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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



FOR THE QUARTERLY PERIOD ENDED March 31, 2004



OR



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------



FOR THE TRANSITION PERIOD FROM  TO



Commission File Number: 000-27861



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Centra Software, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 04-3268918                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



430 Bedford Street,
Lexington, MA 02420

(Address of Principal Executive Offices)



(781) 861-7000

(Registrants Telephone Number, Including Area Code)



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Indicate by check mark whether the registrant (1) 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.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2).    Yes  x    No ̈



The number of shares outstanding of the registrants common stock as of May 3, 2004
was 27,236,974.



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##### Table of Contents

TABLE OF CONTENTS



|           |  |                                                                                                      |  |     
|---------- |  | ---------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                      |  | Page
|           |  | PART I. FINANCIAL INFORMATION                                                                        |  |     
|           |  |                                                                                                     
|Item 1.    |  | Consolidated Financial Statements:                                                                   |  |     
|           |  |                                                                                                     
|           |  | Consolidated Balance Sheets as of December 31, 2003 and March 31, 2004 (unaudited)                   |  | 3   
|           |  |                                                                                                     
|           |  | Consolidated Statements of Operations for the three months ended March 31, 2003 and 2004 (unaudited) |  | 4   
|           |  |                                                                                                     
|           |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2004 (unaudited) |  | 5   
|           |  |                                                                                                     
|           |  | Notes to Consolidated Financial Statements (unaudited)                                               |  | 6   
|           |  |                                                                                                     
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 11  
|           |  |                                                                                                     
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                           |  | 20  
|           |  |                                                                                                     
|Item 4.    |  | Controls and Procedures                                                                              |  | 20  
|           |  |                                                                                                     
|           |  | PART II. OTHER INFORMATION                                                                           |  |     
|           |  |                                                                                                     
|Item 1.    |  | Legal Proceedings                                                                                    |  | 21  
|           |  |                                                                                                     
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                            |  | 21  
|           |  |                                                                                                     
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                     |  | 22  
|           | 
|Signatures |  | 23                                                                                                  



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Consolidated Financial Statements



CENTRA SOFTWARE, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)



|                                                                                                                                                                          |  |                  |         |   |               |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                                                                          |  | December 31,2003 |         |   | March 31,2004 |  
|Assets                                                                                                                                                                    |  |                  |         |   |               |   |         |  
|Current Assets:                                                                                                                                                           |  |                  |         |   |               |   |         |  
|Cash and cash equivalents                                                                                                                                                 |  | $                | 13,357  |   |               | $ | 11,976  |  
|Short-term investments                                                                                                                                                    |  |                  | 15,531  |   |               |   | 22,922  |  
|Accounts receivable, net of reserves of approximately $441 and $332 at December 31, 2003 and March 31, 2004, respectively                                                 |  |                  | 7,832   |   |               |   | 4,622   |  
|Prepaid expenses                                                                                                                                                          |  |                  | 618     |   |               |   | 497     |  
|Other current assets                                                                                                                                                      |  |                  | 361     |   |               |   | 342     |  
|                                                                                                                                                                          |  |                  |         |   |               |   |         |  
|Total current assets                                                                                                                                                      |  |                  | 37,699  |   |               |   | 40,359  |  
|                                                                                                                                                                          |  |                  |         |   |               |   |         |  
|Property and equipment, at cost:                                                                                                                                          |  |                  |         |   |               |   |         |  
|Computers and equipment                                                                                                                                                   |  |                  | 9,601   |   |               |   | 10,349  |  
|Furniture and fixtures                                                                                                                                                    |  |                  | 963     |   |               |   | 963     |  
|Leasehold improvements                                                                                                                                                    |  |                  | 649     |   |               |   | 665     |  
|                                                                                                                                                                          |  |                  |         |   |               |   |         |  
|                                                                                                                                                                          |  |                  | 11,213  |   |               |   | 11,977  |  
|                                                                                                                                                                          |  |                 
|Less: Accumulated depreciation and amortization                                                                                                                           |  |                  | 9549    |   |               |   | 9,955   |  
|                                                                                                                                                                          |  |                  |         |   |               |   |         |  
|                                                                                                                                                                          |  |                  | 1,664   |   |               |   | 2,022   |  
|                                                                                                                                                                          |  |                 
|Long-term investments                                                                                                                                                     |  |                  | 5,888   |   |               |   |        |  
|Restricted cash                                                                                                                                                           |  |                  | 433     |   |               |   | 433     |  
|Other assets                                                                                                                                                              |  |                  | 111     |   |               |   | 66      |  
|Intangible assets, net of amortization                                                                                                                                    |  |                  | 233     |   |               |   | 58      |  
|                                                                                                                                                                          |  |                  |         |   |               |   |         |  
|Total assets                                                                                                                                                              |  | $                | 46,028  |   |               | $ | 42,938  |  
|                                                                                                                                                                          |  |                  |         |   |               |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                      |  |                  |         |   |               |   |         |  
|Current Liabilities:                                                                                                                                                      |  |                  |         |   |               |   |         |  
|Current maturities of long-term debt                                                                                                                                      |  | $                | 1,711   |   |               | $ | 1,343   |  
|Accounts payable                                                                                                                                                          |  |                  | 904     |   |               |   | 1,332   |  
|Accrued expenses                                                                                                                                                          |  |                  | 6,195   |   |               |   | 5,347   |  
|Deferred revenue                                                                                                                                                          |  |                  | 12,340  |   |               |   | 13,035  |  
|                                                                                                                                                                          |  |                  |         |   |               |   |         |  
|Total current liabilities                                                                                                                                                 |  |                  | 21,150  |   |               |   | 21,057  |  
|                                                                                                                                                                          |  |                  |         |   |               |   |         |  
|Long-term debt, net of current maturities                                                                                                                                 |  |                  | 553     |   |               |   | 402     |  
|                                                                                                                                                                          |  |                  |         |   |               |   |         |  
|Commitments and contingencies (Note 4)                                                                                                                                    |  |                  |         |   |               |   |         |  
|Stockholders Equity:                                                                                                                                                     |  |                  |         |   |               |   |         |  
|Preferred stock, $0.001 par value-Authorized-10,000,000 shares, no shares issued at December 31, 2003 and March 31, 2004                                                  |  |                  |        |   |               |   |        |  
|Common stock, $0.001 par value                                                                                                                                            |  |                  |         |   |               |   |         |  
|Authorized-100,000,000 shares as of December 31, 2003 and March 31, 2004                                                                                                  |  |                  |         |   |               |   |         |  
|Issued-27,787,573 shares at December 31, 2003 and 27,969,160 at March 31, 2004 Outstanding-27,047,310 shares at December 31, 2003 and
27,228,897 shares at March 31, 2004 |  |                  | 28      |   |               |   | 28      |  
|Additional paid-in capital                                                                                                                                                |  |                  | 112,489 |   |               |   | 112,760 |  
|Accumulated deficit                                                                                                                                                       |  |                  | (88,106 | ) |               |   | (91,244 | )
|Deferred compensation                                                                                                                                                     |  |                  | (47     | ) |               |   | (32     | )
|Accumulated other comprehensive income                                                                                                                                    |  |                  | 22      |   |               |   | 28      |  
|Treasury stock (740,263 shares of common stock at December 31, 2003 and March 31, 2004, at cost)                                                                          |  |                  | (61     | ) |               |   | (61     | )
|                                                                                                                                                                          |  |                  |         |   |               |   |         |  
|Total stockholders equity                                                                                                                                                |  |                  | 24,325  |   |               |   | 21,479  |  
|                                                                                                                                                                          |  |                  |         |   |               |   |         |  
|Total liabilities and stockholders equity                                                                                                                                |  | $                | 46,028  |   |               | $ | 42,938  |  
|                                                                                                                                                                          |  |                  |         |   |               |   |         |  



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



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CENTRA SOFTWARE, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)



|                                                      |  |                              |        |   |      |   |        |  
|----------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                      |  | Three Months Ended March 31, |       
|                                                      |  | 2003                         |        |   | 2004 |  
|Revenues:                                             |  |                              |        |   |      |   |        |  
|License                                               |  | $                            | 4,365  |   |      | $ | 2,531  |  
|Software services                                     |  |                              | 1,843  |   |      |   | 2,371  |  
|Maintenance and professional services                 |  |                              | 3,475  |   |      |   | 3,734  |  
|                                                      |  |                              |        |   |      |   |        |  
|Total revenues                                        |  |                              | 9,683  |   |      |   | 8,636  |  
|                                                      |  |                              |        |   |      |   |        |  
|Cost of Revenues:                                     |  |                              |        |   |      |   |        |  
|License                                               |  |                              | 140    |   |      |   | 77     |  
|Amortization of acquired developed technology         |  |                              | 175    |   |      |   | 175    |  
|Software services                                     |  |                              | 572    |   |      |   | 636    |  
|Maintenance and professional services                 |  |                              | 1,040  |   |      |   | 976    |  
|                                                      |  |                              |        |   |      |   |        |  
|Total cost of revenues                                |  |                              | 1,927  |   |      |   | 1,864  |  
|                                                      |  |                              |        |   |      |   |        |  
|Gross profit                                          |  |                              | 7,756  |   |      |   | 6,772  |  
|                                                      |  |                              |        |   |      |   |        |  
|Operating Expenses:                                   |  |                              |        |   |      |   |        |  
|Sales and marketing                                   |  |                              | 5,457  |   |      |   | 5,155  |  
|Product development                                   |  |                              | 2,954  |   |      |   | 2,759  |  
|General and administrative                            |  |                              | 2,346  |   |      |   | 1,978  |  
|                                                      |  |                              |        |   |      |   |        |  
|Total operating expenses                              |  |                              | 10,757 |   |      |   | 9,892  |  
|                                                      |  |                              |        |   |      |   |        |  
|Operating loss                                        |  |                              | (3,001 | ) |      |   | (3,120 | )
|Interest income                                       |  |                              | 108    |   |      |   | 91     |  
|Interest expense                                      |  |                              | (41    | ) |      |   | (25    | )
|Other income (expense), net                           |  |                              | 15     |   |      |   | (84    | )
|                                                      |  |                              |        |   |      |   |        |  
|Net loss                                              |  | $                            | (2,919 | ) |      | $ | (3,138 | )
|                                                      |  |                              |        |   |      |   |        |  
|Basic and diluted net loss per share                  |  | $                            | (0.11  | ) |      | $ | (0.12  | )
|                                                      |  |                              |        |   |      |   |        |  
|Basic and diluted weighted average shares outstanding |  |                              | 26,075 |   |      |   | 27,151 |  
|                                                      |  |                              |        |   |      |   |        |  



