<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
(Mark One)
[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                    FOR THE FISCAL YEAR ENDED MARCH 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: 0-28560

                                  NETGURU, INC.
                 (Name of small business issuer in its charter)

               DELAWARE                                  22-2356861
  (State or other jurisdiction of           (I.R.S. Employer Identification No.)
   incorporation or organization)

22700 SAVI RANCH PARKWAY, YORBA LINDA, CA                  92887
(Address of principal executive offices)                 (Zip Code)

                                 (714) 974-2500
                (Issuer's telephone number, including area code)

              Securities registered under Section 12(b) of the Act:
     Title of each class                  Name of exchange on which registered
             NONE                                         NONE

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

                          COMMON STOCK, $0.01 PAR VALUE
                                (Title of Class)

Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year: $17,698,000.

The aggregate market value of the voting common equity held by non-affiliates of
the registrant computed by reference to the closing sale price of the common
equity on June 7, 2004 was $18,032,501. The registrant has no outstanding
non-voting common equity.

The number of shares outstanding of the registrant's only class of common stock,
$0.01 par value was 18,812,154 on June 7, 2004.

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      NONE

Transitional Small Business Disclosure Format (check one):    Yes [ ]  No [X]





<PAGE>

                                TABLE OF CONTENTS

                                     PART I
                                                                            PAGE

Item 1.   Description of Business............................................. 3

Item 2.   Description of Property.............................................12

Item 3.   Legal Proceedings...................................................13

Item 4.   Submission of Matters to a Vote of Security Holders.................13

                                     PART II

Item 5.   Market for Common Equity, Related Stockholder Matters and Small
          Business Issuer Purchases of Equity Securities......................14

Item 6.   Management's Discussion and Analysis or Plan of Operation...........15

Item 7.   Financial Statements................................................37

Item 8.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure................................................37

Item 8A.  Controls and Procedures.............................................38

                                    PART III

Item 9.   Directors and Executive Officers of the Registrant..................39

Item 10.  Executive Compensation..............................................42

Item 11.  Security Ownership of Certain Beneficial Owners and Management
          and Related Stockholder Matters.....................................45

Item 12.  Certain Relationships and Related Transactions......................49

Item 13.  Exhibits, List and Reports on Form 8-K..............................51

Item 14.  Principal Accountant Fees and Services..............................55

Index To Consolidated Financial Statements...................................F-1

Signatures....................................................................56

Index To Exhibits Filed With This Form 10-KSB.................................57

                                       2





<PAGE>

                                  NETGURU, INC.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

OVERVIEW

         We were incorporated in 1981 under the name Research Engineers, Inc.,
and changed our name to netGuru, Inc. in 2000. We are a Delaware corporation.
Our primary business offerings are:

         o    Structural and civil engineering and collaborative software
              products and services for businesses worldwide;

         o    Embedded information technology, or IT, services (including
              engineering business process outsourcing or EBPO); and

         o    Web-based telecommunications services (including long-distance
              communication services that include call termination services and
              prepaid phone cards).

PRODUCTS AND SERVICES

     ENGINEERING AND COLLABORATIVE SOFTWARE PRODUCTS AND SERVICES

         Over the past 23 years, we have continuously improved our core
competency and established a strong brand for our engineering software within
the architectural/engineering/construction, or A/E/C, markets worldwide. Our
engineering software is primarily used for the specific calculations required
for the design of civil and structural engineering projects. We have established
our leadership position in the engineering software industry by being the
first-to-market for personal computer-, or PC-, based engineering software and
by being the first mover to penetrate foreign markets. Currently, 46 of the 50
largest engineering design firms in the world use our engineering software. We
have 19,000 customers, with over 47,000 installations and approximately 160,000
users in 85 countries.

         Our stand-alone and network-based engineering software products provide
fully integrated, easy-to-use design automation and analysis solutions for use
by engineering analysis and design professionals worldwide. We have developed a
comprehensive line of structural, mechanical, civil and process/piping
engineering software products, including our STAAD.Pro(R) family of products,
STAAD.ETC, STAAD.FOUNDATION, ADLPipe and STARDYNE. Our products assist engineers
in performing mission-critical functions, including analysis and design of
industrial, commercial, transportation and utility structures, pipelines,
machinery, automotive and aerospace products. Projects that have been analyzed
and designed using STAAD include the chunnel (connecting England and France),
the MCI Stadium in Washington D.C., the Philadelphia Airport tower and thousands
of other buildings and structures.

         All of our engineering software products use our proprietary
Windows-based graphics engine that provides a modern graphics environment for
model development, visualization/verification and drawing generation. These
products are also designed for use with third-party computer aided design, or
CAD, drafting systems, including Tekla, AutoCAD and MicroStation. Our structural
and civil engineering products provide eight international language options and
twelve local design codes required by our worldwide markets.

                                       3





<PAGE>

         We address the various facets of the engineering design chain from the
software that engineers use to design infrastructure to managing all the
documents related to a specific design project. We partner with other software
vendors offering complementary solutions within the structural engineering
community to offer a complete solution to our customers.

         In April 2000, we acquired Allegria Software, Inc., a developer of
Web-based document management and collaborative tools for engineers and
manufacturers, and we added Allegria Software's eReview and ForReview
collaborative products to our offerings. Our collaborative software innovations
are changing the way engineers conduct their day-to-day business. Once installed
at a host location, our eReview collaborative software enables a host and other
participants to engage in real-time Web-based conferencing and document sharing
anywhere and anytime in over 150 widely used document formats. eReview allows
our customers to bridge physical distances in their global business environments
by enabling decision makers to communicate without costly and time consuming
travel to geographically dispersed locations. Complementing eReview, our
WebWorks software provides comprehensive project-based document and team
management functions. Our collaborative products can be implemented as
stand-alone enterprise solutions or as an integrated system working in concert
with our other products. Due to our engineering experience, our collaborative
software is ideally suited for multi-faceted A/E/C projects. However, our
collaborative software also has direct application for many other industries. We
have also developed workflow management solutions by embedding our collaborative
software in the software of our major original equipment manufacturer, or OEM,
partners, such as FileNet Corporation, who then market the combined solution to
their customers.

         We generate revenues from software licensing fees and annual support
fees established at the time of the initial contract. Suggested list prices
range from approximately $850 to $7,000 for most of our engineering software
products. Suggested list prices range up to $1,000 per license for eReview and
related products. Most of our customers who purchase eReview buy a site license
to cover the entire company's requirements. These site licenses vary in price
from $100,000 to $750,000. Since we have established a solid engineering
customer base through our analytical design software, we believe we possess the
necessary credibility to offer our collaborative solutions across our customer's
enterprise.

     IT SERVICES

         We are an IT total solutions provider, or TSP. Our IT services division
has provided contracted IT services and software solutions to a wide variety of
vertical industry markets (that is, a particular industry or group of
enterprises to whom similar goods and services can be sold), with an emphasis on
engineering, aerospace, e-commerce, semiconductors, finance, education,
insurance, manufacturing, distribution, retail, government, pharmaceuticals and
healthcare. As a TSP, we provide our business-to-business clients with services
that involve integration of multiple existing third party software. We also
offer value-added IT services by incorporating and customizing our proprietary
collaborative software technology and/or our engineering software into
enterprise solutions designed to accomplish our clients' current objectives and
grow with our clients' enterprises. We specialize in providing IT services that
involve mission critical applications that deliver round-the-clock performance.

         We offer our IT services through our service office located in Boston,
Massachusetts. We provide IT services both on a project basis and through
on-site consulting. When we provide IT services on a project basis, we assume
full project management responsibility. Typically, projects are of a fixed
duration and are charged at a fixed price. When we provide on-site consulting
services, we bill our clients on a time and materials basis.

                                       4





<PAGE>

         Our IT services operations include EBPO, where we offer full
engineering technical support to other non-competing engineering software
companies, as well as to steel detailing and fabrication companies in North
America a qualified labor pool of experienced engineers and detailers at our
wholly-owned subsidiary in India to expedite the production of erection drawings
necessary to construct a structure. This allows our customers to extend their
organizational capabilities and capacity and in turn provides a faster
turnaround to their customers while controlling their costs. The production of
erection drawings is the ultimate phase in the engineering design chain whereas
the analytical products we offer (such as STAAD.Pro) are more upstream tasks.

         We provide IT services to customers in the United Kingdom, France and
Germany in addition to customers in North America. We strive to contain costs
while remaining competitive by utilizing our production centers in India to
support our IT services business.

     WEB-BASED TELECOMMUNICATIONS SERVICES

         Our Web-based telecommunications services comprise long-distance
communication services that include call termination services and prepaid phone
cards targeted toward certain niche markets.

         We offer global long-distance call termination services to
communication service providers through our gateway in the U.S. by traditional
delivery methods such as international leased lines and satellite access. Our
long-distance call termination services involve a number of steps. We collect
voice traffic from long-distance service providers. We convert analog traffic to
digital traffic where necessary using software licensed from a third-party. We
compress the traffic and carry it on our communications infrastructure. We then
drop off the traffic at a point where another service provider picks up the
traffic and carries it to its destination or to another service provider. We
generate our revenues from the long-distance service provider from whom we
receive the traffic, and we pay the service provider to whom we drop off the
traffic. As is typical of other small long-distance call termination service
providers, we do not have long-term commitments with third parties to purchase
or sell these communication services.

         Our managed communications network is designed to be a premium
communications and data network built with carrier-grade communications switches
and equipment linked by a combination of the Internet, international leased
lines and satellite access. We monitor and control our communications network
round-the-clock to deliver high quality voice communications. In the U.S., our
communications gateway and switch is located in a leased communications facility
in Los Angeles, California.

         We sell prepaid phone cards through our automated proprietary Website.
The phone cards are available for both domestic and international long-distance
calls.

         Most phone cards are paid for by credit card. Long distance call
termination services are paid for by wire transfer or check within one or two
weeks after we provide the service.

         Although our communications network has generated and, we believe, will
continue to generate revenues from external customers, it will also serve to
facilitate our EBPO services in coming years. Our communications network and an
international private leased circuit will provide a point-to-point link, with
the appropriate bandwidth, between our engineers in India, our offices in the
U.S. and our customers in North America.

CUSTOMERS

     ENGINEERING AND COLLABORATIVE SOFTWARE PRODUCTS AND SERVICES

         We currently license our software products to more than 19,000
companies accounting for over 47,000 software installations. Based on our
customer surveys, we estimate that there are approximately 160,000 users at
these installations worldwide. Our engineering software customers include:

                                       5





<PAGE>

              Jacobs Engineering             British Telecom
              Exxon Corporation              URS/Griner
              General Dynamics               Jet Propulsion Laboratories
              NASA                           US Army Corps of Engineers

              Siemens AG                     Toyo Engineering
              Lockwood Greene                Washington Group International
              Parsons Brinckerhoff           Mitsubishi

         We have implemented our eReview solution for large enterprise customers
in the manufacturing and A/E/C markets. Our eReview customers include:

              Agilent Technologies           Astley-Gilbert
              Case New Holland               Constructware
              Ebuild, Canada                 Tejari-FZ, LLC.
              United Defense                 LG Engineering & Construction Corp.
              Integrated Technical Software  MatrixOne
              Fuji-Xerox                     Paxonix
              Service Point                  Bibbs and Associates

     IT SERVICES

         During the fiscal year ended March 31, 2004, we provided IT consulting
services to over 40 corporate customers in the U.S., including Course
Technology, Inc., Applibiz, Inc., Deutsche Bank, and Sun Microsystems. Net
revenues from Course Technology, Inc. represented more than 15.5% of our net
revenues from IT services.

     WEB-BASED TELECOMMUNICATIONS SERVICES

         We provide our long-distance call termination services to companies
that offer similar services. We offer our prepaid phone card products to
consumers for retail consumption.

SALES AND MARKETING

     ENGINEERING AND COLLABORATIVE SOFTWARE PRODUCTS AND SERVICES

         We market and sell our engineering analysis and design software
products domestically and internationally through our network of branch offices,
subsidiaries and independent sales representatives in the U.S., United Kingdom,
Germany, Japan, France, Scandinavia, Australia, China, Singapore, India,
Indonesia, Korea, Thailand, Malaysia, South Africa, Mexico, Russia, the Middle
East and Latin America. We also market and sell our engineering software
products online through our engineering portal, WEB4ENGINEERS.COM. We use print
advertising, trade show participation and direct mail campaigns to generate
sales leads. In response to product inquiries generated through these
activities, and through our engineering portal, we create elaborate
evaluation/demonstration software packages, complete with full user manuals and
working programs. Our telesales professionals and international distributors
close the sales.

         We utilize this sales approach in connection with the marketing and
sales of product enhancements, upgrades and new products to current customers.
We also generate awareness for our products by posting banners on the Web pages
of professional engineering societies, newsgroups and similar forums on the
Internet. Our Internet strategy includes providing online product demonstrations
and online use of our products for discrete projects.

                                       6





<PAGE>

         Our strategy of partnering with OEM engineering software companies in
other vertical niches also generates a recurring revenue channel. Because of
changes in local and national building codes due to recent earthquakes or
terrorist activities, many of our customers are upgrading to the latest version
of our product, which reflects these changes.

         We market our eReview collaborative software both domestically and
internationally using direct marketing through our network office branches,
subsidiaries and reseller channels. We use print advertising, telemarketing,
e-mail and direct mail campaigns as our primary lead generation activities for
eReview. We intend to work more closely with OEM partners in the document
management space in the coming years.

     IT SERVICES

          We market our IT services offerings primarily through industry-focused
print advertisements, direct mailings to targeted prospects and online on our
Internet portals. We market and sell our IT services on a direct basis and
through customer referrals.

     WEB-BASED TELECOMMUNICATIONS SERVICES

         Our marketing efforts relating to Web-based telecommunications services
have been significantly reduced. Our marketing resources are now being focused
on our other divisions. We continue to maintain our current customer base, and
we service direct referrals from our existing customers.

CUSTOMER SERVICE AND SUPPORT

     ENGINEERING AND COLLABORATIVE SOFTWARE PRODUCTS AND SERVICES

         Purchasers of our engineering software products typically receive 15
days of warranty and a multimedia training CD-ROM. Following the 15-day period,
customers may elect to purchase ongoing support either on a one-year contract
basis or on an as-used fee basis. We also provide "gold level" support where our
engineering software customers who need a higher level of mission critical
technical support are given priority service. To provide quality technical
support worldwide, we employ engineers and software specialists and maintain
product support centers in North America, Europe, the Asia/Pacific region and
India. In addition, through our Website, we provide e-mail technical support to
users of these products.

         We provide full technical support to our collaborative software clients
by phone, fax, e-mail, remote diagnostics and desktop application sharing making
use of our own technology. Each support contract is customized to meet the
individual client's needs.

     IT SERVICES

         Our IT services are primarily project-based and time and
materials-based technology consulting services that do not generally involve
on-going customer service and support. Our IT services group can provide, on a
project-basis, on-going high quality support as contracted by the customer on a
24x7basis to meet the customer's information management needs from our facility
in Boston, Massachusetts.

                                       7





<PAGE>

     WEB-BASED TELECOMMUNICATIONS SERVICES

         Technical customer service and support services are generally not
required for these activities.

RESEARCH AND DEVELOPMENT

         Our current research and development efforts are focused on
collaborative technologies and enhancements to our current engineering software
product offerings. Our research and development efforts with respect to our
collaborative technologies have been focused on:

         o    enhancing response times in application performance;
         o    incorporating and adding the viewing of new two-dimensional and
              three-dimensional file formats (including CAD formats);
         o    building open architecture and interfaces for easy migration and
              integration of legacy systems;
         o    customizing and integrating our product into large systems
              integrator applications for OEM opportunities;
         o    addressing the needs of new and diverse international markets; and
         o    localizing the product by translating our application into
              regional languages.

We continue to enhance our engineering software with our revolutionary
"OpenSTAAD" architecture where we use an open application programming interface
that allows for tight integration with complementary third-party applications,
customized look and feel for graphical user interface, and other
functionalities.

         We offer a broad range of products and services designed to keep pace
with the latest technological advances and address the increasingly
sophisticated needs of our customers in all of our targeted markets. We
continually focus on expanding our existing engineering and collaborative
software product and service offerings with acquired, upgraded and new products
and services, and actively seek opportunities to expand these product and
service offerings through acquisitions and strategic alliances.

         Our research and development group includes specialists in engineering
and collaborative software, IT services, Internet and telecommunications. We
have established research and development facilities in the U.S., India and the
United Kingdom. Our offshore research and development facilities in India are
used to develop content and technologies for our Internet portal, to provide IT
services resources for our projects in the U.S., and to develop and maintain
local engineering software design codes. These projects require significant
man-hours. Due to the availability of skilled technical resources in India at a
fraction of the cost for comparable personnel in the U.S., these projects can be
completed in a cost-effective manner. We believe our offshore technical
resources provide a significant competitive advantage.

         To ensure our products meet the requirements of our users and that
our software development, validation and maintenance processes meet applicable
regulatory guidelines on software development, we have established an extensive
quality assurance and quality control process. Our engineering software adheres
to the Nuclear Regulatory Commission's stringent quality guidelines expressed in
the Code of Federal Regulations at 10 CFR 50, "Domestic Licensing of Production
and Utilization Facilities" and 10 CFR 21, "Reporting of Defects and
Noncompliance."

         Research and development expenses were approximately $2,069,000 and
$2,092,000 during the fiscal years ended March 31, 2004 and 2003, respectively.
The costs of these activities are not borne directly by our customers.

                                       8





<PAGE>

COMPETITION

         We face significant competition within our target markets: for
engineering software products and services for the worldwide engineering
community; Internet-based IT services for businesses worldwide; and traditional
telephony services to and from global destinations. We expect that competition
will intensify as the market for Internet-based solutions aimed at the global
community develops and expands. We compete primarily based on service,
reliability and customer support, and to a lesser extent on price, ease of use
and content.

         In general, we face significant competition in each of our business
segments. Many of our existing and potential competitors have competitive
advantages over us, including, but not limited to, the following:

         o    longer operating histories;
         o    greater name recognition;
         o    larger customer base;
         o    significantly greater financial, technical and other resources;
              and
         o    broader service and/or product offerings.

         To be competitive, we must be able to keep up with technological
advances and continue to enhance our products and services. We may not be able
to compete successfully in one or more of our target markets. Our inability to
do so could adversely impact our business, financial condition or results of
operations by decreasing our market share and the prices we receive for our
products and services, which in turn would decrease our revenues and profit
margins.

     ENGINEERING AND COLLABORATIVE SOFTWARE PRODUCTS AND SERVICES

         The engineering software industry is intensely competitive and rapidly
changing. A number of companies offer products that target the same markets as
our products. In addition, our products occasionally compete with analysis tools
that are developed internally by engineering firms. We believe that we have
significant competitive advantages in the industry based on our:

         o    high caliber development effort;
         o    demonstrated understanding of the needs of the engineering design
              industry;
         o    ability to attract and retain customers;
         o    capability to develop, acquire and implement emerging
              technologies;
         o    ability to provide technical support; and
         o    demonstrated capability to provide attractive price points for our
              products.

         There can be no assurance, however, that our competitors will not
develop products that are superior or achieve greater market acceptance compared
to ours or that we will be able to compete successfully in these markets. Our
competitors to our engineering software products and services include Computers
and Structures, Inc., RISA Technologies, RAM International, GT Strudl, and CSC
Computers and Structures Corporation, to name a few. Over the past twelve years,
industry research has placed us among the top providers of general-purpose
structural engineering analysis and design software. We believe we are among the
leaders in this marketplace due to our technical innovations, such as the use of
open architecture (enabling an engineer to seamlessly integrate our software
with other applications such as AutoCAD, MicroStation and Excel) and the vast

                                       9





<PAGE>

amount of international design codes we support. We are among the top revenue
generators in this marketplace. We are also a leader in terms of worldwide
market penetration since we believe we were the first to incorporate
international design codes into our software.

         The collaborative software and services business is highly competitive
and changes rapidly. Our collaborative software and services face competition
from WebEx, eRoom, Cimmetry, Informative Graphics and PlaceWare. We compete
based on our technical expertise. We believe we are among the top providers of
collaborative software and services in that we were the first to bridge the gap
between two-dimensional and three-dimensional desktop viewing applications and
generic Web-based conferencing technologies.

     IT SERVICES

         Our competitors in the IT consulting services industry include IT
services companies such as Cognizant Technology Solutions and Scient
Corporation, other technology companies and in-house management information
services departments. We believe that the use of our proprietary collaborative
software to add value to our IT services may provide us a competitive advantage
over some of our competition. We believe we are among the smaller providers of
IT services in terms of revenue and size of operations.

     WEB-BASED TELECOMMUNICATIONS SERVICES

         In our long-distance calling card telephony and our call termination
services businesses, we face competition primarily from international
long-distance telecommunications carriers and other wholesale carriers, such as
Startec Global Communication and Fusion Technologies.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

         Our intellectual property rights are an important aspect of our
business. We rely primarily on a combination of contract, copyright, trademark
and trade secret laws, domain registration, license and confidentiality
agreements and software security measures to protect our proprietary technology.
We require all of our employees and other parties with access to our
confidential information to execute agreements prohibiting the unauthorized use
or disclosure of our technology. In addition, we periodically review our
proprietary technology for patentability, although we currently do not have any
patents. Despite these precautions and even though we have experienced only one
misappropriation of our technology over our 23-year history, we believe that
existing laws provide limited protection for our technology and that it may be
possible for a third party to misappropriate our technology or to independently
develop similar technology.

         Our protective measures may be even less effective in the emerging
Internet law field. Internet law is a relatively new and developing area of the
law, and online contracting, privacy and liability issues, among others, are
still being resolved. This lack of certainty is further exacerbated in India,
where the use of the Internet is less evolved than in the U.S. In addition,
effective copyright and trade secret protection may not be available in every
jurisdiction where we distribute our products, particularly in foreign countries
where the laws generally offer no protection or less protection than the laws of
the U.S.

         The laws of India and other foreign countries in which we operate do
not protect intellectual property rights to the same extent as those of the U.S.
For example, India's statutory laws do not protect service marks. Because a
significant portion of our sales of products and services comes from
international markets, this lack of copyright and trade secret protection could
adversely affect our business and results of operations if a third party were
successful in copying our products and services and marketing products and
services similar to ours.

                                       10





<PAGE>

         We distribute our engineering software products under "shrink-wrap"
software license agreements, which grant end-users non-exclusive licenses to use
(rather than ownership of) our products and which contain various provisions
intended to protect our ownership and confidentiality of the underlying
technology. Shrink-wrap licenses, which are not signed by the end-user, may be
unenforceable in certain jurisdictions. In addition to shrink wrap licenses, our
software is distributed with a third party "hardware lock," which is a security
device that is attached to the central processing unit to prevent unauthorized
access to licensed software. Our trademarks include NETGURU.COM(R),
ForReview(R), STAAD.etc.(R), ADLPIPE(R), STAAD(R), STAAD/Pro(R)and
CIVILMASTER(R), among others. We may not be able to secure adequate protection
for our trademarks in the U.S. and in the other countries in which we do
business.

GOVERNMENT REGULATION

     REGULATION OF ENGINEERING SOFTWARE SERVICES

         Regulations promulgated by the Nuclear Regulatory Commission, or NRC,
pursuant to the Atomic Energy Act of 1954, as amended (68 Stat. 919), and Title
II of the Energy Reorganization Act of 1974 (88 Stat. 1242) govern the
engineering software services we provide to all persons/entities who provide
components, equipment, materials, or other goods or services to any one who is
involved in providing services to nuclear production and utilization facilities.
A utilization facility is any nuclear reactor other than one designed or used
primarily for the formation of plutonium or U-233. Our engineering software
division is also governed by the federal regulations that require us to
immediately notify the NRC of any failure of our products to comply with the
Atomic Energy Act of 1954, as amended, relating to substantial safety hazards.

     REGULATION OF THE INTERNET

         The U.S. Congress has passed or is considering passing legislation
regulating certain aspects of the Internet, including online content, copyright
infringement, user privacy, taxation, access charges, digital signatures and
liability for third-party activities. The European Union also has enacted
several directives relating to the Internet, including directives that address
the use of personal data, e-commerce activities, security, commercial piracy,
consumer protection and taxation of e-commerce transactions. Various states in
the U.S. have adopted and/or are considering adopting Internet-related
legislation and regulations, including legislation regarding taxation of
Internet-based transactions, user privacy, digital signatures and liability for
third-party activities. Governmental authorities in the U.S. and abroad are
considering other legislative and regulatory proposals to further regulate the
Internet. Areas of potential regulation include taxation, user privacy, libel,
pricing, quality of products and services and intellectual property ownership.
We cannot predict what new laws will be enacted, or how courts will interpret
existing and new laws. Therefore, we are uncertain as to how new laws or the
application of existing laws will affect our business. In addition, our business
may be indirectly affected by legislation that affects the ability of our
customers to engage in e-commerce activities or otherwise discourages customers
from engaging in e-commerce activities. Increased regulation of the Internet may
decrease the growth in the use of the Internet, which could, among other things,
decrease the demand for our products and services and increase our cost of doing
business.

     REGULATION OF COMMUNICATIONS SERVICES

         The Communications Act of 1934 and Federal Communications Commission,
or FCC, regulations govern the international long-distance telecommunications
services that we provide over circuit-switched networks. The FCC distinguishes
providers of long-distance services as either "dominant" or "non-dominant." We
are classified by the FCC as a non-dominant carrier and are regulated as such.
The FCC generally does not exercise direct oversight over non-dominant carriers,
although it has the statutory power to do so. While the FCC does not regulate

                                       11





<PAGE>

the specific rates that we charge for our international long-distance services,
non-dominant carriers are required to offer such services under rates, terms and
conditions that are just, reasonable and not unreasonably discriminatory. The
FCC has jurisdiction to act upon complaints filed by third parties or brought on
the FCC's own motion against any common carrier, including non-dominant
carriers, for failure to comply with statutory obligations.

         In the past, all non-dominant carriers were required to file tariffs
listing the rates, terms and conditions of service. That requirement was
eliminated by virtue of a decision from a federal appellate court that upheld
the right of the FCC to forbear from requiring tariff filings. The FCC also has
the authority to impose more stringent regulatory requirements and change a
carrier's regulatory classification from non-dominant to dominant. The FCC is
more likely to impose more stringent requirements for carriers that provide
facilities-based service, as we do, and carriers that provide service to other
carriers. In the current regulatory atmosphere, however, we believe that the FCC
is unlikely to do so.

         The FCC imposes only minimal reporting requirements on non-dominant
carriers, although we are subject to certain reporting, accounting and
record-keeping obligations. At present, the FCC exercises its regulatory
authority to set rates primarily with respect to the rates of dominant carriers,
and it has increasingly relaxed its control in this area.

