# UNITED STATESSECURITIES AND
EXCHANGE COMMISSION

# WASHINGTON, D.C. 20549

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# FORM 10-Q

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

# For The Quarterly
Period Ended September 30, 2004

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

# For the Transition
Period from _____ to ____

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# Commission File Number
0-27412

COTELLIGENT, INC.
(Exact name of registrant as specified in its charter)

|                         |            
|------------------------ | -----------
|Delaware                 | 94-3173918 
|(State of incorporation) | (I.R.S. ID)

655 Montgomery Street,Suite 1000, San Francisco, California 94111
(Address of principal executive offices)

(415) 477-9900(Registrants
telephone number, including area code)

100 Theory, Suite 200, Irvine, California 92612
(Former name, former address and former fiscal year, if changed since last report)

Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or 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.

|YesX | No
|---- | --

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 123-2 of
the Act).

|Yes | NoX
|--- | ---

At
November 12, 2004, there were 24,861,621 shares of common stock outstanding.

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# COTELLIGENT, INC.

# INDEX

# Part I 
Financial Information

|                                                                                              |     
|--------------------------------------------------------------------------------------------- | ----
|Item 1.  Financial Statements                                                                 | Page
|Cotelligent, Inc.                                                                            
|Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003          | 3   
|Condensed Consolidated Statements of Operations for the Three and Nine Months Ended          
|September 30, 2004 and 2003                                                                   | 4   
|Condensed Consolidated Statements of Cash Flows for the Nine Months Ended                    
|September 30, 2004 and 2003                                                                   | 5   
|Notes to Condensed Consolidated Financial Statements                                          | 6   
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 12  
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            | 19  
|Item 4. Controls and Procedures                                                               | 19  
|                                                                                              |     
|Part II - Other Information                                                                  
|Item 1. Legal Proceedings                                                                     | 20  
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           | 20  
|Item 3. Defaults upon Senior Securities                                                       | 20  
|Item 4. Submission of Matters to a Vote to Security Holders                                   | 20  
|Item 5. Other Information                                                                     | 20  
|Item 6. Exhibits and Reports on Form 8-K                                                      | 20  
|                                                                                              |     
|Signature                                                                                     | 21  
|Exhibits                                                                                      |     

2

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# Item 1. Financial Statements

COTELLIGENT, INC.CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)(Unaudited)

|                                                                              | September 30,
2004 | December 31,
2003
|----------------------------------------------------------------------------- | ------------------ | -----------------
|ASSETS                                                                        |                    |                  
|Current assets:                                                               |                    |                  
|Cash and cash equivalents                                                     |                    |                  
|Refundable income taxes                                                       |                    |                  
|Accounts receivable, including unbilled accounts of $113 and $245 and net of  |                    |                  
|allowance for doubtful accounts of $51 and $62, respectively                  |                    |                  
|Notes receivable from officer and stockholders, net of valuation allowance of |                    |                  
|$100 and $796, respectively                                                   |                    |                  
|Note receivable from acquirer of discontinued operation                       |                    |                  
|Prepaid expenses and other current assets                                     |                    |                  
|                                                                              |                    |                  
|Total current assets                                                          |                    |                  
|Property and equipment, net                                                   |                    |                  
|Goodwill                                                                      |                    |                  
|Other Intangibles, net of $82 of accumulated amortization                     |                    |                  
|Investment in marketable security                                             |                    |                  
|Other assets                                                                  |                    |                  
|                                                                              |                    |                  
|Total assets                                                                  |                    |                  
|                                                                              |                    |                  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                          |                    |                  
|Current liabilities:                                                          |                    |                  
|Accounts payable                                                              |                    |                  
|Accrued compensation and related payroll liabilities                          |                    |                  
|Restructuring liabilities                                                     |                    |                  
|Deferred revenue                                                              |                    |                  
|Other accrued liabilities                                                     |                    |                  
|                                                                              |                    |                  
|Total current liabilities                                                     |                    |                  
|Restructuring liabilities, net of current portion                             |                    |                  
|Other long-term liabilities                                                   |                    |                  
|Income taxes payable                                                          |                    |                  
|                                                                              |                    |                  
|Total liabilities                                                             |                    |                  
|                                                                              |                    |                  
|Commitments and contingencies                                                 |                    |                  
|                                                                              |                    |                  
|Stockholders' equity:                                                         |                    |                  
|Preferred Stock, $0.01 par value; 500,000 shares authorized, no shares issued |                    |                  
|or outstanding                                                                |                    |                  
|Common Stock, $0.01 par value; 100,000,000 shares authorized, 25,506,221 and  |                    |                  
|14,826,613 shares issued, respectively                                        |                    |                  
|Additional paid-in capital                                                    |                    |                  
|Note receivable from officer                                                  |                    |                  
|Accumulated deficit                                                           |                    |                  
|Treasury stock                                                                |                    |                  
|                                                                              |                    |                  
|Total stockholders' equity                                                    |                    |                  
|                                                                              |                    |                  
|Total liabilities and stockholders' equity                                    |                    |                  
|                                                                              |                    |                  

See
accompanying notes to condensed consolidated financial statements.

3

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COTELLIGENT, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)(Unaudited)

|                                               | Three Months Ended September 30, | Nine Months Ended September 30,
|---------------------------------------------- | -------------------------------- | -------------------------------
|
|Revenues                                       |                                  |                                
|Cost of services                               |                                  |                                
|                                               |                                  |                                
|Gross profit                                   |                                  |                                
|Research and development costs                 |                                  |                                
|Restructuring charge                           |                                  |                                
|Selling, general and administrative expenses   |                                  |                                
|                                               |                                  |                                
|Operating loss                                 |                                  |                                
|                                               |                                  |                                
|Other income (expense):                        |                                  |                                
|Interest expense                               |                                  |                                
|Interest income                                |                                  |                                
|Other                                          |                                  |                                
|                                               |                                  |                                
|Total other income (expense)                   |                                  |                                
|                                               |                                  |                                
|Loss before income taxes                       |                                  |                                
|Income tax expense (benefit)                   |                                  |                                
|                                               |                                  |                                
|Net loss                                       |                                  |                                
|                                               |                                  |                                
|Loss per share:                                |                                  |                                
|Basic and diluted                              |                                  |                                
|                                               |                                  |                                
|Weighted average number of shares outstanding: |                                  |                                
|Basic and diluted                              |                                  |                                
|                                               |                                  |                                

See accompanying notes to condensed consolidated financial statements.

