Schedule II as of
and for the years ended September 30, 2004 and 2003, which presents fairly, in
all material respects, when read in conjunction with the consolidated financial
statements, the information required to be set forth therein.


/s/ J.H. Cohn LLP
Roseland, New Jersey
December 10, 2004
except for Notes 16 and 17
as to which the date is
December 21, 2004

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Vertex Interactive, Inc.:

We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficiency) and cash flows of Vertex Interactive, Inc. and
Subsidiaries for the year ended September 30, 2002. Our audit also included the
financial statement schedule for the year ended September 30, 2002 listed in the
index at Item 15(a). These financial statements and the schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (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 audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Vertex Interactive, Inc. and Subsidiaries for the year ended
September 30, 2002 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule for the year ended September 30, 2002, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects, the information set forth therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant operating losses and,
at September 30, 2002 has a working capital deficiency of $27.4 million and a
Stockholders' Deficiency of $26.8 million. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.

As discussed in Notes 3 and 4 to the financial statements, the Company changed
its method of accounting for goodwill and other intangible assets in accordance
with Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" effective October 1, 2001.

/s/ WithumSmith+Brown P.C.
Livingston, New Jersey
April 30, 2003 (July 31, 2003 as to Notes 1 and 19 of the September 30, 2002
financial statements)

F-2


VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2004 and 2003

ASSETS 2004 2003
---------- ----------
CURRENT ASSETS:
Cash $ 101,390 $ 25,265
Restricted cash - short term 300,000
Accounts receivable, less allowance for
doubtful accounts of $456,358 350,935 639,208
Inventories, net of valuation allowances 368,086 537,337
Prepaid expenses and other current assets 71,696 20,103
---------- ----------
Total current assets 1,192,107 1,221,913

Equipment and improvements, net of accumulated
depreciation and amortization of $1,359,090
and $1,320,152 33,748 70,249

Capitalized software costs, net of accumulated
amortization of $347,269 and $231,513 -- 115,756
Restricted cash - long-term 150,000 --
Deferred financing costs, net of accumulated
amortization of $54,189 260,926 --
Other assets 111,273 111,273
---------- ----------
Total assets $1,748,054 $1,519,191
========== ==========

See notes to consolidated financial statements.

F-3





VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2004 and 2003


LIABILITIES AND STOCKHOLDERS' DEFICIENCY 2004 2003
----------- ------------

CURRENT LIABILITIES:
Notes payable - unrelated parties $1,227,500 $ 1,869,236
Notes payable - related parties - 4,095,848
Convertible notes payable - related parties - 2,294,324
Mandatory redeemable Series D preferred stock -
504 shares at redemption value 504,713 -
Accounts payable 3,653,751 4,533,875
Net liabilities associated with subsidiaries in
liquidation 7,714,783 8,511,077
Payroll and related benefits accrual 1,994,852 2,622,354
Litigation related accruals 3,655,323 4,077,665
Other accrued expenses and liabilities 3,749,685 4,870,759
Deferred revenue 354,203 305,243
----------- ------------
Total current liabilities 22,854,810 33,180,381

Long-term convertible notes payable - unrelated parties,
net of unamortized debt discount 2,549,724 -
---------- ------------
Total Liabilities 25,404,534 33,180,381
---------- ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIENCY:
Series A preferred stock, par value $0.01 per share; 2,000,000 shares
authorized, 1,356,852 issued and outstanding
($10,000,000 aggregate liquidation preference) 13,569 13,569
Series B preferred stock, par value $0.01 per share;
1,000 shares authorized, 1,000 issued and outstanding
($1,000,000 aggregate liquidation preference) 10 10
Series C preferred stock, par value $0.01 per share;
10,000 shares authorized, 997 issued and outstanding at
September 30, 2003 ($997,000 aggregate liquidation preference) 10
Series C-1 preferred stock, par value $0.01 per share;
10,000 shares authorized, 997 issued and outstanding at
September 30, 2004 ($997,000 aggregate liquidation preference) 10 -
Series D preferred stock, par value $0.01 per share;
10,000 shares authorized, 7,111 issued and outstanding
($7,109,995 aggregate liquidation preferences) 71 -
Common stock, par value $0.005 per share; 400,000,000 shares
authorized and 56,116,342 shares issued at
September 30, 2004; 75,000,000 shares authorized and
48,201,978 shares issued at September 30, 2003, 280,583 241,011
Additional paid-in capital 164,442,227 155,364,295
Unearned income (400,000)
Accumulated deficit (186,517,047) (184,332,055)
Accumulated other comprehensive loss (1,808,663) (2,480,790)
Less: Treasury stock, 87,712 shares of common stock (at cost) (67,240) (67,240)
------------- ------------
Total stockholders' deficiency (23,656,480) (31,661,190)
------------- ------------
Total liabilities and stockholders' deficiency $ 1,748,054 $ 1,519,191
============= ============


See notes to consolidated financial statements.

F-4


VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 2004, 2003 and 2002

2004 2003 2002
------------ ------------ ------------
REVENUES $ 2,566,520 $ 4,226,187 $ 36,135,217
COST OF SALES 1,287,435 2,138,883 23,894,594
------------ ------------ ------------

GROSS PROFIT 1,279,085 2,087,304 12,240,623
------------ ------------ ------------

OPERATING EXPENSES:

Selling and administrative 2,925,051 4,642,123 22,503,288
Research and development -- -- 4,179,553
Depreciation of equipment
and improvements 38,938 119,606 820,000
Amortization of intangible assets 115,756 115,757 417,162
Provision for termination of leases -- -- 1,102,984
Impairment of goodwill and
other intangible assets -- -- 18,973,832
------------ ------------ ------------
Total operating expenses 3,079,745 4,877,486 47,996,819
------------ ------------ ------------

OPERATING LOSS (1,800,660) (2,790,182) (35,756,196)
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income -- 2,703 93,967
Interest expense (1,969,074) (851,933) (2,875,396)
Provision for litigation claims -- -- (2,653,891)
Loss on sale or liquidation of
non-core assets -- -- (3,080,656)
Gain on liquidation of
foreign subsidiaries 320,951 -- --
Gain on settlements of liabilities 1,072,247 -- --
Other 193,279 (10,941) (367,364)
------------ ------------ ------------
Net other income (expense) (382,597) (860,171) (8,883,340)
------------ ------------ ------------

LOSS BEFORE PROVISION FOR
INCOME TAXES (2,183,257) (3,650,353) (44,639,536)

Provision for income taxes 1,735 -- 134,843
------------ ------------ ------------

NET LOSS (2,184,992) (3,650,353) (44,774,379)

Charge for preferred stock
beneficial conversion feature 3,444,683 -- --
------------ ------------ ------------

NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS ($5,629,675) ($3,650,353) ($44,774,379)
============ ============ ============
Net loss per common share:

Basic and diluted $ (0.12) $ (0.09) $ (1.26)
============ ============ ============
Weighted average number
of shares outstanding:

Basic and diluted 48,469,039 39,671,923 35,649,274
============ ============ ============

See notes to consolidated financial statements.

F-5







VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Years ended September 30, 2004, 2003 and 2002

Preferred Stock Common Stock
----------------- ---------------- Additional Deferred
Paid-In Compensation/
Shares Amount Shares Amount Capital Unearned Income
-------- ------ ------ ------ ---------- --------------

Balance September 30, 2001 1,356,852 $13,569 34,909,506 $174,548 $149,321,766 $(180,557)

Issuance of common stock 34,404 172 68,844
Issuance of Series B
preferred stock, net of expenses 1,000 10 960,990
Issuance of stock in connection
with acquisitions 1,676,168 8,381 930,667
Issuance of stock and stock
options in connection with
retirement of debt and other
obligations 581,900 2,910 2,031,153
Purchase of treasury
stock (47,657 shares)
Conversion of notes payable
into Series C preferred stock 997 10 996,990
Amortization of deferred
compensation 180,557
Cancellation of common stock (1,676,168) (8,381) (930,667)
Exercise of stock options 1,676,168 8,381 930,667
Settlement of acquisition
related escrow (500,000)
Non cash interest expense 1,168,885
Comprehensive loss:
Net loss
Change in unrealized foreign
exchange translation
gains/losses
Comprehensive loss
--------- -------- ---------- -------- ------------ --------
Balance September 30, 2002 1,358,849 13,589 37,201,978 186,011 154,979,295 -

Common stock issued in exchange
for services 1,000,000 5,000 35,000
Common stock issued for trade credits 10,000,000 50,000 350,000 (400,000)
Other comprehensive income
(loss), net of tax:
Comprehensive loss:
Net loss
Change in unrealized foreign
exchange translation
gains/losses
Comprehensive loss
--------- -------- ---------- -------- ------------ ---------
Balance September 30, 2003 1,358,849 13,589 48,201,978 241,011 155,364,295 (400,000)

Effects of issuance of
warrants with notes payable:
Related parties 54,000
Unrelated parties 427,500
Conversion of notes payable -
related parties into non-redeemable
Series D preferred stock 7,111 71 7,109,924
Exercise of warrants 5,809,980 29,050 288,659
Conversion of long-term
notes payable - unrelated parties 1,754,384 8,772 89,474
Common stock issued in exchange
for services 350,000 1,750 12,250
Issuance of Series C-1 preferred
stock for Series C - -
Write off of unearned income 400,000
Beneficial conversion feature related to
Long-term convertible debt 1,096,125
Comprehensive loss:
Net loss
Change in unrealized foreign
exchange translation
gains/losses
Reclassification into
current period earnings
Comprehensive loss

--------- -------- ---------- -------- ------------ --------
Balance September 30, 2004 1,365,960 $ 13,660 56,116,342 $280,583 $164,442,227 $ -
========= ======== ========== ======== ============ ========



F-6





VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY)
For the Years Ended September 30, 2004, 2003 and 2002
(continued)

Accumulated
Other
Accumulated Comprehensive Comprehensive Treasury
Deficit Loss Income/(Loss) Stock Total
----------- ------------- ------------- -------- -------

Balance September 30, 2001 $(135,907,323) $(1,426,307) $(45,169) $11,950,527

Issuance of common stock 69,016
Issuance of Series B
preferred stock, net of expenses 961,000
Issuance of stock in connection
with acquisitions 939,048
Issuance of stock and stock options
in connection with
retirement of debt and other
obligations 2,034,063
Purchase of treasury stock
(47,657 shares) (22,071) (22,071)
Conversion of notes payable
into Series C preferred stock 997,000
Amortization of deferred
compensation 180,557
Cancellation of common stock (939,048)
Exercise of stock options 939,048
Settlement of acquisition
related escrow (500,000)
Non cash interest expense 1,168,885
Comprehensive loss:
Net loss (44,774,379) $(44,774,379) (44,774,379)
Change in unrealized foreign
exchange translation
gains/losses 160,829 160,829 160,829
------------
Comprehensive loss $(44,613,550)
----------- ============ --------- ------- ------------
Balance September 30, 2002 (180,681,702) (1,265,478) (67,240) (26,835,525)

Common stock issued in exchange
for services 40,000
Common stock issued for trade credits
Other comprehensive income (loss),
net of tax:
Comprehensive loss:
Net loss (3,650,353) $ (3,650,353) (3,650,353)
Change in unrealized foreign
exchange translation
gains/losses (1,215,312) (1,215,312) (1,215,312)
------------
Comprehensive loss $(4,865,665)
----------- ============ --------- -------- ------------
Balance September 30, 2003 (184,332,055) (2,480,790) (67,240) (31,661,190)

Effects of issuance of
warrants with notes payable:
Related parties 54,000
Unrelated parties 427,500
Conversion of notes payable
related parties into non-redeemable
Series D preferred stock 7,109,995
Exercise of warrants 317,709
Conversion of long-term notes payable -
unrelated parties 98,246
Common stock issued in exchange
for services 14,000
Issuance of Series C-1 Preferred
Stock for Series C
Write off of unearned income 400,000
Beneficial conversion feature related to
Long-term convertible debt 1,096,125
Comprehensive loss:
Net loss (2,184,992) $(2,184,992) (2,184,992)
Change in unrealized foreign
exchange translation
gains/losses (401,081) (401,081) (401,081)
Reclassification into current --------
period earnings 1,073,208 1,073,208
Comprehensive loss $(2,586,073)
------------- =============== ----------- -------- ------------
Balance September 30, 2004 $(186,517,047) $(1,808,663) $(67,240)$(23,656,480)
============= =========== ======== ============



See notes to consolidated financial statements.