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



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CENTRA SOFTWARE, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



|                                                                            |  |                              |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Three Months Ended March 31, |        
|                                                                            |  | 2003                         |         |   | 2004 |  
|Cash Flows from Operating Activities:                                       |  |                              |         |   |      |   |         |  
|Net loss                                                                    |  | $                            | (2,919  | ) |      | $ | (3,138  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                              |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                              | 760     |   |      |   | 597     |  
|Provision for bad debt                                                      |  |                              | 38      |   |      |   | (110    | )
|Stock compensation charges                                                  |  |                              | 107     |   |      |   | 15      |  
|Changes in assets and liabilities:                                          |  |                              |         |   |      |   |         |  
|Accounts receivable                                                         |  |                              | 1,263   |   |      |   | 3,525   |  
|Prepaid expenses and other current assets                                   |  |                              | (396    | ) |      |   | 188     |  
|Accounts payable                                                            |  |                              | (224    | ) |      |   | 449     |  
|Accrued expenses                                                            |  |                              | (373    | ) |      |   | (896    | )
|Deferred revenue                                                            |  |                              | 1,114   |   |      |   | 476     |  
|                                                                            |  |                              |         |   |      |   |         |  
|Net cash (used in) provided by operating activities                         |  |                              | (630    | ) |      |   | 1,106   |  
|                                                                            |  |                              |         |   |      |   |         |  
|Cash Flows from Investing Activities:                                       |  |                              |         |   |      |   |         |  
|Purchase of property and equipment                                          |  |                              | (173    | ) |      |   | (787    | )
|Purchase of short-term investments                                          |  |                              | (23,842 | ) |      |   | (21,376 | )
|Maturities of short-term investments                                        |  |                              | 14,963  |   |      |   | 19,873  |  
|Other assets                                                                |  |                              | 1       |   |      |   | 2       |  
|                                                                            |  |                              |         |   |      |   |         |  
|Net cash used in investing activities                                       |  |                              | (9,051  | ) |      |   | (2,288  | )
|                                                                            |  |                              |         |   |      |   |         |  
|Cash Flows from Financing Activities:                                       |  |                              |         |   |      |   |         |  
|Proceeds from issuance of common stock                                      |  |                              | 8       |   |      |   | 271     |  
|Payments on term loans                                                      |  |                              | (500    | ) |      |   | (519    | )
|                                                                            |  |                              |         |   |      |   |         |  
|Net cash used in financing activities                                       |  |                              | (492    | ) |      |   | (248    | )
|                                                                            |  |                              |         |   |      |   |         |  
|Effect of foreign exchange rate changes on cash and cash equivalents        |  |                              | 13      |   |      |   | 49      |  
|                                                                            |  |                              |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                   |  |                              | (10,160 | ) |      |   | (1,381  | )
|Cash and cash equivalents, beginning of period                              |  |                              | 25,891  |   |      |   | 13,357  |  
|                                                                            |  |                              |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                    |  | $                            | 15,731  |   |      | $ | 11,976  |  
|                                                                            |  |                              |         |   |      |   |         |  
|Supplemental Disclosure of Cash Flow Information:                           |  |                              |         |   |      |   |         |  
|Cash paid during the period for interest                                    |  | $                            | 40      |   |      | $ | 25      |  
|                                                                            |  |                              |         |   |      |   |         |  



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



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CENTRA SOFTWARE, INC. AND SUBSIDIARIES



Notes to Unaudited Consolidated Financial Statements



(1)
Operations and Significant Accounting Policies



Centra Software, Inc.,
together with its wholly-owned subsidiaries (Centra or the Company), is a leading provider of application software services and solutions for online business communication and collaboration. Its products and services augment operational business
processes to enable real-time, group-oriented human interaction over corporate networks and the Internet to accelerate product introductions, deliver hands-on software application deployments, effect change-management initiatives, expand training
and certification to employees and external channel partners, facilitate customer interaction and online selling and support project management activities.



Centra is subject to certain business risks that could affect future operations and financial performance. These risks include, but are not limited to, risks associated
with our ability to successfully execute our strategic plan, uncertainty of market reaction to our sales and marketing efforts, quarterly performance fluctuations, product demand for and market acceptance of the Centra 7 collaboration platform and
our other current and future products, the effect of economic conditions generally on the market for IT spending and for our products, the results of our future research and development activities, the impact of competitive products and pricing,
technological difficulties and/or other factors outside our control.



The
accompanying consolidated financial statements reflect the application of certain accounting policies, as described in this note and more fully in the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2003.



(a) Basis of Presentation



The consolidated financial statements include the accounts of Centra and
its wholly-owned subsidiaries, Centra Software Europe Limited, which was incorporated in the United Kingdom, Centra Software Securities Corporation, a Massachusetts securities corporation, Centra RTP, Inc., a Delaware corporation, Centra Software
Southern Europe SAS, which was incorporated in France and Centra Software Australia Pty. Ltd, which was incorporated in Australia. Centra Software Nordic ApS, which was incorporated in Denmark and included in the financial statements for the year
ended December 31, 2003, was dissolved in February 2004. All significant intercompany transactions and balances have been eliminated in consolidation.



The accompanying consolidated financial statements for the three months ended March 31, 2003 and 2004 are unaudited, have been prepared on a basis consistent with the
December 31, 2003 audited consolidated financial statements, and include normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the results of these periods. These unaudited interim consolidated
financial statements do not include all of the footnote disclosures required in audited financial statements for the full year and, accordingly, should be read in conjunction with our audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of results to be expected for the entire year or any other period.



Certain amounts in the prior year financial statement have been reclassified
to conform with the current years presentation.



(b) Use of Estimates



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those
estimates.



(c) Revenue Recognition



Centra follows the specific guidelines of the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2Software Revenue Recognition, and SOP 98-9 Modification of SOP 97-2,Software Revenue Recognition, with Respect to Certain Transactions, and related authoritative literature.



Centra derives its revenues from the sale of software licenses, application service provider
(ASP) and hosting services, maintenance (post-contract support) and professional services. Maintenance includes telephone support, error correction or bug fixes and rights to upgrades and enhancements on a when-and-if available basis. Centra
executes contracts that govern the terms and conditions of each software license, each ASP and hosting agreement, each maintenance and support arrangement and other professional services arrangements. These contracts may be elements in a
multiple-element arrangement. Revenue under multiple-element arrangements, which may include several different software products and services sold together, is allocated to each element based on the residual method in accordance with SOP 98-9. As
described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Management analyzes various factors, including a review of specific transactions, historical
experience, creditworthiness of customers and current market and economic conditions. Changes in judgments based upon these factors could impact the timing and amount of revenue and cost recognized and thus affect the Companys results of
operations and financial condition.



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Centra, generally, licenses its software products on a perpetual basis. Centra applies the provisions of SOP 97-2, as
amended by SOP 98-9, to all transactions involving the sale of software products. Centra recognizes revenue from the sale of software licenses when persuasive evidence of an arrangement exists, the product has been delivered, the fees are fixed or
determinable and collection of the resulting receivable is reasonably assured. This policy is applicable to all direct sales to end-users. License sales to distributors or to value-added resellers are recognized when an end-user customer has been
identified and all other revenue recognition criteria above have been met. License sales to U.S. government agencies through a teaming arrangement with a third-party partner are recognized when a signed order from our partner and evidence of a
purchase order from the government agency to the partner is received and all other revenue recognition criteria above have been met. The Company does not offer a right of return on its products.



For all sales, except those to U.S. government agencies, Centra uses a binding purchase order
and/or a signed sales order and a signed license or service agreement as evidence of an arrangement. For arrangements with multiple elements (for example: the sale of a product license along with the sale of maintenance and support, training and
consulting to be delivered later), Centra allocates revenue to each component of the arrangement using the residual value method. Under the residual method, revenue is recognized in a multiple element arrangement in which vendor-specific objective
evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. Centra defers revenue from the arrangement equivalent to the fair value of the
undelivered elements and recognizes the remaining amount at the time of shipment or when all other revenue recognition criteria have been met. Vendor-specific objective evidence of fair values for the ongoing maintenance and support obligations are
based upon separate sales of renewals of maintenance contracts. Vendor-specific objective evidence of fair value of services, such as training or consulting, is based upon separate sales of these services to other customers.



