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

                                    FORM 10-Q

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

                     For the Quarter ended December 31, 2004

                                       OR

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

             For the transition period from__________ to __________

                         Commission file number 1-11568

                                  DYNTEK, INC.
             (Exact Name of Registrant as Specified in its Charter)

           Delaware                                               95-4228470
(State or other jurisdiction of                                (I.R.S Employer
 incorporation or organization)                              Identification No.)

                          18881 Von Karman Avenue, #250
                                Irvine, CA 92612
               (Address of principal executive offices) (Zip code)

        Registrant's telephone number, including area code (949) 955-0078

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

      Indicate by check whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

      As of February 14, 2005, the number of shares outstanding of the
registrant's Common Stock, $.0001 par value, was 60,437,621.

<PAGE>

                          DYNTEK, INC. AND SUBSIDIARIES

                                      INDEX

                                                                          Page
PART I - FINANCIAL INFORMATION                                           Number
                                                                         ------

Item 1. Condensed Consolidated Financial Statements

  Condensed Consolidated Balance Sheets - as of December 31, 2004
    (unaudited) and June 30, 2004                                        3

  Condensed Consolidated Statements of Operations and Comprehensive
    Income (Loss) (unaudited) - For the Three and Six Months Ended
    December 31, 2004 and December 31, 2003                              4

  Condensed Consolidated Statements of Cash Flows (unaudited) -
    For the Six Months Ended December 31, 2004 and December 31, 2003     5 - 6

  Notes to Condensed Consolidated Financial Statements (unaudited)       7 - 19

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations                              20 - 28

Item 3. Quantitative and Qualitative Disclosures About Market Risk       28

Item 4. Controls and Procedures                                          29

PART II - OTHER INFORMATION

Item 1. Legal Proceedings                                                30
Item 6. Exhibits                                                         31

SIGNATURE                                                                32


                                                                             -2-
<PAGE>

PART 1 - FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                          DYNTEK, INC. AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                         (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                       December 31,       June 30,
                                       ASSETS                                                             2004              2004
                                                                                                       ------------       ---------
                                                                                                       (unaudited)
<S>                                                                                                           <C>             <C>
CURRENT ASSETS:
      Cash                                                                                                    315             2,810
      Cash - Restricted                                                                                       324               479
      Accounts receivable, net of allowance for doubtful accounts of $240                                  15,924            12,045
      Inventories                                                                                           2,050             1,399
      Prepaid expenses and other assets                                                                       353                54
      Other receivables                                                                                         8                88
                                                                                                        ---------         ---------
               TOTAL CURRENT ASSETS                                                                        18,974            16,875

RESTRICTED CASH - over one year                                                                                95                91

INVESTMENTS - Marketable Securities                                                                            43                78

INVESTMENTS - Preferred Stock                                                                               1,104             1,104

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $3,105 and $3,035                                1,117               519

GOODWILL                                                                                                   19,316            19,869

CAPITALIZED SOFTWARE COSTS, net of accumulated amortization of $734 and $652                                   81               163

ACQUIRED CUSTOMER LIST, net of accumulated amortization of $8,502 and $7,136                                6,017             5,542

PURCHASED SOFTWARE, net of accumulated amortization of $690 and $671                                           --                19

DEFERRED FINANCING COSTS, net of accumulated amortization of $247 and $77                                   1,231               655

NOTES RECEIVABLE, long term, including receivable from officer of $100                                        678               548

DEPOSITS AND OTHER ASSETS                                                                                     216               186
                                                                                                        ---------         ---------
      TOTAL ASSETS                                                                                      $  48,872         $  45,649
                                                                                                        =========         =========

      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
      Accounts payable                                                                                  $   8,877         $   5,897
      Line of credit                                                                                        6,160             2,454
      Acquisition costs                                                                                       950                --
      Accrued expenses                                                                                      1,440             1,468
      Deferred revenue                                                                                        723               559
      Notes payable - accrued interest                                                                         79
      Notes payable current portion                                                                           846             1,812
      Liabilities of discontinued operations                                                                  966             4,181
                                                                                                        ---------         ---------
               TOTAL CURRENT LIABILITIES                                                                   19,961            16,450

DEFERRED REVENUE - long term                                                                                   95                91
LONG TERM NOTE PAYABLE                                                                                      9,812             3,505
                                                                                                        ---------         ---------
                       TOTAL LIABILITIES                                                                   29,868            20,046
                                                                                                        ---------         ---------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
      Preferred stock, $.0001 par value, 10,000,000 shares authorized; 604,597
      and 683,317 shares issued and outstanding as of December 31, 2004 and June
      30, 2004, respectively                                                                                    1                 1
      Common stock, $.0001 par value, 150,000,000 shares authorized; 58,989,235
      and 58,430,597 shares issued and outstanding as of December 31, 2004 and
      June 30, 2004 respectively                                                                                5                 5
      Additional paid-in capital                                                                          101,218           100,822
      Accumulated other comprehensive loss                                                                   (207)             (170)
      Accumulated deficit                                                                                 (82,012)          (75,055)
                                                                                                        ---------         ---------
               TOTAL STOCKHOLDERS' EQUITY                                                                  19,004            25,603
                                                                                                        ---------         ---------
               TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                               $  48,872         $  45,649
                                                                                                        =========         =========
</TABLE>

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


                                                                             -3-
<PAGE>

                          DYNTEK, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
                                   (Unaudited)
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                            Three Months Ended               Six Months Ended
                                                                               December 31,                     December 31,
                                                                       ----------------------------    ----------------------------
                                                                           2004            2003            2004            2003
                                                                       ------------    ------------    ------------    ------------
<S>                                                                    <C>             <C>             <C>             <C>
REVENUES:
       Product Revenues                                                $     10,731    $      3,470    $     19,145    $      9,063
       Service Revenues                                                       9,271           6,331          15,640          13,664
                                                                       ------------    ------------    ------------    ------------
                Total revenues                                               20,002           9,801          34,785          22,727
                                                                       ------------    ------------    ------------    ------------

COST OF REVENUES:
       Cost of products                                                       8,641           3,086          15,601           8,047
       Cost of services                                                       7,210           5,362          12,351          11,042
                                                                       ------------    ------------    ------------    ------------
          Total cost of revenues                                             15,851           8,448          27,952          19,089
                                                                       ------------    ------------    ------------    ------------
GROSS PROFIT                                                                  4,151           1,353           6,833           3,638
                                                                       ------------    ------------    ------------    ------------

OPERATING EXPENSES:
       Selling expenses                                                       2,548           1,817           4,374           3,639
       General and administrative expenses                                    1,398           1,259           2,766           2,113
       Non cash expense for warrants                                             43              --              43              --
       Depreciation and amortization                                            781             668           1,542           1,341
       Goodwill Impairment                                                    6,026           3,000           6,026           3,000
                                                                       ------------    ------------    ------------    ------------
                Total operating expenses                                     10,796           6,744          14,751          10,093
                                                                       ------------    ------------    ------------    ------------

LOSS FROM OPERATIONS                                                         (6,645)         (5,391)         (7,918)         (6,455)
                                                                       ------------    ------------    ------------    ------------

OTHER INCOME (EXPENSE):
       Loss on sale of marketable securities                                     --              --              --            (107)
       Interest expense                                                        (402)           (147)           (675)           (502)
       Other expense                                                             --              --             (50)
       Interest income                                                            2              88              11              93
                                                                       ------------    ------------    ------------    ------------
                    Total other income (expense)                               (400)            (59)           (714)           (516)

LOSS FROM CONTINUING OPERATIONS                                        $     (7,045)   $     (5,450)   $     (8,632)   $     (6,971)

DISCONTINUED OPERATIONS
       Gain (loss) on disposal of discontinued operations                        41             (30)          1,676            (205)
                                                                       ------------    ------------    ------------    ------------
NET LOSS                                                               $     (7,004)   $     (5,480)   $     (6,956)   $     (7,176)
                                                                       ============    ============    ============    ============

NET LOSS PER SHARE: Basic and Diluted
       Continuing Operations                                                   (.12)           (.12)           (.15)           (.16)
       Discontinued Operations                                                   --              --             .03            (.01)
                                                                       ------------    ------------    ------------    ------------
                                                                       $       (.12)   $       (.12)   $       (.12)   $       (.17)
                                                                       ============    ============    ============    ============
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION -
           Basic and Diluted                                             58,710,066      44,102,624      58,570,482      43,345,273
                                                                       ============    ============    ============    ============

NET LOSS                                                               $     (7,004)   $     (5,480)   $     (6,956)   $     (7,176)

COMPREHENSIVE LOSS, NET OF TAX
       Change in unrealized gain (loss) on available-for-sale-
       securities                                                               (25)             22             (37)             96
                                                                       ------------    ------------    ------------    ------------

COMPREHENSIVE LOSS                                                     $     (7,029)   $     (5,458)   $     (6,993)   $     (7,080)
                                                                       ============    ============    ============    ============
</TABLE>

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


                                                                             -4-
<PAGE>

                          DYNTEK, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                           ------------------------
                                                                                                              Six Months Ended
                                                                                                                  December 31,
                                                                                                           ------------------------
                                                                                                             2004             2003
                                                                                                           -------          -------
<S>                                                                                                        <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss - Continuing operations                                                                      $(8,632)          (6,971)
                                                                                                           -------          -------
     Adjustments to reconcile net loss, excluding discontinued operations, to
     net cash used in operating activities:
         Depreciation and amortization                                                                       1,455            1,245
         Amortization of debt discount                                                                         (34)              --
         Amortization of deferred financing costs                                                              158               --
         Amortization of capitalized software costs                                                             82              108
         Amortization of warrants issued for services                                                           43
         Loss (gain) on marketable securities                                                                   --              107
         Impairment of goodwill                                                                              6,026            3,000
     Changes in operating assets and liabilities:
         Accounts receivable                                                                                  (781)           2,345
         Inventory                                                                                            (524)            (162)
         Prepaid expenses                                                                                     (108)              55
         Deposits and other assets                                                                             108               22
         Accounts payable                                                                                      704           (2,792)
         Deferred revenue                                                                                       16              (57)
         Accrued expenses                                                                                     (972)            (694)
         Restricted cash                                                                                       155              (21)
                                                                                                           -------          -------
              Total adjustments                                                                              6,334            3,156
                                                                                                           -------          -------

         NET CASH USED IN CONTINUING OPERATIONS                                                             (2,304)          (3,815)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS                              (1,539)          (1,301)
                                                                                                           -------          -------