F-7





VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2004, 2003 and 2002

2004 2003 2002
------------ ------------ ------------

Cash Flows from Operating Activities:
Net Loss $(2,184,992) $(3,650,353) $(44,774,379)

Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 154,693 235,363 1,237,162
Loss on sale or liquidation of
non-core businesses and assets -- -- 3,080,656
Impairment of goodwill and other
intangible assets -- -- 18,973,832
Write-off of unearned income 400,000 -- --
Common stock issued in exchange for services 14,000 40,000 --
Non cash interest expense -- -- 1,168,885
Amortization of deferred financing costs 54,189 -- 180,557
Charges to interest expense for beneficial
conversion feature and warrants issued
with notes payable:
Related parties 54,000 -- --
Unrelated parties 1,171,594 -- --
Gain on liquidation of foreign subsidiaries (320,951) -- --
Gain on settlements of liabilities (1,072,247) -- --

Changes in assets and liabilities, net of
effects of acquisitions and disposals:
Restricted cash (450,000)
Accounts receivable, net 288,273 297,038 4,948,464
Inventories, net 169,251 404,020 933,072
Prepaid expenses and other current assets (51,593) 243,157 261,629
Other assets -- 55,692 1,010,556
Accounts payable (57,877) 104,810 184,707
Accrued expenses and other liabilities (569,229) 1,472,099 5,580,371
Advances from customers -- (343,547) (39,400)
Deferred revenue 48,960 (1,012,197) (1,075,747)
------------ ------------ ------------
Net cash used in operating activities (2,351,929) (2,153,918) (8,329,635)
------------ ------------ ------------

Cash Flows from Investing Activities:
Additions to equipment and improvements (2,436) (2,781) (172,458)
Proceeds from sale of assets, net of cash sold -- -- 1,184,231
------------ ------------ ------------
Net cash provided by (used in) investing
activities (2,436) (2,781) 1,011,773
------------ ------------ ------------
Cash Flows from Financing Activities:
Loans payable bank, net -- -- (683,386)
Deferred financing costs (315,114) -- --
Proceeds from senior credit facility and
notes payable -- 250,000 3,186,000
Payments of senior credit facility and
notes payable -- (145,736) (2,933,645)
Payments of mortgages -- -- (49,564)
Payments of capitalized lease obligations -- -- (127,656)
Proceeds from convertible notes
payable - unrelated parties 3,000,000 -- --
Proceeds from notes and convertible notes
payable - related parties 137,339 1,986,948 5,588,900
Repayment of notes payable - unrelated parties (391,735) -- --
Net proceeds from issuance of stock -- -- 1,030,168
Purchase of treasury stock -- (22,071)
------------ ------------ ------------
Net cash provided by financing activities 2,430,490 2,091,212 5,988,746
------------ ------------ ------------

Effect of exchange rate changes on cash -- 16,736 (8,090)
------------ ------------ ------------
Net increase (decrease) in cash 76,125 (48,751) (1,337,206)
Cash at Beginning of year 25,265 74,016 1,411,222
------------ ------------ ------------
Cash at End of year $ 101,390 $ 25,265 $ 74,016
============ ============ ============
Cash paid for:
Interest $ 154,575 $ 72,000 $ 930,000
Income taxes $ -- $ -- $ 237,000

Noncash investing and financing activities:
Notes payable and accrued interest
- related parties converted into
nonredeemable and mandatory redeemable
preferred stock $ 7,109,995 -- --
Long-term convertible notes payable -
unrelated parties converted into common stock $ 98,246 -- --



See notes to consolidated financial statements.



F-8


VERTEX INTERACTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. RECENT DEVELOPMENTS AND NATURE OF PRESENTATION

Background and Description of Business

Vertex Interactive, Inc. ("Vertex" or "we" or "our" or the "Company") is a
global provider of supply chain management ("SCM") technologies, including
enterprise software systems and applications, that enable our customers to
manage their orders, inventory and warehouse needs, consultative services, and
software and hardware service and maintenance. We serve our clients through
three general product and service lines: (1) enterprise solutions; (2) point
solutions; and, (3) service and maintenance for our products and services,
including service and maintenance of software and hardware we resell for third
parties. Our enterprise solutions include a suite of Java'TM'-architected
software applications, applications devoted to the AS/400 customer base, as well
as a portfolio of "light-directed" systems for inventory, warehouse and
distribution center management. Our point solutions provide an array of products
and services designed to solve more specific customer needs from managing a
mobile field workforce, mobile data collection, distributed bar code printing
capabilities, compliance labeling applications, automated card devices, software
development tools and proprietary software serving SAP R/3 users. We provide a
full range of software and hardware support services and maintenance on a
24-hour, 7-days a week, 365-days a year basis, including the provision of
wireless and wired planning and implementation services for our customers'
facilities.

In August 2002, Vertex formed XeQute Solutions, Inc. ("XeQute"), a Delaware
corporation, which is an indirect, wholly-owned subsidiary. XeQute purchased
most of the operating assets and assumed certain liabilities of both Vertex and
its principal North American subsidiaries and became the principal operating
entity of the group effective October 1, 2002. These assets comprise
substantially all of the enterprise software businesses of Vertex. XeQute is a
wholly-owned subsidiary of XeQute Solutions PLC ("XeQute PLC") which is a
holding company that is a direct, wholly-owned subsidiary of Vertex.

In August 2002, the Company was notified that the NASDAQ Listing Qualifications
Panel had determined that the Company had failed to comply with the $1.00
minimum closing bid price and the minimum stockholders' equity or the market
value of publicly held shares requirements for continued listing and it delisted
the Company's securities from the NASDAQ National Stock Market effective with
the open of business on August 21, 2002 and listed them on the NASDAQ Bulletin
Board. From February 17, 2003 to March 30, 2004, the Company's securities were
quoted on the Pink Sheets, under the symbol "VETXE". The Company's securities
received approval to return to the bulletin board for trading as of March 31,
2004.

Expiration of Acquisition Agreement

As previously reported on Form 8-K which was filed with the Securities and
Exchange Commission on August 12, 2003, the Company entered into an asset
purchase agreement with Jag Media Holdings, Inc. ("JAG Media") pursuant to which
it would sell all of the assets and certain liabilities of XeQute, the Company's
wholly-owned subsidiary, to JAG Media, in exchange for approximately 54% of JAG
Media's common stock. The agreement was subject to certain terms and conditions,
one of which was closing on or before October 31, 2003 and the Company's ability
to arrange $8,000,000 of financing upon terms and conditions satisfactory to JAG
Media, XeQute and Vertex. On October 31, 2003, the agreement expired by its
terms.

F-9


Going Concern Matters

Based upon our substantial working capital deficiency and stockholders'
deficiency, of approximately $21,663,000 and $23,656,000 at September 30, 2004,
respectively, our recurring losses, our historic rate of cash consumption, the
uncertainty arising from our default on a note payable with a balance of
$1,227,500 as of September 30, 2004 (see Note 10), the uncertainty of our
liquidity-related initiatives described in detail below, and the reasonable
possibility of on-going negative impacts on our operations from the overall
economic environment for a further unknown period of time, there is substantial
doubt as to our ability to continue as a going concern.

The successful implementation of our business plan has required, and our ability
to continue as a going concern will require on a going forward basis, the
Company to raise substantial funds to finance (i) continuing operations, (ii)
the further development of our enterprise software technologies, (iii) the
settlement of existing liabilities including past due payroll obligations to our
employees, officers and directors, and (iv) possible selective acquisitions to
achieve the scale we believe will be necessary to enable us to remain
competitive in the global SCM industry. There can be no assurance that we will
be successful in raising the necessary funds.

Fiscal 2004:

In fiscal 2004, the previous decline in the enterprise applications software and
telecommunications industries continued to have a substantial negative impact on
our results of operations. These factors, in combination with our continuing
negative operating cash flows, placed significant pressures on our financial
condition and liquidity and negatively impacted our operations. Operating
activities resulted in cash consumption of approximately $2,352,000 in 2004.

During fiscal 2004 we raised approximately $3,100,000 including cash transaction
costs through the issuance of notes payable and notes and convertible notes
payable from unrelated parties, restructured notes, converted debt into equity,
and paid a loan in default. At September 30, 2004, we had a net cash balance of
approximately $101,000.

Outlook:

In light of current economic conditions, we now anticipate, but cannot assure,
reaching the point at which we will generate cash in excess of our operating
expenses in the quarter ending June 30, 2005. However, we had current
obligations at September 30, 2004 accumulated during the past several years that
substantially exceeded our current assets and, to the extent we cannot settle
existing obligations in stock or defer payment of our obligations until we
generate sufficient operating cash, we will require significant additional funds
to meet accrued non-operating obligations, to fund operating losses, if
required, short-term debt and related interest, capital expenditures and
expenses related to cost-reduction initiatives, and to pay liabilities that
could arise from litigation claims and judgments.

Our sources of ongoing liquidity include the cash flows from our operations,
potential new credit facilities and potential additional equity investments.

F-10


Consequently, Vertex continues to aggressively pursue obtaining additional debt
and equity financing, the restructuring of certain existing debt obligations,
and the reduction of its operating expenses. In addition, it has structured its
overall operations and resources around high margin enterprise products and
services. However, in order to remain in business, the Company must raise
additional cash in a timely fashion.

Initiative Completed or in Process:

The following initiatives related to raising required funds, settling
liabilities and/or reducing expenses have been completed or are in process:

(i) As of September 27, 2004, the Company had approximately $7,614,000 of
borrowings from and accrued interest payable to Midmark Capital, L.P. and its
affiliate, Midmark Capital II, L.P., and certain individuals related to these
two entities, which are referred to collectively as "Midmark". Midmark owns
shares of Vertex's preferred and common stock and has the ability to purchase a
majority interest in Vertex (see Note 12). As explained below, this debt was
exchanged for Series D nonredeemable and mandatory redeemable preferred stock on
that date.

(ii) The Company completed the sale of certain entities and assets during fiscal
2002. After being unsuccessful in attempting to sell its five remaining European
operations (Vertex UK, Vertex Service and Maintenance Italy, Vertex Italy,
Euronet and Vertex France), and based on the continuing cash drain from these
operations, during fiscal 2002 the respective boards of directors determined
that in the best interest of their shareholders that they would seek the
protection of the respective courts in each country, which have agreed to an
orderly liquidation of these companies for the benefit of their respective
creditors. During the year ended September 30, 2004, we recognized a noncash
gain of $321,000 from the approval by creditors of the liquidation of the net
liabilities of the Company's U.K. subsidiary (see Note 2). Upon legal resolution
of the approximately $7,715,000 of net liabilities of these remaining European
entities as of September 30, 2004, we expect to recognize a non-cash gain (and
no significant cash outlay), however the amount and timing of such gain and cash
outlay, if any, is totally dependent upon the decisions to be issued by the
respective court appointed liquidators (See Note 2 as to the approval of the
liquidation of the U.K. subsidiaries in January 2004).

(iii) We have continued to reduce headcount (to approximately 17 employees in
our continuing North American business at September 30, 2004 and December 10,
2004, of whom 3 were furloughed until additional funds are raised), consolidate
facilities and generally reduce costs.

(iv) To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on April 28, 2004 pursuant to
which we sold (i) $3,000,000 in secured convertible notes and (ii) warrants to
buy 3,000,000 shares of our common stock (see Note 11).

(v) The Company is negotiating with vendors to settle balances at substantial
discounts. In addition, the Company is negotiating to settle certain notes
payable and approximately $3,700,000 of litigation accruals at a discount or
with the issuance of shares of either Vertex or XeQute.

(vi) During the year ended September 30, 2004, we realized net gains of
$1,072,000 from settlements of liabilities totaling $1,564,500 through the
payments of $492,500 in cash.

(vii) On September 27, 2004, we completed the terms and conditions of an
Investment Restructuring Agreement that we entered into on May 26, 2004 with six
accredited investors: MidMark Capital L.P., MidMark Capital II, L.P., Paine
Webber Custodian F/B/O Wayne Clevenger, Joseph Robinson, O'Brien Ltd.
Partnership and Matthew Finlay and Teresa Finlay JTWROS, who are also our
principal stockholders.

F-11



On June 25, 2004, as part of the Investment Restructuring Agreement, we
exchanged Series C preferred stock for Series C-1 convertible preferred stock on
a 1:1 basis. On September 27, 2004, we issued 7,615 shares of Series D non
redeemable and mandatory redeemable convertible preferred stock to MidMark
Capital, L.P. in exchange for $7,614,708 of debt owed by our subsidiaries and us
to MidMark Capital II, L.P. In addition, on September 27, 2004, we issued
5,569,980 shares of common stock to MidMark Capital, L.P. upon exercise of
warrants by MidMark Capital, L.P. The exercise price for the warrants was
exchanged for the retirement of $315,309 in debt owed by us to MidMark Capital,
L.P. As well, on September 27, 2004, we issued 240,000 shares of common stock to
MidMark Capital II, L.P. upon exercise of warrants by MidMark Capital II, L.P.
The exercise price for the warrants was exchanged for the retirement of $2,400
in debt owed by us to MidMark Capital II, L.P.

While we are continuing our efforts to reduce costs, increase revenues, resolve
lawsuits on favorable terms and settle certain liabilities on a non-cash basis
there is no assurance that we will achieve these objectives. In addition, we
will continue to pursue strategic business combinations and opportunities to
raise both debt and equity financing. However, there can be no assurance that we
will be able to raise additional financing in the timeframe necessary to meet
our immediate cash needs, or if such financing is available, whether the terms
or conditions would be acceptable to us.

Basis of Presentation:

The accompanying consolidated financial statements have been prepared on a basis
that contemplates Vertex's continuation as a going concern and the realization
of its assets and liquidation of its liabilities in the ordinary course of
business. The accompanying consolidated financial statements do not include any
adjustments, with the exception of the provision to reduce the carrying values
of the assets of the subsidiaries in liquidation to their estimated net
realizable value, relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should we be unable to continue as a going concern. If Vertex fails to
raise capital when needed, the lack of capital will have a material adverse
effect on Vertex's business, operating results, financial condition and ability
to continue as a going concern.

2. ACQUISITIONS AND DISPOSALS

Acquisitions

Purchase Method

In October 2001, the Company acquired Euronet Consulting S.r.l. ("Euronet"), an
Italian software applications consulting firm. The value of the transaction was
approximately $940,000. The Company acquired all of the outstanding shares of
Euronet for 684,620 shares of Vertex common stock, which at the date of
acquisition had a fair market value of approximately $625,000, and additional
shares of common stock issued later in the year: approximately 232,000 shares
with an estimated fair market value of $.44 per share in February 2002 and
approximately 760,000 shares with a fair market value of $.27 per share in April
2002.