At the time of the transaction, Centra assesses whether the fee associated with the
transaction is fixed or determinable based on the payment terms associated with the transaction. Billings to customers are generally due within 30 to 90 days. However, in certain circumstances, Centra has offered extended payment terms greater than
90 days but equal to or less than 180 days to certain customers for which license revenue is recognized upon shipment. These customers are well capitalized and typically have entered into larger scale license arrangements with us. Centra believes
that it has sufficient history of collecting all amounts within the stated terms under these types of arrangements to conclude that the fee is fixed or determinable at the time the product is delivered. In addition, Centra assesses whether
collection is probable or not based on the creditworthiness of the customer. Initial creditworthiness is assessed through Dun & Bradstreet, similar credit rating agencies or the customers SEC filings. Creditworthiness for transactions to
existing customers is assessed through a review of their prior payment history. Centra does not request collateral from its customers. If the Company determines that collection of a fee is not reasonably assured, the Company will defer the fee and
recognize revenue at the time collection becomes reasonably assured, which is generally upon the receipt of payment.



Revenues from start-up fees associated with our ASP service are recognized over the contract period or estimated life of the ASP relationship, whichever is greater.
Revenues related to ASP services are recognized ratably on a straight-line basis over the period that the ASP services are provided, or on an as-used basis if defined in the contract. Revenues for hosting services are recognized ratably on a
straight-line basis over the term that the hosting services are provided. Also, in instances where Centra hosts a customers purchased software on our server and network, Centra provides the customer a copy of the software in addition to the
one we keep on our server and recognizes the license revenue for the purchased software in accordance with our revenue recognition policy for licensed software as discussed above and in accordance with EITF 00-3,Application of SOP 97-2 to
Arrangements that Include the Rights to Use Software Stored on Another Entitys Hardware.



Revenues from maintenance and support services are recognized ratably on a straight-line basis over the term that the maintenance service is provided. Revenues from consulting and education services are recognized
either as the services are performed, ratably over a subscription period or upon completing a project milestone if defined in the agreement. Consulting and education services, including implementation, are not considered essential to the
functionality of our products as these services do not alter the product capabilities, do not require specialized skills and may be performed by the customer or other vendors.



Centra records as deferred revenues any billed amounts due from customers in excess of revenues recognized. Deferred revenues consist
principally of maintenance and support, ASP and hosting services and consulting and education services.



(d) Stock-Based Compensation



The
Company grants stock options to its employees and outside directors. Such grants are for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock-based employee
compensation using the intrinsic value method under the recognition and measurement principles of the Accounting Principals Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations and has
elected the disclosure-only alternative under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure  An Amendment of FASB Statement No. 123. The fair value of the Companys stock options was estimated using the Black-Scholes option-pricing model. This model was developed for use in estimating fair value of traded options
that have no vesting restrictions and are fully transferable. This model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Companys stock options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in managements opinion, the Black-Scholes model does not necessarily provide a reliable single
measure of the fair value of its stock options. The following table illustrates the effect on net income and earnings per share on a pro forma basis as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation (in thousands, except per share data):



|                                                                                                                                            |  |                              |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                                            |  | Three Months Ended March 31, |       
|                                                                                                                                            |  | 2003                         |        |   | 2004 |  
|Net loss, as reported                                                                                                                       |  | $                            | (2,919 | ) |      | $ | (3,138 | )
|Add back: Stock-based compensation included in net loss, as reported                                                                        |  | $                            | 107    |   |      | $ | 15     |  
|Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax
effects |  | $                            | (1,465 | ) |      | $ | (1,252 | )
|                                                                                                                                            |  |                              |        |   |      |   |        |  
|Pro forma net loss                                                                                                                          |  | $                            | (4,277 | ) |      | $ | (4,375 | )
|                                                                                                                                            |  |                              |        |   |      |   |        |  
|Basic and diluted net loss per share                                                                                                        |  |                              |        |   |      |   |        |  
|As reported                                                                                                                                 |  | $                            | (0.11  | ) |      | $ | (0.12  | )
|Pro forma                                                                                                                                   |  | $                            | (0.16  | ) |      | $ | (0.16  | )



7



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##### Table of Contents

The Company has computed the pro forma disclosures required under SFAS No. 123 for stock options granted to employees and
directors using the Black-Scholes option pricing model using the following assumptions:



|                                                                 |  |                              |            |   |      |   |           |  
|---------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | --------- | -
|                                                                 |  | Three Months Ended March 31, |           
|                                                                 |  | 2003                         |            |   | 2004 |  
|Risk free interest rate                                          |  |                              | 1.14%1.75 | % |      |   | 3.1       | %
|Expected dividend yield                                          |  |                              |           |   |      |   |          |  
|Expected lives                                                   |  |                              | 5.0 years  |   |      |   | 5.0 years |  
|Expected volatility                                              |  |                              | 95         | % |      |   | 81        | %
|Weighted average fair value of options granted during the period |  | $                            | 0.95       |   |      | $ | 2.22      |  



(e) Cash, Cash
Equivalents and Short-Term and Long-Term Investments



Centra considers all
highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash equivalents consist of money market accounts. Centra considers investments purchased with maturities at the balance sheet date of more
than three months but less than 12 months to be short-term investments and investments purchased with maturities at the balance sheet date of 12 months or more to be long-term investments. Centra accounts for its short-term and long-term investments
in accordance with SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities. Under SFAS No. 115, investments for which Centra has the positive intent and the ability to hold to maturity are reported at amortized cost,
which approximated fair market value at March 31, 2004. Cash, cash equivalents and short-term and long-term investments consisted of the following at December 31, 2003 and March 31, 2004 (in thousands):



|                                                                                                                       |  |                   |        |                |   |       
|---------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | -------------- | - | ------
|                                                                                                                       |  | December 31, 2003 |        | March 31, 2004
|Cash, cash equivalents and short-term investments:                                                                     |  |                   |        |                |   |       
|Cash                                                                                                                   |  | $                 | 3,489  |                | $ | 3,215 
|Money market accounts                                                                                                  |  |                   | 9,868  |                |   | 8,761 
|Municipal bonds (average 276 and 185 days remaining to maturity at December 31, 2003 and March 31, 2004, respectively) |  | $                 | 15,531 |                | $ | 22,922
|                                                                                                                       |  |                   |        |                |   |       
|Total cash, cash equivalents and short-term investments                                                                |  | $                 | 28,888 |                | $ | 34,898
|                                                                                                                       |  |                  
|Long-term investments:                                                                                                 |  |                   |        |                |   |       
|Federal agency notes (average 429 days remaining to maturity at December 31, 2003)                                     |  | $                 | 5,888  |                | $ |      
|                                                                                                                       |  |                   |        |                |   |       
|Total cash, cash equivalents, short-term and long-term investments                                                     |  | $                 | 34,776 |                | $ | 34,899
|                                                                                                                       |  |                   |        |                |   |       



(f) Comprehensive
Loss



The Company applies the provisions of SFAS No. 130,Reporting
Comprehensive Income, which establishes standards for reporting and displaying comprehensive income (loss) and its components in the consolidated financial statements. Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances from non-owner sources. The only components of comprehensive loss reported by the Company are net loss and foreign currency translation adjustment and are as follows for
the three months ended March 31, 2003 and 2004 (in thousands):



|                                        |  |                              |        |   |      |   |        |  
|--------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                        |  | Three Months Ended March 31, |       
|                                        |  | 2003                         |        |   | 2004 |  
|Net loss                                |  | $                            | (2,919 | ) |      | $ | (3,138 | )
|Foreign currency translation adjustment |  |                              | 20     |   |      |   | 6      |  
|                                        |  |                              |        |   |      |   |        |  
|Comprehensive loss                      |  | $                            | (2,899 | ) |      | $ | (3,132 | )
|                                        |  |                              |        |   |      |   |        |  



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##### Table of Contents

(g) Net Loss Per Share



Basic and diluted net loss per share is presented in conformity with SFAS No. 128,Earnings Per Share, for all periods presented. In
accordance with SFAS No. 128, basic and diluted net loss per share has been computed by dividing the weighted average number of shares of common stock outstanding during the period, less shares subject to repurchase, into the net loss attributable
to common stockholders.



Basic and diluted net loss per share are as follows
(in thousands, except per share amounts):



|                                                                                                           |  |                              |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                           |  | Three Months Ended March 31, |       
|                                                                                                           |  | 2003                         |        |   | 2004 |  
|Net loss attributable to common stockholders                                                               |  | $                            | (2,919 | ) |      | $ | (3,138 | )
|                                                                                                           |  |                              |        |   |      |   |        |  
|Basic and diluted shares:                                                                                  |  |                              |        |   |      |   |        |  
|Weighted average shares of common stock outstanding                                                        |  |                              | 26,092 |   |      |   | 27,151 |  
|Less: Weighted average shares subject to repurchase                                                        |  |                              | (17    | ) |      |   |       |  
|                                                                                                           |  |                              |        |   |      |   |        |  
|Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share |  |                              | 26,075 |   |      |   | 27,151 |  
|                                                                                                           |  |                              |        |   |      |   |        |  
|Basic and diluted net loss per share                                                                       |  | $                            | (0.11  | ) |      | $ | (0.12  | )
|                                                                                                           |  |                              |        |   |      |   |        |  



Options to purchase a total of
6,506,477 and 7,486,970 common shares have not been included in the computation of diluted net loss per share for the three months ended March 31, 2003 and 2004, respectively. These shares are considered anti-dilutive, as Centra has recorded a net
loss for all periods presented.



(2) Segment Information



SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information,
establishes standards for reporting information regarding operating segments and establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions regarding resource allocation and assessing performance.



