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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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FORM 10-Q

|/x/ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2001

or

|/ / | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|--- | ----------------------------------------------------------------------------------------

Commission File Number 0-12194

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FORTEL INC.(Exact name of Registrant as specified in its charter)

California(State or other jurisdiction of
incorporation or organization)

94-2566313(I.R.S. Employer
Identification No.)46832 Lakeview Blvd.Fremont, California
(Address of principal executive offices)

94538-6543(Zip Code)


Registrant's telephone number, including area code: (510) 440-9600

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Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /x/  No / /

The
number of shares of the Registrant's Common Stock outstanding as of June 30, 2001 was 30,387,257.

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FORTEL INC. AND SUBSIDIARIES  INDEX

|         |         |                                                                                                                |                                                                                       | Page
Number
|-------- | ------- | -------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -----------
|PART I.  |         | Financial Information                                                                                          |                                                                                       |            
|         | Item 1. |                                                                                                                | Financial Statements                                                                  |            
|         |         | Condensed Consolidated Balance Sheets (unaudited)June 30, 2001 and September 30, 2000                         |                                                                                       | 3          
|         |         | Condensed Consolidated Statements of Operations (unaudited)Three and Nine Months Ended June 30, 2001 and 2000 |                                                                                       | 4          
|         |         | Condensed Consolidated Statements of Cash Flows (unaudited)Nine Months Ended June 30, 2001 and 2000           |                                                                                       | 5          
|         |         | Notes to Condensed Consolidated Financial Statements (unaudited)                                               |                                                                                       | 7          
|         | Item 2. |                                                                                                                | Management's Discussion and Analysis of Financial Condition and Results of Operations |            
|         | Item 3. |                                                                                                                | Quantitative and Qualitative Disclosures about Market Risk                            |            
|PART II. |         | Other Information                                                                                              |                                                                                       |            
|         | Item 1. |                                                                                                                | Legal Proceedings                                                                     |            
|         | Item 2. |                                                                                                                | Changes in Securities                                                                 |            
|         | Item 3. |                                                                                                                | Defaults Upon Senior Securities                                                       |            
|         | Item 4. |                                                                                                                | Submission of Matters to a Vote of Security Holders                                   |            
|         | Item 5. |                                                                                                                | Other Information                                                                     |            
|         | Item 6. |                                                                                                                | Exhibits and Reports on Form 8-K                                                      |            

Page 2

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FORTEL INC. AND SUBSIDIARIES  CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)  ($000's)

|                                                                             |                                                                                    | June 30,
2001               |       | September 30,
2000 |       
|---------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------- | ----- | ------------------ | ------
|Assets                                                                       |                                                                                    |                             |       |                    |       
|Current assets:                                                              |                                                                                    |                             |       |                    |       
|                                                                             | Cash and cash equivalents                                                          |                             | $     | 477                |       
|                                                                             | Accounts receivable, net                                                           |                             |       | 3,304              |       
|                                                                             | Refundable taxes                                                                   |                             |       | 6                  |       
|                                                                             | Other current assets                                                               |                             |       | 947                |       
|                                                                             |                                                                                    |                             |       |                    |       
|                                                                             |                                                                                    | Total current assets        |       |                    | 4,734 
|Fixed assets, net                                                            |                                                                                    |                             | 560   |                    |       
|Other assets, net                                                            |                                                                                    |                             | 1,339 |                    |       
|                                                                             |                                                                                    |                             |       |                    |       
|                                                                             |                                                                                    | Total assets                |       | $                  | 6,633 
|                                                                             |                                                                                    |                             |       |                    |       
|Liabilities, Redeemable Common Stock and Warrants, and Shareholders' Deficit |                                                                                    |                             |       |                    |       
|Current liabilities:                                                         |                                                                                    |                             |       |                    |       
|                                                                             | Accounts payable                                                                   |                             | $     | 3,818              |       
|                                                                             | Accrued liabilities                                                                |                             |       | 1,047              |       
|                                                                             | Short-term debt                                                                    |                             |       | 761                |       
|                                                                             | Deferred revenue                                                                   |                             |       | 3,769              |       
|                                                                             |                                                                                    |                             |       |                    |       
|                                                                             |                                                                                    | Total current liabilities   |       |                    | 9,395 
|                                                                             |                                                                                    |                             |       |                    |       
|Redeemable common stock and warrants                                         |                                                                                    |                             |      |                    |       
|                                                                             |                                                                                    |                             |       |                    |       
|Shareholders' deficit:                                                       |                                                                                    |                             |       |                    |       
|                                                                             | Common stock                                                                       |                             |       | 79,547             |       
|                                                                             | Accumulated deficit                                                                |                             |       | (82,309            | )     
|                                                                             |                                                                                    |                             |       |                    |       
|                                                                             |                                                                                    | Total shareholders' deficit |       |                    | (2,762
|                                                                             |                                                                                    |                             |       |                    |       
|                                                                             | Total liabilities, redeemable common stock and warrants, and shareholders' deficit |                             | $     | 6,633              |       
|                                                                             |                                                                                    |                             |       |                    |       