OTHER BUSINESS ACTIVITIES DURING THE PAST THREE YEARS

         During the past three years, our service offerings also included travel
services. As a result of our efforts to focus on our core software products and
IT services businesses, in the third quarter of fiscal 2004, we committed to a
plan to sell our travel services subsidiary. We actively marketed the subsidiary
to potential buyers during fiscal 2004 and consummated its sale subsequent to
the year-ended March 31, 2004.

EMPLOYEES

         As of March 31, 2004, we had 260 employees, including 98 in product
development and related support services, 54 in IT consulting, 41 in sales and
marketing and 67 in finance and administration. Of the 260 employees, 259
employees were full time employees and 1 was a part time employee. As of that
date, 100 of our employees were located in the U.S. and 160 were located in
international locations.

ITEM 2.  DESCRIPTION OF PROPERTY.

         Our corporate headquarters are located in Yorba Linda, California, in
a facility consisting of approximately 41,000 square feet of office and
warehouse space. On December 15, 1999, we entered into a 15-year operating lease
for this facility. The terms of this lease provide for monthly payments of
approximately $28,000. The monthly payment is adjusted every 3 years based on
the consumer price index. We are responsible for payment of any property taxes
and are required to maintain property insurance for the remainder of the lease
term.

         We own a 22,000 square-foot research and development facility in
Calcutta, India, built in 1997. In addition, we own an adjacent 20,452
square-foot building in Calcutta, built in 2000, primarily housing our digital
media and Internet operations.

         We also lease office space in various other locations domestically and
internationally where our operations are located. We believe that our existing
facilities are adequate to meet our current needs and that suitable additional
or alternative space will be available in the future on commercially reasonable
terms, although we have no assurance that future terms would be as favorable as
our current terms.

                                       12





<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.

         We are not a party to any material pending legal proceedings.

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

         During the quarter ended March 31, 2004, no matters were submitted to a
vote of our common stockholders.

                                       13





<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
         SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.

         Our common stock trades on The Nasdaq SmallCap Market under the ticker
symbol "NGRU." As of June 4, 2004, there were approximately 123 holders of
record of our common stock. Within the holders of record of our common stock are
brokerage firms that in turn, hold shares of stock for beneficial owners.

         On October 9, 2003, we transferred our listing to The Nasdaq SmallCap
Market from The Nasdaq National Market because, as of March 31, 2003, our
stockholders' equity had declined below the $10 million minimum requirement for
continued listing on The Nasdaq National Market. The Nasdaq SmallCap Market
requires us to maintain $2.5 million in stockholders' equity or to satisfy
alternative criteria.

         We have not paid any dividends to holders of our common stock. The
declaration and payment of dividends are at the sole discretion of the board of
directors and will depend upon our profitability, financial condition, cash
requirements, future prospects and other factors deemed relevant by our board of
directors. Our revolving credit facility with Laurus Master Fund, Ltd ("Laurus")
prohibits us from paying any dividends on our common stock without Laurus'
permission.

         The high and low closing sale prices of a share of our common stock, as
reported by The Nasdaq SmallCap or National Markets, respectively, for each
quarter of fiscal 2004 and 2003, are as follows:

<TABLE>
                                                   Fiscal 2004             Fiscal 2003
                                               -------------------     -------------------
                                                 High       Low           High      Low
                                               --------- ---------     --------- ---------
       <S>                                        <C>       <C>           <C>       <C>
       1st  Quarter (April 1 - June 30)           $1.90     $1.16         $7.49     $1.92
       2nd Quarter (July 1 - September 30)         1.76      1.14          3.65      1.90
       3rd Quarter (October 1 - December 31)       2.10      1.07          2.19      1.25
       4th Quarter (January 1 - March 31)          1.66      1.14          1.75      0.80
</TABLE>

         On January 20, 2004, we issued to our external legal counsel, Rutan &
Tucker, LLP and Richardson & Patel, LLP, 50,000 and 20,000 shares of our common
stock, respectively, for legal services. We also issued 10,000 shares of our
common stock to a former director for past services. The total value of these
shares was $129,000, of which approximately $85,000 was a retainer for future
legal services.

         Exemption from the registration provisions of the Securities Act of
1933, as amended (the "Securities Act"), for the transaction described above is
claimed under Section 4(2) of the Securities Act, among others, on the basis
that such transaction did not involve any public offering and the purchaser was
accredited with access to the kind of information registration would provide.
Appropriate investment representations were obtained and the securities were
issued with restrictive legends.

                                       14





<PAGE>

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

FORWARD-LOOKING STATEMENTS

         This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended, (the "Exchange Act)". We intend that those forward-looking
statements be subject to the safe harbors created by those sections. These
forward-looking statements generally include the plans and objectives of
management for future operations, including plans and objectives relating to our
future economic performance, and can generally be identified by the use of the
words "believe," "intend," "plan," "expect," "forecast," "project," "may,"
"should," "could," "seek," "pro forma," "goal," "estimates," "continues,"
"anticipate" and similar words. The forward-looking statements and associated
risks may include, relate to, or be qualified by other important factors,
including, without limitation:

         o    our ability to achieve and maintain profitability and obtain
              additional working capital, if required;
         o    our ability re-pay our debt and service our interest costs;
         o    our ability to successfully implement our business plans,
              including our engineering business process outsourcing initiative;
         o    our ability to attract and retain strategic partners and
              alliances;
         o    our ability to hire and retain qualified personnel;
         o    the risks of uncertainty of trademark protection;
         o    risks associated with existing and future governmental regulation
              to which we are subject; and
         o    uncertainties relating to economic conditions in the markets in
              which we currently operate and in which we intend to operate in
              the future.

         These forward-looking statements necessarily depend upon assumptions
and estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the
forward-looking statements. We do not undertake to update, revise or correct any
forward-looking statements.

         Any of the factors described above or in the "Risk Factors" section of
this report could cause our financial results, including our net income (loss)
or growth in net income (loss) to differ materially from prior results, which in
turn could, among other things, cause the price of our common stock to fluctuate
substantially.

OVERVIEW

         We incorporated in 1981 under the name Research Engineers, Inc. and
changed our name to netGuru, Inc. in 2000. We are a Delaware corporation. Our
primary business offerings are:

         o    Structural and civil engineering and collaborative software
              products and services for businesses worldwide;
         o    Information technology, or IT, services (including engineering
              business process outsourcing or EBPO); and
         o    Web-based telecommunications services (long-distance communication
              services that include prepaid phone cards and call termination
              services).

                                       15





<PAGE>

         We have provided computer-aided engineering software solutions to our
customers for over 23 years. For the past 21 years, we have supported our
engineering software business with our India-based software programming and IT
resources. In 1999, we acquired two IT services companies in the U.S., which
further expanded our IT resources and capabilities. Our telecommunications
services were started as part of our Internet portal services offerings. They
will also facilitate our EBPO initiative. A more expansive discussion of our
business and services is contained in the "Business" section of this report.

         In fiscal 2004, we began the process of streamlining our business
offerings to focus more on our higher-margin, core structural and civil
engineering software products and services, where we also have an established
presence worldwide as well as to focus on our proprietary collaborative software
products and IT services. Our goal is to address the various facets of the
engineering design chain from the software that the engineers use to design
infrastructure to managing all the documents related to a specific design
project. We partnered with other software vendors offering complementary
solutions within the structural engineering community, including the bridge and
industrial/plant building markets, to offer a complete solution to our
customers. We combined STAAD.Pro with Tekla's market-leading 3D modeler and
created the new building-based product, Tekla Structures. We combined STAAD.Pro
with LARSA to offer a full bridge management solution and began to sell and
market it on a worldwide basis. These strategic alliances enable us to tap into
the vertical disciplines of the structural engineering community that were not
accessible to us in the past. To take advantage of the opportunities for
infrastructure projects in Latin America and Pacific Rim countries, we deepened
our presence in these international markets by establishing regional offices in
Mexico and Thailand, respectively. We have introduced more local design codes
for our structural software to address the stringent building requirements
adopted by these governments to protect infrastructure against earthquakes and
terrorist attacks. We also introduced the Spanish language version of STAAD.Pro
in Mexico. Since customer training is essential to our growth strategy, we
introduced the STAAD Certified Trainer and STAAD Certified Engineer programs and
established 15 new training centers across the U.S. to facilitate year-round
training sessions closer to where our customers are. We also developed training
digital video discs in English, Spanish, German and French for our international
markets.

         In our collaborative software business, we expanded our potential
market for collaborative document viewing and markup solution by partnering with
FileNet Corporation's ValueNet program. We are partnering with FileNet to
develop a workflow management solution specifically for the architectural,
engineering and construction industries. Following a similar OEM model, FileNet
plans to utilize its own sales team to market and sell the combined solution,
including our eReview product, beginning in the summer of 2004. We also intend
to focus on similar second tier document management partners in the Middle East,
Southeast Asia, China and Australia. As we did in our successful implementation
of customized collaborative solutions for Tejari-FZ, LLC, and Ayala Corporation,
the largest providers of online engineering management services in Dubai and
Philippines, respectively, we plan to continue embedding our collaborative tools
within other similar solutions. By taking advantage of the strong relationships
we have built with our 19,000 engineering clients worldwide, we believe we have
a good foundation on which to introduce software addressing the upstream facets
of the design chain.

         Our IT services net revenues had declined from a high of $18,000,000 in
fiscal 2001 to $5,000,000 in fiscal 2004 due to the market decline for such
services. As a result of the steep decline in the IT services net revenues, we
scaled back our domestic IT services operations in 2004. In the third quarter of
fiscal 2004, we expanded our IT services operations to include EBPO services
leveraging our technical expertise, the telecommunication infrastructure and
established infrastructure in India. Our model focuses on our core engineering
competencies rather than financial services or general call centers. Through our
EBPO services we offer full engineering technical support to non-competing
engineering software companies as well as work with steel detailing and
fabrication companies in the U.S. to outsource their labor-intensive work to our

                                       16





<PAGE>

wholly-owned subsidiary in India. Our goal is not to replace U.S. steel
detailing companies but to augment their current workforce so they can take on
more jobs and provide a faster turnaround with higher margins. Whereas STAAD and
our other engineering products concentrate on the numerical analysis and design
of buildings and other infrastructure, the steel detailed drawings are produced
for the erectors to physically assemble the structure at hand.

         In fiscal 2004, our Web-based telecommunications services business
focused on the retail phone card business and reduced its focus on the
less-profitable call termination services. In fiscal 2004, our
telecommunications infrastructure facilitated our 24x7 technical support call
center for our engineering and collaborative software products. We expect this
infrastructure to facilitate our EBPO services as well in the coming years.

CRITICAL ACCOUNTING POLICIES

         We have identified the following as accounting policies that are the
most critical to aid in understanding and evaluating our financial results:

         o    revenue recognition;
         o    allowance for accounts receivable; and
         o    impairment of long-lived assets, including goodwill.

         REVENUE RECOGNITION

         We derive revenues from:

         o    engineering and collaborative software products and services;
         o    IT services; and
         o    Web-based telecommunications services.

         We recognize revenues when the following criteria are met:

         1.   Persuasive evidence of an arrangement, such as agreements,
              purchase orders or written or online requests, exists;
         2.   Delivery has been completed and no significant obligations remain;
         3.   Our price to the buyer is fixed or determinable; and
         4.   Collection is probable.

         At the time of sale of our pre-packaged engineering software products,
we provide a 15-day right of return on the purchase of the product during which
time the customer may return the product to us subject to a $50 restocking fee
on each returned item. Customers may choose to purchase ongoing maintenance
contracts that include telephone, e-mail and other methods of support, and the
right to receive upgrades. Revenue from the maintenance contracts is deferred
and recognized ratably over the life of the contract, usually twelve months.

         We recognize revenues from software we customize to fit a customer's
requirements based on satisfactory completion of pre-determined milestones
(evidenced by written acceptance from the customer) and delivery of the product
to the customer, provided no significant obligations remain and collection of
the resulting receivable is probable.

                                       17





<PAGE>

         In 1997, the Accounting Standards Executive Committee ("AcSec") of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 distinguishes
between significant and insignificant vendor obligations as a basis for
recording revenue and requires that each element of a software licensing
arrangement be separately identified and accounted for based on relative fair
values of each element. We determine the fair value of each element in
multi-element transactions based on vendor-specific objective evidence ("VSOE").
VSOE for each element is based on the price charged when the same element is
sold separately.

         In 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2, "Software
Revenue Recognition, With Respect to Certain Transactions," which modified SOP
97-2 to allow for use of the residual method of revenue recognition if certain
criteria are met. If evidence of fair value of all undelivered elements exists
but evidence does not exist for one or more delivered elements, then we
recognize revenue using the residual method. Under the residual method, the fair
value of the undelivered elements is deferred, and the remaining portion of the
transaction fee is recognized as revenue.

         We recognize revenues from our IT services primarily on a time and
materials basis, with time at a marked-up rate and materials and other
reasonable expenses at cost, as we perform IT services. Certain IT services
contracts are fixed price contracts where we measure progress toward completion
by mutually agreed upon pre-determined milestones and recognize revenue upon
reaching those milestones. Our fixed price IT contracts typically are for a
short duration of one to three months. We did not have any uncompleted fixed
price IT contracts at March 31, 2004.

         We recognize revenues from call termination services at gross sales
value, with the applicable cost separately stated in cost of revenues. We
recognize revenues from our own phone cards based on usage. We recognize
revenues from our resale of third-party phone cards net of returns because no
significant obligations remain once the phone cards are delivered. We recognize
revenues from other products and services sold via Internet portals, where we
are an agent, net of purchase costs when the products and services are delivered
and collection is probable.

         ALLOWANCE FOR ACCOUNTS RECEIVABLE

         We sell to our customers on credit and grant credit to those who are
deemed credit worthy based on our analysis of their credit history. Our standard
payment terms are net 30 days. We review our accounts receivable balances and
the collectibility of these balances on a periodic basis. Based on our analysis
of the length of time that the balances have been outstanding, the pattern of
customer payments, our understanding of the general business conditions of our
customers and our communications with our customers, we estimate the
recoverability of these balances. When recoverability is uncertain and the
unrecoverable amounts can be reasonably estimated, we record bad debt expense
and increase the allowance for accounts receivable by an amount equal to the
amount estimated to be unrecoverable. If the historical data we use to calculate
the allowance provided for doubtful accounts does not reflect our future ability
to collect outstanding receivables, additional provisions for doubtful accounts
may be needed and our future results of operations could be materially affected.

         IMPAIRMENT OF LONG-LIVED ASSETS, INCLUDING GOODWILL

         In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This statement addresses financial accounting and reporting for the
impairment of long-lived assets and the accounting and reporting provisions of
APB No. 30, "Reporting the Results of Operations for a Disposal of a Segment of
a Business." Pursuant to SFAS No. 144, in fiscal 2004 we wrote down the net
assets of our travel subsidiary that was held for sale, to its potential
recoverable value. As a result, we recorded a loss on discontinued operations of
$439,000 in fiscal 2004, including a loss of $291,000 due to the write-down.

                                       18





<PAGE>

         We apply the provisions of SFAS No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed," to software
development costs. At each balance sheet date, we compare the unamortized
software development cost of each product to the net realizable value of the
product. We write off to cost of revenues the amount by which the unamortized
software development cost exceeds the net realizable value of the product.

         On April 1, 2002, we adopted the provisions of SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested at least annually for impairment.

         We consider the following operating segments- engineering and
collaborative software products and services, IT services, and Web-based
telecommunications services - to be our reporting units for purposes of testing
for impairment.

         We use a two-step test to assess potential impairment to goodwill. In
the first step, the fair value of each reporting unit is compared to its
carrying value including goodwill. If the fair value exceeds the carrying value,
then goodwill is not considered impaired, and we do not need to proceed to the
second step. If the carrying value of a reporting unit exceeds its fair value,
then we have to determine and compare the implied fair value of the reporting
unit's goodwill to the carrying value of its goodwill. If the carrying value of
the reporting unit's goodwill exceeds its implied fair value, then we have to
record an impairment loss in the amount of the excess.

         The implied fair value of goodwill is determined by allocating the fair
value of the reporting unit to all of the assets (recognized and unrecognized)
and liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141, "Business Combinations." The
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill.

         We assessed the fair value of our three reporting units by considering
their projected cash flows, using risk-adjusted discount rates and other
valuation techniques, and concluded that as of April 1, 2002, an impairment
write-down for our IT services division was required. We recorded an impairment
charge of $5,824,000 to the IT services goodwill in fiscal 2003 as a cumulative
effect of a change in accounting principle. We are required to perform
additional reviews for impairment annually, or more frequently when events occur
or circumstances change that would more likely than not reduce the fair value of
the net carrying amount.

         Our annual test for impairment is performed as of March 31 every year.
The evaluation of goodwill impairment involves assumptions about the fair values
of assets and liabilities of each reporting unit. If these assumptions are
materially different from actual outcomes, the carrying value of goodwill will
be incorrect. In addition, future results of operations could be materially
impacted by the write-down of the carrying amount of goodwill to its estimated
fair value. There was no impairment of goodwill during the fiscal year ended
March 31, 2004. As of March 31, 2004, our goodwill balance was $2,941,000.

                                       19





<PAGE>

CONSOLIDATED RESULTS OF OPERATIONS

CONTINUING OPERATIONS

NET REVENUES

         The following table presents our net revenues by operating segment
(dollars in thousands):

                                                 YEAR ENDED MARCH 31,
                                                 --------------------
                                                   2004        2003
                                                 --------    --------
NET REVENUES
    Engineering and collaborative
       software products and services            $11,550     $ 9,529
    % of total revenue                              65.3%       52.1%

    IT services                                    4,994       5,586
    % of total revenue                              28.2%       30.5%

    Web-based telecommunications
       services                                    1,154       3,173
    % of total revenue                               6.5%       17.4%
                                                 --------    --------

    Total net revenues                           $17,698     $18,288
                                                 ========    ========

         Net revenues decreased by $590,000 (3.2%) to $17,698,000 in fiscal 2004
from $18,288,000 in fiscal 2003. Our total net revenues primarily consisted of
revenues from (1) engineering and collaborative software products and services,
(2) IT services, and (3) Web-based telecommunications services.

         Engineering and collaborative software products and services net
revenues increased by $2,021,000 (21.2%) to $11,550,000 in fiscal 2004 from
$9,529,000 in fiscal 2003. The increase was primarily the result of:

         o    An increase in engineering software products and services net
              revenues to $10,544,000 in fiscal 2004 from $9,000,000 in fiscal
              2003. Engineering software products and services net revenues
              increased due to the completion and recognition of a large service
              project in the beginning of fiscal 2004 amounting to approximately
              $450,000. The increase was also due to increased sales from
              international regional offices set up in fiscal 2003, and
              increased promotional efforts in Europe and North America, as well
              as successful new channels established in the bridge and building
              industries with partners such as Tekla and LARSA.

         o    An increase in collaborative software net revenues to $1,006,000
              in fiscal 2004 from $529,000 in fiscal 2003. The increase in
              collaborative software revenues was due to the completion of three
              large collaborative software contracts amounting to $495,000,
              whereas in fiscal 2003, we did not complete any large
              collaborative software contracts. The majority of our
              collaborative software revenue is generated from service-oriented
              projects where the revenue is recognized only upon completion of
              the entire project.

         IT services net revenues decreased by $592,000 (10.6%) to $4,994,000 in
fiscal 2004 from $5,586,000 in fiscal 2003. IT services net revenues decreased
as a percentage of total net revenues to 28.2% in fiscal 2004 from 30.5% in
fiscal 2003. Net revenues from domestic IT services have decreased due to
scaling down one of our IT services offices and due to lowering the prices we

                                       20





<PAGE>

charge our customers in order to be able to compete with our competitors and to
retain our current customers. In the past several quarters, the IT services
industry had been adversely affected by a slow economy, and many of our
customers reduced, and continue to reduce, spending on technology consulting and
systems integration services. The decline in domestic IT services net revenues
was offset somewhat by the increase in IT services revenues in Europe and India.
The rate of decline of our domestic IT services business seems to have slowed
somewhat. In November 2003, we initiated an expansion of our IT services into
the EBPO market, leveraging our existing technical support infrastructure in
India, our telecommunications switch in the U.S. and our collaborative software
technology to offer these services to a broad array of companies looking to
outsource these functions. Although we anticipate that our EBPO services
business will bring in additional revenues for the IT services segment, we
cannot assure you that we will be successful in this endeavor, due to
competition among providers of such services and relatively few barriers to
entry since EBPO services are not capital-intensive.

         Web-based telecommunications services net revenues decreased as a
percentage of total net revenues to 6.5% in fiscal 2004 from 17.4% in fiscal
2003. In dollar terms, Web-based telecommunications services net revenues
decreased by $2,019,000 (63.6%) to $1,154,000 in fiscal 2004 from $3,173,000 in
fiscal 2003. This decrease was primarily the result of the following:

         o    Our shift in focus away from call termination services due to
              their low gross margins, which resulted in a decrease in net
              revenues of approximately $1,675,000; and

         o    A decrease of $286,000 in retail phone card net revenues in fiscal
              2004 compared to those net revenues in fiscal 2003 due to
              competition and pricing pressures.

         Although the intense competition in the telecommunications industry and
the resulting pricing pressures should preclude improvement of net revenues from
current levels for the indefinite future, we intend to maintain the
telecommunications infrastructure to facilitate our EBPO initiatives and our
24X7 technical support call centers.

     GROSS PROFIT AND GROSS MARGIN

         The following table presents our gross profit by segment and gross
profit as a percentage of each segment's revenue, or gross margin (dollars in
thousands):
                                                           YEAR ENDED MARCH 31,
                                                          ----------------------
                                                            2004          2003
                                                          --------      --------
GROSS PROFIT
    Engineering and collaborative
      software products and services                      $10,539        $8,636
    IT services                                             1,044         1,374
    Web-based telecommunications
      services                                                429           369
                                                          --------      --------

     Total gross profit                                   $12,012       $10,379
                                                          ========      ========

GROSS MARGIN
    Engineering and collaborative
      software products and services                         91.2%         90.6%
    IT services                                              20.9%         24.6%
    Web-based telecommunications
      services                                               37.2%         11.6%

                                       21





<PAGE>

         Historically, the gross margin from the engineering and collaborative
software products and services segment has been higher than the gross margin
from the IT services segment because service revenues have a higher cost of
labor associated with them, consisting largely of the cost of the consultants
performing the services. The gross margin in the engineering and collaborative
software products and services segment increased slightly to 91.2% in fiscal
2004 from 90.6% in fiscal 2003. Our engineering and collaborative software
products and services segment generally produces a higher gross margin than our
other segments due to the relatively lower costs associated with each
incremental sale. The cost of revenues for the engineering and collaborative
software products and services segment includes amortization of capitalized
software development, printing services, direct supplies such as hardware locks
and recording media, salaries for the technical support employees, freight out
and cost of training revenues. The increase in the gross margin in the
engineering and collaborative software products and services segment is
primarily the result of a relatively greater increase in fiscal 2004 net
revenues from fiscal 2003 levels, compared with a relatively smaller increase in
the cost of these revenues due to increased cost of training revenues. Some of
the components of the cost of revenues, such as amortization of capitalized
software development and salaries, do not vary significantly with changes in
revenues.

         In fiscal 2004, IT services gross margin decreased to 20.9% from 24.6%
in fiscal 2003 primarily due to a decline in IT services business. The IT
services gross margin also was impacted by the nature of services provided by
our international IT offices, which bill clients for equipment (which carry a
lower gross margin) procured as part of the IT consulting services. In dollar
terms, IT services gross profit decreased by $330,000 (24.0%) to $1,044,000 in
fiscal 2004 from $1,374,000 in fiscal 2003 primarily due to the continued market
slowdown for the IT industry. The cost of revenues for IT services includes the
salaries, bonuses and benefits for all of the consulting employees, including
consultants who are "idle" and not billable to a particular customer or project.
Our IT services consultants generally receive higher salaries than our technical
support employees, and we have employed more consultants than technical support
staff, both of which contributed to the lower gross margin as compared to the
engineering and collaborative software products and services segment.
Additionally, the cost of equipment procured for customers of the international
offices are also included in the IT cost of revenues.

         Gross profit from the Web-based telecommunications services segment
increased to $429,000 or 37.2% in fiscal 2004 compared to $369,000 or 11.6% in
fiscal 2003 due to better pricing on phone minutes purchased. The cost of
revenues for our Web-based telecommunications services includes the cost of
buying minutes from another carrier. Although gross profit from our Web-based
telecommunications services increased in fiscal 2004 from the levels in fiscal
2003, we anticipate the competition and pricing pressures will continue to hold
down net revenues and therefore our Web-based telecommunications services net
revenues will not improve from current levels for the indefinite future.

         In order to improve overall gross profit and gross margin, we are
refocusing our sales efforts toward our segment with the highest gross profit,
namely, our engineering and collaborative software products and services
segment, by working to develop strategic relationships, to increase our volume
of telephone sales, and to re-engage with our international distributors. In our
IT services business, we have introduced the EBPO initiatives and will continue
to monitor the costs in an effort to improve gross profit and will continue to
closely monitor our costs related to the Web-based telecommunications services
businesses.

                                       22





<PAGE>

OPERATING EXPENSES

         The following table presents our operating expenses and the percentage
of total net revenue (dollars in thousands):

                                                         YEAR ENDED MARCH 31,
                                                        ----------------------
                                                          2004          2003
                                                        --------      --------
OPERATING EXPENSES
    Selling, general and administrative
      expenses                                          $11,162       $11,353
    % of total revenue                                     63.1%         62.1%

    Research and development expenses                     2,069         2,092
    % of total revenue                                     11.7%         11.4%

    Depreciation                                            956         1,088
    % of total revenue                                      5.4%          5.9%

    Impairment charge                                        --           259
    % of total revenue                                       --           1.4%

    Restructuring                                            --           194
    % of total revenue                                       --           1.1%
                                                        --------      --------

    Total operating expenses                            $14,187       $14,986
    % of total revenue                                     80.2%         81.9%

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses decreased by $191,000 (1.7%) to $11,162,000 in
fiscal 2004 from $11,353,000 in fiscal 2003 primarily due to the following as a
result of our continued efforts to control costs:

         o    salaries and related expenses decreased $529,000 due to employee
              terminations;
         o    rent expense decreased $211,000 since we no longer needed the
              facility that housed one of our telecommunications switches that
              we sold as part of our efforts to reduce our focus on the
              lower-growth telecommunications business and increase our focus on
              higher-growth, higher-margin businesses; and
         o    consulting and professional fees decreased $183,000 due to our
              efforts to control costs.