Centra operates solely in one segment, the development, sales and marketing of software
products and related services. Centras revenues by geographic area are as follows (based on location of customer):



|              |  |                              |   |  |      |  
|------------- |  | ---------------------------- | - |  | ---- | -
|              |  | Three Months Ended March 31, |  
|              |  | 2003                         |   |  | 2004 |  
|United States |  | 79                           | % |  | 78   | %
|Europe        |  | 13                           | % |  | 15   | %
|Other         |  | 8                            | % |  | 7    | %



There are no significant long-lived
assets located outside of the United States.



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##### Table of Contents

(3) Significant Customer



No one customer accounted for more than 10% of total revenues during the three-month periods ended March 31, 2003 and 2004. No one customer equaled more than 10% of
the Companys accounts receivable at December 31, 2003 and March 31, 2004.



(4) Commitments and Contingencies



Securities Class Action
Lawsuit



Centra, certain of its officers and directors and the managing
underwriters of Centras initial public offering were named as defendants in an action filed in the United States District Court for the Southern District of New York. The plaintiffs filed an initial complaint on December 6, 2001 and purported
to serve the Centra defendants on or about March 18, 2002. The original complaint has been superseded by an amended complaint (complaint) filed in April 2002. The action, captioned in re Centra Software, Inc. Initial Public Offering Securities
Litigation, No. 01 CV 10988, which is being coordinated with an action captioned in re Initial Public Offering Securities Litigation, No. 21 MC 92, is purportedly brought on behalf of the class of persons who purchased Centras common stock
between February 3, 2000 and December 6, 2000. The complaint asserts claims under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint alleges that, in connection with
Centras initial public offering in February 2000, the underwriters received undisclosed commissions from certain investors in exchange for allocating shares to them and also agreed to allocate shares to certain customers in exchange for the
agreement of those customers to purchase additional shares in the after-market at pre-determined prices. The complaint asserts that Centras registration statement and prospectus for the offering were materially false and misleading due to
their failure to disclose these alleged arrangements. The complaint seeks damages in an unspecified amount against Centra and the named individuals. The underwriter defendants and the Centra defendants joined in motions to dismiss the
above-reference action on July 3 and July 15, 2002, respectively. On October 9, 2002, the plaintiffs dismissed, without prejudice, the claims against the named Centra officers and directors in the above-referenced action. On February 19, 2003, the
court issued an order denying the motion to dismiss as to Centra and other defendants. On June 7, 2003, the plaintiffs announced a proposed settlement with all issuers, including Centra. Centra plans to participate in this settlement, which will be
fully funded by Centras insurers. The settlement is subject to finalization and court approval. No amount has been accrued related to this matter and legal costs incurred in the defense of the matter are being expensed as incurred.



Winstar Bankruptcy Claim



The Company was named as a defendant in an adversary proceeding arising out of the Winstar
Communications, Inc. bankruptcy, which converted to a case under Chapter 7 on January 24, 2002. The claim alleged that Centra received a preferential transfer from the debtor in the amount of $128,650, which amount was payment in full for a software
license and maintenance support beginning September 2000. The bankruptcy trustee filed suit against Centra, along with numerous other entities, on April 8, 2003. Centra and the bankruptcy trustee reached an agreement to settle this claim for $15,000
on December 5, 2003. On March 23, 2004, the United States Bankruptcy Court (for the District of Delaware) issued an order approving the settlement.



EdiSync Patent Claim



On August 19, 2003, a complaint was filed against the Company and two other defendants by EdiSync Systems, LLC, in the United States District Court for the District of Colorado (No. 03-D-1587 (OES)). The complaint
alleges infringement of two patents for a remote multiple user editing system and method and seeks permanent injunctive relief against continuing infringement, compensatory damages in an unspecified amount, and interest, costs and expenses
associated with the litigation. The Company has filed an answer to the complaint denying all of the allegations. The Company believes it has meritorious defenses and intends to vigorously defend this action. No amount has been accrued related to
this matter and legal costs incurred in the defense of the matter are being expensed as incurred. The Company filed a request for re-examination of the patents at issue with the U.S. Patent and Trademark Office as patent counsel to the Company is of
the opinion that claims of the patents involved in the suit are invalid. The re-examination request was accepted by the Patent Office and the District Court has approved the parties motion to stay the court proceedings during the
re-examination proceedings. Counsel has advised the Company that it has meritorious defenses and the Company intends to vigorously defend this action.



Employment Claim



A former employee of the Company has filed a complaint with the Massachusetts Commission Against Discrimination alleging the Company discriminated against the employee on the basis of age, race and gender in
connection with the employees employment with the Company and subsequent termination. The complaint seeks remedies including damages in an unspecified amount. The Company intends to file a timely response to the complaint, which it believes is
without merit. The Company intends to vigorously defend this action.



Software Indemnifications



We enter into standard
indemnification agreements in our ordinary course of business. Pursuant to these agreements, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our business
partners or customers, in connection with any patent or any copyright or other intellectual property infringement claim by any third party with respect to our products. The term of these indemnification agreements is generally perpetual. The maximum
potential amount of future payments we could be required to make under these indemnification agreements is unlimited. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. Accordingly, we have
no liabilities recorded for these agreements as of March 31, 2004.



10



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##### Table of Contents

We warrant that our software products will perform in all material respects in accordance with our standard published
specifications in effect at the time of delivery of the licensed products to the customer for 90 days. Additionally, we warrant that our maintenance services will be performed consistent with generally accepted industry standards through completion
of the agreed upon services. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history, however, we have never incurred any significant expenses under our product or
service warranties. Accordingly, we have no liabilities recorded for these agreements as of March 31, 2004.



(5) Severance Charges



The Company
incurred severance charges of $1.2 million for the year ended December 31, 2003, related to the retirement of our former president and chief operating officer in October 2003 and a restructuring of the leadership of the sales, marketing and business
operations teams during the fourth quarter of 2003. The severance charges consist of salary payments and health insurance and other benefits that continue during the severance period. The accrued and unpaid balance of these charges at December 31,
2003 was $991,000. During the three-months ended March 31, 2004, the Company paid $251,000 in severance benefits related to the above resulting in an accrual balance remaining of $740,000 at March 31, 2004 which the Company expects to pay out in
2004.



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



Forward-Looking Statements



Certain statements in Managements Discussion and Analysis of Financial Condition and Results of Operations constitute forward-looking
statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words believes, plans, expects, anticipates, and similar expressions identify such forward-looking statements. The forward-looking statements contained
herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Factors that might cause such a difference include,
among other things, those set forth under Overview, Critical Accounting Policies, Liquidity and Capital Resources, and Factors That Could Affect Future Results and those appearing elsewhere in this
report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect managements analysis only as of the date hereof. The Company assumes no obligation to update these forward-looking statements to
reflect actual results or changes in factors or assumptions affecting forward-looking statements.



Overview



We are a leading provider of
application software, services and solutions for online business communications and collaboration. Our products and services augment operational business processes to enable real-time, group-oriented human interaction over corporate networks and the
Internet. These real-time, live group sessions can range from ad hoc, one-on-one online meetings to highly interactive, structured, collaborative learning sessions to prescheduled Web seminars for larger audiences and are key elements to
business processes that include collaborative learning, Web marketing, online selling and other interactive activities. We integrate these real-time, live group sessions with: (1) workflow tools we have developed such as desktop
integration software; (2) professional services capabilities that we or others provide such as content development and (3) leading third-party enterprise software suites such as customer relationship management systems. Furthermore, our products and
services support content and user management around the online session to integrate more tightly with these strategic processes across the extended enterprise. Our customers use Centras products and solutions to accelerate product
introductions, deliver hands-on deployment of software applications, effect change-management initiatives, expand training and certification to employees and external channel partners, facilitate customer interaction and online selling and support
project management activities. In addition, we offer consulting, education and support services that enable our customers to successfully implement, deploy and support our products and solutions throughout their organizations.



Our products are available as packaged software applications, hosted services, and on a
subscription basis through our application service provider, or ASP, offerings. Based on a common collaboration framework, our products and services support a wide range of convenient business interactions online, including real-time virtual
learning, large scale Web conferences and live, interactive Web meetings. Each real-time collaboration interface includes capabilities for Voice-Over-Internet-Protocol, or VoIP, audio, Web-based video, software application sharing, real-time data
exchange, and facilities for session recording and playback. These products and services allow organizations to increase the productivity of their members and enhance the effectiveness of knowledge transfer while reducing travel, facilities and
telecommunications costs.



At the end of 2003, we conducted a thorough and
critical evaluation of the collaboration marketplace and our competitive position. Following this evaluation, we decided to implement a new business strategy focused on growing our leadership position in the collaborative learning market segment of
application software, services and solutions for online business communications and collaborations, and leverage that leadership to increase penetration of other collaboration market segments and to broaden usage of our products throughout the
enterprise with the result of significantly growing our annual revenues and achieving profitability. In furtherance of these objectives, we planned to invest in additional sales and marketing resources to attract new customers, develop new channel
partnerships, enhance our relationships with existing customers, expand international operations and implement new initiatives that improve sales execution and consistency. In addition, we intend to focus our sales and marketing efforts on selling
specialized applications (or solutions) that increase sales effectiveness, improve collaborative learning and accelerate enterprise application rollouts and customer acquisition initiatives to Global 5000 companies, government agencies and higher
education institutions. In the quarter ended March 31, 2004, we began to enact this plan. Among other initiatives, we restructured our sales organization to improve execution and sales consistency and we developed a plan to spend an additional $8
million in 2004 over our 2003 expenditure rate for sales and marketing, to support our strategy through targeted messaging, print advertising, public relations efforts and lead generation marketing programs. However, our strategic initiatives did
not produce the results we expected in the quarter ended March 31, 2004. We now anticipate that it will take longer than we previously thought before we begin to see significant annual revenue growth as a result of our efforts. Therefore we will
continue to review and assess our execution of our strategic plan during 2004, and we intend to make adjustments in the level of our expenditures and investment as may be necessary until such time as we determine whether our new sales strategy will
yield the desired results.