4

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COTELLIGENT, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)(Unaudited)

|                                                                      | Nine Months Ended September 30,
|--------------------------------------------------------------------- | -------------------------------
|
|Cash flows provided by (used in) operating activities:                |                                
|Net loss                                                              |                                
|Adjustments to reconcile net loss to net cash used in operating       |                                
|activities:                                                           |                                
|Equity loss from investment in alliance partner                       |                                
|Unrealized loss on investment in marketable security                  |                                
|Depreciation and amortization                                         |                                
|Compensation expense on change in terms of stock options              |                                
|Provision for doubtful accounts                                       |                                
|Changes in current assets and liabilities:                            |                                
|Accounts receivable                                                   |                                
|Prepaid expenses and other current assets                             |                                
|Income taxes, net                                                     |                                
|Accounts payable and accrued expenses                                 |                                
|Deferred revenue                                                      |                                
|Other assets                                                          |                                
|                                                                      |                                
|Cash used in operating activities                                     |                                
|                                                                      |                                
|Cash flows provided by (used in) investing activities:                |                                
|Purchase of business, net of cash acquired                            |                                
|Payments received on note from acquirer of discontinued operations    |                                
|Purchases of property and equipment                                   |                                
|Dividend received from marketable security                            |                                
|                                                                      |                                
|Cash provided by (used in) investing activities                       |                                
|                                                                      |                                
|Cash flows provided by (used in) financing activities:                |                                
|Proceeds from stock option exercises                                  |                                
|                                                                      |                                
|Cash provided by financing activities                                 |                                
|                                                                      |                                
|Net decrease in cash                                                  |                                
|Cash at beginning of period                                           |                                
|                                                                      |                                
|Cash at end of period                                                 |                                
|                                                                      |                                
|Supplemental disclosures of cash flow information:                    |                                
|Interest paid                                                         |                                
|Income taxes paid (refunded)                                          |                                
|Officer compensation used to pay note receivable                      |                                
|Partial forgiveness of nonrecourse notes related to leveraged stock   |                                
|purchase plan                                                         |                                
|Supplemental non-cash financing and investing activities:             |                                
|Repayment of officer's notes receivable with bonus compensation       |                                
|Revaluation of note receivable from stockholder                       |                                
|Detail of acquisition -                                               |                                
|Fair value of assets acquired                                         |                                
|Liabilities assumed                                                   |                                
|Common stock issued to sellers of an acquired business                |                                
|Warrants issued to sellers of an acquired business                    |                                
|Cash component of consideration due stockholders of acquired business |                                
|                                                                      |                                
|Net cash paid                                                         |                                
|Cash acquired in acquisition                                          |                                
|                                                                      |                                
|Cash used for purchase of business                                    |                                
|                                                                      |                                

See accompanying notes to condensed consolidated financial statements.

5

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COTELLIGENT, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)

# Note 1  Summary of Significant Accounting Policies and Practices

Description of Business

Cotelligent, Inc.
(Cotelligent or the Company), a Delaware corporation, provides
software consulting services to businesses with complex information technology
(IT) operations, narrowcasting services which include digital technologies and
production services for video content, distribution, scripting and playback on digital
display channels and networks, as well as maintenance, support and contract services on
software products it licenses. These financial statements include the accounts of
Cotelligent, Inc. and its subsidiaries. The Company acquired OnSite Media, Inc., a Nevada
corporation, on March 2, 2004. Immediately following the acquisition, the Company
integrated OnSite Media, Inc. into a newly formed subsidiary, Watchit Media USA, Inc. The
results of OnSite Media, Inc. have been included in the Companys results from its
acquisition date (see note 3).

Liquidity

The Company has had operating losses
and negative operating cash flows for the past several fiscal periods. This has been due
to declining demand for IT services and solutions and investments the Company has made in
Watchit Media, Inc., its new narrowcasting business. As a result, the Company is exposed
to certain risks which include the availability of financing, the retention of and
dependence on key individuals, the effects of intense competition, the ability to develop
and successfully market new product and service offerings, and the ability to streamline
operations and increase revenues. While the Company is now focused on executing a growth
strategy in the narrowcasting market, there can be no assurance the Company will be
profitable in the future.

In the past and during the nine
months ended September 30, 2004, management has taken action in response to the continued
softness in IT services in order to preserve cash, including but not limited to
significant reductions in headcount, outsourcing certain administrative functions,
changing benefit plan insurance carriers, relocating the headquarters resulting in lower
lease obligations, acquiring a business in an industry with more near term growth
prospects than IT services and has commenced arranging financing alternatives. Management
has carefully forecasted its results of operations and financial position through
September 30, 2005, and has determined that the Company may not have adequate cash to fund
its anticipated working capital needs.

Beginning in October 2004, management
took further action to reduce costs and, including salary reductions for the executive
officers and vice presidents of the Company, and reductions in force. Cotelligent also
secured a line of credit against its trade accounts receivable, and is considering
alternatives for attracting equity financing.

Basis of Presentation

The accompanying interim financial
statements do not include all disclosures included in the financial statements in
Cotelligents Annual Report on Form 10-K for the year ended December 31, 2003, and
therefore these financial statements should be read in conjunction with the financial
statements included in Cotelligents Form 10-K.

In the opinion of management, the
interim financial statements filed as part of this Quarterly Report on Form 10-Q, reflect
all adjustments necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods and dates presented.

The Company's unaudited condensed interim
consolidated financial statements have been prepared on the basis of a going concern,
which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business.

Stock-Based Compensation

The Company has adopted the interim disclosure
provisions of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure."
Related interim disclosures are as follows.

The Company measures compensation
expense for its employee stock-based compensation awards using the intrinsic value method
and provides pro forma disclosures of net loss and loss per share as if a fair value
method had been applied. Therefore, compensation cost for employee stock awards is
measured as the excess, if any, of the fair value of our common stock at the grant date or
re-measurement date over the amount an employee must pay to acquire the stock and is
amortized over the related service periods using the straight-line method. Compensation
expense previously recorded for unvested employee stock-based compensation awards that are
forfeited upon employee termination is reversed in the period of forfeiture.

6

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COTELLIGENT, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)

The following table compares net loss
and loss per share as reported to the pro forma amounts that would be reported had
compensation expense been recognized for our stock-based compensation plans in accordance
with the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation:

|                                                    | Three Months Ended September 30, | Nine Months Ended September 30,
|--------------------------------------------------- | -------------------------------- | -------------------------------
|
|Net loss, as reported                               |                                  |                                
|Add: Stock-based employee compensation expense      |                                  |                                
|included in reported net income net of related tax  |                                  |                                
|expense, if applicable                              |                                  |                                
|Deduct: Stock-based compensation expense determined |                                  |                                
|under fair value based method for awards net of     |                                  |                                
|related tax expense, if applicable                  |                                  |                                
|                                                    |                                  |                                
|Pro forma net loss                                  |                                  |                                
|                                                    |                                  |                                
|Loss per share, as reported:                        |                                  |                                
|Basic and diluted                                   |                                  |                                
|                                                    |                                  |                                
|Pro forma loss per share:                           |                                  |                                
|Basic and diluted                                   |                                  |                                
|                                                    |                                  |                                