NET CASH USED IN OPERATING ACTIVITIES                                                                       (3,843)          (5,116)
                                                                                                           -------          -------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Other notes receivable                                                                                   (130)              --
     Cash proceeds from the sale of marketable securities                                                       --               71
     Cash paid for acquisitions                                                                             (6,036)
     Cash received from Redrock acquisition                                                                    405               --
     Cash received from ITI acquisition                                                                        106
     Capital expenditures                                                                                     (203)            (116)
                                                                                                           -------          -------
         NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                                (5,858)             (45)
                                                                                                           -------          -------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from debt financing                                                                            4,775               --
     Net proceeds under line of credit                                                                       2,431            1,179
     Issuance of Common Stock, net of expenses                                                                  --            3,982
                                                                                                           -------          -------
         NET CASH PROVIDED BY FINANCING ACTIVITIES                                                           7,206            5,161
                                                                                                           -------          -------
NET  DECREASE IN CASH                                                                                       (2,495)              --
CASH AT BEGINNING OF PERIOD                                                                                  2,810               --
                                                                                                           -------          -------
CASH AT END OF PERIOD                                                                                          315          $    --
                                                                                                           =======          =======
</TABLE>

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


                                                                             -5-
<PAGE>

                          DYNTEK, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (UNAUDITED)
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                               Six Months Ended
                                                                                                                  December 31,
                                                                                                          --------------------------
                                                                                                            2004              2003
                                                                                                          -------            -------
<S>                                                                                                       <C>                <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for interest                                                                                    $   360            $   355

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
     Forgiveness by shareholders of note and accrued interest                                             $    --            $ 5,625

     Debt discount issued in connection with convertible debt                                                 (34)                --

     Issuance of stock in connection with convertible debt                                                     40                 --

     Acquisition of Red Rock Communications in 2004:
     Cash paid to shareholders                                                                              2,750                 --
     Gross cash acquired                                                                                      405                 --
     Contingent consideration                                                                                 750                 --

     Acquisition of Integration Technologies Inc. in 2004:
     Cash paid to shareholders                                                                              2,500                 --
     Gross cash acquired                                                                                      105                 --

     Acquisition of AMR in 2004:
     Cash paid to shareholders                                                                                786                 --
</TABLE>

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


                                                                             -6-
<PAGE>

                           DYNTEK, INC. & SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2004
                                   (UNAUDITED)

1.    Basis of Presentation and Management's Liquidity Plans

      The accompanying  unaudited condensed consolidated financial statements of
DynTek,  Inc.  and its  subsidiaries  ("DynTek",  "Company",  or "we") have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United State of America,  for interim  financial  statements and pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and disclosures required for annual financial
statements.  These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related footnotes for
the year ended June 30, 2004 included in the Form 10-K for the year then ended.

      The accompanying  condensed  consolidated financial statements reflect all
adjustments,  which,  in the opinion of management  consist of normal  recurring
items that are necessary for a fair  presentation  in conformity with accounting
principles generally accepted in the United States of America. These adjustments
include   certain   reclassifications   to  reflect  the   disposal  of  certain
non-emergency  transportation  services  which were a component of the Company's
business  outsourcing  segment.   Preparing  condensed   consolidated  financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets,  liabilities,  revenues and expenses. The results of
operations for any interim period are not necessarily  indicative of the results
attainable for a full fiscal year.

      During the second quarter of fiscal year 2005,  the Company  completed its
acquisition of Integration  Technologies,  Inc. ("ITI").  See "Note 14, Business
Acquisitions."  The condensed  consolidated  financial  statements include ITI's
results of operations of from October 2004.

      As of December 31, 2004, the Company had a working  capital  deficiency of
approximately  $987,000  which  includes  $950,000 of  acquisition  indebtedness
incurred in business  combinations  that were  consummated on September 29, 2004
and October 14, 2004 (Note 14). As  described  in Note 18, the Company  received
$7,700,000  in connection  with the sales of its common  stock.  The proceeds of
this offering will be used for general working capital purposes.

      The Company believes that its cash on hand and cash it expects to generate
from  operations  will sustain the business at least through  December 31, 2005.
However,  there can be no assurance that the Company will have sufficient  funds
to implement  its  business  plan or that the  implementation  of such plan will
generate  sufficient  cash flow. If the Company is not successful in its efforts
to  either  raise or  generate  sufficient  liquidity,  it could  be  forced  to
significantly  alter its  business  plan,  which could  include  making  further
reductions in overhead costs,  and/or divesting  itself of certain  contracts or
other assets.

2.    Accounting Policies

      The Company's  significant  accounting  policies are included in Note 1 to
the Company's consolidated financial statements that were filed in its Form 10-K
for the year ended June 30, 2004.

      In January 2003, Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This  interpretation  of  Accounting  Research  Bulletin  No. 51,  "Consolidated
Financial  Statements," provides


                                                                             -7-
<PAGE>

guidance for  identifying a controlling  interest in a variable  interest entity
("VIE")  established by means other than voting  interest.  FIN 46 also required
consolidation of a VIE by an enterprise that holds such controlling interest. In
December  2003,  the FASB  completed  its  deliberations  regarding the proposed
modifications   to  FIN  No.,   46  and  issued   Interpretation   Number   46R,
"Consolidation  of Variable  Interest  Entities - an  Interpretation  of ARB 51"
("FIN No. 46 R"). The  decisions  reached  included a deferral of the  effective
date and  provisions  for  additional  scope  exceptions  for  certain  types of
variable  interests.  Application  of FIN  No.  46R  is  required  in  financial
statements  of public  entities  that have  interests in VIEs or potential  VIEs
commonly  referred  to as  special-purpose  entities  for periods  ending  after
December 15, 2003.  Application  by public small business  issuers'  entities is
required in all interim and annual financial statements for periods ending after
December 15, 2004.

      The adoption of this pronouncement is not expected to have material effect
on the Company's financial statements.

      In  December  2004,  the FASB issued  Statement  of  Financial  Accounting
Standard  ("SFAS") No. 123R "Share Based Payment".  This statement is a revision
of SFAS  Statement  No.  123,  "Accounting  for  Stock-Based  Compensation"  and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related  implementation  guidance.  SFAS 123R addresses all forms of share based
payment  ("SBP")  awards  including  shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. Under SFAS
123R,  SBP awards  result in a cost that will be  measured  at fair value on the
awards' grant date, based on the estimated number of awards that are expected to
vest that will result in a charge to operations. This statement is effective for
public entities that do not file as small business  issuers--as of the beginning
of the first interim or annual reporting period that begins after June 15, 2005.

      The Company is currently in the process of evaluating  the effect that the
adoption of this pronouncement may have on its financial statements.

      In  December  2004,  the FASB issued  Statement  of  Financial  Accounting
Standard  ("SFAS") no. 153  "Exchanges of  Nonmonetary  Assets".  This Statement
amends  Opinion 29 to  eliminate  the  exception  for  nonmonetary  exchanges of
similar productive assets and replaces it with a general exception for exchanges
of  nonmonetary  assets that do not have  commercial  substance.  A  nonmonetary
exchange  has  commercial  substance  if the future cash flows of the entity are
expected to change significantly as a result of the exchange.  The provisions of
this  Statement,  which  is to  be  applied  prospectively,  are  effective  for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Earlier application is permitted for nonmonetary asset exchanges occurring
in fiscal periods beginning after December 16, 2004.

      The adoption of this pronouncement is not expected to have material effect
on the Company's financial statements.

      EITF Issue 04-8,  "The Effect of Contingently  Convertible  Instruments on
Diluted  Earnings  per Share." The EITF  reached a consensus  that  contingently
convertible  instruments,  such as contingently  convertible debt,  contingently
convertible  preferred  stock,  and other such securities  should be included in
diluted earnings per share (if dilutive)  regardless of whether the market price
trigger has been met. The  consensus  became  effective  for  reporting  periods
ending after December 15, 2004.

      The adoption of this  pronouncement  does not currently  have an effect on
the  Company's  financial  statements  because  the  inclusion  of common  stock
equilivants in earning per share are anti-dilutive.


                                                                             -8-
<PAGE>

3.    Marketable Securities

      Marketable  securities  are classified as available for sale in accordance
with Statement of Financial Accounting Standard ("SFAS") No. 115 "Accounting for
Marketable Securities.". Accordingly, the unrealized loss resulting from valuing
such  securities at their  current  market values is presented as a component of
stockholders'  equity.  At  December  31,  2004,  the  unrealized  loss  on such
securities amounted to $207,000

4.    Investment in Preferred Stock

      At June 30, 2003, the Company held a $1,104,000  note  receivable due from
Private Label Cosmetics,  Inc. ("PLC") payable in 48 monthly  installments  with
interest  at 7.5% per  annum.  The note was  secured by 342 shares of PLC common
stock.  On September 23, 2003, the Company agreed to convert the note into 1,000
shares of PLC preferred  stock which it currently  holds as an investment.  Such
preferred shares are convertible,  at the Company's  option,  into 306 shares of
PLC Common Stock. The preferred  shares also include a liquidation  provision in
the event PLC is sold.  Dividends  are payable at $10,000 per quarter  beginning
March 31, 2005.

5.    Notes Receivable

      On September 30, 2003, the Company received additional security collateral
for its accounts receivable due from LaborSoft Corporation ("LaborSoft"),  a 25%
equity  investee of the Company  (Note 17), by obtaining a  Promissory  Note and
Security  Agreement in the amount of $636,000 that  LaborSoft  owes the Company,
for previously delivered services.  The Promissory Note, which bears interest at
the prime rate, (5.25% as of December 31, 2004),  matures on September 21, 2006.
LaborSoft  granted the Company a security  interest in its assets which includes
receivables, equipment, software, and other intellectual property, inventory and
intangible  assets.  The Company  established a $200,000 reserve of this note in
fiscal year 2003.  The Company  received an  additional  promissory  note in the
amount of  $130,000  on  December  31,  2004 as  additional  security  for trade
receivables  due from  LaborSoft.  The Note bears interest at the prime rate and
matures on December 31, 2007.

      On January 2, 2001,  the Company  advanced  $170,000 to Steven  Ross,  its
Chief  Executive  Officer,  which was  evidenced  by a  promissory  note bearing
interest at 8% per annum. On December 10, 2001, the Company extended the term of
the note to the end of Mr. Ross' period of employment. On December 10, 2001, the
Company  forgave  $70,000 of such note as a bonus to Mr.  Ross.  At December 31,
2004, $100,000 remained outstanding under the note receivable.

6.    Goodwill and Other Intangibles

      The  Company  evaluates  the  recoverability  of its  goodwill  and  other
intangible  assets in  accordance  with the  Statement of  Financial  Accounting
Standards Board ("SFAS") No. 142, "Goodwill and Other Intangible  Assets," on an
annual basis and at interim  periods when events occur or  circumstances  change
that would more likely than not reduce the fair value of a reporting  unit below
its carrying amount.