11



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Critical Accounting Policies



The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates
and judgments, including those related to revenue recognition and the valuation of long-lived assets. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions.



The Companys critical accounting policies are summarized
in our Annual Report on Form 10-K for the year ended December 31, 2003, in the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations under the caption Critical Accounting
Policies. We have reviewed those policies and determined that they remain our critical accounting policies for the three months ended March 31, 2004. We did not make any changes to those policies during this period.



Results of Operations



The following table sets forth operating data expressed as percentages of total revenues for each period indicated.



|                                              |  |                              |    |  |      |   
|--------------------------------------------- |  | ---------------------------- | -- |  | ---- | --
|                                              |  | Three Months Ended March 31, |   
|                                              |  | 2003                         |    |  | 2004 |   
|Consolidated Statements of Operations Data:   |  |                              |    |  |      |   
|Revenues:                                     |  |                              |    |  |      |   
|License                                       |  | 45                           | %  |  | 29   | % 
|Software services                             |  | 19                           |    |  | 28   |   
|Maintenance and professional services         |  | 36                           |    |  | 43   |   
|                                              |  |                              |    |  |      |   
|Total revenues                                |  | 100                          |    |  | 100  |   
|                                              |  |                              |    |  |      |   
|Cost of Revenues:                             |  |                              |    |  |      |   
|License                                       |  | 1                            |    |  | 1    |   
|Amortization of acquired developed technology |  | 2                            |    |  | 2    |   
|Software services                             |  | 6                            |    |  | 8    |   
|Maintenance and professional services         |  | 11                           |    |  | 11   |   
|                                              |  |                              |    |  |      |   
|Total cost of revenues                        |  | 20                           |    |  | 22   |   
|                                              |  |                              |    |  |      |   
|Gross profit                                  |  | 80                           |    |  | 78   |   
|                                              |  |                              |    |  |      |   
|Operating Expenses:                           |  |                              |    |  |      |   
|Sales and marketing                           |  | 56                           |    |  | 59   |   
|Product development                           |  | 31                           |    |  | 32   |   
|General and administrative                    |  | 24                           |    |  | 23   |   
|                                              |  |                              |    |  |      |   
|Total operating expenses                      |  | 111                          |    |  | 114  |   
|                                              |  |                              |    |  |      |   
|Operating loss                                |  | (31                          | )  |  | (36  | ) 
|Other income, net                             |  | 1                            |    |  |     |   
|                                              |  |                              |    |  |      |   
|Net loss                                      |  | (30                          | )% |  | (36  | )%
|                                              |  |                              |    |  |      |   



Comparison of three months ended
March 31, 2003 and 2004



Revenues. Total revenues decreased by
$1.0 million, or 11%, to $8.6 million for the three months ended March 31, 2004, from $9.7 million for the three months ended March 31, 2003. The decrease was driven by a decline in software license revenue of approximately $1.8 million, or 42%,
from the corresponding quarter of 2003, which decline was partially offset by an increase in both software services revenues and maintenance and professional services revenues.



| |  | Software license revenue decreased by $1.8 million, or 42%, to $2.5 million for the three months ended March 31, 2004, from $4.4 million for the three months ended March 31, 2003.
The decrease was attributable to the effects of the change in our strategy towards selling
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12



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##### Table of Contents

| | solutions, and other changes implemented during the quarter to support this new strategy, the result of which had a disruptive and negative impact on the
ability of our sales force to complete sales during the quarter. Also contributing to the decline in license revenue for the quarter ended March 31, 2004 was a decrease in the amount of license revenue generated during the first quarter from orders
pending at the beginning of the quarter as compared with the same quarter last year. Typically, a portion of revenues for any quarter is attributable to billed and unbilled orders pending at the end of the previous quarter, where revenue has not
been recognized because all of the revenue recognition criteria have not been met. Although we expect that the transition to our new sales strategy will be on-going for the next several quarters and continue to impact the efficiency of our sales
force to close deals, we believe growth in license revenue will increase during the year driven by sales to our existing customer base as our sales force continues to focus on penetrating existing accounts in an effort to sell enterprise-wide
solutions. In addition, we believe that as the migration towards our new strategy gains momentum throughout the year, our investments in sales and marketing will begin to yield positive results. However, we can give no assurances that the transition
to our new sales strategy towards selling solutions will be completed this year or that customers will buy these solutions once they are available. Software license revenue represented 29% and 45% of total revenues for the three months ended March
31, 2004 and 2003, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Software services revenues, which includes our ASP and hosting services, increased by $528,000, or 29%, to $2.4 million for the three months ended March 31, 2004, from $1.8 million
for the three months ended March 31, 2003. The increase resulted from both the growth in new ASP accounts added over the past several quarters and an increase in the dollar amount of subscription renewals of our ASP service. We expect that the
number of new ASP accounts added in a quarter to increase while the subscription renewal rate of our ASP service to remain constant in future quarters. We believe a significant percentage of customers will prefer to purchase an ASP service to lower
their initial purchase cost and/or to provide greater flexibility of an outsourced service which does not require the customer to maintain an IT infrastructure or have available IT resources to deploy as compared with software licenses installed on
a customers premises. In addition, we expect the average ASP transaction size to decline due to increased price discounts resulting from increased competition. As a result, we believe software service revenues will grow slightly in future
quarters. However, we can give no assurances that we will continue to achieve similar rates of ASP renewals or that our ASP service revenues will grow in future periods. Software services revenues represented 28% and 19% of total revenues for the
three months ended March 31, 2004 and 2003, respectively.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Maintenance and professional services revenues, which includes our maintenance and support, consulting and education services, increased by $259,000, or 7%, to $3.7 million for the
three months ended March 31, 2004, from $3.5 million for the three months ended March 31, 2003. The increase was primarily attributable to an increase in the dollar amount of renewals of our annual maintenance and support contracts, partially offset
by a decrease in our consulting services revenue due to a lower number of revenue generating consultants available in the first quarter of this year compared with the same quarter last year. We terminated several consultants at the end of last year
whom we are in the process of replacing. We expect total maintenance and professional services revenues to continue to increase in future periods as our installed base of license users grows and new maintenance contracts are added. The rate of the
increase may vary from period to period, depending primarily upon the value of new maintenance contracts added. Any increases may be offset by non-renewals of maintenance contracts. Maintenance and professional services revenues represented 43% and
36% of total revenues for the three months ended March 31, 2004 and 2003, respectively.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cost of license revenue. Our costs of license fees are driven by the amount of products sold. They consist of royalty fees paid to third parties and costs for fulfillment and materials. Cost of license revenues
decreased by $63,000, or 45%, to $77,000 for the three months ended March 31, 2004, from $140,000 for the three months ended March 31, 2003. The decrease was attributable to lower fixed royalty costs, and to a lesser extent, lower royalty costs due
to the decline in license revenue for the quarter. Since a portion of our license costs represent royalties that we pay to third parties on a per unit rate of product sold, primarily on server units, we expect that cost of license revenues will vary
in the future based upon the unit volume of products sold. Cost of license revenues was 3% of license revenues for the three months ended March 31, 2004 and 2003.



Amortization of acquired developed technology. In connection with our acquisition of MindLever in April 2001, we allocated
approximately $2.1 million to acquired developed technology, which is being amortized over a three-year estimated useful life. Amortization of acquired developed technology was $175,000 for each of the three months ended March 31, 2003 and 2004.
During the second quarter of 2004, we will incur $58,000 in amortization costs, after which the acquired developed technology asset will be fully amortized and no further costs will be incurred.



Cost of software services revenues. Our cost of software service revenues includes (1)
salaries and related expenses for our ASP and hosted services organizations, (2) an overhead allocation consisting primarily of that portion of our facilities, communications and depreciation expenses that is attributable to providing these
services, (3) a technical support allocation consisting primarily of a portion of our technical support expenses that is attributable to providing such support to our ASP customer base and (4) direct costs related to our hosting and ASP service
offerings. Cost of software services revenues increased slightly to $636,000 for the three months ended March 31, 2004, from $572,000 for the three months ended March 31, 2003. The increase was due to a higher percentage of total support costs
allocated to ASP technical support based on growth in customer call volume and an increase in costs directly related to the ASP service. Cost of software services revenues was 27% and 31% of software services revenues for the three months ended
March 31, 2004 and 2003, respectively, reflecting the growth in software services revenues combined with a proportionally lower amount of ASP service costs incurred during the quarter attributed to the expanded server capacity achieved with our
latest product release, version 7.0 in June 2003. We anticipate that the cost of software services revenues will increase in absolute dollars to the extent that we continue to expand the capacity of our ASP service beyond its current capacity to
meet demand.



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##### Table of Contents

Cost of maintenance and professional services revenues. Our cost of maintenance and professional services revenues
includes (1) salaries and related expenses for our consulting, education and technical support services organizations and (2) an overhead allocation consisting primarily of that portion of facilities, communications and depreciation expenses that is
attributable to providing these services. Cost of maintenance and professional services revenues decreased slightly to $976,000 for the three months ended March 31, 2004, from $1.0 million for the three months ended March 31, 2003. This decrease was
primarily due to fewer consultants retained during the quarter and a lower percentage of total support costs allocated to technical support for license customers. A greater amount of technical resources were dedicated to supporting our ASP and
hosting services in the first quarter of this year than during the same quarter of 2003. Cost of maintenance and professional services revenues was 26% and 30% of maintenance and professional services revenues for the three months ended March 31,
2004 and 2003, respectively, reflecting the growth in higher margin maintenance services as compared to consulting and education services, which have a lower margin. We anticipate that the cost of maintenance and professional services revenues will
increase slightly quarter to quarter in absolute dollars to the extent that we continue to generate new customers and associated services revenues.