# Note 2  Changes in
Stockholders Equity

|                              | Common Stock | Additional | Notes
Receivable |            | Treasury Stock | Total
|----------------------------- | ------------ | ---------- | ---------------- | ---------- | -------------- | -----
|
|Balance at December 31, 2003  |              |            |                  | 14,826,613 |                | $    
|Issuance of Common Stock      |              |           
|in connection with            |              |           
|purchase of business          |              |            |                  | 10,679,608 |                |      
|Issuance of Warrants in       |              |           
|connection with               |              |           
|purchase of business          |              |            |                  | -          |                |      
|Cost of registering and       |              |           
|issuing securities in         |              |           
|connection with               |              |           
|purchase of                   |              |           
|business                      |              |            |                  | -          |                |      
|Net loss                      |              |            |                  | -          |                |      
|                              |              |            |                  |            |                |      
|Balance at September 30, 2004 |              |            |                  | 25,506,221 |                | $    
|                              |              |            |                  |            |                |      

7

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COTELLIGENT, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)

# Note 3 Acquisition

Cotelligent acquired OnSite Media,
Inc, a Nevada corporation, on March 2, 2004. In the acquisition, OnSite was merged with
and into Watchit Media USA, Inc. a wholly owned subsidiary of Cotelligent, or
Watchit. OnSite was a ten year old company that developed enabling digital
technologies and production services aimed at providing complete solutions for video
content creation, distribution, scripting and playback for companies with digital display
channels and networks. OnSite historically provided this software and service offerings to
the hospitality and gambling industries. This is called narrowcasting.

Narrowcasting technology presents
dynamic, compelling motion media that influences the actions of captive audiences.
Promotional messages for hotel in-room channels, presenting commercial messages to casino
entertainment facilities and outdoor signage had been the primary business of OnSite. In
addition, OnSite developed a unique Internet media creation software application which we
believe will give the newly formed Watchit a competitive advantage. Cotelligent intends to
leverage its marketing expertise, resources and infrastructure to enhance Watchits
current services, launch new proprietary television programs, add greater value to current
client relationships, add clients in the hospitality market, and expand to new markets.

The Company believes the convergence
of Internet, wireless and video media will soon become a major part of the technology
landscape. We believe Cotelligents infrastructure, experience in developing wireless
and Internet business applications and its system integration expertise are an excellent
fit with the rapidly evolving narrowcasting market.

The aggregate consideration paid for
the acquisition was $3,307 (10,679,608 shares of the Companys Common Stock issued at
fair value of $1,815 and based on the average closing price of the Companys common
stock for a few days prior to and after the signing of the definitive agreement and
related public announcement to purchase the business on November 25, 2003, warrants to
purchase 5,339,803 shares of the Companys common stock value using the Black-Sholes
pricing model with valuation of $676, cash consideration of $510 and transaction costs of
$501). Transaction costs of $501 include $195 paid for registration of securities in
connection with the acquisition which were netted against the issuance of the shares to
effect the acquisition in additional paid-in capital. Liabilities assumed were
approximately $227, and tangible assets acquired were approximately $76. The Company
recognized total intangible assets of $3,458 resulting from the acquisition.

The Company has obtained an
independent valuation for the aggregate consideration paid for the acquisition as follows:

|Total liabilities assumed          |  |  | $ | (227  | )
|---------------------------------- |  |  | - | ----- | -
|Total tangible assets acquired     |  |  |   | 76    |  
|Identifiable intangible assets -   |  | 
|Software                           |  |  |   | 73    |  
|Customer contracts                 |  |  |   | 98    |  
|Archived content video library     |  |  |   | 695   |  
|Goodwill                           |  |  |   | 2,592 |  
|                                   |  | 
|Total aggregate consideration paid |  |  | $ | 3,307 |  
|                                   |  | 

The Company has ascribed useful lives
to the identifiable intangible assets that range from 2 to 20 years. In the nine months
ended September 30, 2004 the Company recorded amortization on the identifiable intangible
assets of $82.

Immediately following the close of
the transaction, with the issuance of 10,679,608 shares of Cotelligent common stock, the
former OnSite stockholders owned 43% of the total shares of Cotelligent common stock then
outstanding.

The results of the acquired business
were included in the Companys results of operations from its acquisition date, March
2, 2004.

In accordance with SFAS No. 141,
Business Combinations, the following pro forma information for the
three months ended September 30, 2003 and the nine months ended September 30, 2004 and
2003, gives effect to the acquisition of OnSite Media, Inc., as if the acquisition was
completed as of the beginning of the periods reported below.

8

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COTELLIGENT, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)

|                          |  | Nine Months Ended
September 30,
|------------------------- |  | -------------------------------
|
|Pro forma revenues        |  |                                
|Pro forma net loss        |  |                                
|Pro forma loss per share: |  |                                
|Basic and diluted         |  |                                
|                          |  |                                

# Note 4  Investment
in Marketable Security

During 2002, the Company acquired
5,316,704 shares of Series C Convertible Redeemable Preferred Stock (Series C)
of Bluebook International Holding Company, Inc. (Bluebook), representing an
approximately 15% ownership interest (assuming conversion of all outstanding preferred
stock) in exchange for $3,000 in cash and contributed services. The value of the Series C
Stock was initially recorded at $3,000, the amount of cash paid to Bluebook. The cost of
the contributed services was recorded as research and development costs. Under the
certificate of designation of the Series C Stock, Bluebook is required, at the
Companys option, to either a) convert the shares of Series C Stock to common stock
at any time or b) redeem the shares of Series C Stock for cash beginning four years and up
through six years after the date of initial issuance.

The Series C Stock meets the
definition of a debt security under the provisions of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. In accordance with SFAS No. 115,
the Company classified the Series C Stock as a trading security and consequently reports
the investment at fair value, with unrealized gains and losses recorded in other income
(expense) in the condensed consolidated statements of operations. Accordingly, the
investment was reduced by $1,447 during the year ended December 31, 2002 and $1,201 during
the nine months ended September 30 2003, due to the decrease in fair value since the
acquisition date. The investment continued to decrease in value subsequent to September
30, 2003, and by December 31, 2003, had no value.

During the nine months ended
September 30, 2003, the Company delivered software development services to Bluebook for
which no revenue was recognized. Payments of $270 were received from Bluebook for the
delivery of services during the nine months ended September 30, 2003 which were applied
against and further reduced the carrying value of the investment below market value. Cost
of $230 associated with software development services during the nine months ended
September 30, 2003, were recorded as research and development costs.

During 2003, Cotelligent filed a
claim under arbitration proceedings against Bluebook for unpaid services. Bluebook filed a
counter claim against Cotelligent for breach of a consulting services agreement. On May 4,
2004, the Company executed a Settlement Agreement with Bluebook whereby, in satisfaction
of all claims by both parties, all of Cotelligents Series C Stock was converted into
5,316,704 shares of Bluebook Common Stock. The Company continues to report the investment
at fair value, which at September 30, 2004, was zero.