      During the  quarter  ended  December  31,  2004,  the  Company  recorded a
$6,026,000  goodwill  impairment  charge  including  $4,227,000  relating  to  a
specific service contract that the Company was notified will not be renewed. The
Company  acquired  such  contract as part of a group of  contracts in its merger
with Dyncorp in 2001. In addition,  the Company recorded a $1,799,000 impairment
charge  associated  with certain  contracts  for which the renewal  options were
unlikely.


                                                                             -9-
<PAGE>

7.    Credit Facility

      On June 30, 2003, the Company  entered into a twelve month credit facility
agreement  with annual  automatic  renewals with an agency of Textron  Financial
Corporation  ("Textron").  Textron provides the Company with a full notification
factoring  facility for up to $7,000,000 of working  capital  collateralized  by
accounts receivable,  inventory, general intangibles and other assets. Under the
terms of such credit facility, Textron finances, with recourse, up to 85% of the
Company's eligible accounts receivable, as defined, Advances under this facility
bear  interest  at the  prime  rate plus 2% (7.25% at  December  31,  2004).  In
addition, the Company pays a 0.15% discount fee on all advances.  Effective July
1, 2004 the Textron  agreement was amended and extended for an additional period
of twenty four months. As of December 31, 2004, $6,160,000 was outstanding under
this credit facility.

8.    Senior Subordinated Convertible Notes

      On October  15,  2004 the Company  entered  into a 9% Senior  Subordinated
Convertible  Note  Purchase   Agreement  (the  "Note  Agreement")  with  certain
investors  (the  "Purchasers")  in which it issued an aggregate of $4,438,775 in
principal amount of the Company's  Senior  Subordinated  Convertible  Notes (the
"Senior  Notes"),  bearing 9% interest per annum with a maturity of three years.
The Senior Notes are convertible  into shares of the Company's common stock at a
conversion price of $.65 per share, subject to certain adjustments.


      As part of the  issuance  of the Notes,  the  Company  also  issued to the
Purchasers  warrants  to  purchase  3,414,442  shares of the common  stock at an
exercise  price of $.7475 per share (the  "Warrants").  The Warrants,  which are
immediately exercisable,  expire on September 30, 2009. In addition, the Company
issued to Purchasers who had not previously participated in any financing of the
Company  warrants  to purchase  up to 554,540  shares of the Common  stock at an
initial  exercise  price of $1.25 per share  (the  "Additional  Warrants").  The
Additional Warrants, which are immediately exercisable, expire on June 10, 2005.

      Pursuant to the Note Agreement,  the Company issued to Duncan Capital LLC,
the placement agent in connection with the transaction,  warrants to purchase up
to 692,308 shares of the Company's  Common Stock at an initial exercise price of
$0.7475 per share (the "Placement Warrants") and paid a cash fee of $360,000 and
61,538  shares  of  common  stock.  The  Placement  Warrants  may  be  exercised
immediately  and will expire on  September  30, 2009.  In addition,  the Company
incurred additional legal and transfer fees of $45,000.

      The Company  registered for resale the shares of the Common Stock issuable
upon the  conversion  of the Notes and the exercise of the  associated  warrants
discussed above on a registration  statement on Form S-3,that was filed with the
Securities and Exchange Commission on November 17, 2004.

9.    Amended and Restated Secured Convertible Notes

      On November 15, 2004, the Company  issued an Amended and Restated  Secured
Convertible  Term Note (the  "Amended  Note") to the Laurus  Master  Fund,  Ltd.
("Laurus  Funds").  The  Amended  Note  replaces  previous  the  previous  notes
outstanding  in  the  aggregate   principal   amount  of  $6,000,000  that  were
convertible into common stock at $1.15 per share.

      The Amended  Note  provides  for a  $1,000,000  increase in the  remaining
principal  balance of the previous  notes and to  restructure  the new aggregate
principal of  $6,649,999  after taking into  account  principal  payment made to
date,  under the Amended Note to defer all payments  until  December 1, 2005. In
exchange,  the Company reduced the conversion  price under the Amended Note from
$1.15 per share to $0.65 per share.  The Amended Note is  convertible to Company
common stock at the option of Laurus Funds.


                                                                            -10-
<PAGE>

      The Amended Note  provides  for Interest  payable at the prime plus 1% per
annum, but not less than 4% per annum. The Company, at its option, may repay the
principal and interest in shares of its common stock shares, if at the time such
stock is delivered (i) there exists an effective registration statement covering
the  distribution  of such shares by the  investor and (ii) the market price for
such  shares  is  greater  than  115% of $0.65 per  share,  the price  fixed for
conversion to common stock of amounts  outstanding  under the Amended Note.  Any
amounts of Amended Note  principal  paid in cash,  prior to  maturity,  shall be
subject to a 2% premium payment.

      As part of the transaction, Laurus Funds also received a five-year amended
and  restated  warrant to  purchase  1,046,150  shares of DynTek  common  stock,
exercisable  at $0.65 per share (the  "Amended  Warrant").  The Amended  Warrant
replaces the warrant  previously  issued to Laurus Funds in connection  with the
convertible  note financing which provided for the purchase of 625,000 shares at
an exercise  price of $1.25 per share.  Substantially  all assets of the Company
have been pledged as security for this obligation.

10.   Commitments, Contingencies, and Other Agreements

COMMONWEALTH OF VIRGINIA

      Effective  December 15, 2002, the Company entered into a mutual Settlement
Agreement (the "Settlement Agreement") to cancel a contract (the "Transportation
Contract") in which it provided non-emergency  transportation brokerage services
through third party providers (the "Transportation Vendors") to the Commonwealth
of Virginia  ("Virginia").  Pursuant the terms of the Settlement Agreement,  the
Company agreed to make certain payments due to the Transportation  Vendors under
an agreed-upon  schedule through June 2003. At the time the Company entered into
the Transportation Contract,  DynCorp, Inc. ("Dyncorp") posted a $2,400,000 bond
(the "Bond") to guarantee its financial  performance under the contract in favor
of  Virginia.  Dyncorp also  indemnified  the Company for any  potential  losses
(obligations) in excess of $2,400,000 (the "Bonded  Amount").  Certain claims of
the Transportation Vendors caused the Bond to be called, initiating a process of
disbursing the Bonded Amount to Transportation  Vendors with verifiable  claims.
The bonding company filed an interpleader action (the "Interpleader  Matter") to
distribute  the Bonded  Amount on July 22,  2003.  In addition to making  claims
against the Bond in the Interpleader Matter, many of the Transportation  Vendors
initiated  separate  claims for payment  against the Company both as part of and
separate  from the  Interpleader  Matter.  The Company  provided  DynCorp with a
limited  release of its indemnity  for aggregate  claims in excess of the Bonded
Amount.  Accordingly,  the Company  assumed the  liability  for valid  claims in
excess of the Bonded Amount.

      The  Company  entered  into  settlement  agreements  with a number  of the
Transportation  Vendors  and, on December  1, 2004,  the Court  entered an Order
granting  the  Company's   Motion  to  Approve   Settlements  and  to  Authorize
Disbursement of  Interpleader  Funds (the "Order").  Pursuant to the Order,  the
Bonded  Amount  was  transferred  to the  Transportation  Vendors  by  DynTek in
accordance with the terms of various settlement agreements.

      All claims in the Interpleader  Matter against the Bond and/or against the
Company,  except for six,  have been settled and paid in full as of December 31,
2004. The Transportation Vendors holding these settled and paid claims have been
dismissed from the Interpleader Matter and pending state court lawsuits, if any,
have also been dismissed.  Of the six remaining unpaid claims,  five are settled
and will be paid in full by June 1, 2005. These remaining Transportation Vendors
will be dismissed from the  Interpleader  Matter as their  settlements are paid.
The Company is still  negotiatiating  and is proceeding with litigation with the
remaining  Transportation Vendor with which it has not entered into a settlement
agreement.  A portion  of the  Bonded  Amount is being  held in escrow  for this
Transportation Vendor, if necessary.


                                                                            -11-
<PAGE>

      The Company records  provisions for the estimated amount of any settlement
or judgment in excess of amount covered by the portion of the Bonded Amount that
is held in escrow. The Company believes that its provisions are adequate but, is
unable to predict the outcome of the remaining unsettled claim.

OTHER AGREEMENTS

      Effective  October  15,  2004,  the  Company  entered  into an  Employment
Agreement,  ("Zublin  Agreement")  with  Casper  Zublin,  Jr.  to  serve  as the
Company's Chief Operating Officer.  Under the Zublin Agreement,  Mr. Zublin will
receive a base  salary of $300,000  per year,  and an annual  performance  bonus
pursuant to a plan to be  established by the Company's  Compensation  Committee.
Mr.  Zublin  received  a grant of  options  to  purchase  350,000  shares of the
Company's  common  stock,  subject to  certain  vesting  provisions.  The Zublin
Agreement also provides Mr. Zublin with  severance  benefits in the event of his
termination  for  certain  reasons.  The Zublin  Agreement  provides  additional
benefits  for Mr.  Zublin in the event of a change in control of the Company and
Mr.  Zublin's  employment  is  terminated,  subject  to certain  conditions.  In
connection with his employment,  Mr. Zublin also entered into an Indemnification
Agreement with the Company.

      On November 12, 2004,  the Company  entered into an  Employment  Agreement
(the "Webber  Agreement")  with Robert I. Webber to serve as the Company's Chief
Financial Officer and as a director of the Company.  Under the Webber Agreement,
which is effective as of August 1, 2004, Mr. Webber receives a base salary at an
annualized  rate of  $300,000,  and is entitled  to receive an annual  incentive
bonus pursuant to a bonus plan to be  established by the Company's  Compensation
Committee. The bonus will be based upon the achievement of criteria as set forth
in the Company's  bonus plan. Mr. Webber received a grant of options to purchase
660,000 shares of the Company's  common stock, and may receive a grant of 50,000
shares of restricted stock,  subject to certain Company  performance and vesting
provisions.  The Webber Agreement also includes  severance and change in control
benefits, in the event of Mr. Webber's termination for certain reasons.