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

Page 3

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FORTEL INC. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (unaudited)  (In thousands except per share data)

|                                                                    |                                            | Three Months Ended
June 30, |        | Nine Months Ended
June 30, |  
|------------------------------------------------------------------- | ------------------------------------------ | --------------------------- | ------ | -------------------------- | -
|
|Net product sales                                                   |                                            | $                           | 1,631  |                            | $
|Services and other                                                  |                                            |                             | 1,822  |                            |  
|                                                                    |                                            |                             |        |                            |  
|                                                                    | Net sales                                  |                             |        | 3,453                      |  
|Costs and expenses:                                                 |                                            |                             |        |                            |  
|                                                                    | Cost of products sold                      |                             |        | 125                        |  
|                                                                    | Cost of services and other                 |                             |        | 789                        |  
|                                                                    | Research and development expenses          |                             |        | 840                        |  
|                                                                    | Selling, general & administrative expenses |                             |        | 3,309                      |  
|                                                                    | Impairment of goodwill                     |                             |        | 945                        |  
|                                                                    |                                            |                             |        |                            |  
|                                                                    | Operating loss                             |                             |        | (2,555                     | )
|Other (income) expense                                              |                                            |                             | 36     |                            |  
|                                                                    |                                            |                             |        |                            |  
|Net income (loss)                                                   |                                            | $                           | (2,591 | )                          | $
|                                                                    |                                            |                             |        |                            |  
|Basic income (loss) per share                                       |                                            | $                           | (.09   | )                          | $
|                                                                    |                                            |                             |        |                            |  
|Number of shares used in basic income (loss) per share calculations |                                            |                             | 30,226 |                            |  
|                                                                    |                                            |                             |        |                            |  
|Diluted income (loss) per share                                     |                                            | $                           | (.09   | )                          | $
|                                                                    |                                            |                             |        |                            |  
|Shares used in diluted income (loss) per share calculation          |                                            |                             | 30,226 |                            |  
|                                                                    |                                            |                             |        |                            |  

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

Page 4

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FORTEL INC. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  ($000's)  (unaudited)

|                                                       |                                                                             | Nine Months Ended
June 30,                        |  
|------------------------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------------------- | -
|
|Cash flows used in operating activities:               |                                                                             |                                                   |  
|                                                       | Net loss                                                                    |                                                   | $
|                                                       | Adjustments to reconcile net loss to net cash used in operating activities: |                                                   |  
|                                                       |                                                                             | Impairment of goodwill                            |  
|                                                       |                                                                             | Issuance of common stock in settlement of lawsuit |  
|                                                       |                                                                             | Depreciation and amortization                     |  
|                                                       |                                                                             | Provision for doubtful accounts                   |  
|                                                       |                                                                             | Stock-based compensation to consultants           |  
|                                                       |                                                                             | Change in operating assets and liabilities:       |  
|                                                       |                                                                             | Increase in accounts receivable                   |  
|                                                       |                                                                             | Decrease in refundable income taxes               |  
|                                                       |                                                                             | Decrease (increase) in other current assets       |  
|                                                       |                                                                             | Increase in accounts payable                      |  
|                                                       |                                                                             | Increase (decrease) in accrued liabilities        |  
|                                                       |                                                                             | Increase in deferred revenue                      |  
|                                                       |                                                                             |                                                   |  
|                                                       | Net cash used in operating activities                                       |                                                   |  
|                                                       |                                                                             |                                                   |  
|Cash flows provided by (used in) investing activities: |                                                                             |                                                   |  
|                                                       |                                                                             | Acquisition of fixed assets                       |  
|                                                       |                                                                             | Proceeds from disposal of fixed assets            |  
|                                                       |                                                                             | Capitalized software development costs            |  
|                                                       |                                                                             | Purchase of other assets                          |  
|                                                       |                                                                             |                                                   |  
|Net cash provided by (used in) investing activities    |                                                                             |                                                   | 7
|                                                       |                                                                             |                                                   |  

Page 5

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|Cash flows provided by financing activities:              |                                           |                                                      |     |      |        |       |      
|--------------------------------------------------------- | ----------------------------------------- | ---------------------------------------------------- | --- | ---- | ------ | ----- | -----
|                                                          |                                           | Proceeds from borrowings under factor line of credit |     |      | 3,996  |       |      
|                                                          |                                           | Repayment of borrowings                              |     |      | (3,235 | )     |      
|                                                          |                                           | Issuance of common stock                             |     |      | 63     |       |      
|                                                          |                                           |                                                      |     |      |       
|                                                          | Net cash provided by financing activities |                                                      |     | 824  |        |       | 1,124
|                                                          |                                           |                                                      |     |      |       
|                                                          | Net decrease in cash and cash equivalents |                                                      |     | (412 | )      |       | (390 
|Cash and cash equivalents, beginning of year              |                                           |                                                      | 889 |      |        | 1,670 |      
|                                                          |                                           |                                                      |     |      |       
|Cash and cash equivalents, end of period                  |                                           | $                                                    | 477 |      | $      | 1,280 |      
|                                                          |                                           |                                                      |     |      |       
|Supplemental cash flow information:                       |                                           |                                                      |     |      |        |       |      
|                                                          | Interest paid                             |                                                      | $   | 125  |        | $     | 114  
|Supplemental non-cash investing and financing activities: |                                           |                                                      |     |      |        |       |      
|                                                          |                                           | Conversion of preferred stock                        |     | $    |       |       | $    

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

Page 6

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FORTEL INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (unaudited)  (Amounts in thousands except per share data)

1.  General

FORTEL Inc. (the "Company" or "FORTEL") is an information technology company specializing in computer and systems optimization, data
correlation and search technology. FORTEL develops and markets enterprise intranet and eBusiness performance management solutions through its product offerings which include: multi-platform
performance analysis and correlation software used to optimize performance in eBusiness and enterprise backoffice infrastructure systems, professional services to enhance its offerings to existing and
new customers, and software-based Internet tools.