The accompanying consolidated financial statements assume the Euronet
acquisition closed effective October 1, 2001. The Company has accounted for this
acquisition using the purchase method of accounting in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" for
Euronet and, accordingly, the financial statements include the results of
operations from October 1, 2001 for Euronet. An allocation of the purchase price
for Euronet has been made to the assets and liabilities acquired as of October
1, 2001 based on their estimated fair market values as shown in the table below:


F-12


September 30
-------------
2002
------------
Accounts receivable $ 294,148
Other assets 61,771
Intangible assets (including in-process
research and development of $3,600,000 in 2001) 1,078,007
Other liabilities (494,878)
-------------
Total consideration paid, less cash acquired 939,048
Less stock issued to sellers 939,048
-------------
Net cash paid $ 0
=============

Abandoned Merger

During the quarter ended March 31, 2002, the Company terminated a proposed
transaction with Plus Integration Supply Chain Solutions, BV, ("Plus") a private
supply chain management software and solutions provider headquartered in
Haarlem, the Netherlands, and charged to other expense approximately $960,000 of
previously deferred acquisition costs (primarily legal, accounting and other
professional service fees) incurred with respect to the proposed transaction.

Sales or Divestitures of Non-Core Businesses

The Company developed and initiated a plan in the quarter ended June 30, 2002
that would result in the sale or divestiture of assets or closings of businesses
that are not part of the Company's current strategic plan or have not achieved
an acceptable level of operating results or cash flows. In connection with this
plan, the Company has completed the sale of certain businesses and assets (see
"Disposals"). After being unsuccessful in attempting to sell its five remaining
European operations (Vertex UK-previously PSS, Vertex Service and Maintenance
Italy - previously SIS, Vertex Italy, Euronet and Vertex France - previously ICS
France) and based on the continuing cash drain from these operations, the
respective boards of directors determined that in the best interest of their
shareholders that they would seek the protection of the respective courts in
each country, which have agreed to an orderly liquidation of these companies for
the benefit of their respective creditors. During the second quarter of fiscal
2004, the Company recognized a noncash gain of $321,000 from the approval by
creditors of the liquidation of the net liabilities of the Company's U.K.
subsidiary, as explained below. Accordingly, the remaining net assets and
liabilities of these businesses are classified as net liabilities associated
with subsidiaries in liquidation in the accompanying September 30, 2004 and 2003
consolidated balance sheets. While the Company expects the liquidation process
to take through at least June 30, 2005, significant variations may occur based
on the complexity of the entities and requirements of the respective country. In
addition, following the termination of an agreement in principle to sell our
North American wireless and cable installation division, we closed down this
operation in July 2002. The revenues for all of these non-core businesses (sold
and liquidated) were approximately $24,000,000 in 2002.

A net loss of approximately $4,400,000 was a component of the "Loss on Sale or
Liquidation of Non-core Assets" in 2002. Such amount included a provision to
reduce the carrying values of the net assets, including any remaining goodwill,
to their estimated net realizable values and to record estimated transaction and
closing costs of this plan. Retained liabilities are generally carried at their
contractual or historical amounts. The ultimate amounts required to settle these
retained liabilities will differ from estimates, based on contractual
negotiations, and the outcome of certain legal actions and liquidation
proceedings.


F-13


The following is a summary of net assets and retained liabilities as of
September 30, 2004 and 2003:

2004 2003
----------- ------------
Cash $ 200,504 $ 654,068
Receivables, net 1,181,413 990,468
Inventories, net 652,053 608,993
Accounts payable (2,288,560) (2,959,933)
Accrued liabilities (5,065,009) (5,207,546)
Deferred revenue (1,245,093) (1,186,486)
Loans payable - banks (1,150,091) (1,074,142)
Other liabilities - (336,499)
----------- -----------
Net liabilities associated with
subsidiaries in liquidation $(7,714,783) (8,511,077)
=========== ===========

At September 30, 2001, the Company's Irish subsidiary had approximately $130,000
of non-interest bearing loans payable to the Irish government that were
repayable at rates linked to future revenues earned. Under the terms of the
agreement, the loans were to be repaid at a rate of 4.2% of project sales made
in the United States by PSS in the period from July 1998 to June 2001 and were
due for repayment in the period commencing in July 1999 and ending in July 2002.
If the repayments calculated as a percentage of sales are not sufficient to
repay the loans in full, the Irish government may write-off the balance. PSS had
not made any sales in the United States through September 30, 2003 and, thus, no
repayments had been made against these borrowings nor has the Irish government
agreed to write off the balance. Since the Irish subsidiary has been placed in
liquidation, the remaining balance is included in other liabilities in the table
above.

The Company received notice that the liquidation of the UK companies, which were
under liquidation as of September 30, 2003 and 2002, has been approved and
finalized by the UK creditors as of January 5, 2004. Based on such notice,
management reduced the Company's net liabilities associated with subsidiaries in
liquidation by approximately $1,400,000, reclassed approximately $1,073,000 of
translation loss from accumulated other comprehensive loss to the consolidated
statement of operations, and recognize a gain of approximately $320,000 in
fiscal 2004.

The results of these businesses' operations for the years ended September 30,
2004, 2003 and 2002 are not segregated from other businesses in the accompanying
statements of operations as they were not considered distinct segments or
discontinued operations.

Except for the gain from the liquidation of the U.K. subsidiary, the results of
operations of these businesses for the years ended September 30, 2004, 2003 and
2002 were not significant.

DISPOSALS

During the year ended September 30, 2002, the Company completed the sale of the
following product lines and business units:

1) In April 2002 the Company sold the source code, documentation and all
related rights to the TMS product line to Pitney Bowes in exchange for
$1,650,000, which included the cancellation of the $1,000,000 Pitney Bowes
promissory note and related accrued interest (See Note 10). In connection with
this sale, Vertex eliminated 34 positions.

2) In May 2002 the Company sold a portion of its mobile computing
solutions business in Ireland in exchange for approximately $200,000 of cash and
the assumption of approximately $200,000 of liabilities.

F-14


3) In June 2002 the Company sold the source code, documentation and all
related rights to the NetWeave software product line to a company established by
former employees of the Company. The proceeds included approximately $500,000 in
cash and the assumption of approximately $400,000 of deferred revenue
liabilities.

4) In July 2002, the Company sold the German point solutions business to
AG, which is owned by one of the Company's Directors, and a related entity, in
consideration for approximately $400,000, including the cancellation of the AG
note payable (See Note 11) and related accrued interest.

5) In August 2002, the Company sold DynaSys S.A., its French based
advanced planning software business to MidMark Capital in consideration for
$6,000,000, including the cancellation of $5,900,000 of convertible notes
payable and $100,000 of related accrued interest (See Note 11). As part of this
transaction, Vertex retained the right to repurchase, on February 9, 2003, 20%
of the shares of DynaSys held by MidMark at the original purchase price of
$120,000 paid by MidMark. The purchase price for such shares could be paid for
in newly issued 10% senior secured notes or cash, at Vertex's option. This right
of repurchase was subject to among other things, an initial public offering of
DynaSys common stock in the six months following the closing and that the total
market capitalization of DynaSys shall be not less than $9,000,000 at the time
of repurchase. Such offering did not occur and the right to repurchase has
expired.

6) During July and August, 2002, the Company also completed the sale of
three additional components of its European business: (a) the UK hardware
maintenance business; (b) the Benelux point solutions and hardware maintenance
businesses; and (c) the French hardware maintenance business for a total
consideration of approximately $300,000.

The aggregate net gain of approximately $1,200,000 on these transactions is
included in the Loss on Sale or Liquidation of Non-core Assets component of
other income (expense)in 2002.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates in the Preparation of Financial Statements

The preparation of 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. The more significant estimates are those used by management to
measure net liabilities associated with subsidiaries in liquidation, litigation
accruals, the recoverability of intangible assets, the allowances for doubtful
accounts and inventory reserves and the value of shares, options or warrants
issued for services or in connection with financing transactions. Actual results
could differ from those estimates.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.

Revenue Recognition

Equipment Sales:

Revenue related to sales of equipment is recognized when the products are
delivered, title has passed, the collection of the related receivable is deemed
probable by management and no obligations to the customer remain outstanding.


F-15


Software License Sales:

Revenue related to software license sales is recorded at the time of shipment
provided that (i) no significant vendor obligations remain outstanding at the
time of sale; (ii) the collection of the related receivable is deemed probable
by management; and (iii) vendor specific objective evidence ("V.S.O.E.") of fair
value exists for all significant elements, including post contract customer
support ("PCS") in multiple element arrangements.

Where the services relate to arrangements requiring significant production,
modification or customization of software, and the service element does not meet
the criteria for separate accounting, the entire arrangement, including the
software element, is accounted for in conformity with either the
percentage-of-completion or completed contract accounting method.
Percentage-of-completion generally uses input measures, primarily labor costs,
where such measures indicate progress to date and provide a basis to estimate
completion.

Professional Services:

The Company provides consulting and other services on a per-diem billing basis
and recognizes such revenues as the services are performed.

Support and Service:

The Company accounts for revenue related to service contracts and post contract
customer support over the life of the arrangements, usually twelve months,
pursuant to the service and/or licensing agreement between the customers and the
Company.

Deferred Revenue

Deferred revenue represents the unearned portion of revenue related to PCS and
other service arrangements not yet completed and revenue related to multiple
element arrangements that could not be unbundled pursuant to Statement of
Position ("SOP") 97-2 "Software Revenue Recognition" or, in the case of projects
accounted for using percentage of completion or completed contract accounting in
accordance with SOP 81-1 "Accounting for Performance of Construction - Type and
Certain Production -Type Contracts".

Inventories

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

Equipment and Improvements

Equipment and improvements are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed on the straight-line basis over the
estimated useful lives of individual assets or classes of assets. Improvements
to leased properties or fixtures are amortized over the shorter of their
estimated useful lives or the related lease terms.

The estimated useful lives of depreciable assets are as follows:

Category Years
-------- -----
Office furniture and equipment 3-10
Computer equipment 3-7
Other 3-10

F-16


Software Development Costs and Other Intangible Assets

Pursuant to SFAS 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, " the Company is required to charge the costs of
creating a computer software product to research and development expense as
incurred until the technological feasibility of the product has been
established; thereafter, all related software development and production costs
are required to be capitalized.

Commencing upon the initial release of a product, capitalized software costs and
any costs of related purchased software are generally required to be amortized
over the estimated economic life of the product or based on current and
estimated future revenues. Thereafter, capitalized software costs and costs of
purchased software are reported at the lower of amortized cost or estimated net
realizable value. Due to the inherent technological changes in the software
development industry, estimated net realizable values or economic lives may
decline and, accordingly, the amortization period may have to be accelerated or
impaired balances may have to be written off.

The Company had other intangible assets that were written off or that became
fully amortized prior to the end of fiscal 2002 which consisted primarily of the
excess of cost over the fair value of identifiable net assets of businesses
acquired ("goodwill"). Until September 30, 2001, goodwill was amortized on a
straight-line basis over estimated useful lives which ranged from 5 to 25 years.
Effective October 1, 2001, the Company was required to adopt the provisions of
SFAS 142, "Goodwill and Other Intangible Assets". Pursuant to SFAS 142, goodwill
and other intangible assets with indefinite lives are no longer amortized and
are subject to reduction only when their carrying amounts exceed their estimated
fair values based on impairment tests that are required to be made annually or
more frequently under certain circumstances. Fair values are determined based on
models that incorporate estimates of future profitability and cash flows.

Impairment of long-lived assets

Under the provisions of SFAS 144, "Accounting for the Impairment of Long-Lived
Assets," which became effective for the Company as of October 31, 2002, and SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" which was effective prior to that date, impairment
losses on long-lived tangible and intangible assets that do not have indefinite
lives, such as equipment and software licenses, are generally recognized when
events or changes in circumstances, such as the occurrence of significant
adverse changes in the environment in which the Company's business operates,
indicate that the undiscounted cash flows estimated to be generated by such
assets are less than their carrying value and, accordingly, all or a portion of
such carrying value may not be recoverable. Impairment losses are then measured
by comparing the fair value of assets to their carrying amounts. However,
impairment losses for capitalized software costs are determined pursuant to SFAS
86 and impairment losses for goodwill and other intangible assets with
indefinite useful lives are now determined pursuant to SFAS 142 as described
above.

As a result of its evaluations pursuant to SFAS 86, SFAS 121 and SFAS 142, the
Company wrote off approximately $19,000,000 of intangible assets in 2002 (see
Note 4).

Net Earnings (Loss) Per Share

The Company presents "basic" earnings (loss) per share and, if applicable,
"diluted" earnings per share pursuant to the provisions of SFAS 128, "Earnings
per Share". Basic earnings (loss) per shares is calculated by dividing net
income or loss applicable to common stock (which reflects a charge for a
preferred beneficial conversion feature in 2004) by the weighted average number
of common shares outstanding during each period.

F-17


The calculation of diluted earnings per share is similar to that of basic
earnings per share, except that the denominator is increased to include the
number of additional common shares that would have been outstanding if all
potentially dilutive common shares, such as those issuable upon the exercise of
stock options and warrants and the conversion of convertible securities, were
issued during the period and appropriate adjustments were made for the
application of the treasury stock method and the elimination of interest and
other charges related to convertible securities.