      On November 12, 2004,  the Company  entered into an  Employment  Agreement
(the "Ross  Agreement") with Steven J. Ross to serve as the Company's  President
and Chief  Executive  Officer and as a director of the  Company.  Under the Ross
Agreement,  which is  effective  as of July 1, 2004,  Mr.  Ross  receives a base
salary at an  annualized  rate of  $440,000,  and he is  entitled  to receive an
annual  incentive  bonus  pursuant  to a  bonus  plan to be  established  by the
Company's Compensation  Committee.  The bonus will be based upon the achievement
of criteria as set forth in the Company's bonus plan.  Under the agreement,  Mr.
Ross  will  receive  a grant of  options  to  purchase  1,320,000  shares of the
Company's  common stock, and may receive a grant of 200,000 shares of restricted
stock,  subject to certain Company performance and vesting provisions.  The Ross
Agreement also includes  severance and change in control benefits,  in the event
of Mr. Ross' termination for certain reasons.

      On October 15, 2004, the Company entered into a one year agreement with DC
Asset Management,  LLC for the negotiation,  evaluation and structure of merger,
acquisition  and other  transactions.  As  consideration  the  Company  issued a
five-year  warrant to  purchase  up to  1,150,000  shares of Common  Stock at an
exercise price of $.50. The exercise price was subsequently increased to $.52.

11.   Stock Based Compensation

      During the year ended June 30,  2003,  the Company  adopted  Statement  of
Financial  Accounting  Standard  ("SFAS") No. 148,  "Accounting  for Stock-based
Compensation-Transition  and Disclosure."  This statement  amended SFAS No. 123,
"Accounting for Stock-based  Compensation." As permitted under SFAS No. 123, the
Company  applies the intrinsic  value method of  accounting  for its stock based
compensation in accordance with  Accounting


                                                                            -12-
<PAGE>

Principles  Board  Opinion  (APB)  No.  25,  "Accounting  for  Stock  Issued  to
Employees."  As  required  under SFAS No.  148,  the  following  table  presents
pro-forma net income (loss) and basic and diluted  income (loss) per share as if
the fair value-based method had been applied to all awards.

<TABLE>
<CAPTION>
                                                                     Three Months Ended               Six Months Ended
                                                                   ----------------------          ----------------------
Periods Ended December 31,                                          2004            2003            2004            2003
--------------------------                                         ------          ------          ------          ------
<S>                                                                <C>             <C>             <C>             <C>
Net Loss                                                           $7,004          $5,480          $6,956          $7,176
Stock-based employee compensation
cost, net of tax effect, under fair
value accounting                                                       35               9              70              18
                                                                   ------          ------          ------          ------
Pro-forma net income (loss) under
Fair Value Method                                                  $7,039          $5,489          $7,026          $7,194
                                                                   ======          ======          ======          ======
Income / (Loss) per share:
Basic                                                              $  .12          $  .12          $  .15          $  .17
                                                                   ======          ======          ======          ======
Diluted                                                            $   --          $   --               $          $   --
                                                                   ======          ======          ======          ======
Pro-forma income (loss) share: Basic                               $   --          $   --          $   --          $   --
                                                                   ======          ======          ======          ======
Pro-forma income (loss) share:
Diluted                                                            $  .12          $  .12          $  .15          $  .17
                                                                   ======          ======          ======          ======
</TABLE>

      The fair value of each  option  grant was  estimated  at the date of grant
using  the  Black-Scholes  option  valuation  model.  The  Black-Scholes  option
valuation  model was developed  for use in  estimating  the fair value of traded
options which have no vesting  restrictions and are fully transferable.  Because
the Company's stock options have  characteristics  significantly  different from
those of traded options, and because changes in the subjective input assumptions
can materially  affect the fair value  estimate,  in management's  opinion,  the
existing models do not necessarily provide a reliable single measure of the fair
value estimate of its stock options. In calculating the fair values of the stock
options, the following assumptions were used:

                                                     Fiscal year     Fiscal year
                                                     2005 grants     2004 grants
                                                     -----------     -----------
Dividend yield                                                --              --
Weighted average expected life:                        2.2 years       3.6 years
Weighted average risk-free interest rate                    3.12%           2.5%
Expected volatility                                           35%           136%

12.   Stockholders' Equity

      On August 14, 2001, the Company's  preferred stock became convertible into
the  Company's  Class A common  stock,  at a rate of 2.5 common  shares for each
preferred share tendered. As of December 31, 2004, 1,585,203 of such shares have
been  converted  into  3,963,008  shares of Common  stock,  with a remainder  of
604,597 shares not yet converted.

      On October 7, 2004,  the Company issued 300,000 shares of its Common Stock
to be held in escrow for AMR  Networks.  The shares  are  included  in the total
outstanding shares as of December 31, 2004. However,  the shares do not have any
voting rights are not eligible for dividend  while held in escrow.  The issuance
relates to the purchase of certain assets and contracts  from AMR Networks.  The
shares are held in escrow and may be earned  and


                                                                            -13-
<PAGE>

distributed  over a three year  period of 100,000  shares  annually  upon annual
fiscal year achievement of $ 500,000 of gross profit.

      On October 15, 2004,  the Company  issued a warrant to purchase  1,150,000
shares of Common Stock at an exercise price of $.50 to DC Asset Management,  LLC
as retainer for negotiation, evaluation and structure of merger, acquisition and
other  transactions.  The exercise price was subsequently  increased to $.52 per
share.

      In connection  with the Note Agreement dated October 15, 2004, see Note 8,
the Company issued warrants to purchase 3,414,442 shares of the Company's Common
Stock at an exercise price of $.7475.  The warrants will expire on September 30,
2009.  Additionally,  warrants to purchase up to 554,540 shares of the Company's
Common stock at an exercise price of $1.25 per share,  which will expire on June
10, 2005 were issued.  The Company  issued to Duncan  Capital LLC, the placement
agent in  connection  with the  transaction,  warrants to purchase up to 692,308
shares of the Company's Common Stock at an initial exercise price of $0.7475 per
share which will expire on September 30, 2009.

      On November 15, 2004,  the Company  issued an amended five year warrant to
purchase  1,046,150  shares of Common  Stock,  exercisable  at $.65 per share in
relation to the Amended and Restated Secured Convertible Note, described in Note
9.

      On November 15, 2004,  the Company issued 61,538 shares of Common Stock to
Duncan Capital as a placement  agent in connection with the Amended and Restated
Secured Convertible Note, described in Note 9.

13.   Earnings per Share

      Basic earnings per share is computed on the basis of the weighted  average
number of common shares  outstanding.  Diluted earnings per share is computed on
the basis of the weighted  average number of common shares  outstanding plus the
effect of outstanding  stock options using the "treasury  stock method".  Common
stock  equivalents  consisting  of  options,  warrants,  convertible  debt,  and
convertible  preferred stock totaling 45,640,598 and 17,610,990 were excluded in
the diluted weighted average calculation for the three months ended December 31,
2004 and December 31, 2003 respectively. As the effect would be anti-dilutive.

Total outstanding stock, options,  convertible preferred stock, convertible debt
and warrants are as follows:

          ------------------------------------------------------------
                                                As of December 31,
                                                2004          2003
          Common stock                       58,989,235    46,720,235
          Options and warrants               26,859,990    14,532,662
          Convertible debt                   17,269,115            --
          Convertible preferred stock         1,511,493     3,078,328
                                            -------------------------
                                            104,629,833    64,331,225
                                            =========================

14.   Business Acquisitions

Red Rock Communications

      On September 29, 2004, the Company entered into a Stock Purchase Agreement
(the  "Agreement")  effective  August 1, 2004 to acquire all of the  outstanding
Common Stock of Redrock Communications Solutions, Inc., ("Redrock") for purchase
consideration consisting of (i) an initial aggregate cash payment of $2,500,000;
(ii) a deferred  aggregate  cash  payment of $500,000  payable 60 days after the
closing  date;  (iii)  an  earn-out  cash  payment  up to a


                                                                            -14-
<PAGE>

maximum amount of $1,500,000, based upon Redrock's EBITDA for the period of July
1, 2004 through June 30, 2005 and (iv) $500,000 of the  Company's  common stock,
subject to  adjustment  based on the final  determination  of Redrock's  working
capital,  divided by $.63,  the average  closing price of the  Company's  common
stock for the 10 trading preceding the closing date.

      An  employee  of  Redrock   Communications   Solutions,   Inc.,  a  Nevada
corporation  "Redrock"),  is claiming that he owns up to one-third  (1/3) of the
outstanding  shares  of Common  Stock of  Redrock  at the time of the  Company's
acquisition of the  outstanding  shares of Redrock  pursuant to a Stock Purchase
Agreement  dated  September  29, 2004,  by and among the Company and the two (2)
holders of record (the  "Sellers")  of the  outstanding  shares of Redrock  (the
"Redrock  Agreement").  The  Redrock  employee  thereby is  claiming  that he is
entitled to receive one-third (1/3) of the consideration paid by the Company for
the acquisition of all then-outstanding shares of Redrock. The Redrock Agreement
provides an indemnification for the benefit of the Company by the Sellers of any
breach or inaccuracy of any of the  representations  and warranties  made by the
Sellers and the Company in the Redrock Agreement,  which include representations
with respect to Redrock's capital structure, its securities then-outstanding and
the Sellers'  ownership of the shares of Redrock  stock.  No complaint  has been
filed,  and the  parties  in the  dispute  have  discussed  the  possibility  of
mediation as a means to resolve the dispute.

      As a result of this dispute,  the Company is  withholding a portion of the
deferred  cash  payment in the amount of $250,000  ("Deferred  Payment"),  which
payment is past due,  that is payable to the  Sellers  pursuant  to the  Redrock
Agreement as part of the consideration for the purchase of the Redrock shares to
offset any indemnification  claims that the Company may have against the Sellers
once the dispute is resolved. The Company will release the Deferred Payment that
is withheld upon  execution by the Redrock  employee of a letter of  affirmation
and waiver of any claims he might have against the Company.

A summary of the business assets acquired (in thousands) is as follows:

     Consideration paid:
     Stock to be issued                                    $  500
     Cash                                                   3,000
     Liabilities assumed                                    2,095
                                                           ------
     Total consideration                                   $5,595
                                                           ------
     Assets acquired:
     Cash                                                     405
     Accounts receivable, net                               1,221
     Inventory                                                115
     Prepaid expenses, deposits and other assets                8
     Property and equipment                                   136
     Customer list                                            755
     Goodwill                                               2,955
                                                           ------
     Fair value of assets acquired                         $5,595
                                                           ------

Integration Technologies Inc.

      On October 14, 2004,  the Company  entered  into an Agreement  and Plan of
Merger (the  "Merger  Agreement"),  by and among the  Company,  ITI  Acquisition
Corp.,  a  California  corporation  and wholly owned  Subsidiary  of the Company
("Merger  Sub"),  Integration  Technologies,   Inc.,  a  California  corporation
("ITI"), the shareholders of ITI (the "Shareholders") and Casper Zublin, Jr., in
his capacity as the shareholder representative (the "Representative").