         The decrease in SG&A expenses resulting from the above was offset by:

         o    a $556,000 expense for strategic consulting and investor relations
              services; and
         o    a $232,000 expense related to employee termination.

         SG&A expenses in fiscal 2004 included $713,000 in non-cash expenses
related to warrants issued for strategic consulting and investor relations
services and a stock option granted to an employee as part of a severance
package.

         RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D")
expenses consist primarily of software developers' wages. In fiscal 2004, R&D
expenses decreased slightly by $23,000 (1.1%) to $2,069,000 from $2,092,000 in
fiscal 2003. As a percentage of engineering and collaborative software net
revenues, to which they mostly relate, R&D expenses decreased to 17.9% in fiscal
2004 from 22.0% in fiscal 2003.

                                       23





<PAGE>

         DEPRECIATION. In fiscal 2004, depreciation decreased by $132,000
(12.1%) to $956,000 from $1,088,000. The decrease in depreciation in fiscal 2004
was primarily due to the absence of depreciation expense for the
telecommunications switch that we sold in fiscal 2004. No depreciation expense
for this asset was recorded in fiscal 2004, since it was being held for sale
from the beginning of the fiscal year to its sale date (see "Impairment charge"
below).

         IMPAIRMENT CHARGE. No impairment charge for continuing operations was
recorded in fiscal 2004. In fiscal 2003, we recorded an impairment charge of
$259,000, which consisted of $67,000 to write off a capitalized software project
and $192,000 to write down a telecommunications switch to its estimated resale
value.

         RESTRUCTURING. In March 2001, we announced plans to restructure our
operations. As a result of this restructuring plan, we recorded a restructuring
charge of $2,400,000 in the fourth quarter of fiscal 2001. The restructuring
plan consisted of four major points: 1) refocused strategic direction of
Internet service provider ("ISP") initiatives; 2) refocused strategic direction
of Internet portal initiatives; 3) consolidation of technical support
activities; and 4) elimination of our in-house legal department.

         While the majority of the restructuring charge was recorded in fiscal
2001, additional charges of $41,000 and $199,000 were recorded in fiscal 2002
and fiscal 2003, respectively, since the original estimate of severance expenses
was insufficient. As of March 31, 2004, we did not have any unpaid obligations
related to this restructuring program.

         SEGMENT PROFITABILITY. Operating loss in the engineering and
collaborative software products and services segment decreased by $1,202,000
(55.2%) to $976,000 in fiscal 2004 from $2,178,000 in fiscal 2003. Operating
loss in fiscal 2004 included no restructuring or impairment charges. Operating
loss in the engineering and collaborative software products and services segment
in fiscal 2003 included $29,000 in restructuring charges and $67,000 in
impairment charges related to the write-off of capitalized software development
costs for software that was developed by a third party. In the IT services
segment, the operating loss decreased by $30,000 (19.2%) to $126,000 in fiscal
2004 from $156,000 in fiscal 2003. Operating loss in the Web-based
telecommunications services segment decreased by $845,000 (95.5%) to $40,000 in
fiscal 2004 from $885,000 in fiscal 2003. Operating loss in the Web-based
telecommunications segment in fiscal 2003 included $192,000 related to an
impairment write-down of a telecommunications switch. Operating expenses related
to the corporate center in fiscal 2004 declined $355,000 (25.6%) to $1,033,000
from $1,388,000 in fiscal 2003 primarily due to $200,000 in restructuring
expenses as well as due to reductions in salary-related expenses.

OTHER EXPENSE (INCOME)

         The following table presents our other (income) and its percentage of
total net revenue (dollars in thousands):
                                                         YEAR ENDED MARCH 31,
                                                       -------------------------
                                                         2004             2003
                                                       --------         --------
OTHER EXPENSE (INCOME)
    Interest, net                                      $  610           $  267
    % of total revenue                                    3.4%             1.5%

    Other (income) expense                             $ (129)          $  (38)
    % of total revenue                                   (0.7)%           (0.2)%

    Total other expense                                $  481           $  229
    % of total revenue                                    2.7%             1.3%

                                       24





<PAGE>

         INTEREST EXPENSE. Net interest expense increased $343,000 (128.5%) in
fiscal 2004 to $610,000 from $267,000 during fiscal 2003. The increase in net
interest expense is primarily due to an increase in the convertible debt balance
during fiscal 2004 compared to fiscal 2003. The interest expense due to
convertible debt increased $377,000 (1,047.2%) in fiscal 2004 to $413,000 from
$36,000 in fiscal 2003. We expect interest expense to be approximately at the
same level in fiscal 2005 as in fiscal 2004. Net interest expense on long-term
debt in a foreign subsidiary decreased $8,000 (8.0%) to $92,000 in fiscal 2004
from $100,000 in fiscal 2003. The increase in interest expense was offset by a
slight increase in interest income and a decrease in interest expense for
capitalized leases in fiscal 2004. Interest expense on capitalized leases in
fiscal 2004 declined $36,000 to $103,000 from $139,000 in fiscal 2003.

         OTHER (EXPENSE) INCOME. Other income increased by $91,000 to $129,000
in fiscal 2004 from $38,000 in fiscal 2003 primarily due to the sale of obsolete
ISP equipment that was written off in the prior fiscal year.

         INCOME TAXES. For fiscal 2004, we recorded an income tax expense of
$15,000 relating to certain state and foreign taxes compared to an income tax
benefit of $204,000 in fiscal 2003. The tax benefit in fiscal 2003 resulted from
changes in estimates of certain tax liabilities that were no longer deemed
necessary.

         CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. We adopted SFAS
No. 142 on April 1, 2002. In accordance with SFAS No. 142, we assessed the fair
value of our three reporting units by considering their projected cash flows,
using risk-adjusted discount rates, and other valuation techniques. Given
consideration of relevant factors, we concluded that, as of April 1, 2002, an
impairment write-down for our IT services division was required. In accordance
with the provisions of SFAS No. 142, we recorded an impairment charge of
$5,824,000 to IT services goodwill in fiscal 2003, and recorded this as a
cumulative effect of a change in accounting principle.

DISCONTINUED OPERATIONS

         As a result of our efforts to focus on our core software products and
IT services businesses, in the third quarter of fiscal 2004, we committed to a
plan to sell our travel services subsidiary. We actively marketed the subsidiary
to potential buyers during fiscal 2004 and consummated its sale subsequent to
the fiscal year-end. We have presented the results of operations of the travel
services subsidiary in our consolidated statements of operations under
"discontinued operations," and the assets and liabilities of this subsidiary
separately in our consolidated balance sheets. We wrote down the net assets of
our travel subsidiary to their fair value less cost to sell. As a result, in
fiscal 2004, we recorded a loss on discontinued operations of $439,000,
including a loss of $291,000 due to the write-down. This subsidiary was sold
subsequent to fiscal year-end at its approximate fair value.

                                       25





<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         Historically, we have relied upon cash from financing activities to
fund most of the cash requirements of our operating and investing activities.
Currently, we finance our operations (including capital expenditures) primarily
through existing cash and cash equivalent balances, issuance of convertible
notes and borrowings under the revolving credit facility. We have used debt and
equity financing when appropriate and practicable, such as by issuing to Laurus,
a $2,000,000 convertible note in December 2002 ("2002 Note") and a $1,400,000
convertible note in December 2003 ("2003 Note"). Our principal sources of
liquidity at March 31, 2004 consisted of $1,746,000 of cash and cash
equivalents. Cash and cash equivalents decreased by $1,126,000 (40.6%) during
fiscal 2004. The primary reasons for this decline were cash used in operations,
capital expenditures, repayment of long-term debt, financing fees and payments
toward capital lease obligations, which were offset by the issuance of the 2003
Note.

         Net cash used in operations was $1,204,000 in fiscal 2004 compared to
$1,872,000 in fiscal 2003. Net loss was the primary reason for the decrease in
cash used in operating activities during fiscal 2004. The following contributed
to cash usage in fiscal 2004:

         o    A $568,000 increase in accounts receivable;
         o    A $270,000 decrease in deferred revenues;
         o    A $199,000 decrease in accrued restructuring costs;
         o    A $161,000 increase in prepaid expenses and other current assets;
              and
         o    A $131,000 decrease in accounts payable.

The above were offset by a $610,000 decrease in deposits due to payment of legal
settlements and a $202,000 increase in accrued expenses.

         Net loss was also the primary reason for the decrease in cash used in
operating activities during fiscal 2003. The following contributed to cash usage
in fiscal 2003:

         o    A $184,000 increase in deposits, primarily due to a $605,000
              deposit for legal settlements;
         o    A $162,000 decrease in accounts payable;
         o    A $152,000 decrease in accrued restructuring costs; and
         o    A $118,000 decrease in income taxes payable.

         The above were offset by a $382,000 decrease in accounts receivable due
to lower level of billings on credit; a $305,000 decrease in income tax
receivable due to receipt of an income tax refund; a $288,000 increase in
deferred revenues due to the deferral of a large project that was not completed
prior to the year-end; a $216,000 decrease in prepaid expenses and other current
assets: and a $183,000 decrease in notes and related party loans receivable.

         Net cash used in investing activities in fiscal 2004 consisted of the
purchase of a short-term investment of $100,000 and capital expenditures of
$94,000, offset by $150,000 in proceeds from the sale of the telecommunications
switch. Net cash used in investing activities in fiscal 2003 consisted solely of
$222,000 in capital expenditures.

         Financing activities provided $11,000 and $1,433,000, in fiscal 2004
and fiscal 2003, respectively. Cash provided by financing activities during
fiscal 2004 primarily resulted from the issuance of the 2003 Note and additional
borrowings by one of our international subsidiaries. We paid back $519,000 to
Laurus, and the international subsidiary paid back $1,293,000 in bank debt. We

                                       26





<PAGE>

also paid $175,000 in financing fees to Laurus in fiscal 2004. Cash provided by
financing activities in 2003 primarily resulted from the issuance of the 2002
Note. The proceeds from the 2002 Note, net of financing fees of $214,000, were
$1,786,000. In fiscal 2003, we used $647,000 to repay bank debt and capital
lease obligations.

         During fiscal 2004, we converted $845,000 of the principal balance of
the 2002 Note into equity by issuing 650,000 shares of common stock to Laurus at
the fixed conversion price of $1.30.

         We incurred net losses of $3,110,000 and $10,529,000 and used cash in
operations of $1,204,000 and $1,872,000 in fiscal years 2004 and 2003,
respectively. Our future capital requirements will depend upon many factors,
including sales and marketing efforts, the development of new products and
services, possible future strategic acquisitions, the progress of research and
development efforts, and the status of competitive products and services.

         Historically, we have relied upon cash from financing activities to
fund most of the cash requirements of our operating and investing activities. We

have not been able to generate sufficient cash from our operating activities in
the past, and there is no assurance we will be able to do so in the future.
However, we believe that current and future available capital resources will be
adequate to fund our operations for the next twelve months, because we are
continuing to implement cost containment measures in an effort to reduce net
cash outflow both domestically and abroad and are working to increase sales of
our software products. The results of these combined efforts have reduced our
consolidated monthly net cash outflow from operations to approximately $100,000
per month.

         We believe we will be able to generate cash from operations or through
existing or additional sources of debt and equity financing. If adequate funds
from operating or financing activities are not available, we may be required to
delay, scale back or eliminate portions of our operations and product
development efforts or to obtain funds through arrangements with strategic
partners or others that may require us to relinquish rights to certain of our
technologies or potential products or other assets. Accordingly, our inability
to obtain any needed financing could result in a significant loss of ownership
and/or control of our proprietary technology and other important assets and
could hinder our ability to fund our continued operations and our product
development efforts that historically have contributed significantly to our
competitiveness.

         The following table summarizes our contractual obligations and
commercial commitments at March 31, 2004 (in thousands of dollars):

<TABLE>
                                                 ----------------------------------------------------------------
                                                                        PAYMENTS DUE BY PERIOD
                                                 ----------------------------------------------------------------
CONTRACTUAL OBLIGATIONS                          TOTAL    LESS THAN 1   1-3 YEARS    4-5 YEARS      AFTER 5 YEARS
-----------------------                          -------  -----------   ---------    ---------      -------------
                                                             YEAR
                                                             ----
<S>                                               <C>        <C>           <C>           <C>            <C>
Long-Term Debt                                    2,728      1,235         1,363          88               42
Capital Lease Obligations                           477        109           233         135               --
Operating Leases                                  3,978        521           901         740            1,816
                                                 ----------------------------------------------------------------
Total Contractual Cash Obligations                7,183      1,865         2,497         963            1,858
                                                 ================================================================
</TABLE>

         On July 31, 2003, we received a $4,000,000 revolving credit facility
from Laurus. The availability of funds under this credit facility is limited by
the amount of the unpaid balances on the 2002 Note and the 2003 Note
(collectively, the "Laurus Notes"). At March 31, 2004, we had a total
availability of $1,870,000 under the revolving credit facility.

                                       27





<PAGE>

         We are required to use the net proceeds from this financing for general
corporate purposes only. We are also required not to permit for any fiscal
quarter commencing April 1, 2003, the net operating cash flow deficit to be
greater than $500,000, excluding extraordinary items, as determined by Laurus.
At March 31, 2004, we were in compliance with this covenant.

         To the extent we are in need of any additional financing, we cannot
assure you that any such additional financing will be available to us on
acceptable terms, or at all. In addition, any future financing may cause
significant dilution to existing stockholders. Any debt financing or other
financing of securities senior to our common stock likely will include financial
and other covenants that will restrict our flexibility. At a minimum, we expect
these covenants to include restrictions on our ability to pay dividends on our
common stock.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

REVENUE RECOGNITION

         The Emerging Issues Task Force, or EITF, reached a consensus for EITF
No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF No. 00-21
provides accounting guidance for allocation of revenue where delivery or
performance of products or services may occur at different points in time or
over different periods. We adopted this consensus on July 1, 2003. Under EITF
No. 00-21, revenue must be allocated to all deliverables regardless of whether
an individual element is incidental or perfunctory. The adoption of EITF No.
00-21 did not materially impact our consolidated financial condition or results
of operations.

         In July 2003, the EITF reached a consensus on EITF 03-5, "Applicability
of AICPA SOP 97-2 to Non-Software Deliverables." EITF 03-5 provides accounting
guidance on whether non-software deliverables (for example, non-software related
equipment or services) included in an arrangement that contains software are
within the scope of SOP 97-2. In general, any non-software deliverables are
within the scope of SOP 97-2 if the software deliverable is essential to the
functionality of the non-software deliverables. We adopted the consensus in
October 2003. The adoption of EITF 03-5 did not materially impact our
consolidated financial condition or results of operations.

FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments that have characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that is within its
scope as a liability (or as an asset in some circumstances). Many of those
instruments were previously classified as equity. This statement is effective
for financial instruments entered into or modified after May 31, 2003. The
adoption of SFAS No. 150 did not materially impact our consolidated financial
condition or results of operations.

RISK FACTORS

         AN INVESTMENT IN SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS ANNUAL REPORT ON FORM 10-KSB, YOU SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS BEFORE DECIDING TO INVEST OR MAINTAIN AN INVESTMENT
IN SHARES OF OUR COMMON STOCK. THIS ANNUAL REPORT CONTAINS OR INCORPORATES BY
REFERENCE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR

                                       28





<PAGE>

ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE

FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS ANNUAL REPORT. IF ANY
OF THE FOLLOWING RISKS ACTUALLY OCCURS, IT IS LIKELY THAT OUR BUSINESS,
FINANCIAL CONDITION AND OPERATING RESULTS WOULD BE HARMED. AS A RESULT, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE PART OR ALL
OF YOUR INVESTMENT.

         OUR PLANS TO RETURN TO PROFITABILITY DEPEND ON OUR ABILITY TO INCREASE
         REVENUES DESPITE CONTINUING TO CUT COSTS IN A VARIETY OF AREAS, WHICH
         MAY NOT BE FEASIBLE.

         We incurred net losses of $3,110,000 and $10,529,000 in fiscal 2004 and
fiscal 2003 respectively. We used cash in operations totaling $1,204,000 and
$1,872,000 for the fiscal years 2004 and 2003, respectively. During the past
year, our operating expenses have stayed relatively flat. However, in order to
achieve profitability, we must increase our revenues while continuing to control
our expenses. We are continuing to implement cost containment measures in an
effort to reduce our cash consumption from operations both domestically and
abroad, and we are working to increase sales of our software products. The
results of these combined efforts reduced our average monthly net cash used in
operations from $156,000 per month in fiscal 2003 to approximately $100,000 per
month in fiscal 2004.

         We intend to continue these combined efforts and are tailoring our cost
containment measures with the goal of having each of our operating units or
costs centers generate positive cash flow. If adequate funds from operating
activities are not available, we may be required to delay, scale back or
eliminate portions of our operations and product development efforts or to
obtain funds through arrangements with strategic partners or others that may
require us to relinquish rights to certain portions of our technologies or
potential products or other assets. Furthermore, because some of the areas of
expense cutting, such as sales and marketing and research and development,
involve activities that we ordinarily undertake with the expectation that they
will contribute to future revenues, obtaining and maintaining profitability may
be difficult, even with reduced expenses. Even if near-term profitability can be
achieved through cost cutting, it will not be sustainable if the effect of cost
cutting is to impede future revenue growth.

         IF WE ARE UNABLE TO RAISE CAPITAL IN THE FUTURE, WE MAY BE UNABLE TO
         FUND OPERATING CASH SHORTFALLS.

         Our future capital requirements will depend upon many factors,
including sales and marketing efforts, the development of new products and
services, possible future strategic acquisitions, the progress of our research
and development efforts, and the status of competitive products and services. As
of March 31, 2004 and 2003, we had working capital of $1,530,000 and $1,077,000,
respectively, and an accumulated deficit of $30,444,000 and $27,334,000,
respectively. As of those dates, we had $1,746,000 and $2,772,000, respectively,
of cash and cash equivalents and $3,352,000 and $2,654,000, respectively, of
accounts receivable, net of allowance for doubtful accounts.

         We believe that current and future available capital resources will be
adequate to fund our operations for the next twelve months. However,
historically we have not been able to generate sufficient cash from our
operating activities and have relied upon cash from financing activities to fund
most of the cash requirements of our operating and investing activities. At
March 31, 2004, we had used $2,130,000 out of a total of $4,000,000 in available
credit from Laurus leaving a credit availability of $1,870,000. To the extent we
are in need of any additional financing, it may not be available to us on
acceptable terms, or at all. Our inability to obtain any needed financing could
result in a significant loss of ownership and/or control of our proprietary
technology and other important assets and could also hinder our ability to fund
our continued operations and our product development efforts that historically
have contributed significantly to our competitiveness.

                                       29





<PAGE>

         Any financing may cause significant dilution to existing stockholders.
Any debt financing or other financing of securities senior to our common stock
likely will include financial and other covenants that will restrict our
flexibility. At a minimum, we expect these covenants to include restrictions on
our ability to pay dividends on our common stock.

         THE VOTING POWER OF YOUR INVESTMENT AND OUR EARNINGS PER SHARE WOULD
         BE SUBSTANTIALLY DILUTED IF ALL OR A SIGNIFICANT PORTION OF THE LAURUS
         NOTES WAS CONVERTED INTO SHARES OF OUR COMMON STOCK AT THE INITIAL
         CONVERSION PRICES.

         Through March 31, 2004, we converted $845,000 of convertible debt under
the 2002 Note and issued 650,000 shares of our common stock. As of March 31,
2004, the outstanding principal balances of $730,000 and $1,400,000 under the
2002 Note and 2003 Note, respectively, were convertible by Laurus into up to
561,538 shares and 1,076,923 shares of our common stock, respectively, at the
initial fixed conversion price of $1.30 per share. At March 31, 2004, 18,087,154
shares of our common stock were issued and outstanding. If the 1,638,461
aggregate number of shares of common stock underlying the Laurus Notes had been
issued and outstanding as of that date, disregarding conversion limitations
described in the agreements, then Laurus would have beneficially owned
approximately 8.3% of the 19,725,616 shares of common stock that would have been
outstanding on March 31, 2004. We may borrow additional amounts under the
revolving credit facility from time to time, which would increase the principal
balance that could potentially be converted into shares of our common stock in
the future. As a result, if the entire principal balance of the Laurus Notes
and/or any additional amounts we may borrow under the revolving credit facility
were converted at their initial fixed conversion prices, substantial dilution of
the voting power of your investment and of our earnings per share would occur.

         THE MARKET PRICE OF OUR COMMON STOCK AND THE VALUE OF YOUR INVESTMENT
         COULD SUBSTANTIALLY DECLINE IF THE REMAINING BALANCE OF THE 2002 NOTE
         AND ALL OR A SIGNIFICANT PORTION OF THE 2003 NOTE WERE CONVERTED INTO
         SHARES OF OUR COMMON STOCK AND RESOLD INTO THE MARKET, OR IF A
         PERCEPTION EXISTS THAT A SUBSTANTIAL NUMBER OF SHARES WILL BE ISSUED
         UPON CONVERSION OF THE LAURUS NOTES AND THEN RESOLD INTO THE MARKET.

         If the conversion prices at which the balances of the Laurus Notes are
converted are lower than the price at which you made your investment, immediate
dilution of the value of your investment will occur. In addition, sales of a
substantial number of shares of common stock issued upon conversion of the
Laurus Notes, or even the perception that such sales could occur, could
adversely affect the market price of our common stock, which would mean that the
Laurus Notes would be convertible into an increased number of shares of our
common stock in cases where, as described elsewhere in these risk factors, the
conversion price is based upon a discount from the closing price of our common
stock. You could, therefore, experience a substantial decline in the value of
your investment as a result of both the actual and potential conversion of the
remaining balance on the Laurus Notes.

         THE VOTING POWER AND VALUE OF YOUR INVESTMENT COULD DECLINE IF THE
         LAURUS NOTES ARE CONVERTED AT A REDUCED PRICE DUE TO OUR ISSUANCE OF
         LOWER-PRICED SHARES.

         The $1.30 initial fixed conversion price of the Laurus Notes will be
subject to downward weighted-average anti-dilution adjustments in most cases
where we issue securities at a purchase, exercise or conversion price that is
less than the then-applicable fixed conversion price of the note. For example,
if the fixed conversion price were $1.30 per share and we were to issue
1,000,000 shares of common stock at a price of $1.00 per share in a transaction
that is not excluded from the anti-dilution provisions, then the fixed
conversion price would be reduced to $1.28 per share, and approximately 25,601
additional shares of common stock would become issuable upon conversion of the
principal amount of the Laurus Notes. Consequently, the voting power and value
of your investment would decline if conversions occurred at the new lower fixed
conversion price.

                                       30





<PAGE>

         THE MARKET PRICE OF OUR COMMON STOCK COULD SUBSTANTIALLY DECLINE AND
         THE VOTING POWER AND VALUE OF YOUR INVESTMENT COULD BE SUBJECT TO
         UNLIMITED ADDITIONAL DILUTION IF THE LAURUS NOTES WERE CONVERTED ON
         ONE OR MORE OCCASIONS AT AN ALTERNATE CONVERSION PRICE THAT APPLIES IF
         WE ISSUE A CALL NOTICE UNDER ONE OR BOTH OF THE LAURUS NOTES,
         PARTICULARLY IF LAURUS SEQUENTIALLY CONVERTS PORTIONS OF THE LAURUS
         NOTES INTO SHARES OF OUR COMMON STOCK AT ALTERNATE CONVERSION PRICES
         AND RESELLS THOSE SHARES INTO THE MARKET.

         If we are in default or if we issue call notices under Laurus Notes,
then an alternate conversion price based on a discount from the market price of
our common stock may apply, and the Laurus Notes could become convertible into
an unlimited number of additional shares of our common stock, particularly if
Laurus sequentially converts portions of the Laurus Notes into shares of our
common stock at alternate conversion prices and resells those shares into the
market. If Laurus sequentially converts portions of the Laurus Notes into shares
of our common stock at alternate conversion prices and resells those shares into
the market, then the market price of our common stock could decline due to the
additional shares available in the market, particularly in light of the
relatively thin trading volume of our common stock. Consequently, if Laurus
repeatedly converts portions of the Laurus Notes at alternate conversion prices
and then resells those underlying shares into the market, a continuous downward
spiral of the market price of our common stock could occur that would benefit
Laurus at the expense of other existing or potential holders of our common
stock, creating a conflict of interest between Laurus and investors who purchase
the shares of common stock resold by Laurus following conversion of the Laurus
Notes.

         THE MARKET PRICE OF OUR COMMON STOCK COULD SUBSTANTIALLY DECLINE AND
         THE VOTING POWER AND VALUE OF YOUR INVESTMENT COULD BE SUBJECT TO
         ADDITIONAL DILUTION IF THE LAURUS NOTES ARE CONVERTED ON ONE OR MORE
         OCCASIONS AT AN ALTERNATE CONVERSION PRICE THAT APPLIES IF WE
         PREVIOUSLY ELECTED TO PAY ALL OR A PORTION OF OUR MONTHLY PAYMENT IN
         SHARES OF OUR COMMON STOCK AND OUR STOCK IS TRADING AT LESS THAN $1.43
         FOR THE TEN TRADING DAYS PRECEDING THE MONTLY PAYMENT DATE,
         PARTICULARLY IF LAURUS SEQUENTIALLY CONVERTS PORTIONS OF THESE NOTES
         INTO SHARES OF OUR COMMON STOCK AT ALTERNATE CONVERSION PRICES AND
         RESELLS THOSE SHARES INTO THE MARKET.

         If we elect to pay all or a portion of a monthly payment in shares of
our common stock and the average closing price of our common stock for the 10
trading days preceding the monthly payment date is less than $1.43, then we, at
our sole discretion, must determine whether to pay the monthly payment in cash
or to require Laurus to convert all or part of the monthly payment amount that
we had elected to pay in shares of our common stock at a conversion price equal
to 85% of the average of the three lowest closing prices during the 20 trading
days immediately preceding the conversion date. If Laurus sequentially converts
portions of the Laurus Notes into shares of our common stock at alternate
conversion prices and resells those shares into the market, then the market
price of our common stock could decline due to the additional shares available
in the market, particularly in light of the relatively thin trading volume of
our common stock. Consequently, if we elect to have Laurus repeatedly convert
portions of the Laurus Notes at alternate conversion prices and then Laurus
resells those underlying shares into the market, a continuous downward spiral of
the market price of our common stock could occur that would benefit Laurus at
the expense of other existing or potential holders of our common stock, creating
a conflict of interest between Laurus and investors who purchase the shares of
common stock resold by Laurus following conversion of the Laurus Notes.