2.  Basis of Presentation

The accompanying consolidated financial statements include the accounts of FORTEL Inc. and all wholly-owned domestic and foreign subsidiaries. All
material intercompany balances and transactions have been eliminated. The interim statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC) and should be read in conjunction with the audited financial statements contained in the Company's annual report on Form 10-K for the fiscal year ended
September 30, 2000. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been
condensed or omitted although the Company believes the disclosures which are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial
statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position and results of operations as of and for the periods indicated.

The
results of operations for the period ended June 30, 2001 are not necessarily indicative of the results expected for the full year. The balance sheet as of September 30, 2000 is
derived from the audited financial statements as of and for the year then ended but does not include all notes and disclosures required by accounting principles generally accepted in the United States
of America.

Page 7

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The Company's consolidated financial statements have been prepared using generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and
liquidations of liabilities in the normal course of business. The Company has incurred significant losses from operations for at least the past two fiscal years. The Company continues to experience
negative cash flows from operations and has been dependent on credit facilities to sustain its activities. There is no assurance that such credit facilities will be available in the future. These
factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustment that might result from the outcome of
this uncertainty.

3.  Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests
method. We believe that the adoption of SFAS 141 will not have a significant impact on our consolidated financial statements.

In
July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after March 15, 2001.
SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for
impairment of existing goodwill and other intangibles. We are currently assessing but have not yet determined the impact of SFAS 142 on our consolidated financial position and results of
operations.

On
October 1, 2000, the Company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS 133 establishes accounting and
reporting standards for derivative instruments and requires that all derivatives be recognized on the balance sheet at their fair value. The adoption of SFAS 133 had no effect on the
accompanying consolidated financial statements.

In
December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"),

Page 8

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Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financials filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company is required to adopt SAB 101 in the fourth quarter of fiscal 2001. We
believe that the implementation of SAB 101 will not have a material effect on the consolidated financial position or results of operations of the Company.

4.  Other Assets

Included in other assets is goodwill and purchased technology, which are being amortized on a straight-line basis over five years. The Company
periodically assesses the recoverability of these other assets by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future
operating cash flows. The amount of impairment, if any, is measured based on a projected discounted future operating cash flows and is recognized as a write down of the asset to its estimated net
realizable value. As part of the the Company's review of its third quarter financial results, an impairment assessment of these other assets was performed. The assessment was performed primarily due
to the significant decline in the Company's common stock price, the fact that the Company's common stock has been delisted from the Nasdaq SmallCap Market, and the overall decline in industry growth
rates. As a result, the Company recorded a $945,000 impairment charge to adjust the goodwill associated with the acquisition of the three software companies to $0, which approximated its fair value.
Other assets consist of the following (in thousands) as of:

|                                       |  | June 30,
2001 |        | September 30,
2000 |  
|-------------------------------------- |  | ------------- | ------ | ------------------ | -
|Goodwill                               |  | $             |       |                    | $
|Purchased technology                   |  |               | 2,588  |                    |  
|Deferred software implementation costs |  |               | 351    |                    |  
|Purchased software                     |  |               | 550    |                    |  
|Capitalized development projects       |  |               | 1,403  |                    |  
|Other assets                           |  |               | 144    |                    |  
|Less: accumulated amortization         |  |               | (3,697 | )                  |  
|                                       |  |               |        |                    |  
|                                       |  | $             | 1,339  |                    | $
|                                       |  |               |        |                    |  

Page 9

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5.  Credit Facility

The Company has a $3 million accounts receivable revolving line of credit. Borrowings are based on 80% of certain eligible receivables which are aged
90 days or less. The interest rate approximates 18% per annum calculated on the average daily balance outstanding. Additionally, there is an administrative fee of 1/2 of one
percent of each amount factored. The credit facility has no maturity; however, either party may terminate at any time. During the nine months ended June 30, 2001, the Company had borrowed
approximately $4.0 million and repaid approximately $3.2 million. At June 30, 2001, approximately $0.8 million was outstanding against the line of credit.

6.  Legal Proceedings:

During the quarter ended June 30, 2000, the Company's two outstanding legal proceedings were settled, resulting in a net gain of approximately
$1.0 million, which was recorded in other income. In the first, the Company's suit against a vendor was settled on May 15, 2000. The Company received $2.5 million in cash
($1.8 million after attorney fees) which was recorded in other income as a gain from settlement of a vendor lawsuit. In the second, a complaint for Breach of Contract, Declaratory Relief and
Specific Performance, against the Company, was settled on May 31, 2000. The Company issued 387,500 shares of the Company's common stock, resulting in a charge of $787 thousand to other
expense as a loss from settlement of litigation.

7.  Common Stock

Common stock activity for the period from October 1, 2000 through June 30, 2001 (in thousands) is as follows:

Common Stock
Shares

Common Stock
AmountBalance at September 30, 2000

26,780

$
74,471Reclassification of redeemable common stock and warrants to common stock

2,192


5,000Issuance of common stock under repricing warrants agreement

1,267


Common stock issued under employee stock purchase plan

148


63Stock-based compensation




13Balance at June 30, 2001

30,387

$
79,547


Page 10

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On July 18, 2000, the Company, through a private placement, issued 2,191,781 shares of common stock to two institutional investors (the "Investors") in exchange for $5,000,000.
This private placement was pursuant to the Securities Purchase Agreement, Registration Rights Agreement and Repricing Warrants (collectively the "Agreements"). Due to a redemption feature contained
within the Agreements, the transaction was recorded in temporary equity on the balance sheet at September 30, 2000.

On
November 8, 2000, the Company entered into a letter agreement with the Investors to modify the Agreements to replace the redemption feature with specified liquidated damages
as a remedy for certain breaches of and defaults under the Agreements. As a result of the modification of these terms, the transaction was reclassified from temporary equity into shareholders' equity
at December 31, 2000.