                                                                            -15-
<PAGE>

      On October 18, 2004,  the Merger Sub was merged into ITI with ITI becoming
a wholly-owned subsidiary of the Company (the "Merger").  The consideration paid
or payable to the  Shareholders  in connection  with the Merger is comprised of:
(i) an initial cash payment of $2,500,000; (ii) an earn-out cash payment up to a
maximum  amount of $1.5 million,  based upon ITI's EBITDA for the period between
July 1, 2004 through June 30, 2005 to be paid on or before July 30, 2005;  (iii)
a earn-out cash payment up to a maximum amount of $1.5 million, based upon ITI's
revenue for the period  between July 1, 2004 through June 30, 2005 to be paid on
or before July 30, 2005; and (iv) an aggregate number of whole shares of Company
common  stock of based on the average  closing  sale price per share (the "Share
Price") of such  common  stock as reported  on the Nasdaq  SmallCap  Market (the
"Nasdaq") for the 30 trading days prior to June 28, 2005, determined as follows:
(a)  2,140,000  shares if the Share  Price is  greater  than $1.00 but less than
$1.50; (b) that number of shares equal to $2,140,000  divided by the Share Price
if the Share  Price is less than  $1.00,  provided  that the  maximum  number of
shares  issuable  pursuant  to this  clause (b) shall be no more than  4,280,000
shares;  or (c) that number of shares equal to  $3,210,000  divided by the Share
Price if the Share Price is greater than $1.50 (the "Stock  Consideration").  At
the  option  of the  Representative,  up to fifty  percent  (50%)  of the  Stock
Consideration  may be paid in cash instead of Company Common Stock.  In no event
will the  Company be required to issue  shares of Company  Common  Stock if such
issuance would require stockholder  approval under the Nasdaq Marketplace Rules.
In the event the number of shares issuable as Stock Consideration is so limited,
the Company will pay the difference to the Shareholders in cash.

A summary of the business assets acquired (in thousands) is as follows:

     Consideration paid:
     Cash                                                   2,500
     Liabilities assumed                                    2,542
                                                           ------
     Total consideration                                   $5,042
                                                           ------
     Assets acquired:
     Cash                                                     105
     Accounts receivable, net                               1,952
     Inventory                                                 12
     Prepaid expenses, deposits and other assets              101
     Property and equipment                                   329
     Customer list                                          1,200
     Goodwill                                               1,343
                                                           ------
     Fair value of assets acquired                         $5,042
                                                           ------

The  following   unaudited  pro-forma   information   reflects  the  results  of
continuting  operations  of the  Company  as though  the  acquisitions  had been
consummated as of July 1, 2003 (in thousands).

-------------------------------------------------------------
                              Six Month ended December 31,
-------------------------------------------------------------
                              2004                    2003
-------------------------------------------------------------
Revenue                     $38,884                  $32,838
-------------------------------------------------------------
Net Loss                     (6,523)                  (8,754)
-------------------------------------------------------------
Net Loss per share              .11                      .12
-------------------------------------------------------------

15.   Discontinued Operations

      During  2003,  the Company  disposed of its  non-emergency  transportation
business.


                                                                            -16-
<PAGE>

As of  December  31,  2004,  the total  remaining  liabilities  of  discontinued
operations amounted to $966,000. A significant portion of such payables are owed
to the Transportation  Vendors involved in the Inter-Pleader Matter described in
Note 10.

16.   Business Segments

      DynTek's  operations are organized along its product lines and include two
segments;   Information  Technology  Services  and  Business  Process  Outsource
Services.  The  Information  Technology  Services  segment  provides  a range of
specialized IT infrastructure  services:  system  architectural  design,  legacy
systems integration,  network  engineering,  applications  development,  network
security services, help desk support and operational support, primarily to state
and local government entities and mid-market commercial entities. In conjunction
with  these  service  offerings,  it also sells  hardware  and  software  to its
customers.  Operations are distributed  primarily among seven states California,
Florida, Massachusetts,  Michigan, Nevada, Virginia and New York, with employees
situated in locations that are convenient to client sites.

      The Business Process  Outsourcing  segment  contracts  outsourced  program
operations  for state  government  agencies  in  several  areas,  including  the
privatization  of child  support  enforcement  services.  Our  business  process
outsourcing  customers  have included  various  governmental  departments in the
states of North Carolina,  Kansas and Nebraska.  The Company maintains  employee
locations in these states as well.  Typically these contracts are for multi-year
periods of  performance,  with  options to renew for  additional  periods.  Such
contracts are generally  awarded through  competitive  procurements.  Payment is
based on either fixed-price, fixed-unit- price based on contractual allocations,
revenue sharing, or a combination of the above.

      Our reportable  segments are business units that offer different  services
and contract types and are managed separately due to the expertise and different
managed  key  factors  in each  area.  Since the  separate  Business  Processing
Outsourcing  segment was acquired as a unit,  management  has retained  separate
reporting and review criteria for that unit. The following table provides actual
selected financial data for our business segments (in thousands):


                                                                            -17-
<PAGE>

<TABLE>
<CAPTION>
                                                                               Business             Information
                                                                                Process             Technology
                                                                              Outsourcing            Services               Total
                                                                               --------              --------              --------
<S>                                                                            <C>                   <C>                   <C>
Three months ended December 31, 2004
Sales to external customers                                                    $  2,201              $ 17,801              $ 20,002
Depreciation and amortization expense                                               116                   655                   781
Goodwill impairment                                                               5,837                   189                 6,026
Operating loss                                                                   (5,763)               (1,283)               (7,046)
Net interest expense                                                                 --                   400                   400
Total assets                                                                      9,985                38,887                48,872
Capital expenditures                                                                 27                   104                   167

Three months ended December 31, 2003
Sales to external customers                                                    $  2,302              $  7,499              $  9,801
Depreciation and amortization expense                                               111                   557                   668
Goodwill impairment                                                               3,000                    --                 3,000
Operating loss                                                                   (3,001)               (2,390)               (5,391)
Net interest expense                                                                 --                    59                    59
Total assets                                                                     22,299                24,169                46,468
Capital expenditures                                                                 --                    35                    35

Six months ended December 31, 2004
Sales to external customers                                                    $  4,877              $ 29,908              $ 34,785
Depreciation and amortization expense                                               233                 1,309                 1,542
Goodwill impairment                                                               5,837                   189                 6,026
Operating loss                                                                   (5,684)               (2,948)               (8,632)
Net interest expense                                                                 --                   664                   664
Total assets                                                                      9,985                38,887                48,872
Capital expenditures                                                                 27                   176                   203

Six months ended December 31, 2003
Sales to external customers                                                    $  5,014              $ 17,713              $ 22,727
Depreciation and amortization expense                                               222                 1,119                 1,341
Goodwill impairment                                                               3,000                    --                 3,000
Operating loss                                                                   (3,137)               (3,319)               (6,456)
Net interest expense                                                                 --                   409                   409
Total assets                                                                     22,299                24,169                46,468
Capital expenditures                                                                 78                    38                   116
</TABLE>

17.   Related-Party Transactions

      In March 2001,  the Company  purchased 25% of the equity in  LaborSoft,  a
company that provides labor  relations  management  software to labor unions and
commercial  customers,  to  supplement  its other market  segment  services.  In
connection with such investment,  the Company  appointed one of its directors to
become  chairman of  Laborsoft's  board of directors.  The Company also provides
infrastructure  services  to  LaborSoft,   under  a  cost  plus  fee-for-service
agreement.

      The Company  accounts for its  investment  in  Laborsoft  under the equity
method of accounting.  Accordingly,  the Company's records its pro-rata share of
Laborsoft's income (loss) as an increase (decrease) in the carrying value of its
investment.  The Company's pro-rata share of Laborsoft's losses since March 2001
amount to approximately $456,000. Such losses have eliminated the carrying value
of the LaborSoft investment.

18.   Subsequent Events

      On February 10,  2005,  the Company  entered  into a  Securities  Purchase
Agreement with certain  institutional and accredited investors (the "Investors")
for the sale of  $7,700,000  of Common  Stock of the Company at a price of $0.52
per share. In connection  with such


                                                                            -18-
<PAGE>

purchase,  the Investors  received  warrants (the  "Warrants") to purchase up to
3,700,000  shares of our Common Stock.  The Warrants  have an exercise  price of
$0.66 per share,  and are  exercisable  for a period  beginning  six months from
issuance  and ending  five years  thereafter.  The  Company has agreed to file a
registration  statement  underlying  the common stock and shares  issuable  upon
exercise  of the  Warrants  within a period  of 30 days of the  closing  of this
transaction.


                                                                            -19-
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
        OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

The following discussion and analysis of our results of operations and financial
position should be read in conjunction with our audited  consolidated  financial
statements  and related notes included in our Annual Report on Form 10-K for the
year ended June 30, 2004 and the unaudited consolidated financial statements and
related notes included in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

Statements contained in this Quarterly Report on Form 10-Q and in future filings
with the Securities and Exchange Commission include "forward-looking statements"
within the  meaning of such term in Section 27A of the  Securities  Act of 1933,
Section 21E of the Securities  Exchange Act of 1934, and the Private  Securities
Litigation  Reform Act of 1995.  The  Company  wishes to caution  readers not to
place  undue  reliance  on any such  forward-looking  statements,  each of which
speaks only as of the date made.  Forward-looking  statements  involve known and
unknown  risks,  uncertainties  and  other  factors  which  could  cause  actual
financial or operating results, performance or achievements expressed or implied
by such forward-looking  statements not to occur or be realized. Such statements
are subject to certain risks and  uncertainties  that could cause actual results
to differ materially from historical results and those presently  anticipated or
projected.  See a discussion  of such risks and factors in the "Factors That May
Affect Future Results"  section of our Annual Report on Form 10-K for the fiscal
year ended June 30, 2004 as filed with the Securities  and Exchange  Commission.
Forward-looking  statements  made in this Form 10-Q  generally  are based on our
best estimates of future results, performances or achievements,  predicated upon
current  conditions  and the most recent  results of the companies  involved and
their respective industries. Forward-looking statements may be identified by the
use of  forward-looking  terminology such as "may," "will,"  "could,"  "should,"
"project," "expect," "believe," "estimate,"  "anticipate," "intend," "continue,"
"potential,"  "endeavor,"  "opportunity"  or similar terms,  variations of those
terms or the  negative  of those  terms or other  variations  of those  terms or
comparable  words or  expressions.  Potential risks and  uncertainties  include,
among other things, such factors as:

o     Our ability to reach  target  markets for  services  and  products and our
      ability to retain current and attract future customers;

o     Our  ability  to  successfully   integrate  acquired  companies  into  our
      operations, and our ability to acquire additional companies, if any;

o     Our ability to turn contract backlog into revenue and net income, the size
      and timing of additional orders and their  fulfillment,  as well as market
      acceptance,  revenues and profitability of our current and future products
      and services;

o     Our ability to finance and sustain  operations,  including  the ability to
      fund, maintain,  replace and/or extend the Textron credit facility,  which
      is discussed in Note 7, and/or the Laurus Funds Note,  when either becomes
      due,  respectively,  or  to  replace  such  instruments  with  alternative
      financing;

o     Our  ability  to  raise  equity  capital  or debt in the  future,  despite
      historical losses from operations;

o     Our ability to successfully  defend or settle the remaining  claims in the
      Virginia litigation;

o     The  continuing  desire of state and local  governments  to  outsource  to
      private contractors, and our ability to service such contracts;

o     General economic conditions in the United States and elsewhere, as well as
      the economic conditions  affecting the industries in which we operate, our
      customers and suppliers;


                                                                            -20-
<PAGE>

o     The  competitive  environment in the regions in which we compete,  and the
      cost-effectiveness of our products and services;

o     Political and  regulatory  matters that affect the  industries in which we
      operate;

o     Our continued ability to trade on the NASD bulletin board; and

o     Other risks  detailed  in our filings  with the  Securities  and  Exchange
      Commission.