As of September 30, 2004, there were 225,718,736 shares of common stock
potentially issuable upon the exercise of stock options and warrants (9,959,606
shares) and the conversion of convertible securities (215,759,130 shares).
However, diluted per share amounts have not been presented in the accompanying
consolidated statements of operations because the Company had a net loss in
fiscal 2004, 2003 and 2002 and the assumed effects of the exercise of all of the
Company's outstanding stock options and warrants and the conversion of all of
its convertible securities would have been anti-dilutive.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined to include all changes in equity except
those resulting from investments by stockholders and distributions to
stockholders and is reported in the Statements of Changes in Stockholders'
Deficiency. Included in the Company's comprehensive loss are net loss and
foreign exchange translation adjustments.

Stock-Based Compensation

SFAS 123, "Accounting for Stock-Based Compensation" provides for the use of a
fair value based method of accounting for employee stock compensation. However
SFAS 123 also allows an entity to continue to measure compensation cost for
stock options granted to employees using the intrinsic value method of
accounting prescribed by APB 25, "Accounting for Stock Issued to Employees"
which requires charges to compensation expense based on the excess, if any, of
the fair value of the underlying stock at the date a stock option is granted
over the amount the employee must pay to acquire the stock. The Company has
elected to continue to account for employee stock options under APB 25.
Accordingly, it is required by SFAS 123 and SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" to make pro forma
disclosures of net income (loss) and earnings (loss) per share as if the fair
value based method of accounting under had been applied.

The Company did not grant any stock options to employees and did not record any
compensation expense in connection with employee stock options during the years
ended September 30, 2004 and 2003; however, it did grant options to employees in
prior periods. If the Company had elected to recognize compensation cost based
on the fair value of the options granted at the grant date and had amortized the
cost over the vesting period pursuant to SFAS 123, net loss, loss applicable to
common stock and net loss per common share would have been increased to the pro
forma amounts indicated in the table below:


2004 2003 2002
----------- ----------- ------------
Net loss-as reported $(2,184,992) $(3,650,353) $(44,774,379)
Deduct total stock - based
employee compensation
expense determined under
a fair value based method
for all awards net of
related tax effects 985,648 1,502,005 76,601
----------- ----------- ------------
Net loss pro-forma $(3,170,640) $(5,152,358) $(44,850,980)
=========== =========== ============
Loss applicable to common
stock pro-forma $(6,615,323) $(5,152,358) $(44,850,980)
=========== =========== ============

Loss per common
share--as reported $(.12) $(0.09) $(1.26)
Loss per common
share--pro-forma (.14) (0.13) (1.26)


F-18


The fair value of each option granted is estimated on the date of grant using
the Black Scholes option-pricing model with the following assumptions used in
fiscal 2002 (no options were granted in fiscal 2004 and 2003):

2002
----

Expected dividend yield 0.00%
Expected stock price volatility 134.88
Risk-free interest rate 4.00
Expected life of options 3 years

The effects of applying SFAS 123 and the results obtained through the use of the
Black-Scholes option-pricing model used are not necessarily indicative of future
values.

In accordance with the provisions of SFAS 123 and related interpretations of the
Emerging Issues Task Force (the "EITF") of the Financial Accounting Standards
Board (the "FASB"), all other issuances of common stock, stock options or other
equity instruments to employees and non employees as the consideration for goods
or services received by the Company are accounted for based on the fair value of
the equity instruments issued (unless the fair value of the consideration
received can be more reliably measured). Generally, the fair value of any
options, warrants or similar equity instruments issued will be estimated based
on the Black-Scholes option-pricing model. Such fair value is measured as of an
appropriate date pursuant to the guidance in the consensus of the Emerging
Issues Task Force ("EITF") for EITF Issue No. 96-18 (generally, the earlier of
the date the other party becomes committed to provide goods or services or the
date performances by the other party is complete) and capitalized or expensed as
if the Company had paid cash for the goods or services.

The Company accounts for the intrinsic value of beneficial conversion features
arising from the issuance of convertible debt and preferred stock with
conversion rights that are in-the-money at the commitment date pursuant to the
consensuses for EITF Issue No. 98-5 and EITF Issue No. 00-27. The resulting
charge arising from the issuance of convertible debt is recorded as interest
expense if the related debt is convertible immediately or as debt discount which
is amortized to interest expense using the effective yield method over the
period to the debt instrument's earliest conversion date. The resulting charge
arising from the issuance of preferred stock is included as an adjustment to net
income or loss in computing net income or loss applicable to common stock at the
commitment date if the preferred stock is convertible immediately or over the
period to the earliest conversion date of the preferred stock. The intrinsic
value of a beneficial conversion feature is determined after initially
allocating an appropriate portion of the proceeds received from the sale of the
related debt instrument or preferred stock to any detachable instruments (such
as warrants) included in the sale or exchange based on relative fair values.

Concentration of Credit Risk

The Company's financial instruments that are exposed to concentration of credit
risk consist primarily of cash and accounts receivable. The Company maintains
its cash in bank accounts that, at times, have balances that exceed the
federally insured limit of $100,000 (there was a balance of $61,000 in excess of
the limit at September 30, 2004). The Company reduces its exposure to credit
risk by maintaining its cash deposits with major financial institutions and
monitoring their credit ratings.

F-19


Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base, their
dispersion across different geographic areas, and generally short payment terms.
In addition, the Company closely monitors the extension of credit to its
customers while maintaining allowances for potential credit losses. On a
periodic basis, the Company evaluates its trade accounts receivable and
establishes an allowance for doubtful accounts, based on a history of past
write-offs and collections and current credit considerations.

In fiscal 2004, the Company had two customers whose sales were approximately 35%
of total revenue. At September 30, 2004, the two customers accounted for
approximately 30% of total accounts receivable.

There were no such concentrations in fiscal 2003 and 2002.

Fair Value of Financial Instruments

The Company's material financial instruments for which disclosure of estimated
fair value is required by certain accounting standards consisted of cash,
accounts receivable, notes payable, accounts payable and net liabilities
associated with subsidiaries in liquidation. In the opinion of management, cash
and accounts receivable were carried at values that approximated their fair
values because of their liquidity and/or their short-term maturities. Due to the
financial condition of the Company, management believes that the Company's notes
payable, accounts payable, and net liabilities associated with companies in
liquidation could be settled at less than their carrying values. However, such
fair values cannot be reasonably estimated.

Foreign Currency Translation

Assets and liabilities of the Company's foreign affiliates are translated at
current exchange rates, while revenue and expenses are translated at average
rates prevailing during the respective period. Translation adjustments are
reported as a component of comprehensive income (loss).

Advertising Costs

Advertising costs are expensed as incurred. Advertising expense was
approximately $19,000, $26,000, and $400,000 in fiscal 2004, 2003 and 2002,
respectively.

Research and Development

Research and development expenditures are charged to expense as incurred and
amounted to approximately $4,180,000 in 2002. No research and development
expenses were incurred in 2004 and 2003.

Income Taxes

The Company accounts for income taxes pursuant to the asset and liability method
which requires deferred income tax assets and liabilities to be computed for
temporary differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. The income tax provision or credit is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.

New Accounting Pronouncements

In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." This consensus provides
guidance on when and how to separate elements of an arrangement that may involve
the delivery or performance of multiple products, services and rights to use
assets into separate units of accounting. The guidance in the consensus is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company adopted this consensus in the quarter beginning
July 1, 2003. The transition provision allows either prospective application or
a cumulative effect adjustment upon adoption. The adoption of this consensus did
not have a material effect on the Company's results of operations.

F-20


In December 2002, the FASB issued SFAS 148 which amended SFAS 123 to provide
alternative methods of transition for entities that elect to switch to the fair
value method of accounting for stock options in fiscal years ending after
December 15, 2002. The Company has not made such an election. SFAS 148 also
requires more prominent and detailed disclosures in annual and interim financial
statements for stock-based compensation regardless of which method of accounting
is selected. The Company has included the additional disclosures required by
SFAS 148 above.

In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." The Company does not hold any material derivative instruments and
does not conduct any significant hedging activities.

In May 2003, the FASB issued SFAS 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
requires that an issuer classify financial instruments that are within its scope
as a liability. Many of those instruments were classified as equity under
previous guidance. Most of the guidance in SFAS 150 was effective for all
financial instruments entered into or modified after May 31, 2003, and otherwise
was effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of the provision of SFAS 150 did not have any impact on
the Company's consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an Interpretation of FASB
Statements Nos. 5, 57 and 107 and a Rescission of FASB interpretation No. 34."
FIN 45 among other things, clarifies that a guarantor is required to recognize,
at inception of a guarantee, a liability for the fair value of the obligation
undertaken. The adoption of the initial recognition and measurement provisions
of FIN 45 was required for guarantees issued or modified after December 31,
2002. Such adoption did not have a material impact on the Company's consolidated
financial statements.

In December 2003, the FASB issued revised Interpretation No. 46R, "Consolidation
of Variable Interest Entities". Interpretation No. 46R requires companies with a
variable interest in a variable interest entity to apply this guidance as of the
first reporting period ending after December 15, 2003. The application of the
guidance could result in the consolidation of a variable interest entity. The
adoption of the provision of FIN 46R did not have any impact on the Company's
consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123(R), "Accounting for Stock-Based
Compensation". SFAS 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SGAS 123(R) requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS 123(R), only certain pro-forma disclosures of fair
value were required. SFAS 123(R) shall be effective for the Company as of the
beginning of the first interim or annual reporting period that begins after
December 15, 2005. The adoption of this new accounting pronouncement is expected
to have a material impact on the financial statements of the Company commencing
with the third quarter of the year ending September 30, 2006.

F-21


4. INTANGIBLE ASSETS

As of September 30, 2004, the only intangible asset of the Company was
capitalized software costs, which has been fully amortized. Information related
to changes in the Company's intangible assets during the years ended September
30, 2004 and 2003 is presented separately below for intangible assets that are
or were subject to amortization and intangible assets that were not subject to
amortization.

Intangible assets subject to amortization as of September 30, 2004 and related
changes during fiscal 2004 and 2003 were as follows:





September 30, Amortization September 30, Amortization September 30,
2002 Expense 2003 Expense 2004
------------ ------------- ------------ ------------ -------------


Gross Cost $347,269 $ - $347,269 $ - $347,269
Accumulated amortization-
based upon estimated life
of 3 years 115,756 115,757 231,513 115,756 347,269
-------- -------- -------- ---------- ---------
Net book value $231,513 $115,757 $115,756 $115,756 $ -
======== ======== ======== ========== =========


Intangible assets subject to amortization as of September 30, 2002 and related
changes during fiscal 2002 were as follows:

Additions/
Estimated September 30, Amortization September 30,
Life 2001 Expense Disposals 2002
--------- ----------- ------------ ----------- ------------
Gross Cost
Covenant Not To Compete 2 yrs $ 300,000 - ($300,000)(1) $ -
Technology 5 yrs 2,800,000 - (2,800,000)(2) -
Capitalized Software 3 yrs 444,980 - (97,711)(3) 347,269
Software License 5 yrs 1,028,890 - (1,028,890)(3) -
------------- ---------- ------------ ----------
$ 4,573,870 - $(4,226,601) $ 347,269
============= ========== ============ ==========
Accumulated Amortization
Covenant Not To Compete $ 237,500 $ 62,500 $ (300,000)(1) -
Technology 466,664 349,998 (816,662)(2) -
Capitalized Software 24,426 132,040 (40,710)(3) $ 115,756
Software License 222,924 154,332 (377,256)(3) -
--------- ---------- ----------- -----------
$ 951,514 $698,870(4) $(1,534,628) $ 115,756
============= ========== ============ ==========
Net Book Value
Covenant Not To Compete $ 62,500 $ (62,500) $ - -
Technology 2,333,336 (349,998) (1,983,338)(2) -
Capitalized Software 420,554 (132,040) (57,001)(3) $ 231,513
Software License 805,966 (154,332) (651,634)(3) -
--------- --------- ------------ -------
$ 3,622,356 ($ 698,870)(4) ($2,691,973) $ 231,513
=========== =========== ============= =========


(1) The covenant not to compete became fully amortized in February of 2002.
(2) The technology intangible asset was sold in April 2002.
(3) The software license and certain capitalized software were sold in June
2002.
(4) Includes $281,708 of impairment charges.

F-22


Intangible assets not subject to amortization as of September 30, 2002 and the
related changes during 2002 were are follows:




September 30, Additions/ September 30,
2001 Foreign Exchange Reductions 2002
-------------- ----------------- ------------- -----------

Cost
Goodwill $ 27,487,656 $1,571,266(6) $(29,058,922)(5)(7)(8) -
Acquired Workforce 600,000 - (600,000)(5) -
------------- ------------- ------------ ----------
$ 28,087,656 $1,571,266 $(29,658,922) -
============= ============= ============

Accumulated Amortization
Goodwill $ 2,859,871 $ (2,859,871)(5)(8) -
Acquired Workforce 80,000 (80,000)(5) -
------------- ------------- ----------
$ 2,939,871 $ (2,939,871) -
============= ==============
Carrying Value
Goodwill $ 24,627,785 $1,571,266(6) $(26,199,051)(5)(7)(8) -
Acquired Workforce 520,000 - (520,000)(5) -
------------ ---------- ------------- -----------
$ 25,147,785 $1,571,266 $(26,719,051) $ -
============ ========== ============= ===========



(5) Goodwill of approximately $3,000,000 and acquired workforce related to the
Transcape acquisition were written off in connection with its sale in April
2002.

(6) The additions to goodwill during the year ended September 30, 2002 relate
primarily to the acquisition of Euronet (See Note 2), as well as foreign
exchange translation adjustments on European goodwill.

(7) Goodwill reductions of approximately $4,200,000 relate to European assets
sold or written off in connection with subsidiaries placed into liquidation (See
Note 2).