8.  Earnings Per Share ("EPS")

A reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (in thousands, except per share amounts) for the three and
nine months ended June 30, 2000 and 2001:

|                                |                                | Three Months Ended
June 30, |        | Nine Months Ended
June 30, |  
|------------------------------- | ------------------------------ | --------------------------- | ------ | -------------------------- | -
|
|
|NumeratorBasic and Diluted EPS |                                |                             |        |                            |  
|                                | Net income (loss)              |                             | $      | (2,591                     | )
|                                |                                |                             |        |                            |  
|DenominatorBasic EPS           |                                |                             |        |                            |  
|                                | Common stock outstanding       |                             |        | 30,226                     |  
|                                |                                |                             |        |                            |  
|                                |                                |                             | 30,226 |                            |  
|                                |                                |                             |        |                            |  
|Basic income (loss) per share   |                                | $                           | (.09   | )                          | $
|                                |                                |                             |        |                            |  
|DenominatorDiluted EPS         |                                |                             |        |                            |  
|                                | DenominatorBasic EPS          |                             |        | 30,226                     |  
|                                | Effect of Dilutive Securities: |                             |        |                            |  
|                                |                                | Common stock options        |        |                            | 
|                                |                                |                             |        |                            |  
|                                |                                |                             | 30,226 |                            |  
|                                |                                |                             |        |                            |  
|Diluted income (loss) per share |                                |                             | (.09   | )                          | $
|                                |                                |                             |        |                            |  

Page 11

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For the quarter and nine-month period ended June 30, 2001, options to purchase 1 thousand and 82 thousand shares of common stock, respectively, were
not included in the computation of diluted EPS because of the anti-dilutive effect of including these shares in the calculation for both periods. Additionally, warrants to purchase
1,882 thousand shares of common stock were not included in the computation of EPS for the quarter and nine-month period ended June 30, 2001. For the quarter and
nine-month period ended June 30, 2000, options to purchase 633 thousand and 559 thousand shares of common stock, respectively, were not included in the computation of
diluted ESP because of the anti-dilutive effect of including those shares in the calculation for both periods.

9.  Segment Information

For the quarters and nine-month periods ended June 30, 2000 and 2001, the Company had two reportable segmentsSoftware and Year
2000 Services. The Software business segment develops and markets E-business performance management software solutions. The Year 2000 segment provided service to review software code and
identify areas within the code where Year 2000 problems might occur. Following completion of the remaining contract outstanding at September 30, 1999, the Company ceased providing these Year
2000 services in October 1999.

The
following table presents certain segment financial information (in thousands) for the three- and nine-month periods ended June 30:

|                |  | Three Months Ended
June 30, |        | Nine Months Ended
June 30, |  
|--------------- |  | --------------------------- | ------ | -------------------------- | -
|
|Revenue:        |  |                             |        |                            |  
|Software        |  | $                           | 3,453  |                            | $
|Year 2000       |  |                             |       |                            |  
|                |  |                             |        |                            |  
|Total           |  | $                           | 3,453  |                            | $
|                |  |                             |        |                            |  
|Operating loss: |  |                             |        |                            |  
|Software        |  | $                           | (2,555 | )                          | $
|Year 2000       |  |                             |       |                            |  
|                |  |                             |        |                            |  
|Total           |  | $                           | (2,555 | )                          | $
|                |  |                             |        |                            |  

Page 12

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The table below presents net sales (in thousands) by geographic area for the three- and nine-month periods ended June 30:

|           |  | Three Months Ended
June 30, |       | Nine Months Ended
June 30,
|---------- |  | --------------------------- | ----- | --------------------------
|
|Net sales: |  |                             |       |                           
|U.S.       |  | $                           | 1,733 |                           
|Europe     |  |                             | 1,580 |                           
|Other      |  |                             | 140   |                           
|           |  |                             |       |                           
|Total      |  | $                           | 3,453 |                           
|           |  |                             |       |                           

The
table below presents long-lived asset information (in thousands) by geographic area:

June 30,
2001

September 30,
2000Long-lived assets:U.S.

$
1,626

$
3,693Europe


273


500Total

$
1,899

$
4,193


10. Comprehensive Loss

Comprehensive loss includes all changes in equity during a period except those resulting from investments by and distributions to shareholders. There were no
material differences between comprehensive loss and net loss as reported for each of the periods presented in these condensed financial statements.

11. Related party transactions

During the quarter ended June 30, 2001, certain directors and officers of the Company made loans to the Company. These loans bear interest at 18% per
annum and are payable 90 days from receipt of the funds. These loans were recorded as short-term debt. At June 30, 2001,included in short-term debt is $150,000 in
loans received from such directors and officers.

12. Subsequent event

On July 25, 2001 the Company received demand letters from its investors Deephaven Private Placement Ltd. and Harp Investors LLC demanding liquidated
damages upon a default under the Securities Purchase Agreement, the Repricing Warrants and the Registration Rights Agreement all dated July 18, 2000 and as subsequently amended on
November 6, 2000 in the aggregate amount of $1,400,000 due to the Company's delisting from The Nasdaq SmallCap Market effective May 16, 2001 and its failure to register additional
securities. Pursuant to the Securities Purchase Agreement, such liquidated damages
begin to accrue upon receipt by the Company of a written notice from these investors. The Company does not currently have the capabilities to satisfy these demands. Should the Company fail to
negotiate a significant reduction or waiver of such demands the Company will not be able to satisfy its obligations and might therefore cease to continue as a going concern.