The Company has no obligation  to publicly  release the results of any revisions
to any forward-looking statements to reflect anticipated or unanticipated events
or circumstances occurring after the date of such statements.

Business Overview

We provide information technology ("IT") security,  converged network,  internet
protocol ("IP")  telephony,  access  infrastructure,  and technology  management
solutions.  We serve as a source of  products  and  services  to state and local
government and mid-market commercial enterprises.  We provide total solutions to
our clients by delivering systems design, installation,  consulting, maintenance
and integration of network computing products and applications.

Through  recent  acquisitions  of Redrock  Communications  Solutions,  Inc.  and
Integration  Technologies,  Inc.,  we have  increased  our  presence in Southern
California,  and  have  bolstered  our  multi-disciplinary   practice  areas  in
security,  access  infrastructure,  wide area  networks  ("WAN")  and local area
networks  ("LAN"),  IP telephony or  voice-over  IP  ("VOIP"),  and  application
infrastructure.  We are focusing on growing our higher margin service offerings,
while maintaining expense controls and improving our balance sheet. We intend to
continue to seek acquisitions and organic growth that will build threshold share
and  critical  density in our target  markets  of  leading IT  spending  states.
Moreover,  we intend to  capitalize on business  practices of acquired  entities
that we believe will enhance  competitive  advantage and ensure delivery of high
quality IT services to our customers and build stronger  relationships  with our
vendors.

We presently realize revenue from client engagements that entail the delivery of
end-to-end solutions,  and the sales of products to our customers.  Services are
primarily  provided to the client at hourly rates that are  established for each
of our  employees  or  third-party  contractors  based upon their  skill  level,
experience and the type of work performed.  We also provide  project  management
and  consulting  work  which are  billed  either by an agreed  upon fixed fee or
hourly  rates,  or a combination  of both.  We generally  endeavor to expand our
sales of higher margin solution and project management services. The majority of
our services are provided under purchase orders or bid contracts with government
entities.

Costs of services and related  products consist  primarily of salaries,  cost of
outsourced  labor and products to complete the  projects.  Selling,  general and
administrative  expenses consist primarily of salaries and benefits of personnel
responsible  for  administrative,   finance,   operative,  sales  and  marketing
activities  and  all  other  corporate  overhead  expenses.  Corporate  overhead
expenses  include rent,  telephone  and internet  charges,  insurance  premiums,
accounting and legal fees, depreciation and amortization expenses.

Results of Operations

Continuing Operations

The following  table sets forth for the periods  presented  information  derived
from  our  unaudited   condensed   consolidated   statement  of  operations  (in
thousands):


                                                                            -21-
<PAGE>

Revenues

<TABLE>
<CAPTION>
                                         For the Three Months ended                       For the Six Months ended
                              ---------------------------------------------------------------------------------------------------
                                                December 31,                                     December 31,
                              ---------------------------------------------------------------------------------------------------
                                                      Percentage                                            Percentage
                                2004         2003       change      Amount         2004         2003          change      Amount
                              ---------------------------------------------------------------------------------------------------
<S>                           <C>           <C>           <C>      <C>           <C>            <C>             <C>      <C>
Product(1)                    $  5,874      $3,470        69%      $  2,404      $ 12,271       9,063           35%      $  3,208

Service(1)                       5,480       6,331       (13%)         (851)       11,061      13,664          (19%)       (2,603)
                              --------      ------       ---       --------      --------     -------          ---       --------

Total (1)                       11,354       9,801        16%         1,553        23,332      22,727            3%           605

Product(2)                       2,983         n/a       100%         2,983         5,000         n/a          100%         5,000

Service(2)                       2,270         n/a       100%         2,270         3,058         n/a          100%         3,058
                              --------      ------       ---       --------      --------     -------          ---       --------

Total(2)                         5,253         n/a       100%         5,253         8,058         n/a          100%         8,058

Product(3)                       1,874         n/a       100%         1,874         1,874         n/a          100%         1,874

Service(3)                       1,521         n/a       100%         1,521         1,521         n/a          100%         1,521
                              --------      ------       ---       --------      --------     -------          ---       --------

Total(3)                         3,395         n/a       100%         3,395         3,395         n/a          100%         3,395

Totals                        $ 20,002      $9,801       104%      $ 10,201      $ 34,785     $22,727           53%      $ 12,058
                              ========      ======       ===       ========      ========     =======          ===       ========
</TABLE>

(1)   Revenues  from  Redrock and  Integration  Technologies  are  excluded  for
      comparative purposes.

(2)   Represents  revenues  generated from Redrock  following the acquisition on
      August 1, 2004.

(3)   Represents revenues generated from Integration  Technologies following the
      acquisition on October 1, 2004.

Three Months ended December 31, 2004 and 2003

Revenue for the three months ended  December 31, 2004 amounted to  approximately
$20,002,000  as  compared  with  revenue  of  approximately  $9,801,000  for the
comparable  2003 period.  The increase in revenue is attributable to an increase
in product  revenue  of  approximately  $7,261,000  and an  increase  in service
revenue of  approximately  $2,940,000.  The  increase  in  revenue is  primarily
attributable  to an increase of  $8,648,000  in  revenues  from  Redrock and ITI
during the quarter, and an increase of $1,553,000 in revenues,  or 16%, from the
prior DynTek business over the same period in the prior fiscal year.

Our customers  are  primarily  state and local  government  entities,  primarily
located in New York, Michigan,  Massachusetts, and Florida, as well as mid-sized
corporations in diversified industries located in Southern California.

Twenty-five of our customers  accounted for 54% of our total revenues and 40% of
our total accounts receivable during the quarter.

Although no one customer accounted for 10% or more of our revenues,  the loss of
major  customers  could be  expected  to have a material  adverse  effect on our
financial  condition  during  the short  term and until we are able to  generate
replacement business, and there can be no assurance of obtaining such business.

Six Months ended December 31, 2004 and 2003


                                                                            -22-
<PAGE>

Revenues  for  the  six  month  period  ended  December  31,  2004  amounted  to
approximately $34,785,000,  as compared to revenues of approximately $22,727,000
during  the same  six-month  period for the prior  fiscal  year.  This  increase
resulted  primarily  from  $8,058,000  in  additional  revenues from the Redrock
acquisition, which was effective in August 2004, and $3,395,000 in revenues from
the ITI acquisition, which closed in October 2004.

Gross Profit

Three Months ended December 31, 2004 and 2003

Gross  profit from  product  sales  increased  to 19% in the three  months ended
December 31, 2004 from 11% in the comparable  2003 period,  primarily due to the
sale of  higher  margin  products  in our  solutions,  pass  thru  sales  in the
education  business and higher product margins from the acquisitions.  The gross
profit from service revenue  increased to 22% in the three months ended December
31, 2004 from 15% in the  comparable  2003 period.  The increase in gross profit
margin from services was primarily  related to the higher  service  margins from
acquisitions and sale of higher end service solutions.

Six Months ended December 31, 2004 and 2003

Gross profit during the six months ended December 31, 2004 increased to 20% from
16% in the  comparable  six month  period in the prior year.  Gross  profit from
product sales  increased from 11% to 19%, and gross profit from service  revenue
increased  from 19% to 21%.  These  increases  were primarily due to the sale of
higher margin  products in our solutions and higher margins in product sales and
services from  acquisitions  completed  during the six months ended December 31,
2004.

We  continue to face  competitive  market  pressures  which may impact the gross
profit on our product revenue and service related  revenue,  including price and
gross profit margin  pressures.  We intend to meet the  challenges of aggressive
price reductions and discount  pricing by certain product  suppliers by focusing
our offerings around relatively higher margin practice areas, including security
solutions,  voice over-IP and access infrastructure.  There can be no assurance,
however,  that we will be able to continue to improve profit margins and compete
effectively and profitably in all areas, given the intense competition currently
existing in the IT Service industry.