                                       31





<PAGE>

         For example, if we elect to pay Laurus in shares of our common stock
and the average closing price of our common stock for the 10 trading days
preceding the monthly payment date is less than $1.43, then the conversion price
of the monthly payment will be equal to 85% of the average of the three lowest
closing prices our common stock during the preceding 20 trading days. So, if our
stock price meets the above conditions and we elect to convert $100,000 of the
monthly payment of the note at a time when the fixed conversion price was $1.30
per share and the average of the three lowest closing prices of our common stock
during the 20 preceding trading days also was $1.30, then the applicable
conversion price would be $1.105 rather than $1.30, and the number of shares
issuable upon the conversion would be 90,498 based upon the alternate conversion
price rather than 76,923 based upon the fixed conversion price. The resale of
those shares into the market would very likely depress the market price of our
common stock because our stock is thinly traded and because Laurus could resell
those shares at a discount to the market price and still realize a profit.

         For example, Laurus could resell the 90,498 shares at a price of $1.20,
which is $0.095 above the hypothetical $1.105 alternate conversion price but
$0.10 below the $1.30 hypothetical market price. If such a sale were to cause
the average of the three lowest closing prices of our common stock to decline
from $1.30 to $1.20 during the 20 trading days preceding Laurus' next conversion
at an alternate conversion price, then, upon our election, Laurus must convert
all or any remaining portion of the monthly payment at a conversion price equal
to 85% of $1.20, or $1.02, and then resell those shares at a discount from this
new, lower market price while still making a profit on the resale, such as
selling for $1.10 and still realizing a $0.08 profit while causing the market
price to go to $1.10. Consequently, the market price of our common stock could
decline and the voting power and value of your investment could be subject to
unlimited additional dilution if we elect to have Laurus repeatedly convert
portions of the Laurus Notes monthly payment at alternate conversion prices and
then Laurus resells those underlying shares into the market.

         CONTRACTUAL LIMITATIONS THAT RESTRICT LAURUS' ABILITY TO CONVERT THE
         LAURUS NOTES MAY NOT NECESSARILY PREVENT SUBSTANTIAL DILUTION OF THE
         VOTING POWER AND VALUE OF YOUR INVESTMENT.

         The contractual limitations that restrict Laurus' ability to convert
the Laurus Notes into, or the exercise of the December 2002 Warrant or the July
2003 warrant (collectively, "Laurus Warrants") for shares of our common stock
are limited in their application and effect and may not prevent substantial
dilution of your investment. Laurus may not, on any given date, convert the
Laurus Notes if, and to the extent that, the conversion would result in the
issuance of a number of shares of common stock with a dollar value that exceeds
25% of the aggregate dollar trading volume of our common stock during the
preceding 30 trading days. However, Laurus may make a series of smaller
conversions that do not exceed this limitation but that result in a decline in
the market price of our common stock and a decline in the voting power and value
of your investment, particularly if Laurus sequentially converts portions of the
Laurus Notes into shares of our common stock at alternate conversion prices and
resells those shares into the market, as described elsewhere in these risk
factors.

         In addition, Laurus is subject to a contractual 4.99% beneficial
ownership limitation that prohibits Laurus from converting the notes if and to
the extent that the conversion would result in Laurus, together with its
affiliates, beneficially owning more than 4.99% of our outstanding common stock.
However, this 4.99% limitation automatically becomes void upon an event of
default under the Laurus Notes and can be waived by Laurus upon 75 days' advance
notice to us. In addition, this 4.99% limitation does not prevent Laurus from
converting the Laurus Notes into shares of common stock and then reselling those
shares in stages over time where Laurus and its affiliates do not, at any given
time, beneficially own shares in excess of the 4.99% limitation. Further, a
contractual limitation that prohibits Laurus from converting the two notes if,
and to the extent, the conversion would result in Laurus and its affiliates
beneficially owning more than 3,565,514 shares of our common stock, will be
removed if and when we obtain stockholder approval at Laurus' request or if an
exemption from applicable Nasdaq corporate governance rules becomes available.
Consequently, these limitations will not necessarily prevent substantial
dilution of the voting power and value of your investment.

                                       32





<PAGE>

         CONVERSIONS OF THE LAURUS NOTES AT DRAMATICALLY REDUCED CONVERSION
         PRICES COULD RESULT IN A CHANGE OF CONTROL OF OUR COMPANY.

         A change of control of our company could occur if, as discussed
elsewhere in these risk factors, conversions of the Laurus Notes occur at
dramatically reduced conversion prices, such as if Laurus sequentially converts
portions of the Laurus Notes at alternate conversion prices into shares of our
common stock and resells those shares into the market. If a change of control
occurs, then the stockholders who historically have controlled our company would
no longer have the ability to exert significant control over matters that could
include the election of directors, changes in the size and composition of the
board of directors, and mergers and other business combinations involving our
company. Instead, one or more other stockholders could gain the ability to exert
this type of control and may also, through control of the board of directors and
voting power, be able to control certain decisions, including decisions
regarding the qualification and appointment of officers, dividend policy, access
to capital (including borrowing from third-party lenders and the issuance of
additional equity securities), and the acquisition or disposition of our assets.

         IF CONVERSIONS OF THE 2002 NOTE AND 2003 NOTE AT DRAMATICALLY REDUCED
         CONVERSION PRICES RESULT IN A CHANGE OF CONTROL OF OUR COMPANY OR THE
         FAILURE OF OUR COMMON STOCK TO MEET NASDAQ MINIMUM BID PRICE
         REQUIREMENTS, THEN WE COULD BE DELISTED FROM THE NASDAQ SMALLCAP
         MARKET, WHICH COULD REDUCE THE LIQUIDITY OF OUR COMMON STOCK AND
         INHIBIT OR PRECLUDE OUR ABILITY TO RAISE ANY NEEDED WORKING CAPITAL
         FROM EQUITY INVESTORS.

         A change of control of our company or a substantial decline in the
market value of our common stock could occur if, as discussed elsewhere in these
risk factors, conversions of Laurus Notes occur at dramatically reduced
conversion prices, such as if Laurus sequentially converts portions of the
Laurus Notes into shares of our common stock and resells those shares into the
market. Nasdaq's qualification standards require, among other things, that
issuers apply for initial inclusion on Nasdaq following a change of control.
Nasdaq looks at many factors in determining whether a change of control has
occurred, including without limitation, changes in the management, board of
directors, voting power and ownership of a company. If Nasdaq determines that a
change of control has occurred due to conversions of the Laurus Notes or
otherwise, we would need to file a new listing application if we want to
maintain our Nasdaq listing. We do not know whether, at the time, if any, that
we would file a new listing application with Nasdaq, we would meet the initial
listing standards of The Nasdaq SmallCap Market.

         In addition, Nasdaq's quantitative listing standards require, among
other things, that listed companies maintain a minimum bid price of $1.00. If
our bid price falls and remains below $1.00 for at least 30 consecutive trading
days, whether due to sequential conversions of the notes and resales of the
underlying shares or otherwise, we may be delisted if we do not regain
compliance with the bid price requirement within any applicable grace period.

         If we are delisted from The Nasdaq SmallCap Market, our stock price
could decline and the ability of our stockholders and of any potential or future
investors to achieve liquidity from our common stock could be severely limited.
This could inhibit, if not preclude, our ability to raise any needed additional
working capital through equity offerings on acceptable terms.

                                       33





<PAGE>

         IF WE ARE UNSUCCESSFUL IN MAINTAINING COMPLIANCE WITH OR MODIFYING OUR
         REGISTRATION OBLIGATIONS WITH REGARD TO THE LAURUS NOTES AND RELATED
         WARRANTS, WE MAY INCUR SUBSTANTIAL MONETARY PENALTIES.

         The agreements we entered into in connection with our issuance of the
Laurus Notes require us to, among other things, register for resale the shares
of common stock issued or issuable under the Laurus Notes and the accompanying
warrants and maintain the effectiveness of the registration statement for an
extended period of time. We are currently in compliance with our registration
obligations. If we are unable to maintain effectiveness of the required
registration statement, or to modify our registration obligations, then we may
be required to pay additional liquidated damages, which would adversely affect
our business, operating results, financial condition, and ability to service our
other indebtedness by negatively impacting our cash flows.

         OUR ADOPTION OF SFAS NO. 142 INCREASED OUR LOSSES FOR THE YEAR ENDED
         MARCH 31, 2003 BY $5,824,000 DUE TO AN IMPAIRMENT WRITE-DOWN FOR OUR
         IT SERVICES DIVISION AND COULD ALSO CAUSE US TO INCUR LARGE LOSSES IN
         FUTURE ACCOUNTING PERIODS IF WE DETERMINE THAT THERE HAS BEEN
         ADDITIONAL IMPAIRMENT OF GOODWILL.

         We adopted this statement effective SFAS No. 142 on April 1, 2002. We
assessed the fair value of our reporting units by considering their projected
cash flows, using risk-adjusted discount rates, and other valuation techniques
and concluded that, as of April 1, 2002, an impairment write-down for our IT
services division was required and accordingly recorded an impairment charge of
$5,824,000 to IT services goodwill in fiscal 2003 as a cumulative effect of a
change in accounting principle. We are required to perform additional reviews
for impairment annually, or more frequently if events occur or circumstances
change that would more likely than not reduce the fair value of the net carrying
amount. We cannot predict whether or when there will be an additional impairment
charge, or the amount of any such charge. If the charge is significant, it could
cause the market price of our common stock to decline. The unamortized balance
of goodwill as of March 31, 2004 was $2,941,000.

         OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR CURRENT MANAGEMENT
         TEAM.

         Our founder, Chairman and Chief Executive Officer, Amrit K. Das, and
our Chief Operating Officer, Santanu K. Das, have been with us for at least 23
years and 14 years, respectively. Their experience, expertise, industry
knowledge and historical company knowledge would be extremely difficult to
replace if we were to lose the services of either of them. The precise impact of
the loss of services of either of them is extremely difficult to predict, but
would likely result in, at a minimum, significant costs to recruit, hire and
retain a successor and impair operating results while the successor was being
recruited and transitioning into the position.

         THE MARKETS IN WHICH WE CURRENTLY COMPETE WILL CONTINUE TO BE HIGHLY
         COMPETITIVE, WHICH HAS RESULTED IN SIGNIFICANT PRICE COMPETITION AND
         MAY RESULT IN REDUCED REVENUES OR LOSS OF MARKET SHARE.

         The Internet-based services, Internet-based engineering software
products and services and telephony services markets each are highly
competitive. The market for Internet-based products and services is
characterized by an increasing number of entrants due to low start-up costs.
Some of our competitors and potential competitors have larger technical staffs,
more established and larger marketing and sales organizations and significantly
greater financial resources than ours. Our competitors may develop products and
services that are superior to ours or that achieve greater market acceptance.
Our future success will depend significantly upon our ability to increase our
share of our target markets and to sell additional products, product

                                       34





<PAGE>

enhancements and services to our customers. We are experiencing pricing
pressures as we work to expand our software products and services market share.
We also are experiencing pricing pressures in our telecommunications operations
due to the turmoil in that market sector. As a result of these pricing
pressures, we may experience declines in our revenues, gross margins and market
share.

         OUR OPERATING RESULTS MAY BE ADVERSELY IMPACTED BY EXCHANGE RATE
         FLUCTUATIONS.

         We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into U.S. dollars, and the
statements of operations are converted using weighted average exchange rates for
the applicable periods. Foreign currency denominated sales may result in gains
and losses on the conversion to U.S. dollars. Therefore, exchange rate
fluctuations can have a detrimental effect on our reported operating results. We
do not engage in hedging activities to protect against the risk of currency
fluctuations.

         WE SELL A SIGNIFICANT PORTION OF OUR PRODUCTS AND SERVICES TO
         CUSTOMERS IN INTERNATIONAL MARKETS IN WHICH WE MAY HAVE DIFFICULTY
         PROTECTING IMPORTANT INTELLECTUAL PROPERTY RIGHTS.

         Sales of our products and services to customers located outside the
U.S. accounted for approximately 51.1% and 40.9% of our total net revenues for
the fiscal years ended March 31, 2004 and March 31, 2003, respectively. Our
intellectual property rights are an important aspect of our international
business. We rely primarily on a combination of contract, copyright, trademark
and trade secret laws, domain name registration, license and confidentiality
agreements and software security measures to protect our proprietary technology.
However, we believe that existing laws provide limited protection for our
technology and that it may be possible for a third party to misappropriate our
technology or to independently develop similar technology. Protective measures
we take may be even less effective in the emerging Internet law field because
online contracting, privacy and liability issues, among others, are still being
resolved. This lack of certainty is even greater in India, where the use of the
Internet is less evolved than in the U.S. In addition, effective copyright and
trade secret protection may not be available in every jurisdiction where we
distribute our products, particularly in foreign countries where the laws
generally offer no protection or less protection than the laws of the U.S. The
laws of India and other foreign countries in which we operate do not protect
intellectual property rights to the same extent as the laws of the U.S. For
example, India's statutory laws do not protect service marks. Because a
significant portion of our sales of products and services comes from
international markets, this lack of copyright and trade secret protection could
adversely affect our business and results of operations if a third party were
successful in copying our products and services and marketing products and
services similar to ours.

         CONFLICTS INVOLVING INDIA AND FUTURE CHANGES IN THE INDIAN GOVERNMENT
         POLICY FAVORING ECONOMIC LIBERALIZATION COULD MAKE OUR INDIAN
         OPERATIONS ECONOMICALLY UNVIABLE.

         During the fiscal years ended March 31, 2004 and March 31, 2003, we
derived approximately 11.6% and 6.4%, respectively, of our total net revenues
from sales made by our Indian operations primarily to customers in India.
However, more than one-half of our employees, many of whom are engaged in
non-sales activities such as engineering business process outsourcing, technical
support and research and development, were based in India. India has from time
to time experienced civil unrest and hostilities with its neighboring countries.
Although the Indian government has changed four times since 1996, the government
of India has pursued policies of economic liberalization throughout the past
decade and the new government that came to power in 2004 has promised to
continue the same. These policies have resulted in significantly increased
opportunities for publicly and privately held businesses in the information
technology services markets in which we operate in India. However, we cannot
assure you that the current government will remain in power or that these
policies will continue. A significant change in the Indian government's policies

                                       35





<PAGE>

could cause our operations in India to become more expensive or more difficult,
and in either case cause us to have to re-evaluate the economic viability of
operating there. Moreover, if civil unrest or hostilities involving India and
any of its neighboring countries should occur, it could have an adverse effect
on the communication infrastructure in India, which could, in turn, cause our
operations there to cease making economic sense. In that event, we may need to
expend significant time and resources in relocating and conducting our Indian
operations elsewhere.

         IF THE QUALITY AND MAINTENANCE OF THE THIRD-PARTY COMMUNICATIONS
         INFRASTRUCTURE ON WHICH WE RELY SUFFERS, OUR SERVICE COULD BE
         DISRUPTED, OUR REPUTATION COULD BE HARMED AND WE COULD LOSE CUSTOMERS.

         We rely on a third-party communications infrastructure to carry our
voice traffic. We have no control over whether the infrastructure on which we
rely will be adequately maintained by the third parties or whether the third
parties will be able to upgrade or improve their equipment and prevent it from
becoming obsolete. If the third parties fail to maintain, upgrade or improve
their equipment, our ability to provide services would be impaired or
interrupted. Impairments or interruptions, particularly impairments or
interruptions that are frequent or long-lasting, could harm our reputation and
cause us to lose existing or potential customers.

         CHANGING TECHNOLOGY MAY RENDER OUR PRODUCT AND SERVICE OFFERINGS
         OBSOLETE AND, THEREFORE, UNMARKETABLE.

         Our ability to compete successfully depends upon the continued
compatibility and interoperability of our services with products and
architectures offered by various vendors. Although we intend to support emerging
standards in the market for Internet access, industry standards may not be
established and, if they become established, we may not be able to conform to
these new standards in a timely fashion or maintain a competitive position in
the market. The announcement or introduction of new products or services by us
or our competitors and any change in industry standards could cause our
customers to defer or cancel purchases of existing products or services.

         U.S. FEDERAL OR STATE GOVERNMENTS MAY INCREASE TELEPHONY REGULATION,
         WHICH COULD CAUSE OUR TELEPHONY BUSINESS TO BECOME ECONOMICALLY
         UNVIABLE, EITHER AS A RESULT OF INCREASED EXPENSES OR AS A RESULT OF
         LIMITATIONS ON GROWING THAT BUSINESS.

         Our provision of telecommunications services is subject to government
regulation in the U.S. Federal law regulates international and interstate
telecommunications, while states have jurisdiction over telecommunications that
originate and terminate within the same state. Changes in existing policies or
regulations by Congress, by the Federal Communications Commission, or the FCC,
or by any state could cause operating in this field to become more expensive or
could cause expansion to become more difficult, such as by limiting the ability
to obtain necessary licenses. We cannot assure you that the regulatory
authorities in one or more states or the FCC will not take action causing this
business to become unviable for us.

         OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE, WHICH COULD
         RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES OF OUR
         COMMON STOCK.

         The market prices of securities of technology-based companies like
ours, particularly Internet-related companies, currently are highly volatile.
The market price of our common stock has fluctuated significantly in the past.
In fact, during the 52-week period ended June 8, 2004, the high and low sale
prices of a share of our common stock were $2.32 and $0.93, respectively. Our
market price may continue to exhibit significant fluctuations in response to a
variety of factors, many of which are beyond our control. These factors include,

                                       36





<PAGE>

among others, deviations in our results of operations from the estimates of
securities analysts, changes in securities analysts' estimates of our financial
performance, changes in market valuations of similar companies and stock market
price and volume fluctuations generally. Additionally, until the full effects of
cost-cutting that began more than a year ago become clear, including whether
those cuts have a long-term negative impact on revenues, it is likely that our
quarter-to-quarter performance will be unpredictable and our stock price
particularly volatile.

         In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. Because of the volatility of the market price of our common stock,
we may in the future be the target of similar litigation. Securities litigation
could result in substantial costs and divert management's attention and
resources.

         OUR NET OPERATING LOSS CARRYFORWARDS MAY BE SUBJECT TO AN ANNUAL
         LIMITATION ON THEIR UTILIZATION, WHICH MAY INCREASE OUR TAXES AND
         DECREASE AFTER-TAX INCOME AND CASH FLOWS.

         As of March 31, 2004, we had available net operating loss carryforwards
of $19,748,000 for federal income tax purposes and $11,142,000 for state income
tax purposes. Due to the "change in ownership" provisions of the Tax Reform Act
of 1986, our net operating loss carryforwards may be subject to an annual
limitation on the utilization of these carryforwards against taxable income in
future periods if a cumulative change in ownership of more than 50% occurs
within any three-year period. To the extent we are unable to fully use these net
operating loss carryforwards to offset future taxable income, we will be subject
to income taxes on future taxable income, which will decrease our after-tax
income and cash flows.

         THE CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK GIVES A FEW
         INDIVIDUALS SIGNIFICANT CONTROL OVER IMPORTANT POLICY DECISIONS AND
         COULD DELAY OR PREVENT CHANGES OF CONTROL.

         As of June 8, 2004, our executive officers and directors and their
family members together beneficially owned approximately 30.2% of the issued and
outstanding shares of our common stock. As a result, these persons have the
ability to exert significant control over matters that could include the
election of directors, changes in the size and composition of the board of
directors, and mergers and other business combinations involving our company. In
addition, through control of the board of directors and voting power, they may
be able to control certain decisions, including decisions regarding the
qualification and appointment of officers, dividend policy, access to capital
(including borrowing from third-party lenders and the issuance of additional
equity securities), and the acquisition or disposition of our assets. In
addition, the concentration of voting power in the hands of those individuals
could have the effect of delaying or preventing a change of control of our
company, even if the change of control would benefit our stockholders. A
perception in the investment community of an anti-takeover environment at our
company could cause investors to value our stock lower than in the absence of
such a perception.

ITEM 7.  FINANCIAL STATEMENTS.

         Our consolidated financial statements are included in this Form 10-KSB
beginning on page F-1.

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

         None.

                                       37





<PAGE>

ITEM 8A.  CONTROLS AND PROCEDURES.

         Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of March 31, 2004, that the design and operation of
our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated, recorded, processed,
summarized and reported to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
whether or not disclosure is required.

         During the quarter ended March 31, 2004, there were no changes in our
internal controls over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

                                       38





<PAGE>

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

         Our directors, executive officers and key employees as of June 22, 2004
were as follows:

<TABLE>
<CAPTION>
            Name                  Age                           Position
            ----                  ---                           --------

<S>                               <C>      <C>
Amrit K. Das                      58       Chairman of the Board, Chief Executive Officer,
                                             President and Director
Santanu K. Das                    31       Executive Vice President, Chief Operating Officer and Director
Stephen W. Owen                   45       Corporate Vice President, President of European
                                             Operations
Bruce K. Nelson                   48       Chief Financial Officer
Clara Y.M. Young                  49       Corporate Vice President, Chief Administrative Officer
                                             and Secretary
D. Dean McCormick III (1) (2)     51       Director
Stanley W. Corbett (1) (2)        71       Director
Benedict A. Eazzetta (1) (2)      41       Director
</TABLE>
----------------------------
(1) Member of Audit Committee.
(2) Member of Compensation and Stock Option Committee.

         AMRIT K. DAS is the founder of our company. He has served as our Chief
Executive Officer and Chairman of our board of directors since our inception in
1981 and as our President since November 2003. Mr. Das also served as our
President from our inception until March 1999. Mr. Das holds a B.S. in
Civil/Structural Engineering from Calcutta University, India, and an M.S. in
Structural Engineering from the University of South Carolina.

         SANTANU K. DAS has served as our Executive Vice President and Chief
Operating Officer and Director since November 2003. Prior to that, he served as
Corporate Vice President and President of Engineering and Collaborative Software
from April 2002 to November 2003, as our Vice President of New Technology from
July 1999 to November 2003 and as a director from September 1996 to July 2003.
Prior to that, Mr. Das served as our Corporate Vice President and President of
Engineering and Animation Software and ASP from January 2001 to March 2002.
Prior to that, Mr. Das served as our Manager of New Technology from May 1997
until June 1999, and as a Senior Engineering Analyst for our company from 1991
to April 1997. Mr. Das holds a B.S. in Structural Engineering from the
University of Southern California and an M.S. in Structural Engineering from the
Massachusetts Institute of Technology. Santanu Das is the son of Amrit K. Das.

         STEPHEN W. OWEN has served as our Corporate Vice President since
September 2001 and as President of European Operations since October 1999. He
served as a director of netGuru from September 2001 to July 2003. Prior to that,
he served as our Director of European Operations from 1987 to 1999. Mr. Owen
holds a B.S. in Civil Engineering from the University College Swansea, United
Kingdom and is a Chartered Engineer for both Civil and Marine Technology
Engineering.

                                       39





<PAGE>

         BRUCE K. NELSON has served as our Chief Financial Officer since April
2002. Prior to joining us, Mr. Nelson served as Chief Financial Officer of
Millennium Information Technologies, Inc. from 1997 to April 2002. From 1992 to
1997, he was co-founder and President of Comprehensive Weight Management, a
healthcare marketing company. From 1985 to 1992, Mr. Nelson served as Treasurer
of Comprehensive Care Corporation, a NYSE-traded national service company. Mr.
Nelson holds a B.S. in Finance from University of Southern California and an
M.B.A. from Bryant College in Smithfield, Rhode Island.

         CLARA Y.M. YOUNG has served as our Corporate Vice President and Chief
Administrative Officer since January 2001 and as our Secretary since March 2001.
Ms. Young served as our Vice President, Administration from December 1987 to
December 2000. Prior to that, Ms. Young served as program analyst with The
Technical Group, Inc. from December 1982 to December 1987. Ms. Young holds a
B.S. in Computer Science from California State University, Fullerton.

         D. DEAN MCCORMICK III is a certified public accountant and has been
president of the consulting and accounting firm of McCormick Consulting, Inc.
(formerly known as McCormick & Company) since July 1993. Mr. McCormick has been
a member of the Forum for Corporate Directors since June 2003 and a member of
the Orange County Leadership Council for the University of Southern California
since September 2001. He served as president of the Orange County Chapter of the
Association for Corporate Growth from 1995 to 1996. Mr. McCormick holds a B.A.
degree in Economics from the University of Redlands and an M.B.A. from the
University of Southern California.

         STANLEY W. CORBETT has served as one of our directors since July 2002.
Mr. Corbett is a manufacturing executive in the aerospace industry. Since 1989,
Mr. Corbett has been providing consulting services for software system
implementations to first and second tier defense contractors as well as
commercial manufacturers. As a consultant, he also has provided solutions to a
large variety of manufacturing problems. Mr. Corbett holds a B.S. in Mechanical
Engineering from Lehigh University and an M.S. in Industrial Engineering from
Stanford University and has completed the University of California at Los
Angeles Executive Program.

         BENEDICT A. EAZZETTA has served as chief operating officer of
Intergraph Process Power & Offshore, an engineering software and services
business segment of Intergraph Corporation (Nasdaq NM:INGR) and executive vice
president of Intergraph Corporation, since May 2001. He co-founded and then
served from January 2000 to April 2001 as vice president of product management
for Industria Solutions, a privately held software and services company. Mr.
Eazzetta served as an engineering executive at ExxonMobil from January 1996 to
January 2000. Prior to that, he served in several engineering, staff and
management positions, including downstream planning and development, economics
and planning, and various operational supervisory roles. Mr. Eazzetta earned a
B.S. degree in Nuclear Engineering and an M.S. degree in Mechanical Engineering
from Georgia Tech.

         All directors hold office until the next annual stockholders' meeting
or until their respective successors are elected or until their earlier death,
resignation or removal. Officers are appointed by, and serve at the discretion
of, our board of directors.

CODE OF BUSINESS CONDUCT AND ETHICS

         Our code of business conduct and ethics, as approved by our board of
directors, can be obtained from our Website, at
http://www.netguru.com/netGuruPolicies.asp.

         We intend to satisfy the disclosure requirement under Item 10 of Form
8-K relating to amendments to or waivers from provisions of the code that relate
to one or more of the items set forth in Item 406(b) of Regulation S-B, by
describing on our Internet Website, within five business days following the date
of a waiver or a substantive amendment, the date of the waiver or amendment, the
nature of the amendment or waiver, and the name of the person to whom the waiver
was granted.

                                       40





<PAGE>

         Information on our Internet website is not, and shall not be deemed to
be, a part of this report or incorporated into any other filings we make with
the Securities and Exchange Commission.