Page 13

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements that are not historical facts but rather are based on current expectations, estimates, projections, beliefs and
assumptions about our industry, our Company, our business and prospects. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates" and variations of these words and
similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors,
some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and
uncertainties include those described in "Risks Associated With FORTEL's Business and Future Operating Results", "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere in this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this
report. We undertake no obligation to update these statements or publicly release the results of any revisions to the forward-looking statements that we may make to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated events.

References
in this document to "FORTEL", "we", "our", and "us" refer to FORTEL Inc., a California corporation, its predecessors, and each of its subsidiaries.

FORTEL
and SightLine are trademarks of FORTEL Inc. Zitel, Datametrics and ViewPoint are registered trademarks of FORTEL Inc. All other service marks, trademarks and
registered trademarks are the property of their respective holders.

Result of Operations

The Company recorded a net loss of $2,591,000 ($0.09 per share) for the quarter ended June 30, 2001 compared with a net income of $57,000 ($0.00 per
share) for the same quarter of the prior year. Diluted weighted average shares outstanding for the current quarter were 30,226,000 compared to 27,019,000 for the same quarter of the prior year. For
the nine months ended June 30, 2001, the net loss was $6,213,000 ($0.21 per share) compared with a net loss of $3,931,000 ($0.15 per share) for the same period a year

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earlier. Year-to-date weighted average shares were 29,791,000 versus 25,760,000 in the prior year.

Total
net sales for the current quarter were $3,453,000 versus total net sales of $7,791,000 for the same quarter of the prior year, a decrease of $4,338,000. For the nine months
ended June 30, 2001, total net sales were $11,970,000 versus total net sales of $17,402,000 for the same period a year earlier, a decrease of $5,432,000. The decrease in net sales in both
periods is primarily attributable to a decrease in net license sales. Additionally, net sales also decreased as a result of the closing of the hardware business and disposition of
non-related training and consulting business.

Gross
margin for the quarter ended June 30, 2001 was 74% of net sales compared to 69% of net sales for the same quarter of the prior year. For the nine months ended
June 30, 2001, gross margin was 74% of net sales compared to 67% of net sales for the same period a year earlier. The improvement in gross margin percentage is a result of product mix. The
Company does not believe that the gross margins reported for the current quarter just ended are necessarily indicative of the gross margins to be expected. Gross margins may be affected by several
factors, including the volume and mix of products sold and price competition.

Research
and development expenses for the quarter ended June 30, 2001 were 24% of net sales compared to 15% for the same quarter of the prior year. For the nine months ended
June 30, 2001, research and development expenses were 24% of net sales compared to 15% of net sales for the same period a year earlier. Actual spending decreased $344,000 for the quarter and
increased $340,000 for the nine-month period ended June 30, 2001.

Selling,
general and administrative ("SG&A") expenses for the quarter ended June 30, 2001 were 96% of net sales versus 66% of net sales for the same period a year earlier.
Actual spending decreased $1,829,000. Included in SG&A in the June 30, 2001 quarter was a $220,000 charge related to a reduction in force. Included in SG&A in the June 30, 2000 quarter
were expenses related to the re-launch of the Company ($520,000), a loss incurred in the sublease of the Company's facility in Fremont (CA) ($371,000) and higher legal costs related to a
lawsuit settled during the June 30, 2000 quarter ($175,000).

For
the nine months ended June 30, 2001, SG&A expenses were 93% of net sales compared to 80% of net sales for the same period a year earlier. Actual spending decreased
$2,810,000.

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The decreased spending in both periods is primarily attributable to a reduction in marketing and sales personnel and a reduction in other general operating expenses.

During
the quarter ended June 30, 2001, as part of the Company's review of its third quarter financial results, an impairment assessment of the goodwill associated with the
acquisition of the three software companies was performed. As a result, the Company recorded a $945,000 impairment charge to adjust the goodwill to $0, which approximated it estimated net realizable
value.

Other
expense was $36,000 for the quarter just ended versus other income of $1,009,000 in the same quarter of the prior year. For the quarter ended June 30, 2001, other expense
was primarily due to the interest expense incurred on the factoring of accounts receivable. Other income for the quarter ended June 30, 2000 was primarily due to the settlement of lawsuits.

For
the nine months ended June 30, 2001, other expense was $129,000 versus other income of $869,000 for the same period a year earlier. For the current nine-month
period, other expense consisted primarily of interest expense incurred on the factoring of accounts receivable. For the comparable period of the prior year, other income was primarily due to the
settlement of lawsuits.

Liquidity and Capital Resources

Since fiscal year 1997, in addition to the working capital provided by product sales, the Company has augmented its cash needs to finance operations primarily
through the issuance of convertible subordinated notes, the private sale of common stock and proceeds from borrowings against the accounts receivable revolving line of credit.

During
the nine-month periods ended June 30, 2001 and 2000, working capital decreased $3,843,000 and $2,743,000, respectively. Cash flows used in operating
activities were $1,243,000 for the nine months ended June 30, 2001 and cash flow utilized by operating activities were $133,000 for the same period a year earlier. For the nine months ended
June 30, 2001, the utilization of cash in operating activities resulted primarily from a net loss of $6,213,000 and an increase in accounts receivable of $73,000, offset by an increase in
deferred revenue of $880,000, an increase in accounts payable of $1,451,000, depreciation and amortization charges of $1,342,000 and impairment of goodwill of $945,000. For the nine-months ended
June 30, 2000, cash utilized by operating activities resulted primarily from the net loss of $3,931,000 and an increase in accounts receivable of $1,215,000, offset by an increase in deferred
revenue of $1,418,000, an increase in accounts payable and accrued liabilities of $1,040,000 and depreciation and amortization charges of $1,628,000.