Selling, General and Administrative

The following  table sets forth for the periods  presented  information  derived
from  our  unaudited   condensed   consolidated   statement  of  operations  (in
thousands):

                                                                            -23-
<PAGE>

<TABLE>
<CAPTION>
                                               For the Three Months ended                         For the Six Months ended
                                                       December 31,                                      December 31,

                                                                     Percentage of                                     Percentage of
                                              Dollars                  Revenues                Dollars                   Revenues
                                         2004        2003           2004      2003        2004         2003           2004      2003
                                       ---------------------------------------------------------------------------------------------
<S>                                    <C>          <C>               <C>      <C>      <C>            <C>              <C>      <C>
Selling(4)                             $ 1,533      $1,817            8%       19%      $ 3,102        3,639            9%       16%

General &
Administrative(4)                        1,219       1,259            6%       12%        2,525        2,113            7%        9%

Depreciation &
Amortization(4)                            710         668            4%        6%        1,404        1,341            4%        6%

Goodwill impairment                      6,026       3,000           30%       31%        6,026        3,000           17%       13%

Other(4)                                   443          59            3%        1%          746          516            3%        2%
                                       -------      ------          ---       ---       -------      -------          ---       ---

Total                                  $ 9,931      $6,803           51%       69%      $13,803       10,609           40%       46%

Selling(5)                                 446         n/a            2%      n/a           703          n/a            2       n/a

General &
Administrative(5)                           21         n/a            *       n/a            82          n/a            *       n/a

Depreciation &
Amortization(5)                             38         n/a            *       n/a           105          n/a            *       n/a

Other(5)                                    --         n/a           --       n/a            11          n/a            *       n/a
                                       -------      ------          ---       ---       -------      -------          ---       ---

Total                                  $   505         n/a            2%      n/a       $   901          n/a            2%      n/a

Selling(6)                                 569         n/a            3%      n/a           569          n/a            2%      n/a

General &
Administrative(6)                          159         n/a            1%      n/a           159          n/a            *       n/a

Depreciation &
Amortization(6)                             33         n/a            1%      n/a            33          n/a            *       n/a

Other(6)                                    --         n/a           --       n/a            --          n/a            *       n/a
                                       -------      ------          ---       ---       -------      -------          ---       ---

Total                                  $   761         n/a            4%      n/a       $   761          n/a            2%      n/a

Totals                                 $11,197      $6,803           57%       69%      $15,465      $10,609           45%       46%
                                       =======      ======          ===       ===       =======      =======          ===       ===
</TABLE>

(4)   Expenses  from  Redrock and  Integration  Technologies  are  excluded  for
      comparative purposes

(5)   Represents  expenses  generated by Redrock  following its  acquisition  on
      August 1, 2004

(6)   Represents  expenses generated by Integration  Technologies  following its
      acquisition on October 1, 2004

*     less than 1%

Three Months ending December 31, 2004 and 2003

Selling,   general  and  administrative   expenses  increased  to  approximately
$3,946,000  in the three  months  ended  December  31,  2004 from  approximately
$3,076,000 in the comparable 2003 period. The increase in expenses was primarily
due to increased  selling  costs on a higher  revenue  base,  and an increase in
general and  administrative  expenses  incurred in connection with  acquisitions
completed during the quarter ended December 31, 2004.  Expressed as a percentage
of net revenues,  selling,  general and administrative expenses decreased to 20%
as compared to 32% in the  comparable  2003 period.  The decrease was  primarily
related to selling  costs on a higher  revenue  base  during the  quarter  ended
December 31, 2004.

Six Months ending December 31, 2004 and 2003

Selling,   general  and  administrative   expenses  increased  to  approximately
$7,140,000  in the  six  months  ended  December  31,  2004  from  approximately
$5,752,000 in the comparable 2003 period. The increase in expenses was primarily
due to increased  selling  costs on a higher  revenue  base,  and an increase in
general and  administrative  expenses  incurred in connection with  acquisitions
completed during the December 31, 2004 period.  Expressed as a percentage of net
revenues,  selling,  general and administrative expenses were 21% as compared to
26% in


                                                                            -24-
<PAGE>

the  comparable  2003 period.  The decrease was primarily  related to additional
selling  costs on a higher  revenue  base  during  the six month  period  ending
December 31, 2004.

Net Income

Three Months ending December 31, 2004 and 2003

Our net loss for the three months ended December 31, 2004 is $7,005,000 compared
to a net loss of  $5,480,000  for the quarter ended  December 31, 2003.  The net
loss in the December  31, 2004  includes  several  non-cash  items,  including a
goodwill  impairment of $6,026,000,  a non-cash  expense for warrants of $43,000
and depreciation  and amortization of $781,000.  Excluding these non-cash items,
the Company had positive  EBITDA of  $204,000.  The increase in the net loss for
the period ended  December 31, 2004 is primarily due to the goodwill  impairment
that the Company recorded in the amount of $6,026,000,  compared to the goodwill
impairment charge of $3,000,000 for the same period in 2003, partially offset by
increases  in our gross profit  margins  during the quarter  ended  December 31,
2004.

The  Company  defines  EBITDA  as net  income  (loss)  before  interest,  taxes,
depreciation and amortization, goodwill impairment charges, and non-cash expense
for securities.  Other companies may calculate EBITDA  differently.  EBITDA is a
non-GAAP measure of profitability and is a widely accepted  financial  indicator
of a company's  ability to service debt, and produce positive cash flow.  EBITDA
should not be considered in isolation, or as an alternative to net income (loss)
or to cash flows from  operating  activities as  determined  in accordance  with
generally accepted accounting  procedures.  The Company believes that EBITDA can
be a useful tool for investors  and others to ascertain the financial  health of
the business,  especially in situations where a company has significant non-cash
operating expenses. EBITDA is widely used in the IT services industry to analyze
company  performance and potential  acquisitions,  and management of the Company
also uses EBITDA as a measure of performance for our regional sales units.

Six Months ending December 31, 2004 and 2003

Our net loss for the six months ended  December 31, 2004 is $6,956,000  compared
to a net loss of $7,177,000  for the six months ended December 31, 2003. The net
loss in the six month  period  ended  December  31,  2004  includes  a  goodwill
impairment of  $6,026,000,  compared to a goodwill  impairment of $3,000,000 for
the  comparable  six-month  period in the prior  year.  The  increased  goodwill
expense is partially  offset by improvements in gross profit from $3,638,000 for
the six months ended  December 31, 2003 to  $6,833,000  for the six month period
ended December 31, 2004. The Company also had a gain on disposal of discontinued
operations of $1,676,000 during the six month period ended December 31, 2004.

Discontinued Operations

Net gain from  discontinued  operations  was $41,000 for the three  months ended
December  31, 2004  compared to a net loss of $30,000 for the three months ended
December 31, 2003. The gain was  attributable to settled claims  associated with
the Virginia non-emergency transportation services contract as described in Note
8 of the condensed consolidated financial statements.

Liquidity and Capital Resources

We measure our  liquidity in a number of ways,  as  summarized  in the following
table:

                                                                            -25-
<PAGE>


                                                   (Dollars in thousands)
                                                  As of                As of
                                            December 31, 2004      June 30, 2004
                                            -----------------      -------------

Cash and cash equivalents                      $    639              $  3,289
Working capital                                $   (987)             $    425
Working capital without giving effect to
  acquisition liability                        $    (37)             $    425

Current ratio                                    0.95:1                1.03:1
Current ratio without giving effect to
  acquisition liability                          0.99:1                1.03:1
Notes payable (current portion)                $    846              $  1,812

Cash and cash equivalents generally consist of cash and money market funds. We
consider all highly liquid investments purchased with maturities of three months
or less to be cash equivalents. Such investments are stated at cost, which
approximates fair value, and are considered cash equivalents for purposes of
reporting cash flows.

During the six months ended December 31, 2004, we used cash of approximately
$2,304,000 in operating activities and $1,539,000 in discontinued operations.

As described in Note 13 to the Condensed Consolidated Financial Statements, in
October 2004, we paid to the former shareholders of Redrock Communications as
part of the purchase price for our acquisition of Redrock Communications an
initial cash payment of $2,500,000. In addition, we are obligated to pay a
deferred cash payment of $500,000 sixty (60) days after the closing date of the
transaction as well as an earn-out cash payment up to a maximum amount of
$1,500,000, based upon Redrock Communications' EBITDA for the period between
July 1, 2004 through June 30, 2005.

As described in Note 13 to the Condensed Consolidated Financial Statements, as
part of the purchase price in our acquisition of Integration Technologies, Inc.,
we paid an initial cash payment of $2,500,000. In addition, we are obligated to
pay an earn-out cash payment up to a maximum amount of $1,500,000, based upon
ITI's EBITDA for the period between July 1, 2004 through June 30, 2005 and an
additional earn-out payment up to a maximum amount of $1,500,000, based upon
ITI's revenue for the period between July 1, 2004 through June 30, 2005.

We had a working capital deficiency of $987,000 as of December 31, 2004. As a
result of the foregoing, our cash decreased by $2,495,000.

On February 10, 2005, the Company entered into a Securities Purchase Agreement
with certain institutional and accredited investors (the "Investors") for the
sale of $7,700,000 of Common Stock, (the "Common Shares") of the Company at a
price of $0.52 per share. In connection with such purchase, the Investors
received warrants (the "Warrants") twenty five percent of the Common Shares. The
Warrants have an exercise price of $0.66 per share, and cannot be exercised for
a period of six months from issuance. The Company has agreed to file a
registration statement underlying the common stock and shares issuable upon
exercise of the Warrants within a period of 30 days of the closing of this
transaction.

On July 31, 2004, our credit facility agreement with an agency of Textron
Financial Corporation ("Textron") was amended and extended for 24 months through
June 30, 2006. The amended Textron facility provides us with a full notification
factoring facility for up to $7,000,000 of


                                                                            -26-
<PAGE>

working capital. Eligible accounts receivable expected to be collected within 90
days are purchased with recourse, less a holdback amount of 15%. Interest is
charged on the outstanding balance at the Prime rate plus 2.0% (7.25% at
December 31, 2004). Additionally, a 0.15% discount fee is charged at the time of
purchase. As of December 31, 2004, the outstanding balance under such credit
facility amounted to $6,160,000.

We may expand the scope of our product and services offerings by pursuing
acquisition candidates with complementary technologies, services or products.
Should we commence such acquisitions, we believe that we would finance the
transactions with a combination of our working capital and the issuance of
additional securities. We may attempt to secure additional funding, including
equity or debt financing where appropriate, for acquisitions. There can be no
assurance, however, that we will be successful in identifying appropriate
acquisition candidates or that, if appropriate candidates are identified, that
we will be successful in obtaining the necessary financing to complete the
acquisitions

In the event of any additional financing, any equity financing would likely
result in dilution to our existing stockholders and any debt financing may
include restrictive covenants. Should we require additional working capital, we
would consider divesting certain of our contracts or other assets that may not
be critical to the business.

Contractual Obligations

<TABLE>
<CAPTION>
                                                                  Payments due by period
                                                                       (in thousands)
                                                                Less                              More
                                                                than 1                  3-5       than 5
                                                     Total       year     1-3 years     years     years
<S>                                                  <C>         <C>         <C>
      Contractual Obligations
      Long-Term Debt Obligations                     11,087      1,263       9,824        --        --
      Operating Lease Obligations                     2,551      1,078         902       571        --
                                                    -------     ------     -------      ----      ----
      Total                                         $13,638     $2,341     $10,726      $571        --
                                                    =======     ======     =======      ====      ====
</TABLE>

Recent Accounting Pronouncements

      In January 2003, Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," provides guidance for identifying a controlling interest
in a variable interest entity ("VIE") established by means other than voting
interest. FIN 46 also required consolidation of a VIE by an enterprise that
holds such controlling interest. In December 2003, the FASB completed its
deliberations regarding the proposed modifications to FIN No., 46 and issued
Interpretation Number 46R, "Consolidation of Variable Interest Entities - an
Interpretation of ARB 51" ("FIN No. 46 R"). The decisions reached included a
deferral of the effective date and provisions for additional scope exceptions
for certain types of variable interests. Application of FIN No. 46R is required
in financial statements of public entities that have interests in VIEs or
potential VIEs commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public small business issuers'
entities is required in all interim and annual financial statements for periods
ending after December 15, 2004.