# Note 5 
Restructuring Programs

In September 2001, as part of the
Companys efforts to streamline its operations commensurate with its revenue base,
the Company identified opportunities to reduce its cost structure. Accordingly, the
Company adopted an exit plan which resulted in a restructuring charge of $2,436 during the
year ended December 31, 2001. The September 2001 plan included provisions for severance of
approximately 145 management and operating staff ($1,034) as well as closure costs
associated with a plan to consolidate or dispose of certain locations ($1,402). The
September 2001 plan did not meet the requirements in order to accrue employee severance
costs as of a commitment date, and these severance costs that did not provide a future
benefit were charged to operations when due and payable.

9

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COTELLIGENT, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)

In August 2003, as part of the
Companys efforts to streamline its operations commensurate with its revenue base,
the Company identified opportunities to reduce its cost structure by reducing headcount.
The Company terminated approximately 33 management and operating staff between August 2003
and December 2003 and recorded a restructuring charge related to the severance and
extended medical coverage (COBRA) benefits provided to the terminated
employees of $2,531. Only the COBRA benefits remained payable at September 30, 2004.

The following summarizes the activity
and balances for these restructuring programs for the nine months ended September 30,
2004.

|                            | September 2001
Facilities Closure | August 2003
Severance Benefits | Total
|--------------------------- | --------------------------------- | ------------------------------ | -----
|Balance, December 31, 2003  |                                   |                                | $    
|Spending                    |                                   |                                |      
|Adjustment                  |                                   |                                |      
|                            |                                   |                                |      
|Balance, September 30, 2004 |                                   |                                |      
|                            |                                   |                                |      

# Note 6  Weighted
Average Number of Shares Outstanding

There were no reconciling items
between the numerator and denominator used to compute basic and diluted loss per share for
the periods presented in the consolidated statements of operations. The Company had
outstanding stock options, warrants and LSPP shares of 8,433,291 and 4,429,746 at
September 30, 2004 and 2003, respectively, that were not included in EPS for those
relevant periods because the Company reported a loss from continuing operations resulting
in an antidilutive effect.

# Note 7  Segment
Information

Cotelligent was previously organized
into one reportable segment, IT Services. Effective with the acquisition of OnSite Media,
Inc. on March 2, 2004, the Company became organized into the following two reportable
segments, to align internal management with current service offerings:

IT Services. IT software and
consulting services to businesses with complex IT operations in addition to maintenance,
support and hosting on software products it has licensed.

Narrowcasting.    
          Creative media development, private venue video programming, installation and
          integration of Internet protocol (IP) digital technology presenting video
          content, distribution, scripting and playback via Broadband to private video
          networks.

Segment reporting became effective in
the three months ended June 30, 2004, as information first became available to the Chief
Executive Officer in the newly acquired narrowcasting segment during that period. The
Chief Executive Officer evaluates segment financial performance based on segment revenues
and gross profit. Cost of services include direct costs of providing service, primarily
personnel. Indirect costs are not allocated to segments as the Chief Executive Officer
does not evaluate the financial performance of each segment based on its respective
assets, capital expenditures or level of selling, general and administrative expense.

The following table summarizes
segment information for the three and nine months ended September 30, 2004. Comparative
information for the three and nine months ended September 30, 2003 has not been provided
as the Company operated in one reportable segment, IT Services.

10

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COTELLIGENT, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)

|                                           | Three Months Ended September 30, 2004
|------------------------------------------ | -------------------------------------
|
|Revenues                                   |                                      
|Cost of services                           |                                      
|                                           |                                      
|Gross profit                               |                                      
|Non allocated operating expenses and other |                                      
|                                           |                                      
|Net Income                                 |                                      
|                                           |                                      
|Depreciation and amortization              |                                      
|                                           |                                      

|                                           | Nine Months Ended September 30, 2004
|------------------------------------------ | ------------------------------------
|
|Revenues                                   |                                     
|Cost of services                           |                                     
|                                           |                                     
|Gross profit                               |                                     
|Non Allocated operating expenses and other |                                     
|                                           |                                     
|Net Income                                 |                                     
|                                           |                                     
|Depreciation and amortization              |                                     
|                                           |                                     

# Note 8  Related
Party Transaction

During the nine months ended
September 30, 2004, the Compensation Committee of the Board of Directors provided the
Chief Executive Officer a bonus upon the completion of the acquisition of OnSite Media,
Inc. (see note 3). The $640 bonus was classified as part of selling, general and
administrative expenses. The amount of the bonus remaining after tax was withheld by the
Company and was used to repay $364 of the notes receivable and accrued interest
outstanding from the Chief Executive Officer. The Company recognized $71 of the repayment
as interest income. Accordingly, the Company reduced the valuation allowance against these
notes receivable by $293 upon repayment. This reduction in the valuation allowance was
classified as selling, general and administrative expenses.

# Note 9  Subsequent Event

On October 8, 2004, the Company
entered into a Contract of Sale Security agreement (as amended, the Agreement)
with CAPCO Financial Company, a division of Greater Bay Bank N.A. (the
Lender), which established a line of credit for the Company. Under the
Agreement, the Company has agreed to sell to the Lender all of its accounts receivable
existing as of the date of the agreement or thereafter created during the term of the
Agreement at a discount below face value. The Lender has reserved the sum of $1,000 for
the purchase of the Companys accounts receivable and these funds are available daily
at the Companys option, subject to the restriction that the maximum amount available
to the Company may not exceed 70% of the accounts receivable that meet the Lenders
eligibility requirements. Funds advanced by the Lender to the Company under the Agreement
are subject to a daily fee equal to the Lenders prime rate plus 4%. The Company has
granted a first priority security interest in all accounts, contract rights, chattel
paper, documents, instruments and related general intangibles now owned or hereafter
acquired and the proceeds thereof. The agreement has an initial term of 12 calendar
months. The Agreement includes customary covenants regarding events of default. Upon an
event of default, the Lender may, among other things, declare any amounts outstanding
under the Agreement immediately due and payable.

11

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

Except for statements of historical
fact contained herein, any statements contained in this report may be deemed to be
forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For
example, words such as may, will, should,
estimates, predicts, potential, continue,
strategy, believes, anticipates, plans,
expects, intends and similar expressions are intended to identify
forward-looking statements. All such forward-looking statements are based upon current
expectations that involve risks and uncertainties. Cotelligents actual results and
the timing of certain events may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those discussed under Risk Factors in
Cotelligents Annual Report on Form 10-K for the fiscal year ended December 31, 2003
and other filings made with the Securities and Exchange Commission. The following
discussion is qualified in its entirety by, and should be read in conjunction with, the
more detailed information set forth in our financial statements and the notes thereto
included elsewhere in this filing. All forward-looking statements included in this report
are based upon information available to Cotelligent as of the date thereof, and
Cotelligent assumes no obligation to update any of such forward-looking statements.