AUDIT COMMITTEE MATTERS

         Prior to July 25, 2003, our Audit Committee consisted of Stanley W.
Corbett, Garret Vreeland and Dr. Laxmi Mall Singhvi. Since July 25, 2003, our
Audit Committee has consisted of Messrs. Corbett, Eazzetta and McCormick, with
Mr. McCormick holding the position of chairman of that committee. Each of the
members of our Audit Committee is "independent" within the meaning of Rule
4200(a)(15) of the listing standards of the National Association of Securities
Dealers. Our board of directors has determined that Mr. McCormick is an "audit
committee financial expert" under SEC rules and meets the NASD's professional
experience requirements.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended, or
the Exchange Act, requires our executive officers and directors, and persons who
beneficially own more than 10% of a registered class of our common stock, to
file initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission, or the SEC. These officers, directors and
stockholders are required by SEC regulations to furnish us with copies of all
such reports that they file.

         Based solely upon a review of copies of such reports furnished to us
during the fiscal year ended March 31, 2004 and thereafter, or any written
representations received by us from reporting persons that no other reports were
required, we believe that, during our fiscal 2004, all Section 16(a) filing
requirements applicable to our reporting persons were met, except that Mr. Peter
Kellogg filed a late Form 5 to report two transactions that occurred during
fiscal 2003 and a late Form 5 to report a transaction that occurred during
fiscal 2004.

                                       41





<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

         The following table sets forth information concerning the annual and
long-term compensation for services rendered during the last three fiscal years
to our company in all capacities as an employee by our Chief Executive Officer
and our other executive officers whose aggregate cash compensation exceeded
$100,000 (collectively, the "named executive officers") during fiscal 2004 shown
below. Amrit K. Das and Santanu K. Das accepted the additional positions of
President and Chief Operating Officer, respectively, when Jyoti Chatterjee
resigned from those positions in November 2003.

<TABLE>
<CAPTION>
                                            Annual Compensation           Long-Term Compensation
                                       ------------------------------  ---------------------------
                                                                          Awards        Payouts
                                                                       -----------    ------------
                                                                       Securities
                                                      Other Annual     Underlying      All Other
           Name and                     Salary      Compensation (1)     Options      Compensation
      Principal Position         Year     ($)              ($)             (#)            ($)
      ------------------         ----  ---------    -----------------  -----------    ------------

<S>                             <C>     <C>              <C>            <C>            <C>     <C>
Amrit K. Das                    2004    330,462             ---            ---         12,324  (3)
   Chairman, Chief Executive    2003    335,513          34,259 (2)        ---         15,524  (4)
   Office, President            2002    348,923          43,024 (2)        ---         18,599  (5)

Jyoti Chatterjee                2004    158,198             ---          200,000       62,799  (6)
   Former President, Former     2003    214,665             ---            ---         13,756  (7)
   Chief Operating Officer      2002    223,062             ---            ---         15,128  (8)

Clara Y.M. Young                2004    126,231             ---          12,000         3,910  (9)
   Corp. Vice President,        2003    128,682             ---            ---          6,340 (10)
   Chief Administrative         2002    133,962             ---            ---         11,305 (11)
Officer

Stephen W. Owen                 2004    157,477             ---            ---            767 (13)
   Corporate Vice President,    2003    142,610             492 (12)       ---            680 (13)
   President, European          2002    169,043           5,100 (12)       ---            646 (13)
Operations

Santanu K. Das                  2004    121,615             ---            ---          8,750 (14)
   Corporate Vice President,    2003    120,150             ---            ---         11,242 (15)
   Chief Operating Officer      2002    124,616             ---            ---         15,992 (16)
</TABLE>

--------------------------------------------------------------------------------
(1)  The costs of certain benefits are not included because they did not exceed,
     in the case of each named executive officer, the lesser of $50,000 or 10%
     of the total annual salary and bonus as reported above.
(2)  Represent personal expenses paid on behalf of the named executive officer,
     none of which expenses exceeded 25% of the total expenses reported.
(3)  Includes $6,324 in premiums paid by us pursuant to a split-dollar life
     insurance policy established for the benefit of Amrit Das and $6,000 in
     company contributions to the 401(k) plan.
(4)  Includes $6,324 in premiums paid by us pursuant to a split-dollar life
     insurance policy established for the benefit of Amrit Das and $9,200 in
     company contributions to the 401(k) plan.
(5)  Includes $7,499 in premiums paid by us pursuant to a split-dollar life
     insurance policy established for the benefit of Amrit Das and $11,100 in
     company contributions to the 401(k) plan.
(6)  Includes $1,267 in premiums paid by us pursuant to a life insurance policy
     established for the benefit of Jyoti Chatterjee, $4,510 in company
     contributions to the 401(k) plan, and $57,022 in cash payments paid between
     January 1, 2004 and June 1, 2004 in connection with Mr. Chatterjee's
     separation and release agreement.
(7)  Includes $2,471 in premiums paid by us pursuant to a life insurance policy
     established for the benefit of Jyoti Chatterjee, $1,689 in premiums paid by
     us pursuant to a long-term disability insurance policy and $9,596 in
     company contributions to the 401(k) plan.
(8)  Includes $2,471 in premiums paid by us pursuant to a life insurance policy
     established for the benefit of Jyoti Chatterjee, $1,689 in premiums paid by
     us pursuant to a long-term disability insurance policy and $10,968 in
     company contributions to the 401(k) plan.
(9)  Includes $400 in premiums paid by us pursuant to a long-term disability
     insurance policy for the benefit of Clara Young and $3,510 in company
     contributions to the 401(k) plan.
(10) Includes $400 in premiums paid by us pursuant to a long-term disability
     insurance policy for the benefit of Clara Young and $5,940 in company
     contributions to the 401(k) plan.
(11) Includes $400 in premiums paid by us pursuant to a long-term disability
     insurance policy for the benefit of Clara Young and $10,905 in company
     contributions to the 401(k) plan.
(12) Represents imputed interest for Stephen Owen's non-interest bearing loan.

                                       42





<PAGE>

(13) Represents premiums paid by us pursuant to a life insurance policy
     established for the benefit of Stephen Owen.
(14) Includes $5,150 in premiums paid by us pursuant to a life insurance policy
     established for the benefit of Santanu Das and $3,600 in company
     contributions to the 401(k) plan.
(15) Includes $5,150 in premiums paid by us pursuant to a life insurance policy
     established for the benefit of Santanu Das and $6,092 in company
     contributions to the 401(k) plan.
(16) Includes $5,150 in premiums paid by us pursuant to a life insurance policy
     established for the benefit of Santanu Das and $10,842 in company
     contributions to the 401(k) plan.

OPTION GRANTS IN LAST FISCAL YEAR

         The following table provides information regarding options granted in
fiscal 2004 to the named executive officers. We have never granted any stock
appreciation rights.

<TABLE>
<CAPTION>
                                                                   PERCENT
                                                                   OF TOTAL
                                                                   OPTIONS
                                                   NUMBER OF      GRANTED TO
                                                  SECURITIES       EMPLOYEES    EXERCISE
                                    GRANT         UNDERLYING       IN FISCAL    PRICE PER  EXPIRATION
     NAME                           DATE        OPTIONS GRANTED    YEAR (1)      SHARE        DATE
     ----                          -------      ---------------   ----------   ---------    -------

<S>                                <C>              <C>             <C>          <C>        <C>
     Jyoti Chatterjee............  12/19/2003       200,000 (2)     42.7%        $1.07      5/31/2009
     Clara Y.M. Young............  11/17/2003        12,000 (3)      2.6%        $1.44      11/17/2013
------------
</TABLE>

(1) Based on options to purchase 468,300 shares granted to our employees during
    fiscal 2004.
(2) The option was granted pursuant to Mr. Chatterjee's separation agreement and
    vested and became exercisable in six monthly installments of 33,333 shares
    each, commencing January 1, 2004.
(3) The option vests and become exercisable in three equal annual installments
    commencing on the date of grant.

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

The following table provides information regarding the number of shares of our
common stock underlying exercisable and unexercisable in-the-money stock options
held by the named executive officers and the values of those options at fiscal
year-end. An option is in-the-money if the fair market value for the underlying
securities exceeds the exercise price of the option. The named executive
officers did not hold any stock appreciation rights or exercise any options
during fiscal 2004.

<TABLE>
<CAPTION>
                                                                Number of Securities
                                                           Underlying Unexercised Options      Value of Unexercised In-the-Money
                            Shares                              At Fiscal Year-End (#)           Options at Fiscal Year-End ($)
                          Acquired on        Value              ----------------------          --------------------------------
          Name            Exercise (#)    Realized ($)      Exercisable      Unexercisable      Exercisable        Unexercisable
          ----            ------------    ------------      -----------      -------------      -----------        -------------

<S>                       <C>             <C>                 <C>            <C>                <C>                <C>
Amrit K. Das              ---             ---                 200,000        ---                308,000            ---

Jyoti Chatterjee          ---             ---                 100,000        100,000            154,000            154,000

Clara Y.M. Young          ---             ---                  86,000         12,000            132,440             18,480

Stephen W. Owen           ---             ---                  92,000        ---                141,680            ---

Santanu K. Das            ---             ---                 200,000        ---                308,000            ---
</TABLE>

                                       43





<PAGE>

LONG-TERM INCENTIVE PLAN AWARDS

         In fiscal 2004, no awards were made to the named executive officers
under long-term incentive plans.

DIRECTORS' COMPENSATION

         From July 2003 to December 2003, Messrs. McCormick, Eazzetta and
Corbett, our non-employee directors, were eligible to receive $1,000 per month,
each, in consideration for their services on our board of directors. In January
2004, this amount was increased to $1,500 per month. Directors are reimbursed
for certain expenses in connection with attendance at board of directors and
committee meetings. We may also periodically award options to our directors
under our existing stock option plans and otherwise.

         During the fiscal year ended March 31, 2004, we granted fully vested
non-qualified stock options to purchase 6,000 shares of common stock each to D.
Dean McCormick III and Benedict A. Eazzetta, upon their appointment to our
board. The options have an exercise price of $1.28 per share (which price was
the fair market value of a share of our common stock on the date of the grant),
vested immediately on the date of the grant, which was August 7, 2003, and
expire August 7, 2013.

REPRICING OF OPTIONS AND SARS

         No adjustments to or repricing of stock options previously awarded to
named executives occurred in fiscal 2004.

EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

         In June 2001, we entered into five-year employment agreements with each
of Amrit Das, our Chairman, Chief Executive Officer and President; Santanu Das,
our Chief Operating Officer and Executive Vice President; and Clara Young, our
Corporate Vice President, Chief Administrative Officer and Secretary.

         The agreements provide that Mr. Amrit Das, Mr. Santanu Das and Ms.
Young will receive minimum base annual salaries of $312,000, $120,000, and
$117,000, respectively. Each agreement also provides for the grant of an annual
bonus in the discretion of the Compensation Committee of the board of directors.
The annual salaries may be adjusted upward in the discretion of the Compensation
Committee. Each employment agreement will terminate prior to its expiration if
the employee dies or becomes permanently disabled, if we cease to conduct
business, or at our election for good cause as defined in the agreements. If we
terminate an agreement other than for good cause, the employee shall (a)
continue to be paid base salary and bonuses for the remainder of the term of the
agreement, (b) continue to receive all benefits and perquisites which he or she
had been receiving immediately prior to such termination for the remainder of
the term of the agreement, and (c) be immediately vested in all stock options to
which he or she would have been entitled during the full term of the agreement
had the termination not occurred.

         Each of the agreements contains provisions for confidentiality and
assignments of intellectual property rights. In addition, each of the agreements
prohibits the employees from competing with us and from recruiting our
employees, suppliers or independent contractors within one year after
termination of the agreements.

                                       44





<PAGE>

         In June 2001, we entered into a five-year employment agreement with
Jyoti Chatterjee, our then President and Chief Operating Officer. The agreement
provided for a minimum base annual salary of $208,000 and contained terms
similar to the other employment agreements discussed above. Mr. Chatterjee
resigned from his positions with us effective November 12, 2003. In connection
with his resignation, we entered into a separation and release agreement
pursuant to which we made cash payments to Mr. Chatterjee aggregating $57,022
between January 1, 2004 and June 1, 2004, and we granted to Mr. Chatterjee a
non-qualified stock option as described in the above "Option Grants in Last
Fiscal Year" table. The separation and release agreement contains mutual general
releases between us and Mr. Chatterjee and a covenant by Mr. Chatterjee to not
accept employment or provide consulting services for any company that
manufactures structural software for analysis and design of structures in direct
competition with our STAAD.Pro software.

         In December 2003, Amrit Das voluntarily agreed to reduce his annual
salary by $100,000, effective April 2004. The $100,000 is to be used toward the
expansion of our EBPO services, which Mr. Das is managing from India. Every pay
period, $3,846 is transferred into a separate bank account set aside
specifically for EBPO service expenses. We anticipate that after our EBPO
services reach annual targeted revenues, we may award Mr. Das in future periods
all or any portion of the amount by which his salary has been reduced.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

BENEFICIAL OWNERSHIP TABLE

     GENERAL

         As of June 8, 2004, 18,812,154 shares of our common stock were
outstanding. The following table sets forth information as of that date
regarding the beneficial ownership of our common stock by:

         o    each of our directors;
         o    each of our named executive officers listed in the summary
              compensation table;
         o    all of our directors and executive officers as a group; and
         o    each person known by us to beneficially own 5% or more of the
              outstanding shares of our common stock as of the date of the
              table.

         Except as indicated below, the address for each named beneficial owner
is the same as ours. The information with respect to each person is as supplied
or confirmed by such person or based upon statements filed with the SEC. The
inclusion of shares in this table as beneficially owned is not an admission of
beneficial ownership. Percentages shown as an asterisk represent less than 1.0%.

         Beneficial ownership is determined in accordance with Rule 13d-3
promulgated by the SEC, and generally includes voting or investment power with
respect to securities. Except as indicated below, we believe each holder
possesses sole voting and investment power with respect to all of the shares of
common stock shown below as owned by that holder, subject to community property
laws where applicable. In computing the number of shares beneficially owned by a
holder and the percentage ownership of that holder, shares of common stock
subject to options or warrants or underlying notes held by that holder that are
currently exercisable or convertible or are exercisable or convertible within 60
days after the date of the table are deemed outstanding. Those shares, however,
are not deemed outstanding for the purpose of computing the percentage ownership
of any other person or group.

     SHARES BENEFICIALLY OWNED BY LAURUS MASTER FUND, LTD.

         Laurus is a security holder named in the table below. Laurus holds a
warrant to purchase up to 200,000 shares of our common stock ("2002 Warrant")
and the 2002 Note. The 2002 Warrant is exercisable at various fixed exercise
prices. The exercise prices and number of shares underlying the 2002 Warrant are
subject to anti-dilution adjustments in connection with mergers, acquisitions,
stock splits, dividends and the like.

                                       45





<PAGE>

         The 2002 Note is convertible at a fixed conversion price of $1.30 per
share, subject to anti-dilution adjustments in connection with mergers,
acquisitions, stock splits, dividends and the like, and in connection with
future issuances of our common stock at prices per share below the
then-applicable conversion price. However, under certain circumstances, such as
if we are in default under the note or if a conversion occurs pursuant to a call
notice, an alternate conversion price based on a discount from the market price
of our common stock may apply. As of the date of the table, the outstanding
principal balance of the 2002 Note was $730,000. For purposes of calculating the
number of shares shown in the table as underlying the note, we have used a
conversion price of $1.30.

         Laurus also holds a warrant to purchase up to 180,000 shares of our
common stock that we issued in July 2003 ("2003 Warrant") in connection with a
revolving credit facility, and the 2003 Note. The 2003 Warrant is exercisable at
various fixed exercise prices. The exercise prices and number of shares
underlying the warrant are subject to anti-dilution adjustments in connection
with mergers, acquisitions, stock splits, dividends and the like.

         The 2003 Note is convertible at a fixed conversion price of $1.30 per
share, subject to anti-dilution adjustments in connection with mergers,
acquisitions, stock splits, dividends and the like, and in connection with
future issuances of our common stock at prices per share below the
then-applicable conversion price. However, under certain circumstances, such as
if we are in default under the note or if a conversion occurs pursuant to a call
notice, an alternate conversion price based on a discount from the market price
of our common stock may apply. As of the date of the table, the outstanding
principal balance of the 2003 Note was $1,400,000. For purposes of calculating
the number of shares shown in the table as underlying the note, we have used a
conversion price of $1.30.

         Laurus is subject to various beneficial ownership and conversion volume
limitations with regard to the Laurus Notes and the 2002 Warrant and 2003
Warrant (collectively, "Laurus Warrants"). Laurus may not on any given date
exercise or convert these instruments if, and to the extent, that the exercise
or conversion would result in the issuance of a number of shares of common stock
with a dollar value that exceeds 25% of the aggregate dollar trading volume of
our common stock during the preceding 30 trading days. However, Laurus may make
a series of smaller exercises or conversions that do not exceed this limitation.

         In addition, Laurus is subject to a contractual 4.99% beneficial
ownership limitation that prohibits Laurus from converting the Laurus Notes and
the Laurus warrants if and to the extent that the conversion or exercise would
result in Laurus, together with its affiliates, beneficially owning more than
4.99% of our outstanding common stock. However, this 4.99% limitation
automatically becomes void upon an event of default under the Laurus Notes, and
can be waived by Laurus upon 75 days' advance notice to us. In addition, this
4.99% limitation does not prevent Laurus from converting the Laurus Notes into
or exercising the Laurus Warrants for shares of common stock and then reselling
those shares in stages over time where Laurus and its affiliates do not, at any
given time, beneficially own shares in excess of the 4.99% limitation. Further,
a contractual limitation that prohibits Laurus from converting the Laurus Notes
or exercising the Laurus Warrants if, and to the extent, the conversion or
exercise would result in Laurus and its affiliates beneficially owning more than
3,565,514 shares of our common stock, will be removed if and when we obtain
stockholder approval at Laurus' request or if an exemption from applicable
Nasdaq corporate governance rules becomes available.

         To our knowledge, Laurus has sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by it, except
that Laurus Capital Management, LLC, a Delaware limited liability company, may
be deemed a control person of the shares held by Laurus. David Grin and Eugene
Grin are the principals of Laurus Capital Management, LLC, and their address is
152 West 57th Street, New York, New York 10019.

                                       46





<PAGE>

    Name and Address           Amount and Nature of Beneficial  Percent of Class
    of Beneficial Owner        Ownership of Common Stock        of Common Stock
    -------------------        -------------------------        ---------------

    Amrit K. Das                       2,770,018 (1)                  14.6%

    Santanu Das                        2,750,900 (2)                  14.5%

    Clara Young                          121,372 (4)                    *

    Stephen Owen                         175,524 (5)                    *

    D. Dean McCormick III                  6,000 (3)                    *

    Benedict A. Eazzetta                   6,000 (3)                    *

    Stanley W. Corbett                    12,000 (3)                    *

    Peter Kellogg                      3,835,800 (6)                  20.4%

    Sormistha Das                      1,868,924 (7)                   9.9%

    Laurus Master Fund, Ltd.           2,037,293 (8)                   9.8%

    All directors and executive
     officers as a group (8
     persons)                          5,871,814 (9)                  30.2%
---------------

(1)  Includes 1,279,759 shares of common stock held by the A. and P. Das Living
     Trust, of which trust Amrit Das is the trustee, and 200,000 shares of
     common stock underlying options. Also includes 50,000 shares of common
     stock held by the Purabi Das Foundation, Inc., of which foundation Amrit
     Das is the trustee. Mr. Das disclaims beneficial ownership of the shares
     held by the foundation.

(2)    Includes 200,000 shares of common stock underlying options.

(3)  Represents shares of common stock underlying options.

(4)  Includes 86,000 shares of common stock underlying options.

(5)  Includes 38,202 shares of common stock held indirectly through Mr. Owen's
     spouse and 92,000 shares of common stock underlying options.

(6)  The address for Mr. Kellogg is 120 Broadway, New York, New York, 10271.

(7)  Includes 6,000 shares of common stock underlying options.

(8)  Represents 380,000 shares of common stock underlying warrants and 1,657,293
     shares of common stock underlying convertible promissory notes.

(9)  Includes 632,000 shares of common stock underlying options, 50,000 shares
     of common stock that are held indirectly by Amrit Das and as to which Mr.
     Das disclaims beneficial ownership, and 38,202 shares of common stock that
     are held indirectly by Mr. Owen's spouse.

                                       47





<PAGE>

EQUITY COMPENSATION PLAN INFORMATION

         The following table gives information about our common stock that may
be issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of March 31, 2004. The existing equity
compensation plans include Research Engineers, Inc. 1996 Stock Option Plan (the
"1996 Plan"), Research Engineers, Inc. 1997 Stock Option Plan (the "1997 Plan"),
Research Engineers, Inc. 1998 Stock Option Plan (the "1998 Plan") netGuru, Inc.
2000 Stock Option Plan (the "2000 Plan") and netGuru, Inc. 2003 Stock Option
Plan (the "2003 Plan") (together "the option plans").

<TABLE>
<CAPTION>
                                                                                    Number of Securities
                                                                                   Remaining Available for
                                                                                    Future Issuance Under
                            Number of Securities to be      Weighted Average         Equity Compensation
                              Issued Upon Exercise of       Exercise Price of         Plans (Excluding
                              Outstanding Options and      Outstanding Options     Securities Reflected in
      Plan Category                Warrants (1)               and Warrants                 Column)
      -------------                ------------               -------------                -------
                                        (a)                      (b)                         (c)
<S>                                  <C>                          <C>                     <C>
Equity compensation
   plans approved by                 1,927,000                    $1.96                   1,930,000
   security holders
Equity compensation
   plans not approved by
   security holders                    485,000                    $1.20                      ---
                            ------------------------          -------------            ----------------
Total                                2,412,000                    $1.81                   1,930,000
                            ========================          =============            ================
</TABLE>

(1)  Number of shares is subject to adjustment for changes in capitalization
     for stock splits, stock dividends and similar events.

         The option plans permit grants of both incentive stock options and
non-qualified stock options. Options under all plans generally vest over 3
years, though the vesting periods may vary from person to person, and are
exercisable subject to continued employment and other conditions.

         Options outstanding under equity compensation plans at March 31, 2004,
were, (see Note 5 "Stockholders' Equity" of Notes to Consolidated Financial
Statements included in this report for further information regarding the option
plans):

                                                              WEIGHTED AVERAGE
                                                               EXERCISE PRICE
                       PLAN            OPTIONS OUTSTANDING        PER SHARE
                       ----            -------------------        ---------
                       1996                  298,000                $1.39
                       1997                  267,000                $1.49
                       1998                  442,000                $2.29
                       2000                  920,000                $2.12
                 -----------------     -------------------  --------------------
                      Total                1,927,000                $1.96
                 =================     ===================  ====================

         Warrants outstanding under equity compensation plans consisted of
485,000 warrants issued in December 2003 at exercise prices ranging from $1.00
to $1.50 per share and vested immediately. The warrants were issued as
consideration for strategic consulting and investor relations services and
expire 5 years from the date of grant.

                                       48





<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         As described in Item 11 of this report, in December 2002, we entered
into a Securities Purchase Agreement with Laurus, which was amended on August 4,
2003. Pursuant to that amended agreement, we issued to Laurus the 2002 Note and
2002 Warrant. The net proceeds from the note were used for general working
capital. The 2002 Note, as amended, which is being amortized over a 24-month
period terminating on June 30, 2005, may be repaid, at our option, in cash or
through the issuance of shares our common stock under certain circumstances. In
connection with this financing, we paid a $200,000 fee to an affiliate of
Laurus.

         On July 31, 2003, we obtained a three-year, renewable, $4,000,000
revolving accounts receivable credit facility from Laurus. In connection with
this financing, we issued to Laurus the 2003 Warrant. The amount available under
this revolving credit facility is reduced by the balances outstanding on the
2002 Note and the 2003 Note.

         On December 4, 2003, we issued to Laurus the 2003 Note, which consisted
of $900,000 that we had borrowed under the credit facility and $500,000 in
additional borrowings. The net proceeds from the 2003 Note were used for general
working capital. The 2003 Note matures on December 3, 2006. The fixed conversion
price, upon which potential issuances of our common stock to satisfy the
obligations of the 2003 Note are based, is $1.30. The 2003 Note, which is being
amortized over a 36-month period terminating on December 4, 2006, may be repaid,
at our option, in cash or through the issuance of shares our common stock under
certain circumstances. Beginning with April 1, 2004 through November 2006, we
are required to pay principal payments of $30,000 plus accrued interest. On
December 1, 2006, we are required to pay the entire balance of the 2003 Note
plus accrued interest. In connection with this financing, we paid a $140,000 fee
to an affiliate of Laurus.

         As a result of these transactions, Laurus became the beneficial owner
of more than 5% of our outstanding common stock if contractual beneficial
ownership and conversion limitations (as described in Item 11 of this report)
are disregarded.

         In October 2003, we borrowed $100,000 from Mr. Amrit Das, our Chief
Executive Officer, and issued to him a 1% interest bearing unsecured promissory
note. The proceeds were used for working capital. The principal along with the
accrued interest are due on or before March 31, 2005. As of March 31, 2004, the
total outstanding principal balance on this note was $100,000, which is included
in the current portion of our long-term debt.

         In October 2003, we borrowed $155,000 from Mr. Jyoti Chatterjee, our
then President and Chief Operating Officer, and issued to him a 1% interest
bearing unsecured promissory note. The proceeds were used to pay off the
telephone switch lease early in order for us to obtain title to the switch and
be able to sell it. As of March 31, 2004, we had repaid the entire balance of
this loan and all accrued interest in full.

         In February 2002, Mr. Amrit Das and Mr. Jyoti Chatterjee pledged some
of their personal assets as collateral to finance our $500,000
telecommunications switch. In December 2003, when the telecommunications switch
was sold, the collateral restrictions on their personal assets from this
transaction were removed.

         In November 2000, we entered into a non-interest bearing secured loan
agreement and promissory note for $85,000 with Mr. Stephen Owen, one of our
officers. The loan was secured by Mr. Owen's pledge of the proceeds from the
exercise and sale of his vested options. Mr. Owen repaid the balance of this
loan in full in April 2003.

         In March 1999, Mr. Amrit Das personally guaranteed a term loan from a
bank in India. The term loan is secured by substantially all of our assets
located in India. The loan bears an annual interest of 16.6% payable monthly.
The principal is payable in quarterly installments beginning June 2000 and
ending March 2005. At March 31, 2004, the balance on this loan was $263,000.

                                       49





<PAGE>

         We are a party to employment and separation agreements with related
parties, as more particularly described in Item 10 of this report. In addition,
Sormistha Das, who beneficially owned 9.9% of our outstanding shares of common
stock as of June 8, 2004, serves as our assistant controller.