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For the nine-month period ended June 30, 2001, net cash provided by investing activities of $7,000 was comprised of disposal of fixed assets of $44,000 and
acquisition of fixed assets of $37,000. During the nine-month period ended June 30, 2000, net cash used in investing activities of $1,381,000 was primarily made up of $680,000 in
capitalized software development costs and $676,000 in acquisition of fixed assets.

Net
cash provided by financing activities was $824,000 and $1,124,000 for the nine-month periods ended June 30, 2001 and 2000, respectively. For the
nine-month period ended June 30, 2001, cash provided by financing activities was comprised of $3,996,000 from borrowings, $63,000 from the sale of stock under the Company's employee
stock purchase plan offset by repayment of borrowings of $3,235,000. Net cash provided by financing activities for the same period a year earlier was comprised of $2,418,000 from borrowings, $154,000
from the sale of stock under the Company's employee stock purchase plan offset by repayment of borrowings of $1,448,000.

The
Company currently plans to increase its revenues to a level that will finance expected expenditures and result in at least neutral cash flows from operations. However, until that
stage is reached, the Company will continue to use its current cash on hand, working capital, and utilize the available accounts receivable line of credit.

If
the Company is unable to generate sufficient cash flows from operations or should management determine it to be prudent, it may attempt to raise additional debt or equity. There
can be no assurance that in the event the Company requires additional financing, that such financing will be available on terms which are favorable or at all.

In
the event that the Company is unable to increase revenue levels or financing is unavailable, management has developed alternative plans which will entail the reduction of expenses
to levels that could be financed by revenues generated. Such reductions in expenditures may include actions similar or greater in scope than the reduction in workforce undertaken by the Company in
September 2000. There can be no assurance that the

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reduction in workforce undertaken in September 2000 or any further cost cutting exercises will be successful in completely eliminating the difference between expenditures and revenues or that
such actions would not have a harmful effect on the Company's business and results of operations.

Based
on its current plans, management believes that the Company will meet its cash requirements for the next twelve months from cash on hand, working capital, cash flow from
operations, and utilization of the available accounts receivable line of credit.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests
method. We believe that the adoption of SFAS 141 will not have a significant impact on our consolidated financial statements.

In
July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after March 15, 2001.
SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for
impairment of existing goodwill and other intangibles. We are currently assessing but have not yet determined the impact of SFAS 142 on our consolidated financial position and results of
operations.

On
October 1, 2000, the Company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS 133 establishes accounting and
reporting standards for derivative instruments and requires that all derivatives be recognized on the balance sheet at their fair value. The adoption of SFAS 133 had no effect on the
accompanying consolidated financial statements.

In
December 1999, SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financials filed with the SEC. SAB 101 outlines the

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basic
criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company is required to adopt SAB 101 in the fourth quarter of
fiscal 2001. We believe that the implementation of SAB 101 will not have a material effect on the consolidated financial position or results of operations of the Company.

Risks Associated with FORTEL's Business and Future Operating Results

Set forth below and elsewhere in this Quarterly Report and in other documents we file with the SEC are risks and uncertainties that could cause actual results
to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report.

A
material portion of our revenues has been derived from large orders, as major customers deployed our products. Increases in the dollar size of some individual license transactions
would also increase the risk of fluctuation in future quarterly results. Moreover, recent adverse economic conditions in the United States, particularly those related to the technology industry, may
increase the likelihood that customers will unexpectedly delay or cancel orders and result in revenue shortfalls. This risk is particularly relevant with respect to large customer orders which are
more likely to be cancelled or delayed and also have a greater financial impact on our operating results. A large number of technology companies, particularly software companies that, like FORTEL,
sell e-commerce related software solutions, have recently announced that these conditions have adversely affected their financial results. Additionally, our operating expenses are based in
part on our expectations for future revenues and are difficult to adjust in the short term. Any revenue shortfall below our expectations could have an immediate and significant adverse effect on our
results of operations.

Fluctuations in Quarterly Results

FORTEL's quarterly operating results have in the past varied and may in the future vary significantly depending on a number of factors,
including:



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Due
to all of the foregoing factors, FORTEL believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should
not be relied upon as an indicator of future performance. It is possible that in some future quarter the Company's operating results may be below the expectations of public market analysts and
investors.

Recent Levels of Net Sales Have Been Insufficient

The Company has not generated net sales sufficient to produce an operating profit in recent years. The Company has relied on significant financings to support
its activities. Operations in prior years were also partially funded by a stream of royalty payments under an agreement with IBM. This agreement was terminated in April 1998. The Company
sustained substantial operating losses and net losses in fiscal years 1997 through 2000. The Company must generate substantial additional net sales and gross margins on its products and services and
must continue to successfully implement programs to manage cost and expense levels in order to remain a viable operating entity. There is no assurance that the Company can achieve these objectives.

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Significant Losses

For the first three quarters of fiscal year 2001, the Company reported a net loss of $6,213,000. The Company reported total net losses of $8,653,000,
$13,103,000 and $43,205,000 for fiscal years 2000, 1999 and 1998, respectively.

The
Company has taken a number of steps to attempt to return to profitability, although there is no assurance that it will be successful. A significant portion of the cumulative
losses were caused by the funding of MatriDigm Corporation and operations of the Company's former storage systems business, which was sold in July 1998. MatriDigm filed Chapter 7 bankruptcy in
October 1999 so there will be no additional funding. The Company has subleased its Fremont, California headquarters, and moved to substantially smaller and less costly premises.