Cotelligent provides IT consulting
services and software solutions including application software maintenance, support and
hosting. These services and solutions are provided under time and materials billing
arrangements or on a fixed-fee basis. In addition, Cotelligent provides narrowcasting
services which includes Internet protocol (IP) technologies and production services for
video content, distribution, scripting and playback on digital display video channels and
networks, as well as maintenance, support and contract services on software products it
licensed. Narrowcasting, maintenance and support services are provided under term
contracts of which most are one year or longer. These contracts are renewable at the
discretion of our clients.

For time and materials arrangements,
revenues are recorded as work is performed. Revenues are directly related to the total
number of hours billed to clients and the associated hourly billing rates. Hourly billing
rates are established for each service provided and are a function of the type of work
performed and the related skill level of the consultant. Revenues pursuant to fixed-fee
contracts are generally recognized as services are rendered on the
percentage-of-completion method of accounting based on hours incurred to total estimated
labor hours to complete. In addition, the Company has developed complete mobile workforce
management solutions for industries that have medium to large transient sales, field or
delivery personnel. A component of these solutions may include software that has been
developed by the Company. For each element in a software arrangement (e.g., license,
maintenance, and services), revenue is recognized once there is evidence of an
arrangement, delivery has occurred, the fee is fixed or determinable, and the
Companys ability to collect is probable. The amount of revenue recognized for each
element is based upon vendor specific objective evidence of fair value using the residual
method. Maintenance, support and hosting revenue is recognized as the Company performs the
services. The Company has not had significant sales of software.

The Companys principal costs
are professional compensation directly related to the performance of services and related
expenses. Gross profits (revenues after professional compensation and related expenses)
are primarily a function of hours billed to clients per professional employee or
consultant, hourly billing rates of those employees or consultants, the percentage of
effort complete with respect to fixed-fee contracts and employee or consultant
compensation. Gross profits can be adversely impacted if services provided cannot be
billed, if the Company is not effective in managing its service activities, if fixed-fee
engagements are not properly priced, if consultant costs increase beyond relative
increases in pricing, or if there are high levels of unutilized time (work activities not
chargeable to clients or unrelated to client services) of full-time salaried service
professional employees.

Operating income can be adversely
impacted by increased administrative staff compensation and expenses related to
streamlining or expanding the Companys business, which may be incurred before
revenues or economies of scale are generated from such investment. Solution business
development activities require a higher level of selling, general and administrative
activities as well as investment in research and development activities.

As a service and software
organization, the Company responds to service demands from its clients. Accordingly, the
Company has limited control over the timing and circumstances under which its services are
provided. Therefore, the Company can experience volatility in its operating results from
quarter to quarter. The operating results for any quarter are not necessarily indicative
of the results for any future period.

# OVERVIEW OF 2003 AND
2004

In the years leading up to 2003, we
strategically shifted from providing general IT services and solutions to a targeted
approach to offering mobile workforce management and Web services. We changed our
go-to-market strategy to better focus our resources and leverage our experience and solid
client base in these areas. Our decision to do this was reinforced at the time by market
research,

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financial research and our own research and analysis indicating that mobile
workforce management and Web services were the next emerging growth markets. Our solutions
utilized broadly accepted as well as cutting edge technologies. We spent considerable time
on the development of these core competencies after divesting the majority of our IT
staffing business in 2000. In addition, the Company carefully assessed and exited a number
of solutions and service offerings that were not core to the principal service offerings
outlined above.

While executing this strategy we
believed we were focused on offering services that would help us increase revenue in the
near term. From 2001 through the third quarter of 2003 the Company continued to invest
heavily in a large scale sales, marketing and business development organization working to
capture new business. In September 2002, the Company hired a marketing executive to
develop and implement a more formalized and systematic marketing program for the Company
because of the difficulty we were having in selling new business to new clients. Marketing
programs re-designed and put in place by early 2003 offered promising results when
measured against prior year sales opportunity pipeline and business backlog. By the second
quarter of 2003, the Company gained more confidence in its marketing program and saw an
unprecedented number of prospect and client proposals. Nevertheless, throughout 2003 we
continued to be disappointed by prospects and clients either delaying decisions to
initiate projects or pursuing lower cost off-shore technical resource to executing their
projects. In spite of the Companys investments in its selling organization, we were
not successful in signing new business with companies we had not done business with
before. We did, however, continue to sign new contracts with existing clients.

In August of 2003, it became clear to
us that a number of opportunities that only a few months before looked promising were not
going to close. The Company performed an in-depth review of each opportunity and concluded
that businesses were reticent to use discretionary expenditures to invest in mobile
workforce and Web service technologies (or other new projects) given the fact that their
current IT environments operated satisfactorily. In addition, fearful of continuing poor
economic conditions and market pressures, we observed that many of the prospects that
decided to pursue projects did so with larger, better capitalized firms than Cotelligent.

It became evident that the outlook
for spending in IT services would continue to be uncertain without any clear indication of
when a turnaround could be expected. Accordingly, in August 2003, the Company terminated
the majority of its senior executive staff along with most of the sales and business
development organization. At the same time we aggressively engaged our existing clients
and committed ourselves to supporting their project requirements. In some cases we have
been successful in securing longer term commitments. By scaling back expenses and focusing
intensely on generating revenue from our long term clients we began to stabilize our
revenue trend allowing us to move forward in our attempt to restore profitability and
positive cash flow in the near term.

Throughout the remainder of 2003, the
Company continued to reduce headcount and looked closely at expense activity to scale back
and streamline operating costs in line with revenue. The Philadelphia-based operation that
supports Cotelligents sales force automation application FastTrack has achieved
stable revenue over the past several years and our clients continue to give us high marks
for performance and client service. In addition, the core team responsible for our custom
software development activities is helping us to take advantage of recurring projects with
existing clients. By keeping only the top sales account executives and account managers,
we have lowered our selling cost and improved our client relationships and retention.

In April 2003, our Chief Executive
Officer, James Lavelle, sent a letter to our stockholders indicating the Companys
intention to engage in merger and acquisition activities in order to help improve
Cotelligents prospects for the future and increase our scale. As a matter of course
since we started our Company in 1996 and successfully executed an aggressive merger and
acquisition strategy through early 1999, we believed this strategy would help us improve
our prospects. We researched and analyzed a variety of vertical markets that could provide
new growth opportunities for us through merger or acquisition. In mid-2003 Cotelligent
signed a letter of intent to acquire a field force automation firm. After 90 days of due
diligence, we decided not to consummate the transaction.