(8) Goodwill of approximately $19,000,000 was written off as a result of the
Company's annual SFAS 142 impairment analysis performed at September 30, 2002.

IMPAIRMENT CHARGES RELATED TO INTANGIBLE ASSETS

2002:

As discussed in Note 3, the Company adopted SFAS 142 on October 1, 2001. The
Company had just completed its assessment of the carrying values of its
intangible assets at September 30, 2001 (see below) and recorded a $78,400,000
write-down. Therefore there was no indication of further impairments on the
Company's goodwill intangible at the time of adoption. However the Company was
required to assess the value of goodwill under the provisions of SFAS 142 at
least annually.

During 2002, the sharp downturn in capital spending in the Company's major
markets continued to negatively impact our core businesses, resulting in
substantially lower than expected revenues, additional operating losses and a
concomitant shortfall in working capital. Significantly lower valuations for
companies within our industry were commonplace and our stock price declined
precipitously. At September 30, 2002, our market capitalization had dropped to
approximately $2,000,000, while our net book value (pre goodwill write off) was
a deficit of $7,000,000.

Based upon these indications, the belief that the decline in market conditions
within our industry was significant and permanent, and the consideration of all
other available evidence, the Company determined that an impairment of goodwill
existed at September 30, 2002 and we recorded a $19,000,000 write-down of the
remaining goodwill.

F-23


5. INVENTORIES
Inventories consist of the following:
September 30,
2004 2003
---------- ----------
Raw materials $308,844 $537,337
Work in process 59,242 0
-------- ----------
Totals $368,086 $537,337
======== ==========

Total inventories were net of valuation allowances of $50,504 at both September
30, 2004 and 2003.

At September 30, 2004 and 2003, inventories of the European operations in
liquidation amounted to approximately $652,053 and $609,000 at September 30,
2004 and 2003, respectively, and are presented on the balance sheet in net
liabilities associated with subsidiaries in liquidation.

6. EQUIPMENT AND IMPROVEMENTS

September 30,
2004 2003
--------- ---------
Office furniture and equipment $728,568 $ 728,568
Computer equipment 540,785 538,349
Other equipment 123,484 123,484
--------- ---------
Totals 1,392,837 1,390,401

Accumulated depreciation and amortization (1,359,089) (1,320,152)
--------- ---------

Net equipment and improvements $33,748 $ 70,249
========= =========
7. OTHER ASSETS

Other assets consist of the following:

September 30,
2004 2003
-------- --------
Security deposits $111,273 $111,273
-------- -------
Totals $111,273 $111,273
======== =======
8. BANK LINES OF CREDIT

The Company had several foreign lines of credit, which allowed it to borrow in
the applicable local currency. These lines of credit were concentrated in
Germany, Italy and the United Kingdom. The Company's lines of credit generally
were collateralized by the accounts receivable of the borrowing subsidiary. None
of these lines of credit were available as of September 30, 2003 as the
subsidiaries have either been sold or placed in liquidation (See Note 2).
Amounts outstanding at September 30, 2004 are classified in net liabilities
associated with subsidiaries in liquidation.

F-24


9. SENIOR CREDIT FACILITY

In November 2001, the Company closed on a $2,000,000, 7% convertible note
payable with Laurus Master Fund, Ltd ("Laurus"), collateralized by certain North
American accounts receivable, with an original maturity date of November 30,
2003. The Note was convertible into Vertex common shares, which the Company was
required to register, at the lower of (i) $0.85 per share (2,352,941 shares) or
(ii) 88% of the eight lowest closing prices during the thirty days prior to the
conversion date. These conversion rates were subject to certain antidilution
provisions.

In February 2002, the Company and Laurus amended and restated the convertible
note payable and entered into a Senior Credit Facility with a maximum borrowing
availability of $2,405,000 and a maturity date of November 30, 2003. The
borrowings under this facility were collateralized by all of the North American
accounts receivable of the Company and by all of the tangible and intangible
assets of the Company and its North American subsidiaries and a subordinated
lien on certain operating assets. Interest accrued on the outstanding balance at
1.67% per month and the Company paid a management fee equal to 1.5% of all
purchased invoices under the Accounts Receivable Purchase Agreement. As of
September 30, 2002, there was an outstanding balance of $145,736 under the
Laurus Senior Credit Facility. In December 2002, the Company repaid the
remaining balance and terminated the agreement.

In connection with the original agreement, the Company also issued options to
purchase 180,000 of the Company's Common Stock at $1.284 per share to the lender
valued at $162,000 (See Note 14). Due to an imbedded beneficial conversion
feature, the Company incurred a non-cash interest charge of approximately
$1,200,000 in November 2001, which included the value of the options. The cash
transaction costs of $219,000 associated with the closing of these transactions
were included in other assets as deferred financing costs, and were being
amortized to interest expense over the original term of the facility. However as
a result of the agreement to terminate the facility, the remaining balance of
the deferred financing costs was charged to expense in the fourth quarter of
fiscal 2002.

10. NOTES PAYABLE TO UNRELATED PARTIES

Notes payable to unrelated parties consist of past due notes payable to the
following:

September 30,
2004 2003
--------- -----------
Renaissance Software, Inc. $1,227,500 $1,227,500
Divisions of Genicom International - 375,000
Aryeh Trust - 266,736
-------- ----------
$1,227,500 $1,869,236
========= ==========

The Company issued approximately $1,500,000 in promissory notes payable, bearing
interest at 8%, in connection with the purchase of Renaissance Software, Inc.
("Renaissance") in fiscal 2000 which were originally due on June 30, 2001. On
August 9, 2001, the Company renegotiated the terms of these notes and, in return
for 147,000 shares of stock (with a fair market value of approximately $162,000)
the notes became payable as follows: $250,000 was due on August 15, 2001, and
the remaining balance, plus accrued interest from June 30, 2001, was due on
September 30, 2001. The Company paid the August 15, 2001 installment and, has
not paid the remaining past due balance as of December 10, 2004.

In connection with the purchase of the assets and business of three former
European service and maintenance divisions of Genicom International in October
2000, the Company paid approximately $2,000,000 in cash at closing and agreed to
make a deferred cash payment of $500,000 that was due on September 1, 2001. The
Company paid $125,000 in December 2001 and had not paid the remaining $375,000
balance as of September 30, 2003. On March 3, 2004, the action was settled for
the sum of $125,000 which was paid on April 30, 2004. The gain of $250,000 is
included in other income in fiscal 2004.


F-25


In December 2002, Vertex, through XeQute PLC, closed a $500,000 Bridge Loan
arranged by CSS whereby it borrowed $250,000 from both Aryeh Trust, an unrelated
party, and Midmark, a related party. The terms of the Bridge Loan are described
in Note 11. This Bridge Loan had been repaid in full in May, 2004.

In connection with an acquisition in September 2001, the Company assumed certain
notes payable to banks and other entities. These notes payable had an aggregate
balance of $435,000 at September 30, 2001. Approximately $90,000 of these notes
were settled through the issuance of 68,933 shares of Vertex common stock and
the balance was paid in cash in fiscal 2001.

On February 1, 2002, the Company closed on a $1,000,000 promissory note with
Pitney Bowes, which was payable on demand after February 15, 2002, with interest
at 12%. This note was collateralized by first or subordinated liens on all of
the tangible and intangible property of the Company. In April 2002, this note
was cancelled in connection with the Company's sale of source code,
documentation and all related rights to the TMS product line to Pitney Bowes.

11. CONVERTIBLE NOTES PAYABLE - UNRELATED PARTIES

Non-current convertible notes payable to unrelated parties, net of unamortized
debt discount of $2,549,724 at September 30, 2004 arose from loans under a
Securities Purchase Agreement with four accredited investors on April 28, 2004
for the private placement (the "Private Placement") of (i) $3,000,000 in
convertible notes (the "Convertible Notes") and (ii) warrants (the "Warrants")
to purchase 3,000,000 shares of our common stock. The investors were obligated
to provide us with an aggregate of $3,000,000 as follows: $1,500,000 which was
provided to us on April 28, 2004; $750,000 which was provided to us on May 28,
2004 ; and $750,000 was provided to us on August 12, 2004.

The Convertible Notes bear interest at 10% and mature two years from the date of
issuance. At the investors' option, 50% of the Convertible Notes will be
convertible into our common stock at the lower of $0.30 or 60% of the average of
the three lowest intraday trading prices for the common stock on a principal
market for the 20 trading days before but not including the conversion date and
the other 50% of the Convertible Notes will be convertible into our common stock
at the lower of $0.30 or 55% of the same average over the same trading period.
The full principal amount of the Convertible Notes would become due upon any
default under the terms of the Convertible Notes. The Warrants are exercisable
until five years from the date of issuance at a purchase price of $0.11 per
share. In addition, we have granted the investors a security interest in
substantially all of our assets and intellectual property and registration
rights. The Company allocated proceeds of $427,500 to the fair value of the
warrants and the remaining $2,572,500 to the fair value of the Convertible
Notes. Based on the excess of the aggregate fair value of the common shares that
would have been issued if the Convertible Notes had been converted immediately
over the proceeds allocated to the Convertible Notes, the investors received a
beneficial conversion feature that had an aggregate intrinsic value of
approximately $1,096,000 as of the commitment date. Accordingly, the Company
recorded an increase in additional paid-in capital and debt discount of
$1,524,000 in connection with the issuance of the Convertible Notes and
warrants, of which $1,171,000 was amortized to interest expense during the year
ended September 30, 2004.

A portion of the proceeds of the Private Placement was used to repay the balance
of the $294,400 note payable to Aryeh Trust.

F-26


During August and September 2004, the Company issued 1,754,384 common shares
upon the conversion of 10% Convertible Notes with an approximate principal
balance of $98,000 at conversion prices of $0.054 and $0.055 per share. In
addition, during the period from October 1, 2004 to December 10, 2004, the
Company issued 10,368,424 common shares upon the conversion of 10% Convertible
Notes with an approximate principal balance of $313,000 at conversion prices
ranging from $0.02 to $0.04 per share.

12. RELATED PARTY TRANSACTIONS

NOTES AND CONVERTIBLE NOTES PAYABLE

Notes and convertible notes payable to related parties at September 30, 2003
consisted of past due or demand notes payable to Midmark as follows:

September 30,
2004 2003
---- ----
10% convertible notes $ - $ 1,814,324
Convertible loan note - 480,000
Demand notes - 3,701,900
Grid note - 143,948
Bridge loan - 250,000
----------- -------------
$ - $ 6,390,172
=========== =============

Midmark is a shareholder of the Company and has the ability to purchase a
majority interest in the Company through the conversion of convertible preferred
stock and the exercise of warrants (see Note 14). Certain Midmark Managing
Directors have served as directors of the Company. In June 2001, November 2001
and again in January 2002, the Company issued in the aggregate $5,500,000 of
convertible notes payable to Midmark. These notes were to automatically convert
into shares of Vertex common stock on the day that the Company obtained the
requisite shareholder approval for the issuance of shares upon conversion to
Midmark. In the event that shareholder approval was not obtained by September
30, 2003, the principal amount plus any accrued interest (at the prime rate)
would become immediately due and payable. The notes were to convert, subject to
future events, into (i) Vertex common stock at a future market price no higher
than $1.31 per share or (ii) 5,500 shares of Series "C" Preferred Stock, which
were convertible into 6,545,000 common shares at $0.84 per share. The Company
was required to register the underlying common shares. In the event of a
shareholder rejection, or prepayment prior to shareholder approval, the interest
rate on the notes would have increased retroactively to 14%.

In March 2002, the Company agreed to amend the agreement related to the
$5,500,000 of convertible notes payable issued in June 2001. The amendment
removed both the requirement for shareholder approval and the automatic
conversion feature, and set the maturity date for September 30, 2003. Concurrent
with the amendment of these notes, Midmark elected to convert approximately
$782,000 of principal and $218,000 of accrued interest into 997 shares of Series
"C" preferred stock. The remaining principal balance of the convertible notes
payable of $4,718,717 and accrued interest at prime were convertible into Series
"C" preferred shares at a conversion price of $1,000 per share. The Series "C"
preferred shares in turn were convertible into shares of common stock at $0.84
per share.

In November 2001, the Company issued $3,000,000 of 10% convertible notes
payable, with an original maturity date of September 30, 2003, to Midmark that
would have been convertible into 3,000 shares of Vertex Series "C" Preferred
Stock at the option of Midmark on the day that the Company obtained the
requisite shareholder approval for the issuance of Series "C" Preferred Stock
upon conversion to Midmark. Midmark could have converted the Series "C"
Preferred Shares into 3,570,026 shares of Vertex common stock at $0.84 per
share. The Company was required to register the underlying common shares. In the
event of a shareholder rejection, or prepayment prior to shareholder approval,
the interest rate on the notes would have increased retroactively to 14%. On
August 9, 2002, the remaining principal balance of $4,718,717 of the convertible
notes and $1,185,176 of the $3,000,000 of 10% convertible notes were fully
settled in connection with the sale of the Company's French based advanced
planning software business to Midmark. The remaining $1,814,324 of past due 10%
convertible notes payable at September 30, 2003 and 2002 were collateralized by
all tangible and intangible property of the Company, except that the holders had
executed in favor of certain senior lenders a subordination of their right of
payment under the convertible notes and the priority of any liens on certain
assets, primarily accounts receivable.


F-27


In December 2002, XeQute received an additional $480,000 from Midmark under a
Convertible Loan Note with terms similar to the 10% convertible note payable
described above. The Convertible Loan Note would have automatically converted
into Non-Voting Shares of XeQute PLC at $0.672 per share when a minimum
subscription of $480,000 of a proposed but now aborted Private Placement had
been reached.