                                       50





<PAGE>

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.

         (a) Exhibits

              2.1   Stock Purchase Agreement dated March 27, 2000 between the
                    registrant, Allegria Software, Inc. and GRAL, Inc. (1)

              2.2   Shareholders Agreement dated May 25, 2000 between the
                    registrant and Anup Das, individually and on behalf of the
                    Indian Shareholders (defined therein) (1)

              2.3   Stock Purchase Agreement dated April 16, 2004, between the
                    registrant and Rakesh Kapoor (2)

              3.1   Form of Restated Certificate of Incorporation of the
                    registrant filed with the Delaware Secretary of State on
                    August 28, 2000 (3)

              3.5   Bylaws of the registrant (5)

              10.1  netGuru, Inc. Securities Purchase Agreement dated December
                    13, 2002 by and between the registrant and Laurus Master
                    Fund, Ltd. (4)

              10.2  Amendment No. 1 to Securities Purchase Agreement dated as of
                    December 13, 2002 by and between the registrant and Laurus
                    Master Fund, Ltd. (6)

              10.3  6% Convertible Note dated December 13, 2002 in the principal
                    amount of $2,000,000 made by the registrant in favor of
                    Laurus Master Fund, Ltd. (4)

              10.4  Amendment No. 1 to Convertible Note in the principal amount
                    of amount of $2,000,000 dated June 4, 2003 by and between
                    the registrant and Laurus Master Fund, Ltd.(6)

              10.5  Common Stock Purchase Warrant dated December 13, 2002 issued
                    by the registrant in favor of Laurus Master Fund, Ltd.(6)

              10.6  Security Agreement dated December 13, 2002 by and between
                    the registrant and Laurus Master Fund, Ltd. (4)

              10.7  Security Agreement dated December 13, 2002 by and between
                    U.S. subsidiaries of the registrant and Laurus Master Fund,
                    Ltd. (4)

              10.8  Guarantee Agreement dated December 13, 2002 by and between
                    U.S. subsidiaries of the registrant and Laurus Master Fund,
                    Ltd. (4)

              10.9  Security Agreement dated July 31, 2003 by and between the
                    registrant and Laurus Master Fund, Ltd. (7)

              10.10 Secured Convertible Note dated July 31, 2003 made by the
                    registrant in favor of Laurus Master Fund, Ltd. (7)

              10.11 Common Stock Purchase Warrant dated July 31, 2003 issued by
                    the registrant in favor of Laurus Master Fund, Ltd. (7)

                                       51





<PAGE>

              10.12 Registration Rights Agreement dated July 31, 2003 by and
                    between the registrant and Laurus Master Fund, Ltd. (7)

              10.13 Amendment No. 2 to Securities Purchase Agreement dated
                    August 4, 2003, by and between the registrant and Laurus
                    Master Fund, Ltd. (7)

              10.14 Amendment No. 2 to Secured Convertible Note dated August 4,
                    2003 by and between the registrant and Laurus Master Fund,
                    Ltd. (7)

              10.15 Security Agreement dated December 4, 2003 by and between the
                    registrant and Laurus Master Fund, Ltd. (8)

              10.16 Registration Rights Agreement dated December 4, 2003 by and
                    between the registrant and Laurus Master Fund, Ltd. (8)

              10.17 Secured Convertible Note dated December 4, 2003 made by the
                    registrant in favor of Laurus Master Fund, Ltd. (8)

              10.18 Amended and Restated Convertible Note dated December 4, 2003
                    in the principal amount of $2,400,000 made by the registrant
                    in favor of Laurus Master Fund, Ltd. (9)

              10.19 Research Engineers, Inc. 1996 Stock Option Plan (5) (#)

              10.20 Research Engineers, Inc. 1997 Stock Option Plan (10) (#)

              10.21 Research Engineers, Inc. 1998 Stock Option Plan (11) (#)

              10.22 netGuru, Inc. 2000 Stock Option Plan (10) (#)

              10.23 netGuru, Inc. 2003 Stock Option Plan (12) (#)

              10.24 Employment Agreement dated June 1, 2001, by and between the
                    registrant and Amrit K. Das (13) (#)

              10.25 Employment Agreement dated June 1, 2001, by and between the
                    registrant and Jyoti Chatterjee (13) (#)

              10.26 Employment Agreement dated June 1, 2001, by and between the
                    registrant and Clara Y. M. Young (13) (#)

              10.27 Employment Agreement dated June 1, 2001, by and between the
                    registrant and Santanu Das (13) (#)

              10.28 Employee Loan Agreement and Promissory Note dated May 3,
                    2001 by and between the registrant and Santanu Das (14)

              10.29 Employee Loan Agreement and Promissory Note dated November
                    1, 2000 by and between the registrant and Stephen Owen (14)

              10.30 Standard Industrial/Commercial Single-Tenant Lease-Net dated
                    November 30, 1999 by and between Lowenberg Corporation and
                    the registrant (14)

                                       52





<PAGE>

              10.31 Separation and Release Agreement dated December 24, 2003 by
                    and between the registrant and Jyoti Chatterjee (8) (#)

              21    Subsidiaries of the registrant

              23    Consent of Independent Registered Public Accounting Firm

              31    Certifications Required by Rule 13a-14(a) of the Securities
                    Exchange Act of 1934, as amended, as Adopted Pursuant to
                    Section 302 of the Sarbanes-Oxley Act of 2002

              32    Certification of Chief Executive Officer and Chief Financial
                    Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
                    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

--------------------------------------------
# Management contract or compensatory plan, contract or arrangement required to
be filed as an exhibit.

(1)      Filed as an exhibit to the registrant's Form 10-KSB for March 31, 2000
         that was filed with the SEC on June 26, 2000 (File No. 0-28560), and
         incorporated herein by reference.

(2)      Filed as an exhibit to the registrant's Form 8-K for April 16, 2004
         that was filed with the SEC on April 28, 2004 (File No. 0-28560), and
         incorporated herein by reference.

(3)      Filed as an exhibit to the registrant's information statement that was
         filed with the SEC pursuant to Section 14 (c) of the Securities Act on
         July 27, 2000 (File No. 0-28560), and incorporated herein by reference.

(4)      Filed as an exhibit to the registrant's Form 8-K for December 5, 2002
         that was filed with the SEC on December 20, 2002 (File No. 0-28560 and
         incorporated herein by reference.

(5)      Filed as an exhibit to the registrant's registration statement on Form
         SB-2 dated May 21, 1996 or amendment thereto dated June 14, 1996
         (Registration No. 333-4844-LA), and incorporated herein by reference.

(6)      Filed as an exhibit to the registrant's Form 10-KSB for March 31, 2003
         that was filed with the SEC on July 15, 2003 (File No. 0-28560), and
         incorporated herein by reference.

(7)      Filed as an exhibit to the registrant's Form 8-Kfor July 25, 2003 that
         was filed with the SEC on August 7, 2003 (File No. 0-28560), and
         incorporated herein by reference.

(8)      Filed as an exhibit to the registrant's registration statement on Form
         S-3 that was filed with the SEC on January 6, 2004 (File No.
         333-112181), and incorporated herein by reference.

(9)      Filed as an exhibit to the registrant's Form 8-Kfor April 27, 2004 that
         was filed with the SEC on June 3, 2004 (File No. 0-28560), and
         incorporated herein by reference.

(10)     Filed as an exhibit to the registrant's registration statement on Form
         S-8 (Registration No. 333-84184) that was filed with the SEC on March
         12, 2002, and incorporated herein by reference.

(11)     Filed as an exhibit to the registrant's proxy statement that was filed
         with the SEC pursuant to Section 14 (a) of the Securities Act on
         November 12, 1998 (File No. 0-28560), and incorporated herein by
         reference.

(12)     Filed as an exhibit to the registrant's Definitive Proxy Statement that
         was filed with the SEC pursuant to Section 14 (a) of the Securities Act
         on October 14, 2003 (File No. 0-28560), and incorporated herein by
         reference.

(13)     Filed as an exhibit to the registrant's Form 10-KSB for March 31, 2001
         that was filed with the SEC on July 13, 2001 (File No. 0-28560), and
         incorporated herein by reference.

(14)     Filed as an exhibit to Amendment No. 1 to the registrant's Form 10-KSB
         for March 31, 2002 that was filed with the SEC on December 3, 2002
         (File No. 0-28560), and incorporated herein by reference.

                                       53





<PAGE>

         (b) Reports on Form 8-K

                 The registrant filed a Form 8-K on March 15, 2004, for December
                 18, 2003, that contained "Item 5 - Other Events" and "Item 7 -
                 Financial Statements and Exhibits." The Form 8-K contained
                 revised consolidated financial statements for the fiscal year
                 ended March 31, 2003 and notes to the financial statements,
                 revised to present the results of the travel subsidiary of the
                 registrant that was being held for sale as discontinued
                 operations of the registrant.

                                       54





<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The following table presents fees for professional audit services
rendered by KPMG LLP for the years ended March 31, 2004 and 2003.

                                                          2004            2003
                                                        ---------      ---------
             Audit Fees: (1)                            $235,000       $281,000
             Audit-Related Fees (2)                           --             --
             Tax Fees: (3)                                    --             --
             All Other Fees: (4)                              --             --
                                                        ---------      ---------
                 Total                                  $235,000       $281,000
                                                        =========      =========

(1) Audit Fees: Fees for professional services performed by KPMG for the audit
of our annual financial statements and review of financial statements included
in our 10-QSB filings, and services that are normally provided in connection
with statutory and regulatory filings or engagement, such as the filing of Form
S-3 or Form S-8.

(2) Audit-Related Fees: KPMG LLP did not provide any audit-related
services.

(3) Tax Fees: KPMG LLP did not provide any professional services with respect to
tax compliance, such as preparation and filing of original and amended returns
for us and our consolidated subsidiaries, refund claims, payment planning, tax
audit assistance and tax work stemming from "Audit-Related" items.

(4) All Other Fees: KPMG LLP did not provide other permissible work for us
that does not meet the above category descriptions.

PRE-APPROVAL POLICY

Our Audit Committee is responsible for approving all Audit, Audit-Related, Tax
and Other Non-Audit Services. The Audit Committee pre-approves all auditing
services and permitted non-audit services, including all fees and terms to be
performed for us by our independent auditor at the beginning of the fiscal year.

Non-audit services are reviewed and pre-approved by project at the beginning of
the fiscal year. Any additional non-audit services contemplated by the company
after the beginning of the fiscal year are submitted to the Audit Committee
chairman for pre-approval prior to engaging the independent auditor for such
services. Such interim pre-approvals are reviewed with the full Audit Committee
at its next meeting for ratification.

                                       55





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

1. Report of Independent Registered Public Accounting Firm F-2

2. Consolidated Financial Statements:

         Consolidated Balance Sheet as of March 31, 2004                   F-3

         Consolidated Statements of Operations for the years ended
         March 31, 2004 and 2003                                           F-4

         Consolidated Statements of Stockholders' Equity and
         Comprehensive Loss for the years ended
         March 31, 2004 and 2003                                           F-6

         Consolidated Statements of Cash Flows for the years ended
         March 31, 2004 and 2003                                           F-7

         Notes to Consolidated Financial Statements                        F-9

                                       F-1





<PAGE>

                                    REPORT OF

                  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
netGuru, Inc.:

We have audited the consolidated financial statements of netGuru, Inc. and
subsidiaries as listed in the accompanying index. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of netGuru, Inc. and
subsidiaries as of March 31, 2004, and the results of their operations and their
cash flows for the years ended March 31, 2004 and 2003, in conformity with U.S.
generally accepted accounting principles.

As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets as
required by Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," on April 1, 2002.

                                  /s/ KPMG LLP

Costa Mesa, California
June 16, 2004, except as to the sixth paragraph
of note 13 which is as of June 17, 2004

                                      F-2





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheet

                                 March 31, 2004

               (In thousands, except share and per share amounts)

                                     ASSETS

Current assets:
    Cash and cash equivalents                                          $  1,646
    Short-term investments                                                  100
    Accounts receivable (net of allowance for doubtful accounts
      of $615)                                                            3,352
    Income tax receivable                                                    16
    Notes and related party loans receivable                                 35
    Deposits                                                                 67
    Prepaid expenses and other current assets                             1,183
    Assets of subsidiary held for sale                                      258
                                                                       ---------

           Total current assets                                           6,657

Property, plant and equipment, net                                        2,215
Goodwill                                                                  2,941
Other assets                                                                217
                                                                       ---------

                                                                       $ 12,030
                                                                       =========
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Current portion of long-term debt                                  $    975
    Current portion of capital lease obligations                            109
    Accounts payable                                                        629
    Income tax payable                                                       55
    Accrued expenses                                                      1,160
    Deferred revenues                                                     1,888
    Other liabilities                                                       208
    Liabilities of subsidiary held for sale                                 103

                                                                       ---------

           Total current liabilities                                      5,127

Long-term debt, net of current portion                                    1,382
Capital lease obligations, net of current portion                           368
Deferred gain on sale-leaseback                                             747
                                                                       ---------

           Total liabilities                                              7,624
                                                                       ---------

Commitments and contingencies  (note 8)
Subsequent events (note 13)

Stockholders' equity:
    Preferred stock, par value $.01; authorized 5,000,000 shares;
      no shares issued and outstanding                                       --
    Common stock, par value $.01; authorized 150,000,000 shares;
      18,087,154 shares issued and outstanding                              181
    Additional paid-in capital                                           35,352
    Accumulated deficit                                                 (30,444)
    Accumulated other comprehensive loss:
      Cumulative foreign currency translation adjustments                  (683)
                                                                       ---------
           Total stockholders' equity                                     4,406
                                                                       ---------
                                                                       $ 12,030
                                                                       =========

          See accompanying notes to consolidated financial statements.

                                      F-3





<PAGE>

<TABLE>

                                 NETGURU, INC. AND SUBSIDIARIES

                              Consolidated Statements of Operations

                               Years ended March 31, 2004 and 2003

                       (In thousands, except share and per share amounts)

<CAPTION>
                                                                      2004        2003
                                                                    ---------   ---------
<S>                                                                 <C>         <C>
Net revenues:
    Engineering and collaborative software products and services    $ 11,550    $  9,529
    IT services                                                        4,994       5,586
    Web-based telecommunications services                              1,154       3,173
                                                                    ---------   ---------

           Total net revenues                                         17,698      18,288

Cost of revenues:
    Engineering and collaborative software products and services       1,011         893
    IT services                                                        3,950       4,212
    Web-based telecommunications services                                725       2,804
                                                                    ---------   ---------

           Total cost of revenues                                      5,686       7,909

           Gross profit                                               12,012      10,379
                                                                    ---------   ---------

Operating expenses:
    Selling, general and administrative                               11,162      11,353
    Research and development                                           2,069       2,092
    Depreciation                                                         956       1,088
    Impairment charge                                                   --           259
    Restructuring charge                                                --           194
                                                                    ---------   ---------

           Total operating expenses                                   14,187      14,986
                                                                    ---------   ---------

           Operating loss                                             (2,175)     (4,607)
                                                                    ---------   ---------

Other expense (income):
    Interest, net                                                        610         267
    Other                                                               (129)        (38)
                                                                    ---------   ---------

           Total other expense                                           481         229
                                                                    ---------   ---------

Loss from continuing operations before income taxes and
    cumulative effect of a change in accounting principle             (2,656)     (4,836)

Income tax expense (benefit)                                              15        (204)
                                                                    ---------   ---------
Loss from continuing operations before cumulative effect
    of a change in accounting principle                               (2,671)     (4,632)

Loss from discontinued operations                                       (439)        (73)
                                                                    ---------   ---------
Loss before cumulative effect of a change in accounting principle     (3,110)     (4,705)
Cumulative effect of a change in accounting principle                   --        (5,824)
                                                                    ---------   ---------

           Net loss                                                 $ (3,110)   $(10,529)
                                                                    =========   =========

                          (continued on following page)

                                              F-4
</TABLE>





<PAGE>

<TABLE>
                                 NETGURU, INC. AND SUBSIDIARIES

                        Consolidated Statements of Operations (Continued)

                               Years Ended March 31, 2004 and 2003

                       (In thousands, except share and per share amounts)

<CAPTION>
                                                                       2004            2003
                                                                   ------------    ------------
<S>                                                                <C>             <C>
Basic and diluted loss per common share:

Loss per common share from continuing operations                   $     (0.15)    $     (0.27)
Loss from discontinued operations                                        (0.03)             --
Cumulative per share effect of a change in accounting principle             --           (0.34)
                                                                   ------------    ------------

Basic and diluted loss per common share                            $     (0.18)    $     (0.61)
                                                                   ============    ============
Weighted average shares used in computing basic and diluted loss
   per common share                                                 17,602,584      17,309,704
                                                                   ============    ============

                  See accompanying notes to consolidated financial statements.

                                              F-5
</TABLE>





<PAGE>

<TABLE>
                                                 NETGURU, INC. AND SUBSIDIARIES

                             Consolidated Statements of Stockholders' Equity and Comprehensive Loss

                                               Years ended March 31, 2004 and 2003

                                              (In thousands, except share amounts)

<CAPTION>
                                         COMMON STOCK                                     ACCUMULATED                      TOTAL
                                 --------------------------   ADDITIONAL                     OTHER           TOTAL      COMPREHEN-
                        PREFERRED  NUMBER OF      PAR          PAID-IN      ACCUMULATED   COMPREHENSIVE   STOCKHOLDERS'    SIVE
                          STOCK     SHARES       VALUE         CAPITAL        DEFICIT     INCOME (LOSS)      EQUITY    INCOME (LOSS)
                          -----  ------------  ------------  ------------   ------------   ------------   ------------  ------------

<S>                       <C>     <C>          <C>           <C>            <C>            <C>            <C>           <C>
Balance, March 31, 2002   $ --    17,265,850   $       173   $    33,057    $   (16,805)   $    (1,094)   $    15,331

    Net loss                --            --            --            --        (10,529)            --        (10,529)  $   (10,529)

    Foreign currency        --            --            --            --             --            243            243           243
       translation
                          -----  ------------  ------------  ------------   ------------   ------------   ------------  ------------

Comprehensive loss for
   the year ended March     --            --            --            --        (10,529)           243             --   $   (10,286)
   31, 2003
                                                                                                                        ============

Exercise of stock           --        32,800            --            55             --             --             55
   options

Issuance of common stock    --        26,500            --            56             --             --             56

Issuance of warrants        --            --            --           199             --             --            199

Other                       --            --            --           (45)            --             --            (45)
                          -----  ------------  ------------  ------------   ------------   ------------   ------------

Balance, March 31, 2003                   --    17,325,150           173        (27,334)          (851)         5,310

    Net loss                --            --            --            --         (3,110)            --         (3,110)  $    (3,110)

    Foreign currency
       translation          --            --            --            --             --            168            168           168
                          -----  ------------  ------------  ------------   ------------   ------------   ------------  ------------

Comprehensive loss for
   the year ended March
   31, 2004                 --            --            --            --         (3,110)           168             --   $    (2,942)
                                                                                                                        ============

Issuance of common stock    --       762,004             8         1,149             --             --          1,157

Issuance of warrants
   and options              --            --            --           881             --             --            881

                          -----  ------------  ------------  ------------   ------------   ------------   ------------

Balance, March 31, 2004   $ --    18,087,154   $       181   $    35,352        (30,444)   $      (683)   $     4,406
                          =====  ============  ============  ============   ============   ============   ============

                                  See accompanying notes to consolidated financial statements.

                                                              F-6
</TABLE>





<PAGE>

<TABLE>
                                 NETGURU, INC. AND SUBSIDIARIES

                              Consolidated Statements of Cash Flows

                               Years ended March 31, 2004 and 2003
                                         (In thousands)
<CAPTION>
                                                                          2004        2003
                                                                        ---------   ---------
<S>                                                                     <C>         <C>
Cash flows from operating activities:
    Net loss                                                            $ (3,110)   $(10,529)
    Loss from discontinued operations                                       (439)        (73)
    Cumulative effect of change in accounting principle                       --      (5,824)
                                                                        ---------   ---------
    Loss from continuing operations                                       (2,671)     (4,632)
    Adjustments to reconcile loss from continuing
      operations to net cash used in operating activities:
        Depreciation and amortization                                      1,232       1,487
        Bad debt expense                                                      63          89
        Deferred income taxes                                                 --        (172)
        Expense recognized on issuance of stock, stock
          options and warrants                                               713          52
        Restructuring charge                                                  --         194
        Amortization of discount on loan                                      70          --
        Impairment charge                                                     --         259
        Loss on disposal of property                                          --           1
        Changes in operating assets and liabilities:
          Accounts receivable                                               (568)        382
          Notes and related party loans receivable                            51         183
          Income tax receivable                                              (15)        305
          Prepaid expenses and other current assets                         (161)        216
          Deposits                                                           610        (184)
          Other assets                                                        30         (22)
          Accounts payable                                                  (131)       (162)
          Accrued expenses                                                   202          27
          Income taxes payable                                               (35)       (118)
          Accrued restructuring costs                                       (199)       (152)
          Other current liabilities                                          (55)        (15)
          Deferred revenues                                                 (270)        288
          Deferred gain on sale-leaseback                                    (70)        (70)
          Change in assets and liabilities of
             subsidiary held for sale                                         --         172
                                                                        ---------   ---------

                  Net cash used in operating activities                   (1,204)     (1,872)
                                                                        ---------   ---------
Cash flows from investing activities:
    Purchase of property, plant and equipment                                (94)       (222)
    Proceeds from sale of property, plant and equipment                      150          --
    Purchase of short-term investment                                       (100)         --
                                                                        ---------   ---------

                  Net cash used in investing activities                      (44)       (222)
                                                                        ---------   ---------

Cash flows from financing activities:
    Proceeds from issuance of long-term debt                               2,559       2,239
    Financing fees                                                          (175)       (214)
    Repayment of long-term debt                                           (1,812)       (225)
    Payment of capital lease obligations                                    (561)       (422)
    Issuance of common stock                                                  --          55
                                                                        ---------   ---------

                  Net cash provided by financing activities                   11       1,433
                                                                        ---------   ---------

    Effect of exchange rate changes on cash and cash equivalents             111         256
                                                                        ---------   ---------

                  Decrease in cash and cash equivalents                   (1,126)       (405)

Cash and cash equivalents, beginning of year                               2,772       3,177
                                                                        ---------   ---------

Cash and cash equivalents, end of year                                  $  1,646    $  2,772
                                                                        =========   =========

                        (continued on the following page)

                                      F-7





<PAGE>

                                 NETGURU, INC. AND SUBSIDIARIES

                        Consolidated Statements of Cash Flows (Continued)

                               Years Ended March 31, 2004 and 2003

                                         (In thousands)

                                                                          2004        2003
                                                                        ---------   ---------

Supplemental disclosure of cash flow information: Cash paid for:
      Interest                                                          $    316    $    308
                                                                        =========   =========
      Income taxes                                                      $     61    $     72
                                                                        =========   =========

Supplemental disclosure of non-cash investing and financing activities:
    Acquisition of equipment under capital leases                       $     --    $     28
    Repayment of convertible debt with common stock                     $    991    $     --

                  See accompanying notes to consolidated financial statements.

                                              F-8
</TABLE>





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                       Years Ended March 31, 2004 and 2003

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       ORGANIZATION

       netGuru, Inc. (the "Company") was incorporated in 1981 in the state of
       New Jersey and reincorporated in the state of Delaware in 1996 under the
       name Research Engineers, Inc. Effective February 18, 2000, the Company's
       name was changed to netGuru.com. Effective February 25, 2000, the
       Company's name was changed to netGuru, Inc. netGuru is an integrated
       Internet technology and services company providing Internet and PC-based
       engineering and collaborative software products and services, information
       technology ("IT") services, and Web-based telecommunications services.

       PRINCIPLES OF CONSOLIDATION

       The consolidated financial statements include the accounts of netGuru,
       Inc. and its wholly-owned subsidiaries. All significant transactions
       among the consolidated entities have been eliminated upon consolidation.

       USE OF ESTIMATES

       The preparation of financial statements in conformity with accounting
       principles generally accepted in the U.S. of America requires management
       to make estimates and assumptions that affect the reported amounts of
       assets and liabilities at the date of the financial statements and the
       reported amounts of revenues and expenses during the reporting periods.
       Actual results could differ from those estimates.

       FAIR VALUE OF FINANCIAL INSTRUMENTS

       Statement of Financial Accounting Standards ("SFAS") No. 107,
       "Disclosures About Fair Value Of Financial Instruments," requires
       management to disclose the estimated fair value of certain assets and
       liabilities defined by SFAS No. 107 as financial instruments. At March
       31, 2004, management believed the carrying amounts of cash and cash
       equivalents, receivable and payable amounts, and accrued expenses
       approximated fair value because of the short maturity of these financial
       instruments. The Company also believed that the carrying amounts of its
       capital lease obligations approximated their fair value, as the interest
       rates approximated a rate that the Company could have obtained under
       similar terms at the balance sheet date. The estimated fair value of the
       Company's long-term debt at March 31, 2004, determined by using
       the effective rate of interest on this indebtedness, was approximately
       $2.8 million.

       FOREIGN CURRENCY TRANSLATION

       The financial condition and results of operations of the Company's
       foreign subsidiaries are accounted for using the local currency as the
       functional currency. Assets and liabilities of the subsidiaries are
       translated into U.S. dollars (the reporting currency) at the exchange
       rate in effect at the fiscal year-end. Statements of operations accounts
       are translated at the average rate of exchange prevailing during the
       respective fiscal years. Translation adjustments arising from the use of
       differing exchange rates from period to period are included in
       accumulated other comprehensive income (loss) in the consolidated
       statements of stockholders' equity. Gains and losses resulting from
       foreign currency transactions are included in operations and are not
       material for fiscal 2004 and 2003.

                                      F-9





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       CASH AND CASH EQUIVALENTS

       The Company considers all highly liquid investments with maturities of
       three months or less at the date of purchase to be cash equivalents.

       SHORT-TERM INVESTMENTS

       Short-term investments consist of certificates of deposits with a
       maturity date greater than three months when purchased.

       PROPERTY, PLANT AND EQUIPMENT

       Property, plant and equipment are stated at cost. Depreciation is
       calculated using the straight-line method over the following useful
       lives:

                           Buildings                                  39 years
                           Computer equipment                         5 years
                           Computer software                          2-3 years
                           Office equipment and furniture             3-7 years

       Assets subject to capital lease agreements and leasehold improvements are
       amortized over the lesser of the life of the asset or the term of the
       lease.