In September 2003, Cotelligent
engaged in a dialog with a Las Vegas based narrowcasting company, OnSite Media, Inc. The
combination of Cotelligents deep history in Internet, media and wireless
technologies and OnSites strength in driving video content to high growth venues in
the gaming and hospitality industries looked promising. Cotelligent entered into a
definitive agreement to acquire OnSite Media, Inc. on November 24, 2003, and closed the
acquisition transaction on March 2, 2004. By integrating OnSites business with
Cotelligents infrastructure, and by utilizing our public company know how to
position us for the future, we have set about executing a strategy that we believe will
allow us to play an important role in the convergence of Internet, video and mobile
technology. This is a growing; fast paced market in which we believe the ability to
integrate these technologies will help us to differentiate us from many other companies.

Because Cotelligent had the
opportunity to work closely with OnSite between the signing of the definitive agreement on
November 24, 2003, and the closing of the transaction March 2, 2004, the integration of
OnSite into Cotelligents infrastructure was immediate. In addition, sales and
business development activity in the narrowcasting market has been continuous. At
September 30, 2004, we are

13

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optimistic about future revenue growth in Watchit, and we
continue to look at other businesses in the narrowcasting space that may be complimentary
to Watchit as possible candidates for acquisition.

Commensurate with the acquisition and
integration of OnSite, the Company now operates two reportable segments: IT Services and
Narrowcasting. The results of the narrowcasting segment have been included in the
Companys results subsequent to the acquisition of OnSite, March 2, 2004.

# CONSOLIDATED RESULTS
OF OPERATIONS(In Thousands)

# Three Months Ended
September 30, 2004 Compared to Three Months Ended September 30, 2003

RevenuesRevenues decreased $434 or 19%, to
$1,825 in the three months ended September 30, 2004 from $2,259 in the three months ended
September 30, 2003.

Revenues per reportable segment were
as follows.

|               | Three Months Ended September 30,
|-------------- | --------------------------------
|              
|IT Services    | $1,570                          
|Narrowcasting  | 255                             
|               |                                 
|Total revenues | $1,825                          
|               |                                 
|               |                                 

Within the IT Services segment,
during 2003, the Company continued its evolution from providing general IT consulting
services towards offering IT solutions targeted in mobile workforce management and Web
services. The decrease in revenue was due to a reduction in custom software development
projects. The decrease in revenue occurred at a time when there was a softening in the IT
services market and during which time the Company invested heavily in sales and formalized
marketing programs. Although the sales and marketing efforts resulted in increased
interest from potential clients, the Companys experience has been that businesses
have not increased spending on IT services and continuously delayed spending in
anticipation of further evidence that an economic recovery was imminent. Accordingly, the
Company dismantled its formal marketing campaign in the latter part of 2003. Given these
circumstances, during the three months ended September 30, 2004, the Company primarily
focused on generating revenue from its existing long term clients.

The narrowcasting segment produced
revenues of $255 during the three months ended September 30, 2004 following the
acquisition of the OnSite business on March 2, 2004.

Gross ProfitGross profit increased $118, or 17%,
to $819 in the three months ended September 30, 2004 from $701 in the three months ended
September 30, 2003.

Gross profit per reportable segment
was as follows.

|                   | Three Months Ended September 30,
|------------------ | --------------------------------
|                  
|IT Services        | $  680                          
|Narrowcasting      | 139                             
|                   |                                 
|Total gross profit | $  819                          
|                   |                                 

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Gross profit for the IT Services
segment as a percentage of revenues increased to 43% from 31%, despite a decline in
revenues, due to utilization of billable staff. Through a reorganization of
responsibilities in the latter part of 2003, the Company maintained the necessary skill
levels but eliminated a number of under-utilized people.

Gross profit for the Narrowcasting
segment as a percentage of revenues was 55% for the three months ended September 30, 2004.

Research and Development
CostsResearch and development costs were
$76 for the three months ended September 30, 2003.

The Company had a dedicated team of people
solely focused on research and development activities associated with mobile workforce
management and Web services solutions. The Company dismantled its research and development
organization in the latter part of 2003.

Selling, General and
Administrative ExpensesSelling, general and administrative
expenses decreased $1,417, or 42%, to $1,924 in the three months ended September 30, 2004
from $3,341 in the three months ended September 30, 2003.

The $1,417 decrease in selling,
general and administrative expenses comprised the following items.

|Decrease in wage and benefits expense due to reductions in number of operating staff as  |  |  |   |       |  
|---------------------------------------------------------------------------------------- |  |  | - | ----- | -
|evidenced by 29 operating staff at September 30, 2004 compared to 44 operating           |  | 
|staff at September 30, 2003                                                              |  |  | $ | 720   |  
|Decrease in outside legal services and outside services due to proxy fight in connection |  | 
|with 2003 annual meeting                                                                 |  |  |   | 695   |  
|Decrease in marketing expense due to discontinuance of marketing programs related to     |  | 
|development of IT services revenues                                                      |  |  |   | 177   |  
|Decrease in occupancy and office operating costs due to the closure of operating         |  | 
|locations and lower headcount                                                            |  |  |   | 272   |  
|Increase in bad debt expense due to reduction in bad debt recoveries recognized in 2003  |  |  |   | (150  | )
|Inclusion of selling, general and administrative expenses of acquired business           |  |  |   | (377  | )
|Other effects                                                                            |  |  |   | 80    |  
|                                                                                         |  | 
|Total decrease in selling, general and administrative expenses                           |  |  | $ | 1,417 |  
|                                                                                         |  | 

Other Income (Expense)Other income (expense) primarily
consists of interest income, interest expense, loss on an investment in an alliance
partner accounted for under the equity method of accounting and the change in market value
associated with an investment in a marketable security.

Interest income, net of interest
expense was $2 for the three months ended September 30, 2004 compared to $28 for the three
months ended September 30, 2003. The decrease in net interest income was primarily the
result of a lower cash balance in 2004 coupled the payoff of remaining amounts due on an
interest bearing obligation in 2003.

Income TaxesThe Company did not record an income
tax benefit for the three months ended September 30, 2004 or 2003 due to the uncertainty
of its realization.

The income tax benefit of $6 for the
three months ended September 30, 2004 compared to income tax expense of $33 for the three
months ended September 30, 2003 and represented minimum state tax payments or incidental
refunds.

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# Nine Months Ended
September 30, 2004 Compared to Nine Months Ended September 30, 2003

# 

RevenuesRevenues decreased $1,672 or 22%, to
$5,903 in the nine months ended September 30, 2004 from $7,575 in the three months ended
September 30, 2003.