The conversion rates of all of the above Midmark notes were subject to certain
antidilution provisions.

The Company borrowed an additional $2,588,900 during the year ended September
30, 2002, and an additional $1,113,000 (including $425,000 restricted for usage
on XeQute obligations) during the year ended September 30, 2003, from Midmark
under nonconvertible notes that were payable on demand, bore interest at 10% per
annum and were secured by the same collateral in which the Company previously
granted a security interest to Midmark under the agreement related to the
convertible notes payable described above.

During October, 2002, Vertex also executed a Grid Note which provided for up to
$1,000,000 of availability from Midmark, This note was to be funded by the
proceeds, if any, from the sale of any shares of Vertex common stock held by
Midmark. This note was payable on demand, carried interest at the rate of 10%
per annum and was secured by the same collateral in which the Company previously
granted a security interest to Midmark under an agreement related to the
convertible notes payable described above. In consideration of Midmark providing
this facility, the Company agreed to issue warrants to purchase a number of
unregistered shares equal to 120% of the number of tradeable shares sold by
Midmark to fund such note, at a purchase price per share equal to 80% of the
price per share realized in the sale of shares to fund the Grid Note. As of
September 1, 2004, the Company had borrowed $281,287 under this arrangement, of
which $143,900 had been borrowed as of September 30, 2003.

As a result of the borrowings through September 1, 2004, the Company was
obligated to issue to Midmark warrants to purchase 5,569,980 shares of common
stock at an exercise price of $0.05 per share. The aggregate estimated fair
value of the warrants at the respective dates of issuance was $54,000, which was
determined using the Black-Scholes option pricing model and recorded as a charge
to interest expense with an offsetting increase in additional paid-in capital,
during the year ended September 30, 2004. In applying the Black-Scholes option
pricing model, the Company used the following assumptions: expected dividend
yield - 0%; expected stock price volatility - 142%; risk free interest rate -
3.50%; and expected life of the warrants - three months.

In December 2002, Vertex, through XeQute PLC, closed a $500,000 Bridge Loan
arranged by CSS whereby it borrowed $250,000 from both Midmark and Aryeh Trust,
an unrelated party. The Bridge Loans were to be repaid with proceeds from a
proposed private placement funding. The Bridge Loans matured on June 9, 2003.
The Company agreed to continue paying interest at the original rate of 3% per
month, with the principal to be repaid when funds became available. The Bridge
Loans were secured by a first security interest in all of the assets of XeQute.
The lenders were each granted warrants to purchase shares of XeQute PLC as part
of the consideration for this loan. The interest charge relating to the fair
value of these warrants was not material and was recognized over the original
term of the Loan. Upon the receipt of the minimum subscription amount for a
private placement by XeQute PLC, Midmark had agreed to relinquish its security
interest in the assets of XeQute, in exchange for warrants to purchase 250,000
common shares of XeQute PLC which were then owned by Vertex. Midmark had agreed
that it would vote any shares which it acquired through the exercise of the
warrant in accordance with the directions of Vertex. However, it was to retain
its security interest in the shares of XeQute PLC owned by Vertex and in all of
the assets of Vertex. The loan from Areyh Trust was repaid in April 2004 (see
Note 10).


F-28


On September 27, 2004, we completed the terms and conditions of an Investment
Restructuring Agreement that we entered into on May 26, 2004 with six accredited
investors: MidMark Capital L.P., MidMark Capital II, L.P., Paine Webber
Custodian F/B/O Wayne Clevenger, Joseph Robinson, O'Brien Ltd. Partnership and
Matthew Finlay and Teresa Finlay JTWROS, who are also our principal
stockholders.

As further explained in Note 14, on June 25, 2004, as part of the Investment
Restructuring Agreement, we exchanged Series C preferred stock for newly
authorized Series C-1 convertible preferred stock on a 1:1 basis. On September
27, 2004, we issued 7,615 shares of newly authorized Series D convertible
preferred stock to MidMark Capital, L.P. in exchange for $7,614,708 of debt,
including accrued interest, owed by our subsidiaries and us to MidMark Capital
II, L.P. In addition, on September 27, 2004, we issued 5,569,980 shares of
common stock to MidMark Capital, L.P. upon exercise of warrants by MidMark
Capital, L.P. The exercise price for the warrants was exchanged for the
retirement of $315,309 in debt owed by us to MidMark Capital, L.P. As well, on
September 27, 2004, we issued 240,000 shares of common stock to MidMark Capital
II, L.P. upon exercise of warrants by MidMark Capital II, L.P. The exercise
price for the warrants was exchanged for the retirement of $2,400 in debt owed
by us to MidMark Capital II, L.P.

Vertex provided registration rights to MidMark with respect to any unregistered
shares of common stock of Vertex. In furtherance of this, MidMark has, under the
terms of a customary lock-up agreement, agreed not to sell any shares of common
stock until the earlier of (x) August 9, 2005 or (y) the sale by the Private
Placement investors of common stock which in the aggregate exceeds two thirds
(as determined by value) of the common stock received by the Private Placement
investors in connection with the exercise of their conversion rights under the
Convertible Notes (see Note 11).

In July 2001, the Company issued a $359,375 convertible note payable to PARTAS
AG, which was owned by one of its Directors. This note was to automatically
convert into 250,000 shares of Vertex common stock on the day that the Company
obtained the requisite shareholder approval for the issuance of shares to PARTAS
AG. Since shareholder approval was not obtained by February 22, 2002, the
principal amount plus the accrued interest (at prime rate) became immediately
due and payable. On July 31, 2002 this convertible note payable was fully
settled with the sale of the German point solutions business to PARTAS AG.

F-29


OTHER RELATED PARTY TRANSACTIONS

In March 2003, the Company's subsidiary XeQute entered into an "Authorized
Marketing Program Partnership Agreement" with Core eBusiness Solutions LLC
("Core"), a company that employs certain former employees of the Company. This
agreement provided Core with the exclusive rights to market and sell certain of
XeQute's warehouse management software in the United States and Canada.

However, in June 2003, XeQute and Core mutually agreed to rescind this agreement
and renegotiate a non-exclusive marketing agreement, which had not been
finalized as of December 10, 2004.

13. OTHER ACCRUED EXPENSES AND LIABILITIES

The components of other accrued expenses and liabilities consist of the
following:

September 30,
2004 2003
---------- ----------
Professional fees $ 382,631 $1,088,055
Remaining obligations on terminated leases 1,436,676 1,402,984
Sales and other taxes, excluding income
and payroll 53,582 57,379
Income taxes 270,863 270,863
Accrued interest 336,506 1,238,936
Other 1,269,427 812,542
---------- ----------
$3,749,685 $4,870,759
========== ==========

14. STOCKHOLDERS' DEFICIENCY

In November 2001, the Company granted options to Laurus, the senior credit
facility lender, to purchase an aggregate of 180,000 common shares at $1.284 per
share. The fair value of these options was approximately $162,000, and was
determined in accordance with the Black-Scholes option-pricing model. This
amount was recorded as additional paid-in capital, as well as interest expense
with the beneficial conversion feature (see Note 9).

In January 2002, the Company issued 102,663 shares with a fair market value of
$122,000 to an employee to settle an obligation for deferred compensation.

Also in January 2002, the Company granted options to purchase an aggregate
1,800,000 shares of common stock at $0.80 per share in connection with the
settlement of certain litigation. Such options had a fair value of approximately
$1,440,000. The Company also placed an equivalent number of common shares into
escrow to be available upon exercise of these options. Of the 1,800,000 shares
placed into escrow, 1,500,000 were unregistered shares. The settlement agreement
also required the Company to register these shares by April 30, 2002, or an
additional monthly cash payment would be required until the shares are
registered. The Company has not registered these shares and has not made
additional monthly cash payments and, as part of the settlement agreement, three
consent judgments have been entered against Vertex (see Note 17 - Settled
Litigation).

In April 2002, the Company sold 34,404 shares to its Chief Executive Officer at
a price of $2.18 per share.

During the year ended September 30, 2002, the Company issued 1,676,168
unregistered shares of common stock to the selling shareholders of Euronet in
consideration for the purchase of Euronet (see Note 2). Subsequent to the
issuance of these shares, stock options for 1,676,168 shares of common stock
were granted and exercised in return for the previously issued shares, which
were then cancelled.

F-30


In July 2002, the Company issued 410,304 shares to its 401k Retirement Plan (see
Note 15) in satisfaction of its calendar 2001 matching contribution obligation
of approximately $380,000. In addition, to enable the Plan to fund certain
withdrawal requests, the Company purchased 47,657 shares from the Plan at a cost
of $22,071 and put them into treasury.

In May 2003 the Company issued 1,000,000 common shares, which had a fair market
value of approximately $40,000, to an investment advisor to assist in the
Company's fund raising efforts.

Effective July 31, 2003, the Company completed the sale of 10,000,000 shares of
its common stock, which had a fair market value at that time of approximately
$400,000, to American Marketing Complex, Inc. ("AMC"). Payment for this purchase
by AMC was in the form of cash equivalent trade credits with a face value of
$4,000,000, which the Company can use or sell to others for the purchase of
merchandise and services. The face value is not necessarily indicative of the
ultimate fair value or settlement value of the trade credits. Any trade credits
not utilized by June 30, 2008 shall expire, unless the Company exercises an
option to extend the agreement for one year. The trade credits were valued at
the fair market value of the shares issued by the Company of $400,000 and
classified as unearned income, which is a separate component of stockholders'
deficiency in the accompanying consolidated balance sheets as of September 30,
2003. The unearned credits were to be offset as the trade credits were used.

In addition, the Company agreed to loan AMC $150,000 of which $10,000 was
delivered at closing; $40,000 was delivered in August 2003; $50,000 was to be
delivered by September 10, 2003 and $50,000 was to be delivered by October 10,
2003. The Company did not make the September or October payments. This loan will
be repaid exclusively from funds received from the sale by AMC of its 10,000,000
shares of the Company's Common Stock. The Company was required to, but did not,
register these shares within six months of the closing. In 2004, AMC declared
that the Company is in default. The Company is in negotiations for the
termination of this agreement with AMC. Hence, during 2004, the Company wrote
off the balance of unearned income and recorded a charge of $400,000 in the
statement of operations.

In addition, the Company issued 5,809,980 shares of common stock on June 25,
2004 upon exercise of warrants (see Note 12) and 1,754,384 shares of common
stock in August and September 2004 upon the conversion of 10% Convertible Notes
(see Note 11).

On September 21, 2004, the Company increased the common shares authorized from
75,000,000 to 400,000,000.

Shares Issued for Services

In July, 2004, the Company issued 350,000 shares of common stock with a fair
value of $14,000 for consulting services rendered.

Preferred Stock

Series "A"

In connection with the Transcape acquisition in February 2001, the Company
issued 1,356,852 shares of Series "A" Preferred Stock. Each outstanding share of
Series "A" Preferred Stock is convertible at any time, at the option of the
holder, into common stock on a one for one basis. All of the common shares
issuable on conversion of the Series "A" Preferred Stock must be registered by
the Company.

Series "B"

In October 2001, the Company raised $1,000,000 in cash through the issuance and
sale of 1,000 shares of Series "B" Convertible Preferred Stock to Pitney Bowes,
with each share of Series "B" Preferred being convertible at any time into 1,190
shares of common stock at a price of $0.84 per share. The Company must register
all of the common shares issuable on conversion of the Series "B" Preferred
Stock. In connection with this transaction Pitney Bowes had nominated Michael
Monahan to Vertex's Board of Directors. He served as a Director from November
15, 2001 until his resignation on February 21, 2002.


F-31


Series "C", Series "C-1" and Series "D"

In March 2002, the Company issued 997 shares of Series "C" Convertible Preferred
Stock to Midmark upon conversion of approximately $997,000 of convertible notes
payable and accrued interest (See Note 12). Each outstanding share of Series "C"
Preferred was convertible at any time into 1,190 shares of common stock at a
price of $0.84 per share. The Company was required to register all of the common
shares issuable on conversion of the Series "C" Preferred Stock.

On June 25, 2004, in connection with the Investment Restructuring Agreement, the
holders of Series C convertible preferred stock exchanged their Series C
convertible preferred stock for Series C-1 convertible preferred stock on a 1:1
basis. The Series C-1 preferred stock was recorded at $997,000 which was the
carrying value of the Series C preferred stock and the aggregate liquidation
value of the Series C-1 preferred stock.

In September 2004, the Company issued 7,615 shares of Series "D" convertible
preferred stock to Midmark upon conversion of approximately $7,615,000 of
convertible and demand notes payable and accrued interest (See Note 12). The
Series D preferred stock was recorded at approximately $7,615,000 which was the
carrying value of the notes and accrued interest payable and the aggregate
liquidation value of the Series D preferred stock.

Vertex and Midmark also entered into a Redemption Agreement providing for the
redemption of a number of shares of Series D preferred stock with a value of
$504,713 based on the per share liquidation value of the Series D preferred
stock upon the earlier of (x) December 31, 2004, or (y) the receipt by Vertex of
a tax refund which was expected in the fourth quarter of calendar year 2004.
Accordingly, a total of 504 shares of Series D preferred stock with an aggregate
liquidation value of $504,713 was included in current liabilities as mandatory
redeemable Series D preferred stock in the accompanying consolidated balance
sheet as of September 30, 2004. As of December 10, 2004, Vertex had not made the
payment.