Sales and marketing expenses. Sales and marketing expenses decreased by $302,000, or 6% to $5.2 million for the three months ended March 31, 2004, from $5.5
million for the three months ended March 31, 2003. The decrease was due to a decline in (1) commissions and bonuses due to lower sales and a lower sales commission rate and (2) bad debt expense reflecting a lower accounts receivable balance at March
31, 2004 compared with March 31, 2003. Offsetting these declines were increases in advertising, tradeshows and sales force training expenses to align our sales and marketing efforts with our new corporate strategy toward selling solutions. Sales and
marketing expenses were 59% and 56% of total revenues for the three months ended March 31, 2004 and 2003, respectively. We expect sales and marketing expenses to increase in the second quarter of 2004 for costs incurred related to our annual user
conference in May and as we continue to increase sales headcount and invest in marketing programs.



Product development expenses. Product development expenses decreased by $195,000, or 7%, to $2.8 million for the three months ended March 31, 2004, from $3.0 million for the three months ended March 31, 2003.
The decrease was primarily due to lower salary and salary related expenses as a result of a reduction in headcount. Product development expenses were 32% and 31% of total revenues for the three months ended March 31, 2004 and 2003, respectively. We
expect product development expenses to remain relatively flat in the second quarter of 2004.



General and administrative expenses. General and administrative expenses decreased by $368,000, or 16%, to $2.0 million for the three months ended March 31, 2004, from $2.3 million for the three months ended
March 31, 2003. The decrease was due to several factors including the decline of (1) executive salaries, (2) bonuses related to quarterly company performance and (3) recruiting costs which were higher in the first quarter of 2003 related to our
search for a new CEO. General and administrative expenses were 23% and 24% of total revenues for the three months ended March 31, 2004 and 2003, respectively. We expect general and administrative expenses, primarily consulting, legal and audit, to
increase slightly in the second quarter of 2004 as a result of continued costs to comply with new and recently enacted regulations for public companies by the U.S. government, such as the Sarbanes-Oxley Act of 2002 and costs associated with
defending pending lawsuits. See Part II, Item 1, Legal Proceedings.



Interest income. Interest income decreased by $17,000 to $91,000 for the three months ended March 31, 2004, from $108,000 for the three months ended March 31, 2003. Interest income consists of interest on our cash, cash equivalents
and short-term investments. The decrease reflects declines in the balances of, and interest rates for, cash, cash equivalents and short-term investments.



Interest expense. Interest expense decreased by $16,000 to $25,000 for the three months ended March 31, 2004, from $41,000 for the three months ended March 31,
2003. The decrease was due to a reduction in interest on our term loans as the result of a decrease in the banks prime interest rate and a decrease in the balances outstanding on our long-term debt.



Other income or expense, net. Other income or expense, net, changed by $99,000 to
reflect a net expense of $84,000 for the three months ended March 31, 2004, from a net income of $15,000 for the three months ended March 31, 2003, as the result of changes in net foreign exchange gains and losses.



Liquidity and Capital Resources



As of March 31, 2004, we had cash and cash equivalents of $12.0 million and short-term
investments of $22.9 million, a decrease of $1.4 million of cash and cash equivalents from $13.4 million at December 31, 2003, and an increase of $7.4 million of short-term investments from $15.5 million as of December 31, 2003. The net combined
increase of $6.0 million for cash, cash equivalents and short-term investments resulted primarily from the reclassification of $5.9 million in long-term investments to a short-term investment status during the quarter having a maturity of less than
one year at March 31, 2004. Our working capital as of March 31, 2004 was $19.3 million, compared to $16.5 million as of December 31, 2003.



Cash provided by operating activities was $1.1 million for the three months ended March 31, 2004. The increase in cash from operating activities consisted of an increase
of $3.5 million in collections on receivables over billings, $597,000 in non-cash depreciation and amortization expense, an increase in deferred revenue of $476,000 and an increase in accounts payable of $449,000, offset by our net loss for the
period of $3.1 million and a decrease in accrued expenses of $896,000. For the three months ended March 31, 2003, our operating activities used net cash of $630,000, resulting from the net loss for the period of $2.9 million offset by a decrease in
accounts receivable of $1.3 million and deferred revenue of $1.1 million.



Cash
used in investing activities was $2.3 million for the three months ended March 31, 2004. Investing activities consisted of purchases of short-term marketable securities of $21.4 million and purchases of $787,000 of property and equipment to support
current operations. Offsetting these purchases were maturities of marketable securities of $19.9 million. For the three months ended March 31, 2003, our investing activities resulted in net cash outflows of $9.1 million and consisted of purchases of
short-term marketable securities of $23.8 million and property and equipment of $173,000 to support current operations, partially offset by maturities of investments of $15.0 million.



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Cash used in financing activities was $248,000 for the three months ended March 31, 2004, primarily related to $519,000
in principal payments made on our equipment line of credit/term loan facility which was partially offset by $271,000 of receipts from the issuance of common stock from the exercise of stock options during the period. Cash used in financing
activities of $492,000 for the three months ended March 31, 2003 was primarily related to principal payments made on term loans under our equipment line of credit.



At March 31, 2004, $1.7 million in term loans under a previous equipment line of credit was outstanding, compared to $2.3 million
outstanding at December 31, 2003. Of the total outstanding, $750,000 is payable in equal monthly principal installments of $125,000 per month plus interest. Interest is payable monthly based on the prime rate (4.0% at March 31, 2004) plus 0.5%. The
remaining outstanding amount of $995,000, representing three separate loan advances, is payable in fixed monthly payments of principal and interest of $35,000, $9,000 and $8,000, maturing at different times through June 2006. Interest was charged at
prime plus 0.5% at the initiation of each of the loan advances, or 5.25%, 4.75% and 4.75%, respectively. All borrowings are secured by substantially all of Centras assets. The current amended equipment line of credit requires Centra to
maintain a minimum balance of cash, cash equivalents and investments of $25 million and to hold 25% of the Companys cash, cash equivalents and investments in operating, deposit and investment accounts at the bank. At March 31, 2004, the
Company was in compliance with the covenants under the equipment line of credit and the availability for borrowings under the current line has been fully used.



Capital expenditures totaled $787,000 and $173,000 for the three months ended March 31, 2004 and 2003, respectively. Our capital expenditures consisted of purchases of
assets to manage our internal operations and our ASP service, including computer hardware and software. Purchases of computer equipment represent the largest component of our capital expenditures. We expect to continue to make capital expenditures
throughout the year as we continue to enhance our ASP service infrastructure and improve our internal information systems. Since inception, we have generally funded capital expenditures either through the use of working capital or with bank
equipment loans.



Days sales outstanding, or DSO (calculated as net accounts
receivable divided by revenue per day for the previous 90 days), at March 31, 2004 was 48 days, a decrease of 11 days compared to our DSO as of December 31, 2003. The decrease in DSO resulted from collections on outstanding balances from prior
periods in conjunction with the decrease in software license revenue. Any increase or decrease in our accounts receivable balance will affect our cash flow from operations and liquidity. Our accounts receivable and DSO balances may increase due to
changes in factors such as the timing of when sales are invoiced and the length of our customers payment cycle. Historically, international customers and resellers pay at a slower rate than domestic customers. An increase in revenue generated
from international customers and resellers may increase our DSO and accounts receivable balances. To the extent that our accounts receivable balance increases, we may incur increased bad debt expense and will be subject to greater general credit
risks.



The Company incurred severance charges of $1.2 million for the year
ended December 31, 2003, related to the retirement of our former president and chief operating officer in October 2003 and a restructuring of the leadership of the sales, marketing and business operations teams during the fourth quarter of 2003. The
severance charges consist of salary payments, and health insurance and other benefits that continue during the severance period. The accrued and unpaid balance of these charges at December 31, 2003 was $991,000. During the three-months ended March
31, 2004, the Company paid $251,000 in severance benefits related to the above resulting in an accrual balance remaining of $740,000 at March 31, 2004 which the Company expects to pay out in 2004.



Over the past two years, in response to business challenges and economic conditions, we have
made considerable efforts to reduce our operating expenses through constrained spending and reductions in workforce. This has resulted in a decrease in our cash used in operations; however, as of March 31, 2004 we still use more cash to operate our
business than we generate in revenues. As discussed above, we anticipate that our overall operating expenses in the immediate future will remain relatively flat or increase slightly in some areas, such as product development expenses and general and
administrative expenses, while we intend to make significant investments in other areas, such as sales and marketing. We anticipate that such operating expenses, along with capital expenditures, will constitute the most significant use of our cash
resources. Although if we have the opportunity, we may also use our cash resources to fund acquisitions or investments in complementary businesses, technologies, products or services. We believe that our existing cash, cash equivalents and
short-term investments, which totaled $34.9 million at March 31, 2004, will be sufficient to meet our anticipated cash requirements for operating expenses, capital expenditures and any strategic efforts for at least the next 12 months. However,
thereafter we may need to raise additional funds to support our operations, particularly if our strategic sales and marketing efforts do not produce the desired results. We might also need to seek additional financing if we were to identify a
strategic opportunity that required more cash than we had available at such time. If we did seek to raise additional funds, though, we may not be able to obtain them on terms that are favorable or acceptable to us. See Factors That Could
Affect Future ResultsWe may require additional funds in this Item 2.