Revenues per reportable segment were
as follows:

|               | Nine Months Ended September 30,
|-------------- | -------------------------------
|
|IT Services    |                                
|Narrowcasting  |                                
|               |                                
|Total revenues |                                
|               |                                

Within the IT Services segment,
during 2003, the Company continued its evolution from providing general IT consulting
services towards offering IT solutions targeted in mobile workforce management and Web
services. The decrease in revenue was due to a reduction in custom software development
projects. The decrease in revenues occurred at a time when there was a softening in the IT
services market and during which time the Company invested heavily in sales and formalized
marketing programs. Although the sales and marketing efforts resulted in increased
interest from potential clients, the Companys experience has been that businesses
have not increased spending on IT services and continuously delayed spending in
anticipation of further evidence that an economic recovery was imminent. Accordingly, the
Company dismantled its formal marketing campaign in the latter part of 2003. Given these
circumstances, during the nine months ended September 30, 2004, the Company primarily
focused on generating revenue from its existing long term clients.

The narrowcasting segment produced
revenues of $565 following the acquisition of the OnSite business on March 2, 2004 through
September 30, 2004.

Gross ProfitGross profit increased 261, or 11%,
to $2,713 in the nine months ended September 30, 2004 from $2,452 in the nine months ended
September 30, 2003.

Gross profit per reportable segment
was as follows:

|                   | Nine Months Ended September 30,
|------------------ | -------------------------------
|
|IT Services        |                                
|Narrowcasting      |                                
|                   |                                
|Total gross profit |                                
|                   |                                

Gross profit for the IT Services
segment as a percentage of revenues increased to 45% from 32%, despite a decline in
revenue, due to utilization of billable staff. Through a reorganization of
responsibilities in the latter part of 2003, the Company maintained the necessary skill
levels but eliminated a number of under-utilized people.

Gross profit for the narrowcasting
segment as a percentage of revenues was 55% following the acquisition of the OnSite
business on March 2, 2004 through September 30, 2004.

Research and Development
CostsResearch and development costs were $569 for the nine months ended September 30, 2003.

The Company had a dedicated team of people
solely focused on research and development activities associated with mobile workforce
management and Web services solutions. Included in research and development expenses for
the nine months ended September 30, 2003 were costs incurred for the development of a
software solution for a business partner. The Company dismantled its research and
development organization in the latter part of 2003.

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# 

Selling, General and
Administrative ExpensesSelling, general and administrative
expenses decreased $4,640, or 42%, to $6,342 in the nine months ended September 30, 2004
from $10,982 in the nine months ended September 30, 2003.

The $4,640 decrease in
selling, general and administrative expenses comprised the following items.

|Decrease in wage expense due to reductions in number of operating staff as evidenced by  |  |  |   |       |  
|---------------------------------------------------------------------------------------- |  |  | - | ----- | -
|29 operating staff at September 30, 2004 compared to 44 operating staff at               |  | 
|September 30, 2003                                                                       |  |  | $ | 2,216 |  
|Decrease in outside legal services and outside services due to proxy fight in connection |  | 
|with 2003 annual meeting                                                                 |  |  |   | 1,488 |  
|Decrease in marketing expense due to discontinuance of marketing programs related to     |  | 
|development of IT services revenues                                                      |  |  |   | 557   |  
|Decrease in travel and entertainment expenses due to reductions in sales, business       |  | 
|development and executive staff positions                                                |  |  |   | 398   |  
|Decrease in occupancy and office operating costs due to the closure of operating         |  | 
|locations and lower headcount                                                            |  |  |   | 631   |  
|Decrease in business insurance due to lower revenues                                     |  |  |   | 84    |  
|Increase in bad debt expense due to reduction in bad debt recoveries recognized in 2003  |  |  |   | (144  | )
|Inclusion of selling, general and administrative expenses of acquired business           |  |  |   | (625  | )
|Other effects                                                                            |  |  |   | 35    |  
|                                                                                         |  | 
|Total decrease in selling, general and administrative expenses                           |  |  | $ | 4,640 |  
|                                                                                         |  | 

Other Income (Expense)Other income (expense) primarily
consists of interest income, interest expense, loss on an investment in an alliance
partner accounted for under the equity method of accounting and the change in market value
associated with an investment in a marketable security.

Interest income, net of interest
expense was $89 for the nine months ended September 30, 2004 compared to $56 for the nine
months ended September 30, 2003. The increase in net interest income was primarily the
result of a lower cash balance in 2004 coupled with the payoff of remaining amounts due
under an interest bearing obligation in 2003.

Other expense for the nine months
ended September 30, 2003 was $1,484 principally from the change in market value associated
with a preferred stock investment which meets the definition of a debt security under the
provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. In accordance with SFAS No. 115, the Company classified its preferred
stock investment as a trading security and consequently reports the investment at fair
value, with unrealized gains and losses recorded in other income (expense) in the
consolidated statements of operations. Accordingly, the investment was reduced by a $1,201
unrealized loss, during the nine months ended September 30, 2003.

Income TaxesThe Company did not record an income
tax benefit for the nine months ended September 30, 2004 or 2003 due to the uncertainty of
its realization.

The income tax benefit of $2 for the
nine months ended September 30, 2004 and the income tax expense of $40 for the nine months
ended September 30, 2003, respectively, were for incidental state tax refunds or payments.

# LIQUIDITY AND CAPITAL
RESOURCES

In recent years, the Company has
financed its operations principally through its own cash resources.

Cash used by operating activities was
$4,259 and $10,747 for the nine months ended September 30, 2004 and September 30, 2003,
respectively. In the nine months ended September 30, 2004, the primary net uses in
operating activities were the $3,480 net loss and a $1,496 reduction in accounts payable
and accrued expenses. In the nine months ended September 30, 2003, the primary net uses in
operating activities were the $12,432 net loss, and a $1,492 reduction in accounts
payable, offset by the $1,201 unrealized loss on an investment in a marketable security,
$792 reduction in accounts receivable, $499 reduction in deferred revenue and a $335
equity loss from investment in alliance partner.

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Cash used by investing activities was
$922 for the nine months ended September 30, 2004, compared to cash provided by investing
activities of $446 for the nine months ended September 30, 2003. In the nine months ended
September 30, 2004, the primary net uses of investing activities were $844 used to
purchase a business, $278 for the purchases of property and equipment principally for a
new and expanded operating location related to the narrowcasting segment, offset by $200
of payments received on a note from the acquirer of a discontinued operation. In the nine
months ended September 30, 2003, the primary sources of cash provided by investing
activities were $360 of payments received on a note from the acquirer of a discontinued
operation and a $270 dividend from the investment in marketable security, offset by $184
for the purchases of property and equipment, principally for continuous upgrades to
computer software and equipment.

The primary sources of liquidity for
the Company going forward are the collection of its accounts receivable and existing cash
balances at September 30, 2004. Total receivables were 44 and 51 days of quarterly revenue
at September 30, 2004 and December 31, 2003, respectively.