Each share of Series C-1 and Series D preferred stock is convertible into $1,000
worth of our common stock, at the selling stockholders' option, at the lower of
(i) $0.30 or (ii) 60% of the average of the three lowest intraday trading prices
for the common stock on a principal market for the 20 trading days before but
not including the conversion date. Accordingly, there is in fact no limit on the
number of shares into which the Series C-1 and Series D preferred stock may be
converted. As of September 27, 2004, the average of the three lowest intraday
trading prices for our common stock during the preceding 20 trading days as
reported on the Over-The-Counter Bulletin Board was $.07 and, therefore, the
conversion price for the Series C-1 and Series D preferred stock was $.042.
Based on this conversion price, 997 shares of Series C-1 preferred stock and
7,615 shares of Series D preferred stock (including the 504 shares classified as
subject to mandatory redemption) were convertible into 205,040,666 shares of
common stock.

Based on the excess of the aggregate fair value of the common shares that would
have been issued if the Series C-1 and Series D preferred stock had been
converted immediately over the aggregate carrying value of the Series C-1 and
Series D preferred stock the investors received a beneficial conversion feature
that had an aggregate intrinsic value of approximately $3,445,000 as of the
commitment date. Accordingly, the Company recorded a charge for the preferred
stock beneficial conversion feature in the accompanying 2004 consolidated
statement of operations resulting in an increase in the loss applicable to
common stock.

Voting Rights and Dividends

All of the preferred stockholders are entitled to vote their shares as though
such conversion had taken place. In addition, preferred stockholders are not
entitled to preferred dividends, but are entitled to their pro rata share of
dividends, if any, declared on common stock under the assumption that a
conversion to common stock had occurred.

Stock Option Plan

The Company has an Incentive Stock Option Plan (the "Plan") that provides for
the granting of options to employees, directors, and consultants to purchase
shares of the Company's common stock. During fiscal 2001, the Company's Board of
Directors approved an increase in the number of shares available for issuance
from 4,000,000 to 8,000,000. The Company is required to register the additional
4,000,000 shares issuable pursuant to options exercised. The Company intends to
register the shares as soon as possible. Options granted under the Plan
generally vest over five years and expire after ten years. The exercise price
per share may not be less than the fair market value of the stock on the date
the option is granted. Options granted to persons owning more than 10% of the
voting shares of the Company may not have a term of more than five years and may
not be granted at less than 110% of fair market value.


F-32


The following table summarizes the common stock options granted, cancelled or
exercised under the Plan:



2004 2003 2002
------------------ ------------------- ------------------
Common Weighted Common Weighted Common Weighted
Stock Average Stock Average Stock Average
Options Exercise Options Exercise Options Exercise
Price Price Price
-------- -------- ------- -------- ------- --------

Outstanding at
beginning of year 1,828,000 $3.14 3,269,000 $3.72 4,691,100 $4.81
Granted - 2,141,168 .66
Exercised - (1,676,168) (.60)
Cancelled (637,500) 5.59 (1,441,000) 4.04 (1,887,100) (5.73)
----------- --------- ---------
Outstanding at
end of year 1,190,500 2.49 1,828,000 3.37 3,269,000 $3.72
========= ========= =========

Exercisable at
end of year 1,008,500 2.5 1,359,500 3.14 1,645,200 $3.59
========= ========= =========
Weighted average
fair value of
options granted
during the year $ - $ - $ .58

The following table summarizes information on stock options outstanding under
the Plan at September 30, 2004:

Options Outstanding Options Exercisable
--------------------------------- ----------------------
Options Weighted
Outstanding Weighted Average Options Weighted
at Average Remaining Exercisable Average
Range of Exercise September Exercise Contractual at September Exercise
Prices 30, 2004 Price Life 30, 2004 Price
- ------------------ --------- -------- ---------- ----------- -------
$.27 to $1.50 740,000 $ .97 6.79 620,000 $ .94
1.51 to 2.25 43,500 1.77 3.39 37,500 1.81
2.26 to 3.40 90,000 2.42 6.61 54,000 2.42
3.41 to 5.00 212,000 3.85 4.44 210,000 3.85
5.01 to 7.65 - - - - -
7.66 to 11.50 50,000 8.70 6.27 43,000 8.69
11.51 to 15.88 55,000 12.69 5.51 44,000 12.69
------- --------
1,190,500 2.49 1,008,500 2.50
========= =========


In September 2004, the Board approved the 2004 Incentive Stock Option Plan (the
"2004 Plan") pending stockholders' approval that provides for the granting of
options to employees, directors and consultants to purchase shares of the
Company's common stock. The number of shares available for issuance under the
2004 Plan is 10,000,000. Options granted under the Plan generally vest over five
years and expire after ten years. The exercise price per share may not be less
than the fair market value of the stock on the date the option is granted.
Options granted to persons owning more than 10% of the voting shares of the
Company may not have a term of more than five years and may not be granted at
less than 110% of fair market value. As of September 30, 2004, no shares were
issued from the 2004 Plan.

F-33


Other Stock Options

In addition to the stock options granted under the "Plan" discussed above, the
Company periodically grants stock options to non-employees in consideration for
services rendered, as well as for services to be rendered. Options issued for
services rendered were accounted for under SFAS 123 and EITF Issue 96-18, using
the Black-Scholes option pricing model to determine their fair value.

In fiscal 2001, options for 467,561 shares were granted to non-employees, which
resulted in an increase in additional paid-in capital of approximately $665,000
and non-cash expenses of approximately $474,000 and non cash acquisition costs
of $191,000. In certain instances, options issued for services to be rendered
are contingent upon specific performance by the grantee, and will be valued when
performance is completed.

In connection with the purchase of Renaissance in fiscal 2000, the Company
assumed 535,644 outstanding stock options of Renaissance employees. The fair
value of the vested portion of these options amounted to $6,217,472 and was
included as part of the consideration paid for Renaissance. The unvested portion
of these options was $461,000 and was included as deferred compensation in
stockholders' equity and was amortized as compensation expense over the
remaining vesting period.

In connection with the purchase of ATS in December 2000, the Company assumed
153,600 outstanding stock options of ATS employees. The fair market value of the
vested portion of these options amounted to $620,000 and was included as part of
the consideration paid for ATS. The unvested portion of these options was
$44,000 and was included as deferred compensation in stockholders' equity and
was amortized as compensation expense over the remaining vesting period.

The following table summarizes common stock options granted, cancelled and
exercised in addition to those in the Plan:



2004 2003 2002
------------------- -------------------- -------------------
Weighted Weighted Weighted
Common Average Common Average Common Average
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- ---------

Outstanding at
beginning of year 5,890,556 $3.45 6,130,673 $3.37 4,572,392 $4.31
Granted - 1,680,000 .85
Cancelled (272,542) 7.67 (240,117) 1.32 (148,719) (3.63)
---------- ---------- ----------
Outstanding at
end of year 5,618,014 3.24 5,890,556 3.45 6,103,673 $3.37
========= ========== ==========

Options exercisable 5,616,014 5,769,106 $3.33 5,937,673 $3.21
========== ========== ==========



Registration Requirements

The Company is obligated to register under the Securities Act of 1933 certain
common shares issued or issuable in connection with acquisition agreements,
private placements, the exercise of options and warrants and the conversion of
notes payable and preferred stock. At September 30, 2004, the Company was
obligated to but had been unable to register approximately 12,646,000 common
shares then outstanding. The Company intends to register the shares as soon as
possible.


F-34


Warrants Issued with Convertible Notes Payable - Unrelated Parties

As of September 30, 2004, the Company had issued 3,000,000 warrants for the
purchase of shares of its common stock in connection with raising $3,000,000
through convertible notes payable (see Note 11). The warrants are exercisable
until five years from the date of issuance at a purchase price of $0.11 per
share. All of these warrants were outstanding as of September 30, 2004.

Warrants Issued by XeQute PLC

As of December 31, 2003, XeQute PLC had issued warrants for the purchase of
shares of its common stock to Midmark, Aryeh Trust and CSS in connection with
certain financing agreements. The total of the fair value of the warrants at the
respective dates of issuance was not material. If all of the warrants had been
exercised as of September 30, 2003, the Company's ownership interest in XeQute
PLC would have decreased from 100% to approximately 90%. During fiscal 2004, the
warrants issued to Midmark were converted into common shares (see Note 12).

Shares Issued Subsequent to September 30, 2004

During the period from October 1, 2004 to December 10, 2004, in addition to
shares issued upon conversion of 10% convertible notes (see Note 11), the
Company issued 1,500,000 shares for various consulting and professional services
rendered and 3,034,404 shares for accrued directors' fees.

15. RETIREMENT PLANS

The Company and certain of its subsidiaries maintain a 401(k) retirement plan,
which is a defined contribution plan covering substantially all employees in the
United States. During fiscal 2001, all subsidiary plans were merged into the
Company's plan. Eligible employees can contribute up to 17% of their
compensation not to exceed Internal Revenue Code limits. In fiscal 2001, the
Company amended its plan to require matching contributions of 50% of the
employees' contribution up to 3% of gross pay. The Company's contribution will
be funded after each calendar year end in either cash or in Vertex stock, at the
Company's option. Prior to fiscal 2001, the various plans provided for matching
contributions based on management's discretion. The Company accrued
contributions for the years ended September 30, 2004, 2003 and 2002 of
approximately $59,000, $80,000 and $202,000, respectively. As explained in Note
14, the Company funded its required matching contribution for the calendar year
ended December 31, 2001 through the issuance of 410,304 common shares.

During October 2004, the Company issued 1,951,452 shares to the plan to fund its
required contributions for the calendar years ended December 31, 2002 and 2003.

16. INCOME TAXES

The components of the income tax provision included in the accompanying
consolidated statements of operations for the years ended September 30, 2004,
2003 and 2002 consist of the following:

2004 2003 2002
-------- ------ --------
Current:
Federal $ -- $ -- $ --
Foreign -- -- 134,473
State 1,735 -- 370
-------- ------ --------
Total Current 1,735 -- 134,843
-------- ------ --------
Deferred:
Federal -- -- --
Foreign -- -- --
State -- -- --
-------- ------ --------
Total Deferred -- -- --
-------- ------ --------
Total income tax provision $ 1,735 $ -- $134,843
======== ====== ========


F-35


The net deferred tax assets in the accompanying consolidated balance sheets as
of September 30, 2004 and 2003 consist of temporary differences related to the
following:

September 30,
----------------------------
2004 2003
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts $ 196,234 $ 196,234
Inventory 179,155 179,155
Net operating loss carryforwards 22,649,800 21,695,108
Capital loss carryforwards 1,850,296 1,850,296
Accrued expenses 1,059,067 1,055,638
------------ ------------
Total deferred tax assets 25,934,552 24,976,431
------------ ------------
Deferred tax liabilities:
Depreciation (18,633) (18,633)
Capitalized software costs -- (49,775)
------------ ------------
Total deferred tax liabilities (18,633) (68,408)
------------ ------------
Valuation allowance (25,915,919) (24,908,023)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============

Deferred tax assets arise from the tax benefit of net operating and capital loss
carryforwards which are expected to be utilized to offset taxable income and
from temporary differences between the recognition in financial statements and
tax returns of certain inventory costs, bad debt allowances on receivables,
depreciation on fixed assets and amortization of certain intangible assets.

A valuation allowance on the net deferred tax assets has been provided based on
the Company's assessment of its ability to realize such assets in the future.
For the years ended September 30, 2004, 2003 and 2002 the valuation allowance
for net deferred tax assets increased by $1,007,896, $1,206,957 and $10,359,502,
respectively, as a result of net changes in temporary differences.

The Company believes that as of September 30, 1999, an ownership change under
Section 382 of the Internal Revenue Code occurred. The effect of the ownership
change would be the imposition of annual limitations on the use of the net
operating loss carryforwards attributable to the periods before the change.

At September 30, 2004, the net operating loss carryforwards available to offset
future taxable income consist of approximately $55,200,000 in Federal net
operating losses, which will expire in various amounts through 2023, and state
net operating losses of approximately $43,100,000 which will expire in various
amounts through 2010. These net operating losses also may be limited due to
ownership changes, the effect of which has not yet been determined by the
Company. Total net operating losses available in foreign jurisdictions are
approximately $3,800,000, none of which relate to periods prior to the
acquisition of certain subsidiaries by Vertex. No pre-acquisition net operating
losses were utilized during fiscal 2004, 2003 and 2002. Based on the fact that
the remaining European subsidiaries are in liquidation, the Company does not
anticipate utilizing the European net operating losses. The capital loss
carryforward at September 30, 2004 of $4,600,000 has no expiration date, but
utilization is limited to the extent of capital gains generated by the Company.

The State of New Jersey has enacted legislation permitting certain corporations
located in New Jersey to sell state tax loss carryforwards and state research
and development credits, or tax benefits. The Company was permitted to sell tax
benefits in the amount of $518,000. On December 17, 2004, the Company received
approximately $456,000 from the sale of the $518,000 of tax benefits which will
be recognized as a tax benefit in the first quarter of fiscal 2005.


F-36


A reconciliation of income tax at the statutory rate to the Company's effective
rate is as follows:

2004 2003 2002
------- -------- -------

Statutory rate 34.0% 34.0% 34.0 %
Effect of:
Valuation allowances (34.0) (34.0) (23.2)
Permanent differences - - (10.8)
State income taxes, net - - (0.3)
------- -------- -------
Effective income tax rate 0% 0% (0.3%)
======= ======== ========

For 2002, the primary permanent differences relate to the impairment and
amortization of goodwill and the in-process research and development write-off
which are not deductible for tax purposes.