The
Company continues to consider options and take actions necessary to bring costs into line with anticipated revenues. There can be no assurance that the Company will be successful
in this effort and remain a viable operating entity.

FORTEL Stock Price Has Been Volatile

The price of FORTEL's common stock during the nine-month period of fiscal year 2001 ranged from the low closing bid price of $0.17
to the high closing bid price of $1.03125. During the fiscal year 2000, the price of the Company's common stock was volatile, ranging from the low closing bid price of $0.65625 to the high closing bid
price of $6.625.

Trading restrictions and reduced liquidity may adversely affect our stock price and the ability to trade our stock

Following the delisting of our Common Stock from The Nasdaq SmallCap Market effective May 16, 2001 our Common Stock is currently traded on the OTC
Bulletin Board market. Our Common Stock may be subject to regulation as a "penny stock." The SEC has adopted regulations which generally define "penny stock" to be any equity security that has a
market price or exercise price less than $5.00 per share, subject to certain exceptions, including listing on the Nasdaq SmallCap Market. If no other exception applies, the Company's common stock may
become subject to the SEC's Penny Stock Rules, Rule 15g-1 through Rule 15g-9 under the Exchange Act. For transactions covered by these rules, broker-dealers must
make a

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special suitability determination for the purchase of such securities and must have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction
involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The
broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market
maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks. Consequently, the penny stock rules may restrict the ability of broker-dealers to sell the Company's securities and may
affect the ability of holders to sell these securities in the secondary market and the price at which such holders can sell any such securities. Rule 15g-9 under the Exchange Act
imposes additional sales practice requirements on broker-dealers who sell such securities except in transactions exempted from such rule. Such exempt transactions include those meeting the
requirements of Rule 505 or 506 of Regulation D promulgated under the Securities Act and transactions in which the purchaser is an institutional accredited investor or an established
customer of the broker-dealer. As a result, holders of our Common Stock may be unable to readily sell the stock they hold or may not be able to sell it at all.

Competition

The market for system management tools in which the Company's software products business unit competes is intensely competitive. Many of the companies with
which the Company competes, such as Computer Associates International, Inc., Hewlett-Packard Company, and BMC Software, Inc. have substantially larger installed bases and greater
financial resources than the Company. There can be no assurance that the Company's competitors will not develop products comparable or superior to those developed by the Company or adapt more quickly
than the Company to new technologies, evolving industry standards, new product introductions, or changing customer requirements.

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Dependence on New Products; Rapid Technological Change

The markets in which the Company operates are characterized by rapid technological change, changing customer needs, frequent new product introductions and
evolving industry standards. The introduction of products embodying new technologies and/or the emergence of new industry standards could render the Company's existing products and services obsolete
and unmarketable. The Company's future success will depend upon its ability to develop and to introduce new products and services on a timely basis that keep pace with technological developments and
emerging industry standards and address the increasingly sophisticated needs of its customers. There can be no assurance that the Company will be successful in developing and marketing products or
services that respond to technological changes or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction
and marketing of new products or services, or that its new products or services will adequately meet the requirements of the marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce new products or services in a timely manner in response to changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be materially and adversely affected.

Product Liability

The Company's agreements with its customers typically contain provisions intended to limit the Company's exposure to potential product liability claims. It is
possible that the limitation of liability provisions contained in the Company's agreements may not be effective. Although the Company has not received any product liability claims to date, the sale
and support of products by the Company and the incorporation of products from other companies may entail the risk of such claims. A successful product liability claim against the Company could have a
material adverse effect on the Company's business and financial position, as well as operating results and cash flows.

Dependence on Proprietary Technology

The Company's success depends significantly upon its proprietary technology. The Company currently relies on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality agreements and contractual provisions to protect

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its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company
has registered its trademarks and will continue to evaluate the registration of additional trademarks as appropriate. The Company generally enters into confidentiality agreements with its employees
and with key vendors and suppliers. The Company currently holds a United States patent on one of its software technologies. There can be no assurance that this patent will provide the Company with any
competitive advantages or will not be challenged by third parties, or that the patents of others will not have a material adverse effect on the Company's ability to do business. The Company believes
that the rapidly changing technology in the computer industry makes the Company's success depend more on the technical competence and creative skills of its personnel than on patents.

There
has also been substantial litigation in the computer industry regarding intellectual property rights, and litigation may be necessary to protect the Company's proprietary
technology. The Company has not received significant claims that it is infringing third parties' intellectual property rights, but there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products, trademarks or other proprietary rights.

The
Company expects that companies in its markets will increasingly be subject to infringement claims as the number of products and competitors in the Company's target markets grows.
Any such claims or litigation may be time-consuming and costly, cause product shipment delays, require the Company to redesign its products or require the Company to enter into royalty or
licensing agreements, any of which could have a material adverse effect on the Company's business, operating results or financial condition. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology, duplicate the Company's products or design
around patents issued to the Company or other intellectual property rights of the Company.

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International Sales and Operations

Sales to customers outside the United States have accounted for significant portions of the Company's net sales. The Company currently has offices in and is
operating in the United Kingdom, The Netherlands, Switzerland, Germany, and France. International sales pose certain risks not faced by companies that limit themselves to domestic sales. Fluctuations
in the value of foreign currencies relative to the U.S. dollar, for example, could make the Company's products less price competitive. If the Company, in the future, denominates any of its sales in
foreign currencies, this could result in losses from foreign currency transactions. International sales also could be adversely affected by factors beyond the Company's control, including the
imposition of government controls, export license requirements, restrictions on technology exports, changes in tariffs and taxes and general economic and political conditions. The laws of some
countries do not protect the Company's intellectual property
rights to the same extent as the laws of the United States. The Company does not believe these additional risks are significant in the United Kingdom, The Netherlands, Switzerland, Germany or France.