In the past and during the nine
months ended September 30, 2004, management has taken action in response to the continued
softness in IT services in order to preserve cash, including but not limited to
significant reductions in headcount, outsourcing certain administrative functions,
changing benefit plan insurance carriers and acquiring a business in an industry with more
near term growth prospects than IT services. Management has carefully forecasted its
results of operations and financial position through September 30, 2005 and has determined
the Company may not have adequate cash to fund its anticipated working capital needs.
Beginning in October 2004, management continued to take further action, including salary
reductions for the executive officers and vice presidents of the Company, further
reductions in headcount, securing a line of credit against its trade accounts receivable.
We are also considering other alternatives for attracting other financing. The Company
cannot be sure, however, that its results of operations will be sufficient to meet its
cash needs through September 30, 2005, or that it will be able to take additional actions
to make up for any cash shortfall.

The following table reflects our
contractual cash obligations as of September 30, 2004, excluding interest, due over the
indicated periods.

|                                             | Payments Due by Period
|-------------------------------------------- | ----------------------
|                                             |                       
|Contractual Cash Obligations:                | Total                 
|Operating leases, net of sublet arrangements | $ 2,331               

# NEW ACCOUNTING PRONOUNCEMENTS

In September  2004,  the FASB issued FASB Staff Position  (FSP)  Emerging  Issues Task Force (EITF) Issue 03-1-1,  Effective Date of
Paragraphs  10-20 of EITF  Issue  No.  03-1,  "The  Meaning  of  Other-Than-Temporary  Impairment  and Its  Application  to  Certain
Investments".  The effective date for the  recognition  and  measurement  guidance in EITF Issue No. 03-1 is deferred.  In addition,
the FASB has issued a proposed FSP to consider  whether  further  application  guidance is  necessary  for  securities  analyzed for
impairment  under EITF Issue No.  03-1.  We will  continue to evaluate  the  potential  impact that the adoption of the proposed FSP
could have on our financial statements.

# CRITICAL ACCOUNTING
ESTIMATES

Allowance for Doubtful
AccountsThe Company provides an allowance for
potentially uncollectible accounts receivable under the provisions of SFAS No. 5,
Accounting for Contingencies, in the ordinary course of business. The
allowance is derived as the result of periodic reviews of aged and known problem accounts
during each quarter. In addition, the Company reserves for unknown issues in its
receivables at the balance sheet date using a formula consistent from quarter to quarter.
Management believes that its approach is appropriate to reserve for potentially
uncollectible receivables. If management had taken another approach to developing its
reserve, the allowance for doubtful accounts may have been different than that reported.

Revenue RecognitionThe Company recognizes revenue for
time and materials contracts when there is evidence of an agreement, a fixed or
determinable fee, its ability to collect is reasonably assured, and delivery has occurred.
Revenues exclude reimbursable expenses charged to and collected from clients. Revenues
pursuant to fixed-fee contracts are generally recognized as services are rendered on the
percentage-of-completion method of accounting based on hours incurred to total estimated
labor hours to complete. Revenues earned for software license sales and service contracts
are recorded based on the provisions of AICPA SOP 97-2, Software Revenue
Recognition, as amended, which shares the basic criteria described above, except
its ability to collect is probable rather than reasonably assured.

Accounting for Income
TaxesThe Company accounts for income taxes
under SFAS No. 109, Accounting for Income Taxes. This pronouncement
requires using an asset and liability approach to recognize deferred tax assets and
liabilities for the tax consequences of temporary differences by applying enacted
statutory tax rates to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities. The Company has not given benefit to any
deferred tax assets or net operating losses in the previous three fiscal years

18

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due to uncertainty of realizing these assets in future periods. In addition, the financial
statements have provided for certain tax positions taken by the Company in certain tax
periods where the statute of limitations still applies.

# Item 3. Quantitative and
Qualitative Disclosures About Market Risk

Cotelligents policy is to
invest its cash in a manner that provides Cotelligent with the appropriate level of
liquidity to enable the Company to meet its current obligations, primarily accounts
payable, capital expenditures and payroll.

Cotelligent has invested its existing
cash in highly liquid money market accounts and does not use derivative financial
instruments, derivative commodity instruments or other market risk sensitive instruments,
positions or transactions. Accordingly, the Company believes that it is not subject to any
material risks arising from changes in interest rates, foreign currency exchange rates,
commodity prices, equity prices or other market changes that affect market risk sensitive
instruments.

On August 19, 2002, the Company
acquired Convertible Redeemable Preferred Stock in Bluebook International Holding Company
(Bluebook). The Company accounted for the preferred stock as a trading
security with changes in fair value recorded in the consolidated statements of operations.
On May 4, 2004, the Preferred Stock was fully converted to common stock of Bluebook. The
Company continues to account for the investment at fair value. Accordingly, subsequent to
August 19, 2002, the Company was exposed to market risk related to changes in the market
price of the common stock in Bluebook.

# Item 4. Controls and
Procedures

Evaluation of Disclosure
Controls and ProceduresAn evaluation of the effectiveness of
the design and operation of the Companys disclosure controls and procedures as of
September 30, 2004 was carried out by the Company under the supervision and with the
participation of the Companys management, including the Chief Executive Officer and
Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Companys disclosure controls and
procedures as of the end of the period covered by this report, were designed and were
functioning effectively to provide reasonable assurance that the information required to
be disclosed by the Company in reports filed under the Securities and Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms. A controls system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the controls systems are met, and
no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected.

Change in Internal
Control over Financial ReportingNo change in the Companys
internal control over financial reporting occurred during the Companys most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect,
the Companys internal control over financial reporting

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# PART II  OTHER
INFORMATION

# Item 1. Legal Proceedings

We
are, from time to time, a party to litigation arising in the normal course of our
business. We are not presently subject to any material litigation.

# Item 2. Unregistered
Sale of Equity Securities and Use of Proceeds

None

# Item 3. Defaults upon
Senior Securities

None

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

None

# Item 5. Other Information

Not
applicable

# Item 6. Exhibits and
Reports on Form 8-K

(a)   Exhibits

31.1       Rule 13a-14(a) Certification of Chief Executive Officer
               31.2    Rule 13a-14(a) Certification of Chief Financial Officer
               32.1       Certification pursuant to 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer.  Section 1350.
               32.2    Certification pursuant to 18 U.S.C.  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer. Section 1350.

(b)   Reports on Form 8-K

Form
8-K filed July 7, 2004 with the Securities and Exchange Commission in connection with a
press release announcing the Companys relocation of its corporate
               headquarters from Irvine, California to San Francisco, California.

Form
8-K filed July 8, 2004 with the Securities and Exchange Commission disclosing a change in
independent accountants.

Form
8-K filed September 2, 2004 with the Securities and Exchange Commission disclosing the
retirement of a director.

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# SIGNATURE

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

|Date: November 15, 2004 |  | COTELLIGENT, INC./s/ Curtis J. ParkerCurtis J. ParkerExecutive Vice President,Chief Financial Officer and Treasurer
|----------------------- |  | -------------------------------------------------------------------------------------------------------------------

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