There are no undistributed earnings of the Company's foreign subsidiaries at
September 30, 2004 and 2003. In the event of a distribution of foreign earnings
in the form of dividends or otherwise, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable to the various foreign countries.

17. COMMITMENTS AND CONTINGENT LIABILITIES

Leases

The Company and its subsidiaries lease office facilities and certain office
equipment under operating leases that expire at various dates through 2008.

Rent expense for the years ended September 30, 2004, 2003 and 2002 was
approximately $200,000, $275,000 and $2,300,000, respectively.

During the year ended September 30, 2002, the Company sold and closed down
various businesses. In connection with these dispositions of non-core
businesses, the Company abandoned certain facilities and terminated leases at a
cost of approximately $1,100,000. As a result of these sales and the accrual of
the remaining terminated lease obligations, the minimum lease payments
(including common area maintenance charges) under non-cancellable operating
leases as of September 30, 2004, that have initial or remaining terms in excess
of one year are as follows:


2005 $176,000
2006 181,625
2007 183,500
2008 65,208
--------
$606,333
========

In October 2003, the Company consolidated its offices into one building in South
Plainfield, and subleased a portion of its office space in Paramus commencing
December 1, 2003. The sublease, which requires rental payments of approximately
$37,000 per year, expires in May 2008. The Company was able to cancel the
remaining portion of the Paramus lease effective January 1, 2004.

F-37


Pending Litigation

We are party to a number of claims, which have been previously disclosed by the
Company, and claims by vendors, landlords and other service providers seeking
payment of balances owed. Since such amounts have already been recorded in
accounts payable or accrued liabilities, these claims are not expected to have a
material affect on the stockholders' deficiency of the Company. However, they
could lead to involuntary bankruptcy proceedings.

a) On or about March 22, 2004, an action against Vertex and its subsidiary
Renaissance Software, Inc. was commenced in New York State Supreme Court, Nassau
County, captioned Great Oak LLC vs. Vertex Interactive, Inc. et. al. The action,
which demands $327,676, alleges two months rent totaling $23,737 and an early
termination fee of $303,929 to be due Great Oak LLC, the landlord of premises
leased to Renaissance Software LLC. Vertex is vigorously defending the action.

b) On April 16, 2003, an action was commenced in the Supreme Court of the State
of New York, County of Suffolk, entitled Bautista v. Vertex Interactive, Inc and
Renaissance Software, Inc. The action, which demands $394,000, was brought by a
former employee claiming breach of his employment agreement. On March 29, 2004,
a judgment was granted against the Company in the amount of $350,482. However
given the Company's current cash position, the judgment has not beed paid.

c) On October 31, 2001, an action was commenced in the United States District
Court, Southern District of New York entitled Edgewater Private Equity Fund II,
L.P. et al. v. Renaissance Software, Inc. et al. The action, brought against
Renaissance Software, Inc., a subsidiary of Vertex, and Vertex, alleged the
default by Renaissance Software, Inc. in payment of certain promissory notes in
the principal aggregate sum of $1,227,500. Vertex guaranteed the notes. The
noteholders demanded $1,227,500, together with interest accruing at the rate of
8% per annum from June 30, 2001. On March 12, 2002, the noteholders were
successful in obtaining a judgment against Renaissance Software, Inc. in the
aggregate amount of $1,271,407 including interest, late charges and attorneys'
fees. However given the Company's current cash position, we have been unable to
pay the judgment and have been pursuing non cash alternatives.

d) As part of the settlement entered into between the Company and three former
principals of a company acquired by Vertex in 2000, consent judgments in the
amount of approximately $1,000,000 each were entered against Vertex on July 19,
2002. The incremental liability has been included in other expense (provision
for litigation) for the year ended September 30, 2003. The Company is currently
negotiating with the former owners to accept forms of payment other than cash.
However, there can be no assurance that a non-cash settlement will be concluded.
In July 2002, the former owners obtained a court levy upon several of the
Company's bank accounts, placing a hold on approximately $70,000 of the
Company's funds. The Company, together with its secured lenders, objected to the
turnover of these funds; however a turnover order was granted by the court in
October 2002. However, given the Company's current cash position, the judgment
has not beed paid.

e) On February 9, 2003, in the matter captioned Scansource, Inc. vs. Vertex
Interactive, Inc., Superior Court of New Jersey, Essex County, a judgment was
granted against the Company in the amount of $142,155. The action alleged non
payment by the Company for computer hardware. However, given the Company's
current cash position, the judgment has not beed paid.

Settled Litigation

a) On June 25, 2003, an action was commenced in the United States District
Court, District of New Jersey, entitled CPG International, N.V. vs. Vertex
Interactive, Inc. The action, which demands $406,342, alleges the Company's
breach of an Asset Sale and Purchase Agreement pursuant to which the Company
acquired various assets related to CPG International's Service business. On
March 3, 2004, the action was settled for the sum of $125,000 which was paid on
April 30, 2004. The gain on settlement is included in the consolidated statement
of operations for the year ended September 30, 2004.


F-38


b) On or about October 29, 2004, an action against Vertex was commenced in New
York State Supreme Court, New York County, captioned NautaDutilh vs Vertex
Interactive, Inc. The action, which demands $434,189, alleges nonpayment by
Vertex of attorneys' fees allegedly incurred by Vertex in connection with a
potential acquisition transaction and the reorganization of Vertex's foreign
business operations. In December 2004, this action was settled for $300,000 and
the gain on settlement of approximately $134,000 will be recognized in the three
months ended December 31, 2004.

PAYROLL OBLIGATIONS

As a result of its severe cash constraints (see Note 1 - Going Concern section),
the Company had fallen as much as two to three months behind in meeting its
payroll obligations to its employees subsequent to September 30, 2002. The
Company has been meeting its current payroll obligations, and has attempted to
pay overdue employee payroll obligations as cash resources become available.
However, in a letter dated April 3, 2003 the New Jersey Department of Labor
(N.J.D.O.L.) has assessed the Company a penalty of $154,000 for failure to pay
payroll on a timely basis. The Company entered into Consent Order and Agreement
with the N.J.D.O.L. to pay down this obligation, starting with an initial
payment on April 30, 2004 of $18,000, which the Company has made, and then
monthly payments of $30,000 starting on June 1, 2004, which the Company has
made, until the balance of the payroll obligations are paid.

In addition, a number of former employees of a California based division of
Vertex had filed claims with the California Department of Labor for non payment
of wages for the second half of July 2002; the final payroll prior to the
closing of the division. The Company had disputed the claims, primarily on the
basis of the lack of documentation for hours worked during the period. However
in July 2003, these claims were heard by the California DOL and the amounts
claimed, together with interest and penalties aggregating approximately $100,000
which remain unpaid as of September 30, 2004, were granted to these former
employees.

Employment Agreements and Other Commitments

The Company has employment agreements with certain key employees, which
automatically renew on an annual basis, unless otherwise terminated by either
party. Such agreements provide for minimum salary levels (approximately $495,000
as of September 30, 2004) as well as for incentive bonuses. As of September 30,
2004, two employees who have employment agreements, are on furlough from the
Company, and are not receiving salaries while on furlough, but are receiving
Company benefits, with the expectation that they can return when the Company has
the financial capability for them to do so. One employee has verbally agreed to
accept a lower salary until such time that the Company has the financial
capability to increase their salary.

On September 27, 1999 the Company entered into a five-year investment banking
agreement with MidMark, which requires the Company to pay annual fees of
$250,000 per annum. Effective August 13, 2002, concurrent with the resignation
of the two Midmark directors from the Vertex Board of Directors, this agreement
was terminated.

Effective October 1, 1999, Edwardstone & Company ("Edwardstone") entered into an
agreement with the Company pursuant to which Edwardstone agreed to provide the
services of Messrs. Biermann and Toms to act as the Executive Chairman and Chief
Executive Officer of the Company. Such agreement provided for aggregate annual
compensation of $600,000 and entitled them to participate in all employee
benefit plans sponsored by Vertex in which all other executive officers of
Vertex participate. The agreement had an initial five-year term. This agreement
was terminated by mutual consent effective September 30, 2002.

F-39


On April 24, 2001 the Company entered into an investment banking agreement with
Harris, Hoover and Lewis, LLC to provide financial advisory and consulting
services with respect to the acquisition of Plus Integration. This agreement
provided for a transaction fee of 2% of the value of the acquisition, together
with related options, with a minimum transaction fee of $500,000. This agreement
was terminated on November 25, 2002 in connection with the general release of
all claims in the litigation settlement discussed above.

On September 23, 2002, the Company entered into a business advisory and
consulting services agreement with Jeffrey Firestone to assist the Company in
raising funds. The Company paid an initial retainer of $5,000. When Mr.
Firestone raises $1,000,000 on behalf of Vertex, he will be entitled to a
monthly retainer of $5,000 for an additional five months. If Mr. Firestone is
successful within a three year period in raising $1,000,000 of funds through a
private equity offering for Vertex, he is entitled to a cash fee equal to 10% of
the proceeds and five year warrants to purchase 10% of the shares and other
equity instruments sold through the private equity offering with an exercise
price equal to the per share price at which shares were sold in the private
equity offering. Mr. Firestone is also entitled to a 3% commission if he
introduces Vertex to an entity that in turn raises money for Vertex on a
commission basis.

On September 30, 2002, Vertex entered into an agreement with Tarshish Capital
Markets ("TCM"), an Israel based corporation to provide financial advisory and
fund raising services. An initial non-refundable retainer fee was accrued by the
Company at September 30, 2002 and was paid in October 2002 in the form of
800,000 shares of Vertex registered common stock, which had an aggregate fair
market value of $56,000. The agreement provides for TCM to use its best efforts
to raise in excess of $5,000,000 in a private stock offering. If TCM is
successful within a three year period, it is entitled to a cash fee equal to 10%
of the amount invested in Vertex and five year warrants to purchase 10% of the
shares and other equity instruments sold through the private placement with an
exercise price equal to the per share price at which shares are sold in the
private stock offering.

18. SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS

The Company operates in one business segment, which is the design, development,
marketing and support of supply chain management solutions.

Geographic Area Data

The following geographic information presents total revenues, gross profit and
identifiable assets for the years ended September 30, 2004, 2003 and 2002 (in
thousands):

2004 2003 2002
-------- -------- --------
Revenues
North America $ 2,566 $ 4,226 $ 15,495
Europe(1) -- -- 20,640
-------- -------- --------
$ 2,566 $ 4,226 $ 36,135
======== ======== ========
Gross Profit
North America $ 1,279 $ 2,087 $ 6,813
Europe(1) -- -- 5,428
-------- -------- --------
$ 1,279 $ 2,087 $ 12,241
======== ======== ========
Identifiable assets
North America $ 17,400 $ 17,171 $ 18,436
Europe(1) -- -- --
Eliminations (15,652) (15,652) (15,636)
-------- -------- --------
$ 1,748 $ 1,519 $ 2,800
======== ======== ========


F-40


(1) The Company had operated throughout Europe, but principally in the United
Kingdom, Germany and Italy. All European operations had either been sold or
placed into liquidation (See Note 2) by September 30, 2002. Products and
Services

Sales to external customers by the three significant product and service line
groupings for the years ended September 30, 2004, 2003 and 2002 (in thousands)
are as follows:


2004 2003 2002
------- ------- -------
Point Solutions $ 0 $ 0 $15,022
Enterprise Solutions 84 889 6,926
Service, Maintenance and Other 2,483 3,337 14,187
------- ------- -------
$ 2,567 $ 4,226 $36,135
======= ======= =======

Major Customers

The Company had no customers that accounted for more than 10% of revenue for the
fiscal years 2003 and 2002. In 2004, the Company had two customers that
accounted for 35% of revenue.

19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations for
the years ended September 30, 2004 and 2003:



Dec. 31 Mar. 31 June 30 Sept. 30
------------ ------------ ------------ ------------

2004
Revenues $ 832,270 $ 517,816 $ 706,208 $ 510,226
Gross profit $ 292,293 $ 282,078 $ 367,098 $ 337,966

Net income (loss) $ (658,200) $ (186,634) $ 588,464 $ (1,928,622)
Weighted average shares
outstanding 48,201,978 48,201,978 48,201,978 48,469,039

Net income (loss) per share $ (0.01) $ (0.00) $ 0.01 $ (0.04)


2003
Revenues $ 1,282,136 $ 1,174,553 $ 1,007,793 $ 761,705
Gross profit 642,153 645,080 384,386 415,685

Net loss (960,090) (863,755) (840,071) (986,437)
Weighted average shares
outstanding 37,201,978 37,201,978 37,663,516 46,571,543

Net loss per share $ (0.03) $ (0.02) $ (0.02) $ (0.02)



F-41





VERTEX INTERACTIVE, INC. AND SUBSIDIARIES

SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002


Balance at Additions Deductions Balance
Beginning Charged to From at End
of Year Expense Reserves of Year
---------- ---------- ---------- ---------

Year Ended September 30, 2004:
Deducted from accounts receivable
for doubtful accounts $ 456,358 $ 0 $ 0 $456,358
Deducted from inventory as
valuation allowance $ 50,504 $ 0 $ 0 $ 50,504

Year Ended September 30, 2003:
Deducted from accounts receivable
for doubtful accounts $ 929,030 $ 0 $ 472,672 $456,358
Deducted from inventory as
valuation allowance $ 271,267 $ 0 $ 220,763 $ 50,504

Year Ended September 30, 2002:
Deducted from accounts receivable
for doubtful accounts $ 380,568 $ 617,465 $ 69,003 $929,030
Deducted from inventory as
valuation allowance $ 10,000 $ 261,267 $ 0 $271,267



F-42