Dependence on Key Personnel

The Company's future performance depends significantly upon the continued service of its key technical and senior management personnel. The Company provides
incentives such as salary, benefits and option grants (which are typically subject to vesting over four years) to attract and retain qualified employees. Recently the Company's stock price has been
volatile and as such, many of the Company's employees hold options with exercise prices greater than the market price of the Company's Common Stock. As a result, the prior grants of options to the
Company's employees may not be a significant incentive to retain the services of these individuals. The loss of the services of one or more of the Company's officers or other key employees could have
a material adverse effect on the Company's business, operating results and financial condition.

The
Company's future success depends on its continuing ability to retain highly qualified technical and management personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain its key technical and management employees or that it can attract, assimilate and retain other highly qualified key technical and management personnel in
the future.

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The Company believes there is significant competition for the few software development professionals with the advanced technological skills necessary to perform the services offered
by the Company's business. The Company's ability to maintain or renew existing relationships and obtain new business depends, in large part, on its ability to hire and retain technical personnel. An
inability to hire such additional qualified personnel could impair the ability of the business to manage and complete its existing projects and to bid for and obtain new projects.

Power Outages in California

We have significant operations, including our headquarters, in the state of California and are dependent on a continuous power supply. California's current
energy crisis could substantially disrupt our operations and increase our expenses. California has recently implemented, and may in the future continue to implement, rolling blackouts throughout the
state. If blackouts interrupt our power supply, we may be temporarily unable to continue operations at our California facilities. Any such interruption in our ability to continue operations at our
facilities could delay the development and delivery of our products and services and otherwise disrupt communications with our customers or other third parties
on whom we rely. Future interruptions could damage our reputation and could result in lost revenue, either of which could substantially harm our business and results of operations. Furthermore,
shortages in wholesale electricity supplies have caused power prices to increase. If energy prices continue to increase, our operating expenses will likely increase which could have a negative effect
on our operating results.

Anti-Takeover Provisions

Certain provisions of the Company's Certificate of Incorporation, as amended and restated, and Bylaws, as amended, California law and the Company's
indemnification agreements with certain officers and directors of the Company may be deemed to have an anti-takeover effect. Such provisions may delay, defer or prevent a tender offer or
takeover attempt that one or more stockholders consider to be in the best interests of same, including attempts that might result in a premium over the market price for the shares held by
stockholders.

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The Company's Board of Directors may issue additional shares of Common Stock or establish one or more classes or series of Preferred Stock, having the number of shares, designations,
relative voting rights, dividend rates, liquidation and other rights, preferences and limitations determined by the Board of Directors without stockholder approval.

The
Board of Directors of the Company has approved the adoption of a Preferred Share Purchase Rights Plan (the "Rights Plan"). Terms of the Rights Plan provide for a dividend
distribution of one preferred share purchase right (a "Right") for each outstanding share of common stock, no par value per share (the "Common Shares"), of the Company. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value (the "Preferred Stock"), at an exercise
price of $69.50 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment, and a redemption price of $.01 per Right. Each one one-hundredth of a
share of Preferred Stock has designations and the powers, preferences and rights, and the qualifications, limitations and restrictions which make its value approximately equal to the value of a Common
Share.

The
Rights are not exercisable until the earlier to occur of (i) 10 days following a public announcement that a person, entity or group of affiliated or associated
persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the outstanding Common Shares or (ii) 10 business days (or such later date as may be determined by action of
the Board of Directors prior to such time as any person(s) or entity becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange
offer the consummation of which would result in the beneficial ownership by an Acquiring Person of 15% or more of such outstanding Common Shares.

The
Rights have certain anti-takeover effects, as they would cause substantial dilution to a potential Acquiring Person that attempted to acquire the Company on terms not
approved by the Company's Board of Directors. The Rights should not interfere with any merger or other business combination approved by the Board of Directors, since the Rights may be redeemed by the
Company at $.01 per Right prior to the earliest of (i) the twentieth day following the time that an Acquiring Person has acquired beneficial ownership of 15% or more of the Common Shares
(unless extended for one or more 10 day periods by the Board of Directors), (ii) a change of control, or (iii) the final expiration date of the rights.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company has considered the provisions of Financial Reporting Release No. 48, "Disclosure of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and
Derivative Commodity Instruments". The Company had no holdings of derivative financial or commodity instruments at June 30, 2001. A review of other financial instruments and risk exposures at
that date revealed the Company did not have exposure to interest rate risk.

The
Company sells it products worldwide. Consequently, the financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Because a major portion of the Company's revenue is currently denominated in U.S. dollars, a strengthening of the dollar could make the Company's products less
competitive in foreign markets.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Changes in Securities

None

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

| |  | (a) |  | Exhibits                                                                                                                |                                                                     
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------
| |  |     |  | None                                                                                                                    |                                                                     
| |  | (b) |  | Reports on Form 8-K                                                                                                    
| |  |     |  | During the period from April 1, 2001 through June 30, 2001, the Company filed the following current report on Form 8-K:
| |  |     |  | Date of Report                                                                                                         | Item(s) Reported:                                                   
| |  |     |  | May 18, 2001                                                                                                            | Delisting of the Company's common stock from Nasdaq SmallCap Market.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|                      |  | FORTEL INC.
|--------------------- |  | -----------
|Date: August 14, 2001 |  | By         

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