      The adoption of this pronouncement is not expected to have material effect
on the Company's financial statements.

      In December 2004, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 123R "Share Based Payment". This statement is a revision
of SFAS Statement No. 123, "Accounting for Stock-Based Compensation" and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance.


                                                                            -27-
<PAGE>

SFAS 123R addresses all forms of share based payment ("SBP") awards including
shares issued under employee stock purchase plans, stock options, restricted
stock and stock appreciation rights. Under SFAS 123R, SBP awards result in a
cost that will be measured at fair value on the awards' grant date, based on the
estimated number of awards that are expected to vest that will result in a
charge to operations. This statement is effective for public entities that file
as small business issuers--as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005.

      The Company is currently in the process of evaluating the effect that the
adoption of this pronouncement may have on its financial statements.

      In December 2004, the FASB issued Statement of Financial Accounting
Standard ("SFAS") no. 153 "Exchanges of Nonmonetary Assets". This Statement
amends Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The provisions of
this Statement which is to be applied prospectively, are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Earlier application is permitted for nonmonetary asset exchanges occurring
in fiscal periods beginning after December 16, 2004. The provisions of this
Statement should be applied prospectively.

      The adoption of this pronouncement is not expected to have material effect
on the Company's financial statements.

      EITF Issue 04-8, "The Effect of Contingently Convertible Instruments on
Diluted Earnings per Share." The EITF reached a consensus that contingently
convertible instruments, such as contingently convertible debt, contingently
convertible preferred stock, and other such securities should be included in
diluted earnings per share (if dilutive) regardless of whether the market price
trigger has been met. The consensus is effective for reporting periods ending
after December 15, 2004.

      The adoption of this pronouncement is not expected to have material effect
on the Company's financial statements.

Critical Accounting Policies and Estimates

The Company's financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. Critical accounting policies for us include
revenue recognition, impairment of investment securities, impairment of
goodwill, accounting for contingencies and accounting for discontinued
operations.

Basis of Presentation. During the fiscal year ended June 30, 2003, the Company
adopted a plan to sell our transportation brokerage operations. The operations
are accounted for as a discontinued operation, and, accordingly, amounts in the
consolidated financial statements and related notes for all periods presented
reflect discontinued operation accounting.

Revenue Recognition. The Company's policy follows the guidance from SEC Staff
Accounting Bulletin ("SAB") 101 "Revenue Recognition in Financial Statements".
SAB 101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements. The Company recognizes revenues when persuasive
evidence of an arrangement exists, the


                                                                            -28-
<PAGE>

product has been shipped or the services have been provided to the client, the
sales price is fixed or determinable, and collectibility is reasonably assured.

Generally, information technology revenues are recognized as services are
provided to the client. Revenues from annual maintenance contracts services
provided by the Company are deferred and recognized ratably over the maintenance
period. Revenues from hardware sales are recognized upon delivery to the client
and when uncertainties regarding customer acceptance have expired. Revenues for
business process outsourcing services are recognized as services are rendered,
normally invoiced on a monthly basis. Revenues on unit-price contracts are
recognized at the contractual selling prices of work completed and accepted by
the client. Revenues on time and material contracts are recognized at the
contractual rates as the labor hours and direct expenses are incurred.

Collectibility of Receivables. A considerable amount of judgment is required to
assess the ultimate realization of receivables, including assessing the
probability of collection and the current credit worthiness of our clients.
Probability of collection is based upon the assessment of the client's financial
condition through the review of its current financial statements or credit
reports.

SFAS 142, Goodwill and Other Intangible Assets, requires that goodwill be tested
for impairment at the reporting unit level (operating segment or one level below
an operating segment) on an annual basis (June 30th for DynTek) and between
annual tests in certain circumstances. Application of the goodwill impairment
test requires judgment, including the identification of reporting units,
assigning assets and liabilities to reporting units, assigning goodwill to
reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value and/or goodwill impairment for each
reporting unit.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk associated with adverse changes in financial and commodity market
prices and rates could impact our financial position, operating results or cash
flows. We are exposed to market risk due to changes in interest rates such as
the prime rate and LIBOR. This exposure is directly related to our normal
operating and funding activities. Historically, and as of December 31, 2004, we
have not used derivative instruments or engaged in hedging activities.

The Textron credit facility exposes the Company to the risk of earnings or cash
flow loss due to changes in market interest rates. The Textron credit facility
requires interest to be paid at 2.0% over the prime rate. The Laurus Funds
convertible secured term note ($6,649,999 on January 31, 2005), exposes the
Company to similar risks, and it requires interest to be paid at 1% over the
prime rate. The table below provides information on the Textron credit facility
and the Laurus Funds note as of December 31, 2004.

                                                               Weighted Average
                                        Principal Balance        Interest Rate
                                        -----------------      ----------------

Factoring credit facility                  $ 6,160,000               6.5%

Secured Convertible Notes                  $ 4,438,775               9.0%

Secured Convertible Laurus Note            $ 6,649,000               5.5%


                                                                            -29-
<PAGE>

ITEM 4. CONTROLS AND PROCEDURES

      An evaluation as of the end of the period covered by this quarterly report
was performed under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
for the effectiveness of the design and operation of the Company's disclosure
controls and procedures as of December 31, 2004. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer, have concluded
that the Company's disclosure controls and procedures are effective to ensure
that the information required to be disclosed in the Company filings or which it
submits under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. There have been no changes in the Company's
internal controls over financial reporting or in other factors identified in
this evaluation that occurred during the three months ended December 31, 2004
that have materially affected, or are reasonably materially likely to affect,
the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

COMMONWEALTH OF VIRGINIA

      Effective December 15, 2002, the Company entered into a mutual Settlement
Agreement (the "Settlement Agreement") to cancel a contract (the "Transportation
Contract") in which it provided non-emergency transportation brokerage services
through third party providers (the "Transportation Vendors") to the Commonwealth
of Virginia ("Virginia"). Under the terms of the Settlement Agreement, the
Company agreed to make certain payments due to the Transportation Vendors under
an agreed-upon schedule through June 2003. At the time the Company entered into
the Transportation Contract, DynCorp, Inc. ("Dyncorp") posted a $2,400,000 bond
(the "Bond") to guarantee its financial performance under the contract in favor
of Virginia. Dyncorp also indemnified the Company for any potential losses
(obligations) in excess of $2,400,000 (the "Bonded Amount"). Certain claims of
the Transportation Vendors caused the Bond to be called, initiating a process of
disbursing the Bonded Amount to Transportation Vendors with verifiable claims.
The bonding company filed an interpleader action (the "Interpleader Matter") to
distribute the Bonded Amount on July 22, 2003. In addition to making claims
against the Bond in the Interpleader Matter, many of the Transportation Vendors
initiated separate claims for payment against the Company both as part of and
separate from the Interpleader Matter. The Company provided DynCorp with a
limited release of its indemnity for aggregate claims in excess of the Bonded
Amount. Accordingly, the Company assumed the liability for valid claims in
excess of the Bonded Amount.

      The Company entered into settlement agreements with a number of the
Transportation Vendors and, on December 1, 2004, the Court entered an Order
granting the Company's Motion to Approve Settlements and to Authorize
Disbursement of Interpleader Funds (the "Order"). Pursuant to the Order, the
Bonded Amount was transferred to the Transportation Vendors by DynTek pursuant
to the terms of various settlement agreements. All claims in the Interpleader
Matter against the Bond and/or against the Company, except for six, have been
settled and paid in full as of December 31, 2004. The Transportation Vendors
holding these settled and paid claims have been dismissed from the Interpleader
Matter and pending state court lawsuits, if any, have also been dismissed. Of
the six unpaid claims, five are settled and will be paid in full by June 1,
2005. These remaining Transportation Vendors will be dismissed from the
Interpleader Matter as their settlements are paid.

      The Company is still in negotiations and is proceeding with litigation
with the one remaining Transportation Vendor that has not entered into a
settlement agreement with the Company. A portion of the Bonded Amount is being
held in escrow for this Transportation Vendor, if necessary. The Company records
provisions for the estimated amount of any settlement or judgment in excess of
amount covered by the portion of the Bonded Amount being


                                                                            -30-
<PAGE>

held in escrow. The Company believes its provisions are adequate but is unable
to predict the outcome of the remaining unsettled claim.

ITEM 6. EXHIBITS

      (a)   Exhibits.

            10.10 Service Agreement between DynTek Inc. and DC Asset Management
            dated September 1, 2004

            10.11 Form of warrant issued by DynTek Inc. to DC Asset Management
            pursuant to the Service Agreement dated September 1, 2004

            10.12 Agreement and Plan of Merger by and amount DynTek Inc. ITI
            Acquisition Corp., Integration Technologies, Inc.,the Shareholders
            of Integration Technologies, Inc. and Casper Zublin, Jr. as the
            Shareholder Representative dated as of October 14, 2004

            10.13 Amended and Restated Convertible Note dated November 15, 2004

            10.14 Form of warrant issued by DynTek Inc. issued to Laurus
            pursuant to the Amended and Restated Convertible Note dated November
            15, 2004

            10.15 Registration rights agreement pursuant to the Amended and
            Restated Convertible Note dated November 15, 2004

            10.16 Form of stock option agreement pursuant to the 2001 DynTek
            Stock Option Plan

            31.1 Certification of Chief Executive Officer Pursuant to Section
            302 of the Sarbanes-Oxley Act of 2002.

            31.2 Certification of Chief Financial Officer Pursuant to Section
            302 of the Sarbanes-Oxley Act of 2002.

            32.1 Certification of Chief Executive Officer Pursuant to Section
            906 of the Sarbanes-Oxley Act of 2002.

            32.2 Certification of Chief Financial Officer Pursuant to Section
            302 of the Sarbanes- Oxley Act of 2002.


                                                                            -31-
<PAGE>

                                    SIGNATURE

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

                                                  DYNTEK, INC.

                                                  By: /s/ Robert I. Webber
                                                  ------------------------
                                                  Robert I. Webber
                                                  Chief Financial Officer, Chief
                                                  Accounting Officer, Executive
                                                  Vice President and Secretary

                                                  Date: February 14, 2005


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