       GOODWILL

       The Company adopted the provisions of SFAS No. 142 "Goodwill and Other
       Intangible Assets" on April 1, 2002. SFAS No. 142 requires that goodwill
       and intangible assets with indefinite useful lives no longer be
       amortized, but instead be tested for impairment at least annually. SFAS
       No. 142 also requires that intangible assets with estimable useful lives
       be amortized over their respective estimated useful lives to their
       estimated residual values, and reviewed for impairment in accordance with
       SFAS No. 121 and subsequently, SFAS No. 144 after its adoption. SFAS No.
       142 required the Company to perform an assessment of whether there was an
       indication that goodwill was impaired as of the date of adoption.

       The Company assessed the fair values of its three reporting units by
       considering their projected cash flows, using risk-adjusted discount
       rates and other valuation techniques and determined that an impairment
       write-down for its IT services division was required. In accordance with
       the provisions of SFAS No. 142, the Company recorded an impairment charge
       of $5,824,000 to IT services goodwill in fiscal 2003 as a cumulative
       effect of a change in accounting principle.

       The Company is required to perform additional reviews for impairment
       annually, or more frequently if events occur or circumstances change that
       would more likely than not reduce the fair value of the net carrying
       amount. The Company performed its annual review and determined that, as
       of March 31, 2004 and March 31, 2003 no additional impairment of goodwill
       existed,

                                      F-10





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       The balance of goodwill at March 31, 2004 was $2,941,000. The following
       table reconciles changes to goodwill for the year ended March 31, 2003
       (in thousands of dollars):

       Balance as of March 31, 2002                                 $     8,765
          Cumulative effect of a change in accounting principle          (5,824)
                                                                    -----------
       Balance as of March 31, 2003 and 2004                        $     2,941
                                                                    -----------

       IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

       The Company accounts for its long-lived assets under SFAS No. 144,
       "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
       No. 144 requires that long-lived assets be reviewed for impairment
       whenever events or changes in circumstances indicate that the carrying
       amount of an asset may not be recoverable. Recoverability of assets to be
       held and used is measured by a comparison of the carrying amount of an
       asset to future net cash flows expected to be generated by the asset. If
       the carrying amount of an asset exceeds its estimated future cash flows,
       an impairment charge is recognized in the amount by which the carrying
       amount of the asset exceeds the fair value of the asset. SFAS No. 144
       requires companies to separately report discontinued operations and
       extends that reporting to a component of an entity that either has been
       disposed of (by sale, abandonment, or in a distribution to owners) or is
       classified as held for sale. Assets to be disposed of are reported at the
       lower of the carrying amount or fair value less costs to sell.

       SOFTWARE DEVELOPMENT COSTS AND PURCHASED TECHNOLOGY

       The Company capitalizes costs related to the development of certain
       software products in accordance with SFAS No. 86, "Accounting for the
       Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed."
       Capitalization of costs begins when technological feasibility is
       established and ends when the product is available for general release to
       customers. As of March 31, 2004, capitalized costs of approximately
       $69,000, net of accumulated amortization, were included in other assets.
       Approximately $38,000 of this amount represents software developed
       in-house and $31,000 represents the cost of software developed on the
       Company's behalf by third parties. Additions to capitalized software were
       $0 and $28,000 during fiscal 2004 and 2003, respectively.

       The Company amortizes capitalized software development costs and
       purchased technology using the straight-line method over two to five
       years, or the ratio of actual sales to anticipated sales, whichever is
       greater. Amortization of software development costs and purchased
       technology charged to cost of revenues was approximately $276,000 and
       $287,000 for fiscal 2004 and 2003, respectively. Accumulated amortization
       of capitalized software was $935,000 and $625,000 as of March 31, 2004
       and 2003, respectively.

       REVENUE RECOGNITION

       The Company recognizes revenue when the following criteria are met: 1.
       persuasive evidence of an arrangement, such as agreements, purchase
       orders or written or online requests, exists; 2. delivery has been
       completed and no significant obligations remain; 3. the Company's price
       to the buyer is fixed or determinable; and 4. collection is probable. The
       Company's revenues arise from the following segments: engineering and
       collaborative software products and services; IT services; and Web-based
       telecommunications services.

                                      F-11





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       Revenue from software sales is recognized when persuasive evidence of an
       arrangement exists, delivery has been completed and no significant
       post-contract support obligations remain outstanding, the price to the
       Company's buyer is fixed or determinable and collection of the resulting
       receivable is probable. Since the second quarter of fiscal 2003, the
       Company has provided a 15-day right of return (from the date of purchase)
       on the purchase of a product during which time the customer may return
       the product subject to a $50 restocking fee per item returned. Since the
       Company's product returns have historically not been material, the
       Company does not make any provisions for such returns. Customers may
       choose to purchase maintenance contracts that include telephone, e-mail
       and other methods of support, and the right to receive upgrades. Revenue
       from these maintenance contracts is deferred and recognized ratably over
       the life of the contract, usually twelve months.

       In October 1997, the Accounting Standards Executive Committee ("AcSEC")
       of the AICPA issued Statement of Position ("SOP") 97-2, "Software Revenue
       Recognition." SOP 97-2 distinguishes between significant and
       insignificant vendor obligations as a basis for recording revenue, with a
       requirement that each element of a software licensing arrangement be
       separately identified and accounted for based on relative fair values of
       each element. The Company determines the fair value of each element in
       multi-element transactions based on vendor-specific objective evidence
       ("VSOE"). VSOE for each element is based on the price charged when the
       same element is sold separately.

       In 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software
       Revenue Recognition, With Respect to Certain Transactions," which
       modifies SOP 97-2 to allow for use of the residual method of revenue
       recognition if certain criteria have been met. If evidence of fair value
       of all undelivered elements exists but evidence does not exist for one or
       more delivered elements, then revenue is recognized using the residual
       method. Under the residual method, the fair value of the undelivered
       elements is deferred and the remaining portion of the transaction fee is
       recognized as revenue.

       The Company sells its engineering and collaborative software along with a
       maintenance package. This constitutes a multiple element arrangement. The
       price charged for the maintenance portion is the same as when the
       maintenance is sold separately. The fair values of the maintenance
       contracts sold in all multiple element arrangements are recognized over
       the terms of the maintenance contracts. The engineering and collaborative
       software portion is recognized when persuasive evidence of an arrangement
       exits, price is fixed and determinable, when delivery is complete,
       collection of the resulting receivable is probable and no significant
       obligations remain.

       Revenues from providing IT services are recognized primarily on a time
       and materials basis, with time at a marked-up rate and materials and
       other reasonable expenses at cost, once the services are completed and no
       significant obligations remain. Certain IT services contracts are fixed
       price contracts where progress toward completion is measured by mutually
       agreed upon pre-determined milestones for which the Company recognizes
       revenue upon achieving such milestones. Fixed price IT contracts are
       typically for a short duration of one to three months. The Company did
       not have any fixed price contracts at March 31, 2004.

                                      F-12





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       Revenues from call termination services are recognized at gross sales
       value, with the applicable cost separately stated in the cost of
       revenues. Revenues from the Company's own phone card sales are deferred
       and recognized based on usage, whereas revenues from resale of
       third-party phone cards are recognized net of returns since no
       significant obligations remain once the product is delivered. Other
       products and services sold via Internet portals, where the Company is an
       agent, are recognized net of purchase costs when the products and
       services are delivered and collection is probable.

       DEFERRED REVENUES

       The Company defers revenues for its maintenance contracts, for its
       collaborative software sales and for its phone card revenues that are not
       considered earned. The Company defers its maintenance revenues when the
       maintenance contracts are sold, and then recognizes the maintenance
       revenues over the term of the maintenance contracts. The Company defers
       its collaborative software sales revenues if it invoices or receives
       payment prior to the completion of a project, and then recognizes these
       revenues upon completion of the project when no significant obligations
       remain. The Company defers revenues from the sales of its own phone cards
       when the cards are sold, and then recognizes revenues from these phone
       card sales based on usage. Revenues from any unused portion of phone card
       minutes are recognized upon expiration of the phone cards.

       RESEARCH AND DEVELOPMENT

       The Company's research and development ("R&D") costs consist mainly of
       developers' salaries. The Company follows the provisions of SFAS No. 86
       to capitalize software development costs when technological feasibility
       has been established and to stop capitalization when the product is
       available for general release to customers. The Company expenses
       development costs when they are related to enhancement of existing
       software products.

       INCOME TAXES

       The Company accounts for income taxes using the asset and liability
       method. Deferred tax assets and liabilities are recognized for the future
       tax consequences attributable to differences between the financial
       statement carrying amounts of existing assets and liabilities and their
       respective tax bases, and operating loss and tax credit carryforwards.
       Deferred tax assets and liabilities are measured using enacted tax rates
       expected to apply to taxable income in the years in which those temporary
       differences are expected to be recovered or settled.

       EARNINGS (LOSS) PER SHARE

       Basic earnings (loss) per share ("EPS") is calculated by dividing net
       income (loss) by the weighted-average common shares outstanding during
       the period. Diluted EPS reflects the potential dilution to basic EPS that
       could occur upon conversion or exercise of securities, options, or other
       such items, to common shares using the treasury stock method and/or if
       converted method based upon the weighted-average fair value of the
       Company's common shares during the period. See Note 11 "Loss Per Share"
       for a computation of EPS.

                                      F-13





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       COMPREHENSIVE INCOME (LOSS)

       The Company applies the provisions of SFAS No. 130, "Reporting
       Comprehensive Income," which establishes rules for the reporting and
       display of comprehensive income (loss) and its components. SFAS No. 130
       requires changes in foreign currency translation adjustments, which are
       reported separately in stockholders' equity, to be included in other
       comprehensive income (loss).

       STOCK-BASED COMPENSATION

       The Company applies the provisions of SFAS No. 123, "Accounting for
       Stock-Based Compensation." As permitted by SFAS No. 123, the Company
       continues to follow the guidance of Accounting Principles Board ("APB")
       Opinion No. 25, "Accounting for Stock Issued to Employees." Consequently,
       compensation related to stock options is the difference between the grant
       price and the fair market value of the underlying common shares at the
       grant date. Generally, the Company issues stock options to employees with
       a grant price equal to the market value of common stock on the grant
       date. The Company has issued certain stock options with a grant price
       below the market value at the grant date. The Company recognizes
       compensation expense on these grants over the vesting period, generally
       three to four years.

       As required by SFAS No. 123, the Company discloses below the pro forma
       effect on operations, and the Black-Scholes option pricing model
       assumption information for stock options, as if compensation costs were
       recorded at the estimated fair value of the stock options granted
       (dollars in thousands, except amounts per share):

              For the fiscal years ended March 31,           2004        2003
                                                          ----------   ---------

              Net loss - as reported                      $  (3,110)   $(10,529)
              Deduct:  Stock-based compensation expense
                  determined under the fair value based
                  method for all awards, net of tax             694       1,575

                                                          ----------   ---------
              Net loss - pro forma                           (3,804)    (12,104)
                                                          ==========   =========
              Basic and diluted net loss per share -
                  as reported                             $   (0.18)   $  (0.61)
                  pro forma                                   (0.22)      (0.70)
                                                          ==========   =========
              Weighted average fair value of options
                  granted                                 $    1.24    $   1.97
                                                          ==========   =========
              Black-Scholes option pricing model
                  assumptions:
                       Dividend yield                            --          --
                       Expected volatility                      108%        111%
                       Risk-free interest rate                 3.09%       3.19%
                       Expected option lives (in years)         6.5         6.8

                                      F-14





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       SEGMENT REPORTING

       The Company applies the provisions of SFAS No. 131, "Disclosures about
       Segments of an Enterprise and Related Information." SFAS No. 131 requires
       segments to be determined and reported based on how management measures
       performance and makes decisions about allocating resources. See Note 10
       "Segment and Geographic Data" for a description of and disclosures
       regarding the Company's significant reportable segments.

       RECLASSIFICATIONS

       Certain reclassifications have been made to the 2003 consolidated
       financial statements to conform to the 2004 presentation.

       IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

       The Emerging Issues Task Force (EITF) recently reached a consensus for
       EITF 00-21, "Revenue Arrangements with Multiple Deliverables." EITF 00-21
       provides accounting guidance for allocation of revenue where delivery or
       performance of products or services may occur at different points in time
       or over different periods. The Company adopted this consensus on July 1,
       2003. Under EITF No. 00-21, revenue must be allocated to all deliverables
       regardless of whether an individual element is incidental or perfunctory.
       The adoption of EITF 00-21 did not materially impact the Company's
       consolidated financial condition or results of operations.

       In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
       Financial Instruments with Characteristics of Both Liabilities and
       Equity." SFAS No. 150 establishes standards for how an issuer classifies
       and measures certain financial instruments with characteristics of both
       liabilities and equity. It requires that an issuer classify a financial
       instrument that is within its scope as a liability (or as an asset in
       some circumstances). Many of those instruments were previously classified
       as equity. This statement is effective for financial instruments entered
       into or modified after May 31, 2003. For financial instruments created
       before the issuance date of this statement and still existing at the
       beginning of the interim period of adoption, transition shall be achieved
       by reporting the cumulative effect of a change in accounting principle by
       initially measuring the financial instruments at fair value or other
       measurement attribute required by this statement. The adoption of SFAS
       No. 150 did not materially impact the Company's consolidated financial
       condition or results of operations.

       In July 2003, the EITF reached a consensus on EITF 03-5, "Applicability
       of AICPA SOP 97-2 to Non-Software Deliverables." EITF 03-5 provides
       accounting guidance on whether non-software deliverables (for example,
       non-software related equipment or services) included in an arrangement
       that contains software are within the scope of SOP 97-2. In general, any
       non-software deliverables are within the scope of SOP 97-2 if the
       software deliverable is essential to the functionality of the
       non-software deliverables. The Company adopted this consensus in fiscal
       2004. The adoption of EITF 03-5 did not materially impact the Company's
       consolidated financial condition or results of operations.

                                      F-15





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

(2)    PROVISION FOR RESTRUCTURING OF OPERATIONS

       In March 2001, the Company announced plans to restructure its operations.
       As a result of this restructuring plan, the Company recorded a
       restructuring charge of $2,400,000 in fiscal 2001. The restructuring plan
       consisted of four major points: 1) refocused strategic direction of
       Internet service provider ("ISP") initiatives; 2) refocused strategic
       direction of Internet portal initiatives; 3) consolidation of the
       Company's technical support activities; and 4) elimination of the
       Company's in-house legal department.

       The total amount charged for the refocus of ISP operations in fiscal 2001
       was $1,998,000. This total charge consisted of $171,000 in contractual
       obligations and $1,827,000 in asset write-offs related to ISP operations
       in India. These charges did not include any employee costs.
       With regard to the Internet portal business, the Company redirected its
       primary focus toward the telephony and travel services offered through
       the portal. The initial restructuring charge related to the refocus of
       the portal business was $194,000, of which $168,000 was related to asset
       write-offs, and $26,000 was related to contractual obligations. These
       charges did not include any employee costs.

       The restructuring charge related to the consolidation of technical
       support facilities was $166,000, of which $49,000 related to accrued
       severance payments for the two terminated employees and $117,000 related
       to contractual lease obligations for the vacated space. During fiscal
       2003, the Company made cash payments of $55,000 for severance expenses
       relating to the termination of one of the employees and $47,000 for lease
       payments for the vacated office space. During fiscal 2004, the Company
       paid the remaining $19,000 for lease payments for the vacated office
       space.

       The elimination of the in-house legal department primarily consisted of
       the termination of one employee whose position was not refilled, and the
       charge initially was estimated to be $42,000. In fiscal 2002, the Company
       paid $52,000 toward this restructure charge. Additional charges of
       $41,000 and $199,000 were recorded in fiscal 2002 and in fiscal 2003,
       respectively, since the original estimate of severance expenses was
       insufficient. During fiscal 2003, the Company paid $50,000 toward
       settlement of obligations due to the terminated employee. During fiscal
       2004, the Company paid the remaining settlement obligation of $180,000.

                                      F-16





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       Activity relating to the restructuring charge is as follows (in
       thousands):

<TABLE>
<CAPTION>
                               REFOCUS OF    REFOCUS OF   CONSOLIDATION  ELIMINATION
                                   ISP         PORTAL      OF TECHNICAL   OF LEGAL         TOTAL
                               OPERATIONS    OPERATIONS      SUPPORT     DEPARTMENT
                              ------------   ------------   ----------   ------------   ------------
<S>                           <C>            <C>            <C>          <C>            <C>
       March 31, 2000                  --             --           --             --             --
       Restructuring charge   $     1,998            194    $     166    $        42    $     2,400
       Asset write-off             (1,827)            --           --             --         (1,827)
       Cash payments                  (70)          (194)          --             --           (264)
                              ------------   ------------   ----------   ------------   ------------
       March 31, 2001                 101             --          166             42            309

       Cash payments                   --            (67)         (58)           (52)          (177)
       Adjustments                    (67) a          67  a       (16) b          41  b          25
                              ------------   ------------   ----------   ------------   ------------

       March 31, 2002                  34             --           92             31            157

       Cash payments                   --             --         (102)           (50)          (152)
       Adjustments                    (34) c          --           29  c         199  c         194
                              ------------   ------------   ----------   ------------   ------------

       March 31, 2003                  --             --           19            180            199

       Cash payments                   --             --          (19)          (180)          (199)
                              ------------   ------------   ----------   ------------   ------------

       March 31, 2004         $        --    $        --    $      --    $        --    $        --
                              ============   ============   ==========   ============   ============
</TABLE>

a.         Represents reversal of over-accrual for contractual obligations for
           ISP operations and additional amounts accrued for contractual
           obligations related to the portal operations.

b.         Represents reversal of over-accrual for technical support severance
           costs and additional amounts accrued for anticipated severance costs
           for the elimination of the legal department.

c.         Represents reversal of over-accrual for contractual obligations for
           ISP operations and additional amounts accrued for severance costs for
           the elimination of the legal department and the consolidation of
           technical support.

           As of March 31, 2004, no accrued restructuring charges remained.

                                      F-17





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

(3)     PROPERTY, PLANT AND EQUIPMENT

       Property, plant and equipment, at cost, as of March 31, 2004 consisted of
       the following (in thousands):

                     Land                                               $    26
                     Buildings and leasehold improvements                   888
                     Office and computer equipment, software
                         and furniture                                    6,224
                     Assets under capital lease                             942
                                                                        --------
                                                                          8,080
                     Less accumulated depreciation and amortization      (5,865)
                                                                        --------
                     Property, plant and equipment, net                 $ 2,215
                                                                        ========

       On December 15, 1999, the Company consummated a sale and leaseback
       transaction involving its Yorba Linda, California facility. Concurrent
       with the sale, the Company entered into a fifteen-year operating lease on
       the facility (see Note 8 "Commitments and Contingencies"). The net book
       value of the land and building and the related mortgage were removed from
       the Company's consolidated balance sheet and the lease payments are being
       charged to expense as incurred. The gain on the sale transaction of
       $1,047,000 has been deferred and is being recognized on a straight-line
       basis over the period of the lease as a reduction in lease expense. The
       deferred gain, net of accumulated amortization, was $747,000 as of March
       31, 2004.

(4)    LONG-TERM DEBT

       On December 13, 2002, the Company entered into a Securities Purchase
       Agreement (the "Agreement") with Laurus Master Fund, Ltd. ("Laurus").
       Pursuant to the Agreement, the Company issued to Laurus a 6% Convertible
       Note (the "2002 Note") in the principal amount of $2,000,000 maturing on
       December 12, 2004 and a warrant to purchase up to 200,000 shares of the
       Company's common stock at the following exercise prices: $1.76 per share
       for the purchase of up to 125,000 shares; $2.08 per share for the
       purchase of an additional 50,000 shares; and $2.40 per share for the
       purchase of an additional 25,000 shares. The warrant exercise price may
       be paid in cash, in shares of the Company's common stock (if the fair
       market value of a single share of common stock exceeds the value of the
       per share warrant exercise price), or by a combination of both. The
       warrant expiration date is December 13, 2007.

       The 2002 Note was recorded net of a discount of $214,000 representing the
       estimated fair value of the warrant. The proceeds, net of fees and
       expenses, from the 2002 Note were $1,786,000. The discount is being
       amortized over the life of the 2002 Note using the effective interest
       rate method.

       On August 4, 2003, the terms of the 2002 Note were amended as follows:
       (1) the interest rate on the convertible note was amended from 6% to the
       greater of 5% or prime rate plus 1%, payable in arrears; (2) the
       amortization period was extended from 20 months ending on November 13,
       2004 to 24 months ending on July 31, 2005; (3) the penalty for repayments
       of the outstanding balance in cash was removed; and (4) the fixed
       conversion price, upon which potential issuances of the Company's common
       stock to satisfy the obligations of the convertible note are based, was

                                      F-18





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       reduced from $1.60 to $1.30. The transaction was accounted for as a
       modification of debt under EITF 96-19, "Debtor's Accounting for a
       Modification or Exchange of Debt Instruments." As a result of the
       reduction in the conversion price from $1.60 to $1.30, a beneficial
       conversion amount of $302,000, estimated using the Black-Scholes option
       pricing model, was recorded as a discount to the convertible debt, which
       is being amortized over the life of the note using the effective interest
       rate method.

       The 2002 Note may be repaid, at the Company's option, in cash or through
       the issuance of shares our common stock under certain circumstances
       described in the Agreement. At any time before the 2002 Note is fully
       paid, Laurus may choose to convert all or part of the accrued interest on
       and/or principal of the 2002 Note at the conversion price then in effect,
       subject to certain contractual beneficial ownership and volume
       limitations as described in the Agreement.

       At March 31, 2004, the Company had a principal balance of $730,000,
       excluding unamortized fees and beneficial conversion adjustments, under
       the 2002 Note. Each of the Company's domestic subsidiaries also signed a
       guaranty of payment in favor of Laurus.

       On July 31, 2003, the Company obtained a three-year, renewable,
       $4,000,000 revolving accounts receivable credit facility from Laurus (the
       "Facility"). The amount available under this Facility is reduced by the
       balances outstanding on the 2002 Note and the 2003 Note (defined below).

       Borrowings under the Facility accrued interest, initially, at an annual
       rate equal to the greater of 5% or the prime rate plus 1%. Beginning
       November 1, 2003, the interest rate may be adjusted every month based on
       certain registration requirements and on the volume weighted average
       price of the Company's common stock. No adjustments were made to the
       interest rate during the period ended March 31, 2004. Obligations owed
       under this Facility may be repaid at the Company's option in cash or
       through the issuance of shares of our common stock at the fixed
       conversion price of $1.30 per share, subject to volume limitations, as
       described in the Facility. The Facility has a three-year term, which
       automatically renews every three years unless cancelled in writing by the
       Company or by Laurus under certain conditions. An early termination fee
       of up to $120,000 will be payable if the Facility is terminated prior to
       August 1, 2006. The Facility also provides the Company, under certain
       conditions, the flexibility to borrow additional amounts up to $1,000,000
       above what is available based upon eligible accounts receivable. Any such
       additional borrowings will accrue interest at a rate of 0.6% per month,
       payable monthly.

       In connection with this Facility, the Company paid Laurus a fee of
       $140,000. The Company also issued to Laurus, a five-year warrant to
       purchase 180,000 shares of the Company's common stock, exercisable at
       various prices. The fair market value of this warrant estimated using the
       Black-Scholes option-pricing model was $201,000, which was recorded as a
       discount. Laurus may also receive additional five-year warrants to
       purchase up to 400,000 shares of our common stock at an exercise price
       equal to 125% of the fixed conversion price based upon how much of the
       outstanding obligation under the Facility is converted to equity. As of
       March 31, 2004, none of the additional five-year warrants had been
       issued. The Facility is secured by a general security interest in the
       assets of the Company and its subsidiaries.

                                      F-19





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       During fiscal 2004, the Company borrowed $900,000 under this facility and
       recognized approximately $140,000 of debt discount as a result of the
       beneficial conversion rate of the debt. On December 4, 2003, the
       outstanding balance of $900,000 under the Facility was refinanced with
       Laurus along with $500,000 of additional borrowings into a three-year, 5%
       secured convertible note ("2003 Note"). The interest rate on the 2003
       Note is equal to the greater of the prime rate plus 1.0% or 5% and is
       payable in arrears commencing January 1, 2004. The 2003 Note matures on
       December 3, 2006. The fixed conversion price, upon which potential
       issuances of the Company's common stock to satisfy the obligations of the
       2003 Note are based, is $1.30. At March 31, 2004, the Company had no
       borrowings under the Facility and a principal balance of $1,400,000,
       excluding fees and beneficial conversion adjustments, under the 2003
       Note.

       The Company was required to use the net proceeds from the 2003 Note for
       general corporate purposes only. The Company is also required not to
       permit for any fiscal quarter commencing April 1, 2003, the net operating
       cash flow deficit to be greater than $500,000, excluding extraordinary
       items, as determined by Laurus. At March 31, 2004, the Company was in
       compliance with this covenant.

       Long-term debt, including capital lease obligations, consisted of the
       following at March 31, 2004 (in thousands):

<TABLE>
<CAPTION>

<S>                                                                                           <C>
       Term loan from a bank in India, bearing interest at 16.6% per annum
           payable monthly, principal due in quarterly installments beginning
           June 2000 and ending March 2005, secured by substantially all of the
           Company's assets located in India and guaranteed by a major
           stockholder (see Note 6)                                                           $     263

       Revolving line of credit from a bank in India, bearing interest at 14.5%
           per annum, secured by substantially all of the Company's assets
           located in India, maturing September 2004.                                               194

       Convertible note (2002 Note), bearing 5.0% interest per annum, secured by
           a general security interest in the Company's assets and the assets of
           its domestic subsidiaries. Principal monthly payments of $75,000 and
           interest through June 2005                                                               730

       Convertible note (2003 Note), bearing 5.0% interest per annum, secured by
           a general security interest in the Company's assets and the assets of
           its domestic subsidiaries. Principal monthly payments of $30,000 and
           interest due through December 2006                                                     1,400

       Capital lease obligations maturing at dates ranging from May 2004 to
           November 2008, secured by the leased assets                                              477

       Note payable, bearing interest at 1.0% per annum, principal and accrued
           interest due on or before March 31, 2005 (see Note 6)                                    100

      Other                                                                                          41
                                                                                              ----------
               Total long-term debt before unamortized discount                                   3,205
                     Less: Unamortized discount                                                   (371)
                                                                                              ----------
               Long-term debt                                                                     2,834
                     Less: current portion                                                        1,084
                                                                                              ----------
                                                                                              $   1,750
                                                                                              ==========
</TABLE>

                                      F-20





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       The long-term debt, excluding unamortized discount, and capital lease
       obligations mature in each of the following years ending March 31 (in
       thousands):

                                                     LONG-TERM   CAPITAL LEASE
                                                        DEBT      OBLIGATIONS
                                                     ---------   -------------

                   2005                              $  1,235    $        184
                   2006                                   635             172
                   2007                                   728             156
                   2008                                    46             117
                   2009                                    42              41
                   Thereafter                              42              --
                                                     ---------   -------------
                   Total minimum payments            $  2,728             670
                                                     =========

                   Less amount representing interest                     (193)
                                                                 -------------
                   Present value of minimum capital
                       lease payments                            $        477
                                                                 =============

                                      F-21





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

(5)    STOCKHOLDERS' EQUITY

       WARRANTS

       The Company has issued warrants in the past relating to certain
       acquisitions, issuances of stock, financing activities and as
       consideration for services to the Company.