Commitments and Contingencies



As of March 31, 2004, our
primary financial commitments consisted of obligations outstanding under long-term debt, operating leases and other contractual obligations. In our Annual Report on Form 10-K for the year ended December 31, 2003, we included under the heading
Commitments and Contingencies a table setting forth the Companys commitments and contingencies as of that date.



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Factors That Could Affect Future Results



As defined under the safe harbor provisions of The Private Securities Litigation Reform Act of 1995, some of the matters discussed in this
filing contain forward-looking statements regarding future events, including but not limited to statements about the beliefs and expectations of management regarding the Companys future performance, the Companys strategic
initiatives, its ability to achieve and maintain a leadership position in real-time conferencing and collaboration, demand for the Companys software services and managements goals and objectives regarding future results of operations.
These statements reflect managements beliefs and expectations as of the date of this report, and involve risk and uncertainties that may cause actual results, events and performance to differ materially. These risk factors include, but are not
limited to: risks associated with our ability to successfully execute our strategic plan, uncertainty of market reaction to our sales and marketing efforts, product demand for and market acceptance of the Centra 7 collaboration platform and our
other current and future products and services, the effect of economic conditions, in general, on the market for IT spending and for our products, the results of our future research and development activities, the impact of competitive products and
pricing, technological difficulties and/or other factors outside our control. If any of the events described below were to actually occur, then our business, financial condition or results of operations could be seriously harmed and the trading
price of our common stock could decline. There is no assurance that we will be able to implement our operating plans as anticipated or achieve projected revenue and earnings goals.



Important factors that could cause our actual results to differ from the forward-looking statements described above include, but are not
limited to, the factors outlined below.



We may not successfully execute our
strategic plan.



Earlier in 2004, we announced that we expected to incur
additional expenses of approximately $2 million per quarter in 2004 pursuant to strategic initiatives undertaken to improve the effectiveness of our sales and marketing activities. Over the course of the next several operating periods we will be
investing in additional resources to expand our sales channels and enhance our marketing activities. We intend these efforts to help achieve our goals of increasing the size of our customer base in our target markets, broadening our relationships
with existing customer accounts, and increasing market awareness of our products. However, our operating results for the quarter ended March 31, 2004 fell short of our expectations, and we can give no assurance our strategy will produce the desired
results. If we are not successful in achieving our objectives despite these significant planned expenditures, our liquidity and working capital will be materially diminished and the value of our stockholders investments could decrease.



We have incurred substantial losses in the past and may not achieve
profitability in the future.



We incurred net losses of $7.9 million in
2003 and $3.1 million for the quarter ended March 31, 2004. We had an accumulated deficit of $91.2 million at March 31, 2004. We cannot predict when we will become profitable, if at all, and if we do, we may not remain profitable for any substantial
period of time. If we fail to achieve and maintain profitability, then our investors expectations may not be met and the market price of our common stock may fall.



Our success depends on our ability to execute our marketing, sales and distribution initiatives.



To increase our revenues, we must increase our brand awareness through advertising and other
marketing initiatives, increase the size and effectiveness of our direct field sales force, and enhance the effectiveness of our current distribution channels and partner programs including our value-added resellers, integrated technology solution
partners and marketing partners. We will continue to focus on improving the productivity and effectiveness of our direct sales organizations through training and focused marketing programs. However, we cannot be sure that we will be successful in
hiring, training and motivating our sales staff to increase productivity or in retaining qualified sales personnel. In addition, we must effectively leverage our relationships with our indirect channel partners. Our existing, or future, indirect
channel partners may choose to devote greater resources to marketing and supporting the products of other companies including our competitors. Also, we may face conflicts between our sales force and our indirect channel partners. Our inability to
effectively optimize the efforts of our marketing initiatives, our direct sales organizations, our partners and our indirect distribution channel could limit our future revenue growth and hurt our future operating results.



Our future success depends to a significant degree on our senior management team.



In 2003, we effected a number of significant changes to our senior
management team, including:



| |  | Paul R. Gudonis joined the Company as president and chief executive officer;
| | - | ----------------------------------------------------------------------------



| |  | Leon Navickas, our founder, left the position of chief executive officer while remaining chairman of the Board of Directors and taking on the new role of chief strategy officer;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Anthony Mark, our president and chief operating officer retired;
| | - | ----------------------------------------------------------------



| |  | Richard Cramer joined the Company as senior vice president of worldwide sales; and
| | - | ----------------------------------------------------------------------------------



| |  | James Freeze joined the Company in the newly created position of chief marketing officer.
| | - | -----------------------------------------------------------------------------------------



Our future success will depend in part on our ability to carry out the transition in senior management and to integrate the new people and
positions into our operations, as well as on the efforts of our other senior managers. Changes in our management team or the inability of our executive officers and key employees to work effectively as a team could have a material adverse effect on
our business, operating results and financial condition.



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Delays in sales could cause significant variability in our revenues and operating results for any particular period.



We generally need to educate potential customers regarding the benefits
of our real-time conferencing, collaboration and learning products and services before they will commit to the purchase of our products. Our sales cycle varies depending on the size and type of customer contemplating a purchase, the complexity of
the customers purchasing process and whether we have conducted business with the customer in the past. Both new and existing customers frequently need to obtain approvals from multiple decision makers within their organization prior to making
purchase decisions.



We face significant competition from other technology
companies and we may not be able to compete effectively.



The markets for
real-time conferencing, collaboration and learning products and services are highly competitive. We expect that our competition in this market will intensify in the future, which will likely result in price reductions, reduced gross margins and loss
of market share, any one of which could seriously harm our business. Competitors vary in size and in the scope and breadth of the products and services offered. We encounter competition with respect to different aspects of our real-time
conferencing, collaboration and learning solutions from a variety of software and services vendors. In addition, larger companies with more resources than we have could enter our market and either reduce our sales or require us to lower our prices,
or both.



Some of our competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources than we do. Some have significantly greater name recognition and a larger installed base of customers. In addition, many of our competitors have well-established relationships
with our current and potential customers. In the past, we have lost potential customers to competitors for various reasons, including lower prices and other incentives not matched by us. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs. Accordingly, it is possible that new competitors or alliances among competitors may
emerge and rapidly acquire significant market share.



We may lose customers
or incur losses if we experience system failures that significantly disrupt the availability and quality of our hosted and ASP services.



While our products can be deployed at a customers premises or on its network as a packaged software application, we also deliver our products as an ASP or hosted
service utilizing our network. Our hosted services and ASP services depend on the efficient and continued operation of our internal and outsourced computer and communications hardware and software systems and our ability to avoid and mitigate any
interruptions in service or reduced capacity. Some of our communications hardware and software is hosted at third-party facilities. These third-party providers are vulnerable to business and economic uncertainties, as well as damage or interruption
from human error, telecommunications failures, computer viruses, sabotage, and intentional acts of vandalism, all of which may affect their ability to continue to provide services. Interruptions in service or performance problems, for whatever
reason, could undermine confidence in our services and cause us to lose customers or make it more difficult to attract new ones. In addition, any significant interruption in our service could result in losses to our customers. Although we attempt
contractually to disclaim liability for any such losses, a court might not enforce a limitation on our liability, which could expose us to financial loss.



Future regulations could be enacted that either directly restrict our business or indirectly impact our business by limiting the growth of Internet-based business and
services.



As commercial use of the Internet increases, federal, state and
foreign agencies could enact laws or adopt regulations covering issues such as user privacy, content, taxation of products and services, encryption, network and information security, and the convergence of telephone and other traditional
communication services with Internet communications such as voice-over Internet telephony. If enacted, such laws or regulations could limit the market for our products and services. Any inconsistencies between state, federal and non-U.S. laws and
regulations could affect distribution of our products and/or increase our costs. Such legislation or regulation could also dampen the growth in Web usage and decrease its acceptance as a medium of communications and commerce.



Our future success will depend on our ability to respond effectively to technological
changes and new industry standards and developments in new versions of our products.



As with any software technology, we expect that the demand and product specifications continue to change and therefore our future success will depend in large part on our ability to stay current with any technology
shifts and meet the evolving needs of the market by timely introduction of new products or product releases. In the past, we have experienced delays in the introduction of new products. In addition, our product enhancements must meet the
requirements of our current and prospective customers and must achieve significant market acceptance. We could also incur substantial costs if we need to modify our products, services or information technology infrastructure to adapt to these
changes, standards and developments.



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We face business risks relating to our international operations.



Our success is focused on sales to multinational corporations, which requires us to have
international operations and incur risks associated with those operations. In addition to our North American operations, we have established sales, marketing and service operations in Europe, Middle East, Asia and Australia and we sell through
distributors and resellers in a number of countries around the world. We cannot be sure that our international operations will be successful. Our international operations require resources and management attention beyond those required for our
domestic operations and subject us to additional regulatory, economic and political risks, including:



| |  | longer payment cycles and problems in collecting accounts receivable;
| | - | ---------------------------------------------------------------------



| |  | adverse changes in trade and tax regulations;
| | - | ---------------------------------------------



| |  | the absence or significant lack of legal protection for intellectual property rights;
| | - | -------------------------------------------------------------------------------------



| |  | the adoption of data privacy or other laws or regulations which restrict or regulate the use of our products or the Internet;
| | - | -----------------------------------------------------------------------------------------------------------------------------



| |  | provisions of local laws governing our contracts in other countries;
| | - | --------------------------------------------------------------------



| |  | difficulties in managing an organization spread over several countries, including complications arising from cultural, language and time differences that may lengthen sales and
implementation cycles;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | challenges relating to localization of technology;
| | - | --------------------------------------------------



| |  | political and economic instability; and
| | - | ---------------------------------------



| |  | currency risks, including fluctuations in exchange rates.
| | - | ---------------------------------------------------------



We cannot assure our investors that we will be able to manage these risks effectively or that our international efforts will be successful.