       The following table summarizes the fair value of warrant issuances and
       the assumptions used in determining fair value.

<TABLE>
<CAPTION>
                                                            Estimated
                             Number of   Exercise price     life (in                       Risk-free    Fair value of
       Grant date            warrants      per share         years)         Volatility       rate        warrants(a)
       ----------            --------      ---------         ------         ----------       ----        -----------

      <S>                     <C>       <C>                  <C>              <C>            <C>         <C>
      September 1999          170,000     $4.71-$4.84        3 - 5             93%           6.72%         $542,000
      February 2000           200,000        $38.00            5               93%           6.72%       $4,666,000
      March 2000              102,000        $28.50          3 - 5             93%           6.72%       $4,303,000
      June 2000                60,000        $19.00            5              146%           4.87%         $979,000
      May-June 2000            53,300   $16.50 - $23.46        3              146%           4.87%         $717,000
      November 2000           200,000        $3.93             5              146%           4.87%       $1,188,000
      December 2002           200,000     $1.76-$2.40          5              100%           3.0%          $200,000
      July 2003               180,000     $1.50-$1.89          5              122%           3.24%         $201,000
      December 2003           485,000     $1.00-$1.50          5              116%           3.14%         $504,000
</TABLE>

(a) Fair value was determined using the Black-Scholes option-pricing model.

                                      F-22





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       The following table summarizes the warrant activity (number of shares in
       thousands):

                                                        NUMBER OF       WEIGHTED
                                                          SHARES        AVERAGE
                                                        UNDERLYING      EXERCISE
                                                         WARRANTS        PRICE
                                                        ---------     ----------

       Outstanding at March 31, 2002                         650      $   20.76
       Issued                                                200           1.92
       Exercised                                              --             --
       Forfeited                                             (27)         15.28
                                                          -------     ----------

       Outstanding at March 31, 2003                         823      $   16.37
       Issued                                                665           1.33
       Exercised                                              --             --
       Forfeited                                             (53)         16.93
                                                          -------     ----------
       Outstanding at March 31, 2004                       1,435      $    9.38
                                                          =======     ==========

       STOCK OPTION PLANS

       The Company has adopted the following employee stock option plans:

<TABLE>
<CAPTION>

                                                                                      SHARES
                                                     ADOPTED        TERMINATES      AUTHORIZED
                                                  --------------  ---------------  ------------
         <S>                                      <C>              <C>               <C>
         NetGuru, Inc. 2003 Stock Option Plan     December 2003    December 2013     1,000,000
             (the "2003 Plan")
         NetGuru, Inc. 2000 Stock Option Plan
             (the "2000 Plan")                    December 2000    November 2010     1,000,000
         Research Engineers, Inc. 1998 Stock
             Option Plan (the "1998 Plan")        December 1998    November 2008     1,000,000
         Research Engineers, Inc. 1997 Stock
             Option Plan (the "1997 Plan")        February 1997    February 2007       600,000
         Research Engineers, Inc. 1996 Stock
             Option Plan (the "1996 Plan")        April 1996       April 2006          588,000
</TABLE>

       Each plan provides for the granting of shares as either incentive stock
       options or non-qualified stock options. Options under all plans generally
       vest over 3 years, though the vesting periods may vary from option to
       option, and are exercisable subject to continued employment and other
       conditions. As of March 31, 2004, there were 1,000,000 options available
       for grant and none outstanding and exercisable under the 2003 Plan, there
       were 79,000 options available for grant and 507,000 options exercisable
       under the 2000 Plan, 441,000 options available for grant and 442,000
       options exercisable under the 1998 Plan, 110,000 options available for
       grant and 267,000 options exercisable under the 1997 Plan, and 101,000
       options available for grant and 298,000 options exercisable under the
       1996 Plan.

                                      F-23





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       The following is a summary of activity related to all outstanding stock
       options (number of shares in thousands):

                                                                     WEIGHTED
                                                                     AVERAGE
                                                       NUMBER OF  EXERCISE PRICE
                                                         SHARES     PER OPTION
                                                       ---------  --------------
                Outstanding at March 31, 2002             1,916   $       2.67
                Granted                                     125           1.97
                Exercised                                   (30)          1.53
                Forfeited                                   (85)          3.54
                                                       ---------
                Outstanding at March 31, 2003             1,926          2.61
                Granted                                     468           1.24
                Exercised                                    --             --
                Forfeited                                  (367)          2.15
                                                       ---------
                Outstanding at March 31, 2004             2,027   $       2.38
                                                       =========

       The following table summarizes options outstanding and exercisable by
       price range at March 31, 2004:

<TABLE>
<CAPTION>

                                        OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                            --------------------------------------------  ----------------------
                                           WEIGHTED-
                                            AVERAGE                                    WEIGHTED-
                                           REMAINING                      EXERCISABLE   AVERAGE
           RANGE OF          NUMBER OF    CONTRACTUAL   WEIGHTED-AVERAGE   AT MARCH    EXERCISE
        EXERCISE PRICES       SHARES         LIFE        EXERCISE PRICE    31, 2004      PRICE
        ---------------       ------         ----        --------------    --------      -----

       <S>                    <C>            <C>             <C>           <C>           <C>
       $  0.00 - $  1.25      200,000        4.7              $1.07        100,000        $1.07
       $  1.25 - $  1.35      169,000        8.9              $1.30         66,000        $1.30
       $  1.35 - $  1.50      795,000        4.5              $1.44        648,000        $1.44
       $  1.50 - $  3.80      745,000        6.0              $2.70        682,000        $2.77
       $  3.80 - $  7.60       10,000        5.5              $4.25         10,000        $4.25
       $  7.60 - $ 11.40      100,000        5.8             $10.46        100,000       $10.46
       $ 11.40 - $ 19.00        8,000        6.3             $18.06          8,000       $18.06
                           -----------                                   ----------
              Total         2,027,000                                    1,614,000
                           ===========                                   ==========
</TABLE>

       At March 31, 2004, the range of exercise prices and the weighted average
       remaining contractual life of outstanding options were $1.07 to $18.06
       and 5.5 years, respectively.

(6)    RELATED PARTY TRANSACTIONS

       As discussed in Note 4 "Long-Term Debt" and Note 13 "Liquidity," the
       Company issued two convertible debt instruments, the 2002 Note and the
       2003 Note, to Laurus. As a result of this financing, Laurus became the
       beneficial owner of more than 5% of the Company's outstanding common
       stock if contractual beneficial ownership and conversion limitations are
       disregarded. In connection with the 2002 Note and the 2003 Note, the
       Company paid fees of $200,000 and $140,000, respectively, to an affiliate
       of Laurus.

                                      F-24





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       In October 2003, the Company issued a 1.0% interest bearing promissory
       note for $100,000 to Mr. Amrit Das, the Company's chief executive
       officer. The proceeds from this financing were used for working capital.
       The principal along with the accrued interest is due on or before March
       31, 2005. As of March 31, 2004, the total outstanding principal balance
       on this note was $100,000, which is included in the current portion of
       long-term debt.

       In October 2003, the Company borrowed $155,000 from Mr. Jyoti Chatterjee,
       the Company's then President and Chief Operating Officer, and issued to
       him a 1% interest bearing unsecured promissory note. The proceeds were
       used to pay off the telephone switch lease early in order for the Company
       to obtain title to the switch and to be able to sell it. As of March 31,
       2004, the Company had repaid the entire balance of this loan and all
       accrued interest in full.

       In February 2002, Mr. Amrit Das and Mr. Jyoti Chatterjee, the
       Company's then President and Director, pledged certain of their personal
       assets as collateral to finance the Company's $500,000 telephony switch.
       In December 2003, when the telephony switch was sold, the collateral
       restrictions on their personal assets from this transaction were removed.

       In November 2000, Mr. Stephen Owen, an officer of the Company, issued a
       promissory note to the Company for $85,000, which loan was secured by his
       pledge of the proceeds from the exercise and sale of his vested options.
       Mr. Owen repaid the balance of this loan in full in April 2003.

       In March 1999, Mr. Amrit Das personally guaranteed a term loan from a
       bank in India. The term loan is secured by substantially all of the
       Company's assets located in India. The loan bears an annual interest of
       16.6% payable monthly. The principal is payable in quarterly installments
       beginning June 2000 and ending March 2005. At March 31, 2004, the Company
       owed $263,000 on this loan (see Note 4 "Long-Term Debt").

 (7)   RETIREMENT PLANS

       The Company and certain of its subsidiaries have adopted qualified cash
       or deferred 401(k) retirement savings plans. The domestic plan covers
       substantially all domestic employees who have attained age 21 and have
       had one year of service. Employees may contribute up to 14% of their
       compensation. The Company makes matching contributions to the plan of 37%
       to 50% of the employees' elective contributions for the first 6% of
       compensation. The international employees are not covered by any
       retirement plans. For the years ended March 31, 2004 and 2003, Company
       contributions to the domestic retirement plans were approximately $95,000
       and $153,000, respectively.

(8)    COMMITMENTS AND CONTINGENCIES

       The Company leases certain facilities and equipment under non-cancelable
       operating leases. The facility leases include options to extend the lease
       terms and provisions for payment of property taxes, insurance and
       maintenance expenses.

                                      F-25





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       At March 31, 2004, future minimum annual rental commitments under these
       lease obligations were as follows (in thousands):

                     Year ending March 31:
                         2005                                    521
                         2006                                    480
                         2007                                    421
                         2008                                    385
                         2009                                    355
                         Thereafter                            1,816
                                                            ---------
                                                            $  3,978
                                                            =========

       Rent expense was $627,000 and $698,000 for the years ended March 31, 2004
       and 2003, respectively.

       The Company is a party to various litigation arising in the normal course
       of business. Management believes the disposition of these matters will
       not have a material impact on the Company's consolidated financial
       condition or results of operations.

(9)    INCOME TAXES

       The components of loss from continuing operations before income taxes are
       as follows for the years ended March 31, (in thousands):

                                                       2004            2003

                        United States             $     (2,708)    $     (4,855)
                        Foreign                             52               19
                                                  -------------    -------------
                          Total                         (2,656)          (4,836)
                                                  =============    =============

       The (benefit) provision for taxes on income from continuing operations is
       comprised of the following for the years ended March 31, (in thousands):

                                                      2004              2003
                                                  -------------    -------------
                    Current:
                        Federal                   $         --     $       (159)
                        State                                6                2
                        Foreign                              9              125
                                                  -------------    -------------
                                                            15              (32)
                    Deferred:
                        Federal                             --             (134)
                        State                               --              (38)
                        Foreign                             --               --
                                                  -------------    -------------
                                                            --             (172)
                                                  -------------    -------------
                          Total                   $         15     $       (204)
                                                  =============    =============

                                      F-26





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       The reported (benefit) provision for taxes on income from continuing
       operations differs from the amount computed by applying the statutory
       federal income tax rate of 34% to loss before income taxes as follows for
       the years ended March 31, (in thousands):

                                                              2004       2003
                                                            --------  ---------

              Income tax benefit at statutory rate          $  (903)  $ (1,644)
              State taxes, net of federal benefits              (52)      (144)
              Foreign income tax rate differential               (8)       119
              U.S. tax on foreign earnings,
                 previously deferred under APB 23                22        600
              Change in valuation allowance                     975        862
              Research and development credits                  (16)         -
                 Other                                           (3)         3
                                                            --------  ---------
                    Total                                   $    15   $   (204)
                                                            ========  =========

       The Company provides deferred income taxes for temporary differences
       between assets and liabilities recognized for financial reporting and
       income tax purposes. The tax effects of temporary differences for
       continuing operations at March 31, 2004 are as follows (in thousands):

                                                                          2004
                                                                        --------

                 Deferred tax assets:
                     Accrued vacation                                   $    76
                     Allowance for doubtful accounts                         71
                     Amortization of intangibles                          1,618
                     Net operating loss carryforwards                     7,383
                     Research and development credit
                         carryforwards                                      183
                     Gain on sale of property                               299
                                                                        --------
                            Total deferred tax assets                     9,630
                            Less: valuation allowance                    (8,829)
                                                                        --------
                            Net deferred tax assets                         801
                                                                        ========

                 Deferred tax liabilities:
                     Depreciation                                          (179)
                     U.S. tax on foreign earnings, net of
                        Foreign tax credit                                 (622)
                                                                        --------
                            Total deferred tax liabilities              $  (801)
                                                                        ========

       At March 31, 2004, the Company had tax net operating loss carryforwards
       of approximately $19,748,000 for federal income tax purposes and

       $11,142,000 for state income tax purposes, which expire at varying dates
       beginning in 2019 and 2006, respectively. Due to the "change in
       ownership" provisions of the Tax Reform Act of 1986, the Company's net
       operating loss carryforwards may be subject to an annual limitation on
       the utilization of these carryforwards against taxable income in future
       periods if a cumulative change in ownership of more than 50% occurs
       within any three-year period.

                                      F-27





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       In addition to the net operating loss carryforwards, the Company has, for
       federal income tax purposes, $103,000 of research and development credit
       carryforwards, which expire at varying dates beginning in 2013.
       Additionally, the Company has, for state income tax purposes, $80,000 of
       research and development credit, which carries forward indefinitely.

       In assessing the realizability of the net deferred tax assets, management
       considers whether it is more likely than not that some or all of the
       deferred tax assets will not be realized. The ultimate realization of
       deferred tax assets depends upon either the generation of future taxable
       income during the periods in which those temporary differences become
       deductible or the carryback of losses to recover income taxes previously
       paid during the carryback period. As of March 31, 2004, the Company had
       provided a valuation allowance of $8,829,000 to reduce the net deferred
       tax assets due in part to the potential expiration of certain tax credit
       and net operating loss carryforwards prior to their utilization. The net
       change in the deferred tax asset valuation allowance for fiscal year 2004
       was $1,150,000.

       Deferred taxes have been provided for U.S. federal and state income taxes
       and foreign withholding taxes on the portion of undistributed earnings on
       non-U.S. subsidiaries expected to be remitted. Applicable foreign taxes
       have also been provided.

(10)   SEGMENT AND GEOGRAPHIC DATA

       The Company is an integrated Internet and IT technology and services
       company. The Company's operating segments are:

         o    Engineering and collaborative software products and services;
         o    IT services;
         o    Web-based telecommunications services; and
         o    Center

       Through March 31, 2003, the Company's management included all unallocable
       expenses related to corporate activities in the Company's engineering and
       collaborative software products and services segment. In order to
       facilitate better management of its costs, since April 1, 2003, the
       Company's management monitors its unallocable expenses related to the
       Company's corporate activities in a separate "Center," which is reflected
       in the tables below. Prior period presentation has been revised to
       provide comparable information.

                                      F-28





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       The significant components of worldwide operations by reportable
operating segment are:

                                                               FOR THE YEAR
                                                              ENDED MARCH 31
                                                           ---------------------
                                                             2004        2003
                                                           ---------   ---------
                                                              (IN THOUSANDS)
                      NET REVENUES
           Engineering and collaborative software
              products and services                        $ 11,550    $  9,529
           IT services                                        4,994       5,586
           Web-based telecommunications services              1,154       3,173
                                                           ---------   ---------
                    Consolidated                           $ 17,698    $ 18,288
                                                           =========   =========

                      GROSS PROFIT
           Engineering and collaborative software
              products and services                        $ 10,539    $  8,636
           IT services                                        1,044       1,374
           Web-based telecommunications services                429         369
                                                           ---------   ---------
                    Consolidated                           $ 12,012    $ 10,379
                                                           =========   =========

                    OPERATING LOSS
           Engineering and collaborative software
              products and services                        $   (976)   $ (2,178)
           IT services                                         (126)       (156)
           Web-based telecommunications services                (40)       (885)
           Center                                            (1,033)     (1,388)
                                                           ---------   ---------
                    Consolidated                           $ (2,175)   $ (4,607)
                                                           =========   =========

            DEPRECIATION AND AMORTIZATION EXPENSE
                 CHARGED TO COST OF REVENUES
           Engineering and collaborative software
              products and services                        $    276    $    287
           IT services                                           --          --
           Web-based telecommunications services                 --         100
                                                           ---------   ---------
                    Consolidated                           $    276    $    387
                                                           =========   =========

         DEPRECIATION EXPENSE CHARGED TO OPERATIONS
           Engineering and collaborative software
              products and services                        $    936    $  1,054
           IT services                                            9          22
           Web-based telecommunications services                 11          12
                                                           ---------   ---------
                    Consolidated                           $    956    $  1,088
                                                           =========   =========

                   RESTRUCTURING CHARGE
           Engineering and collaborative software
              products and services                        $     --    $    194
           IT services                                           --          --
           Web-based telecommunications services                 --          --
                                                           ---------   ---------
                    Consolidated                           $     --    $    194
                                                           =========   =========

                                      F-29





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

                                                               FOR THE YEAR
                                                              ENDED MARCH 31
                                                           ---------------------
                                                             2004        2003
                                                           ---------   ---------
                                                              (IN THOUSANDS)
                     IMPAIRMENT CHARGE
           Engineering and collaborative software
              products and services                        $     --    $     67
           IT services                                           --          --
           Web-based telecommunications services                 --         192
                                                           ---------   ---------
                    Consolidated                           $     --    $    259
                                                           =========   =========

              CUMULATIVE EFFECT OF A CHANGE IN
                    ACCOUNTING PRINCIPLE
           Engineering and collaborative software
              products and services                        $     --    $     --
           IT services                                           --       5,824
           Web-based telecommunications services                 --          --
                                                           ---------   ---------
                    Consolidated                           $     --    $  5,824
                                                           =========   =========

              EXPENDITURES FOR ADDITIONS TO
                   LONG-LIVED ASSETS
           Engineering and collaborative software
              products and services                        $     94    $    222
           IT services                                           --          --
           Web-based telecommunications services                 --          --
                                                           ---------   ---------
                    Consolidated                           $     94    $    222
                                                           =========   =========

                                                          At March 31,
                      GOODWILL                               2004
                                                           ---------
                                                         (in thousands)
           Engineering and collaborative software
              products and services                        $  1,945
           IT services                                          946
           Web-based telecommunications services                 50
                                                           ---------
                    Consolidated                           $  2,941
                                                           =========

                                      F-30





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       The Company's operations are based worldwide through foreign and domestic
       subsidiaries and branch offices in the U.S., Germany, India, the United
       Kingdom, and Asia-Pacific. The following are significant components of
       worldwide operations by geographic location:

                                                     FOR THE YEAR ENDED MARCH 31
                                                      ------------------------
                                                         2004           2003
                                                      ----------    ----------
                                                           (IN THOUSANDS)
                           NET REVENUE
                United States                         $   8,651     $  10,802
                The Americas (other than U.S.)              692           772
                Europe                                    3,939         3,271
                Asia-Pacific                              4,416         3,443
                                                      ----------    ----------
                         Consolidated                 $  17,698     $  18,288
                                                      ==========    ==========

                          EXPORT SALES
                United States                         $   2,137     $   1,749
                                                      ==========    ==========

                                                      At March 31,
                        Long-Lived assets               2004
                                                      ----------
                                                    (in thousands)

                United States                         $   4,084
                Europe                                      204
                Asia-Pacific                              1,085
                                                      ----------

                         Consolidated                 $   5,373
                                                      ==========

11.  DISCONTINUED OPERATIONS

              In its efforts to focus on its core software products and IT
services businesses, during fiscal 2004, the Company committed to a plan to sell
its travel services subsidiary and actively marketed it. Accordingly, the
results of the travel subsidiary's operations are excluded from the Web-based
telecommunications services segment and reported as "discontinued operations."
The net assets of the subsidiary (including $340,000 in goodwill) were written
down to their potential recoverable value of $155,000 at March 31, 2004.

                                      F-31





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

              The following table summarizes financial information for the
discontinued operation, with prior period presentation reclassified to conform
to the current period presentation:

                                                              YEAR ENDED
                                                               MARCH 31,
                                                        -----------------------
                                                          2004           2003
                                                        --------       --------
Discontinued operations:
     e-Destinations, Inc. revenues                      $   309        $ 1,672
                                                        ========       ========

     Loss from operations of
        e-Destinations, Inc.                            $  (148)       $   (73)
     Loss due to write-down                                (291)            --
                                                        --------       --------
Loss from discontinued
     operations                                         $  (439)       $   (73)
                                                        ========       ========

                                                        MARCH 31,
                                                          2004
                                                       ---------
    Current assets                                     $    258
    Current liabilities                                     103
                                                       =========

(12)  LOSS PER SHARE

       The following table illustrates the computation of basic and diluted net
       loss per share for the years ended March 31, (in thousands):

<TABLE>
<CAPTION>

                                                                  2004        2003
                                                                ---------   ---------
              <S>                                               <C>         <C>
              Numerator:
              Net loss -- numerator for basic and diluted
                 net loss per share                             $ (3,110)   $(10,529)

              Denominator:
              Denominator for basic net loss per share -
                 average number of common shares outstanding
                 during the year                                  17,603      17,310
              Incremental common shares attributable to
                 exercise of outstanding options and warrants         --          --
                                                                ---------   ---------
              Denominator for diluted net loss per share          17,603      17,310
                                                                =========   =========

              Basic net loss per share                          $  (0.18)   $  (0.61)
                                                                =========   =========

              Diluted net loss per share                        $  (0.18)   $  (0.61)
                                                                =========   =========
</TABLE>

       Options, warrants and their equivalents amounting to 957,000 and 837,000
       potential common shares were excluded from the computations of diluted
       loss per share for fiscal 2004 and 2003, respectively, because the effect
       would have been antidilutive. Of these amounts, potential common shares
       from the possible conversion of the Laurus Notes in fiscal 2004 and 2003
       amounted to 909,000 and 409,000, respectively.

                                      F-32





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

(13)   SUBSEQUENT EVENTS

       SALE OF TRAVEL SUBSIDIARY

       On April 16, 2004, the Company sold its travel services subsidiary for a
       cash sales price of $155,000, net of sales commission, with no resulting
       gain or loss from this sale.

       CONVERSION OF PORTIONS OF LAURUS NOTES INTO EQUITY

       On April 15, 2004, the Company issued 200,000 shares of common stock to
       Laurus and reduced the outstanding balance on the 2003 Note by $260,000.

       On April 19, 2004, the Company issued 500,000 shares of common stock to
       Laurus and reduced the outstanding balance on the 2002 Note by $650,000.

       AMENDMENT TO 2003 NOTE AND ADDITIONAL BORROWING

       On April 27, 2004, the Company amended and restated the 2003 Note to
       reflect an additional $1,000,000 that the Company borrowed on April 27,
       2004, so that the principal amount on the 2003 Note was increased to
       $2,400,000 from $1,400,000 (the "Amended and Restated Note"). The Amended
       and Restated Note matures on December 4, 2006. The net proceeds from the
       sale of the Amended and Restated Note have been used for working capital.

       In conjunction with this amendment, Laurus Capital Management, LLC, an
       affiliate of Laurus, was paid an additional fee of $10,000.

       LINE OF CREDIT

       On June 17, 2004, one of the Company's foreign subsidiaries refinanced
       its outstanding term loan and revolving line of credit with a new
       revolving credit facility for $680,000. The annual interest rate on this
       revolving credit facility is 11%. The credit facility expires in May
       2005.

 (14)  LIQUIDITY

       The Company incurred net losses of $3,110,000 and $10,529,000 and used
       cash in operations of $1,204,000 and $1,872,000 in fiscal 2004 and 2003,
       respectively. The Company's future capital requirements will depend upon
       many factors, including sales and marketing efforts, the development of
       new products and services, possible future strategic acquisitions, the
       progress of research and development efforts, and the status of
       competitive products and services. The Company believes it will be able
       to generate cash from operations or through existing or additional
       sources of debt and/or equity financing. On July 31, 2003, the Company
       obtained a $4,000,000 revolving credit facility from Laurus. The
       availability of funds under this credit facility is limited by the amount
       of the loan balances on the 2002 Note and 2003 Note issued to Laurus. At
       March 31, 2004, the Company had a total availability of $1,870,000 under
       this credit facility. The Company has continued its program to reduce

                                      F-33





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

                       Years Ended March 31, 2004 and 2003

       costs and expenses. If adequate funds are not available, the Company may
       be required to delay, scale back, or eliminate its research and
       development programs and its marketing efforts or to obtain funds through
       arrangements with partners or others who may require the Company to
       relinquish rights to certain of its technologies or potential products or
       assets.

                                      F-34





<PAGE>

                                   SIGNATURES

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

                                          NETGURU, Inc

Dated: June 29, 2004                      /s/ Amrit K. Das
                                          -------------------------------------
                                          Amrit K. Das, Chief Executive Officer

         In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.

           Name                                Title                   Date
---------------------------   -----------------------------------  -------------

/s/ Amrit K. Das              Chairman of the Board, Chief         June 29, 2004
----------------              Executive Officer, President and
Amrit K. Das                  Director (principal executive
                              officer)

/s/ Santanu Das               Executive Vice President, Chief      June 29, 2004
---------------
Santanu Das                   Operating Officer, Director

/s/ Bruce Nelson              Chief Financial Officer (Principal   June 29, 2004
----------------
Bruce Nelson                  financial and accounting Officer)

/s/ D. Dean McCormick III     Director                             June 29, 2004
-------------------------
D. Dean McCormick III

/s/ Stanley W. Corbett        Director                             June 29, 2004
----------------------
Stanley W. Corbett

/s/ Benedict A. Eazzetta      Director                             June 29, 2004
------------------------
Benedict A. Eazzetta

                                       56





<PAGE>

                  INDEX TO EXHIBITS FILED WITH THIS FORM 10-KSB

         EXHIBIT NO.                DESCRIPTION
         -----------                -----------

              21       Subsidiaries of the registrant

              23       Consent of Independent Registered Public Accounting Firm

              31       Certifications Required by Rule 13a-14(a) of the
                       Securities Exchange Act of 1934, as amended, as Adopted
                       Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

              32       Certification of Chief Executive Officer and Chief
                       Financial Officer Pursuant to 18 U.S.C. Section 1350, as
                       Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
                       of 2002

                                       57