We rely on third-party technology to enhance our products.



We incorporate into our products software licensed from third-party software companies that
enhances, enables or provides functionality for our products. This third-party software may not continue to be available on commercially reasonable terms or with acceptable levels of support or functionality, or at all. Failure to maintain those
license arrangements, failure of the third-party vendors to provide updates, modifications or future versions of their software or defects and errors in, or infringement claims against, those third-party products could delay or impair our ability to
develop and sell our products.



Our success depends on our ability to
protect our proprietary rights.



Our success depends to a significant
degree upon the protection of our software and other proprietary technology. If we fail to protect our proprietary rights, other companies might use our technology to introduce competing products or services that compete with ours, without paying us
for our technology. This could have a material adverse effect on our business, operating results and financial condition. Our proprietary technology and intellectual property includes one pending U.S. patent application, which has not yet been
approved, and the Centra® trademark, among others.
We depend upon a combination of patent and trademark laws, license agreements, non-disclosure and other contractual provisions to protect proprietary and distribution rights of our products. In addition, we attempt to protect our proprietary
information and those of our vendors and partners through confidentiality and license agreements with our employees and others. Although we have taken steps to protect our proprietary technology, they may be inadequate. Existing trade secret,
copyright and trademark laws offer only limited protection. Moreover, the laws of other countries in which we market our products may afford little or no effective protection of our intellectual property. If we resorted to legal proceedings to
enforce our intellectual property rights, the proceedings could be burdensome and expensive, even if we were to prevail.



Claims by other companies that we infringe their proprietary technology could force us to redesign our products or otherwise hurt our financial condition.



If we were to discover that any of our products violated third-party
proprietary rights, there can be no assurance that we would be able to reengineer the product or obtain a license on commercially reasonable terms, or at all, that would enable us to continue offering the product without substantial reengineering.
Also, our product license agreement terms state that we will indemnify our customers for any of their costs as a result of our infringement on others technology, if any. Such costs could be substantial. We do not conduct comprehensive patent
searches to determine whether the technology used in our products infringes patents held by third parties. In addition, product development is inherently uncertain in a rapidly developing technology environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to similar technologies. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is



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invalid, and could distract our management from our business. Furthermore, a party making such a claim could secure a
judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our products or cause our customers to stop using our products. On August 19, 2003, EdiSync
Systems, LLC, filed a complaint against us in federal court in Denver, Colorado, alleging infringement of two patents for a remote multiple user editing system and method and seeking to enjoin us from continuing to sell our products, as well as
unspecified compensatory damages. Although we believe we have meritorious defenses and intend to vigorously defend this action, we can give no assurance that we will be able to achieve a satisfactory outcome. See Legal Proceedings.



Our business could be adversely affected if our products contain errors.



Software products as complex as ours may contain undetected errors or
bugs that result in product failures. From time to time we have identified errors in our products after commercial introduction of the products. While we have not been materially harmed by errors in the past, the occurrence of errors in the future
could result in loss of or delay in revenues, loss of market share, diversion of product development resources, injury to our reputation or damage to our efforts to build brand awareness, any of which could have a material adverse effect on our
business, operating results and financial condition.



We could incur
substantial costs resulting from product liability claims relating to our customers use of our products and services.



Many of the business interactions supported by our products and services are critical to our customers businesses. Any failure in a customers business
interaction or other collaborative activity caused or allegedly caused by our products and services could result in a claim for substantial damages against us, regardless of our responsibility for the failure. Although we maintain general liability
insurance, including coverage for errors and omissions, and contractually attempt to limit liability, there can be no assurance that our existing coverage will continue to be available on reasonable terms or will be available in amounts sufficient
to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim.



The inability of our technical support services to meet customer needs and demands may adversely impact our financial results.



Our products involve very complex technology and the failure or inability of our technical support staff to meet customer expectations in a
timely manner or customer dissatisfaction with our product functionality or performance could result in loss of revenues, loss of market share, failure to achieve market acceptance, injury to our reputation, liability for service or warranty costs
and claims and other increased costs.



We may require additional funds.



We expect that our current cash, cash equivalents and short-term
investments will be adequate to provide us with sufficient working capital for at least the next 12 months. However, our current plans and projections may prove to be inaccurate or our expected cash flow may prove to be insufficient to fund our
operations because of difficulties in executing our sales and marketing strategy, demand for our new products, delays in developing new products and improvements, unanticipated expenses or other unforeseen difficulties. Therefore, we may need to
raise additional capital to continue to fund our operations.



Our ability to
obtain any additional financing that may be needed will depend on a number of factors, including market conditions, our operating performance and investor interest, particularly in real-time conferencing, collaboration and learning software
companies. These factors may make the timing, amount, terms and conditions of any financing unattractive. They may also result in our incurring additional indebtedness or accepting stockholder dilution. If adequate funds are not available or are not
available on acceptable terms, we may have to forego strategic acquisitions or investments, defer our product development activities, or delay our continued rollout of new products and product versions. Any of these actions may seriously harm our
business and operating results.



The market price of our common stock has
been and may continue to be volatile.



Our stock price, like that of other
technology companies, has been extremely volatile. The announcement of new products, services, technological innovations, customers or distribution partners by us or our competitors, quarterly variations in our operating results, changes in revenues
or earnings estimates by securities analysts, speculation in the press or investment community and overall economic conditions are among the factors affecting our stock price.



In addition, the stock market in general and the market prices for technology companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of these companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. Recently, when the market
price of a stock has been volatile, holders of that stock have often instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs
defending the lawsuit. The lawsuit could also divert the time and attention of our management away from operating our business.



The general economic uncertainties in the United States and abroad continue to cause significant volatility in the stock markets. The continued threat of terrorism in the
United States and abroad, the ongoing military action and heightened security measures undertaken in response to that threat can be expected to cause continued volatility in securities markets. In addition, foreign political unrest may continue to
adversely affect the economy.



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Certain provisions of our charter and of Delaware law make a takeover of our company more difficult.



Our corporate documents and Delaware law contain provisions that might enable our
management to resist a takeover of our company. These provisions, including our stockholder rights plan, might discourage, delay or prevent a change in the control of Centra or a change in our management. These provisions could also discourage proxy
contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our
common stock. Additionally, we have entered into agreements with certain employees and executive officers, which, among other things, include certain severance and change of control provisions.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



We are exposed to market risk related to foreign currency exchange rates and to changes in interest rates. We do not use derivative financial instruments for speculative or trading purposes.



Foreign Currency



We develop products in the United States and sell them worldwide. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in foreign markets. International sales are typically denominated in euros, British pounds, Australian dollars or in U.S. dollars. Since some of our sales internationally are
currently priced in U.S. dollars, a strengthening of the U.S. dollar could make our products less competitive in foreign markets. In the three months ended March 31, 2003 and 2004, we generated approximately 21% and 22% of our revenues,
respectively, outside of the United States. Our foreign subsidiaries incur most of their expenses in the local currency. Accordingly, all foreign subsidiaries use the local currency as their functional currency. Translation gains and losses are
deferred and accumulated as a separate component of stockholders equity (accumulated other comprehensive loss) in the consolidated balance sheets. Realized and unrealized gains and losses resulting from foreign exchange transactions are netted
and included in other expense, net, in the accompanying consolidated statements of operations. A 10% change in the valuation of the functional currencies relative to the U.S. dollar as of March 31, 2004, would not have a material impact on the
Companys results of operations for the three months ended March 31, 2004.



Interest Rates



We maintain a short-term investment portfolio
consisting mainly of fixed rate U.S. government-backed federal agency notes and highly liquid money market instruments, with an average maturity of less than 12 months, in accordance with our investment policy approved by the Companys board of
directors. Our general investing policy is to limit the risk of principal loss and seeks to ensure the safety of invested funds by limiting market and credit risk. We currently use a registered investment manager to place our investments, which are
typically held to maturity. These investments are denominated in U.S. dollars. Cash balances in foreign currencies overseas are operating balances and are only invested in short-term deposits of the local operating bank. All highly liquid
investments with original maturities of three months or less are considered to be cash equivalents.



Investments in fixed rate interest earning financial instruments are subject to interest rate risk and will decrease in value if market interest rates were to increase. However, due to the conservative nature of our
investment portfolio, a sudden change in interest rates would not have a material effect on the fair value of the portfolio. If market interest rates were to decline, the interest earned on our investment portfolio would decrease. We estimate that
if the average yield of our investments had decreased by 100 basis points, our interest income for the three months ended March 31, 2004, would have decreased by less than $58,000. This estimate assumes that the decrease occurred on the first day of
the period and reduced the yield of each investment instrument by 100 basis points. The impact on our future interest income and future changes in investment yields will largely depend on the gross amount of our portfolio.



Our long-term debt and available line of credit require interest payments calculated at
variable interest rates. If interest rates were to increase, the interest payments on our long-term debt would also increase. The effect of any such increase in interest expense would be partially offset by any resulting increase in interest income
from our investment portfolio.



Item 4. Controls and Procedures



As required under
the Sarbanes-Oxley Act of 2002, our chief executive officer and chief financial officer conducted a review of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(e) and 15d-14(e)) in connection with the preparation of
this report. Based on such evaluation, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were adequate and effective to provide
reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and
forms.



There were no changes in our internal control over financial reporting
identified in connection with the above-referenced evaluation that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



From time to time, we
have been, and expect to continue to be, subject to legal proceedings and claims in the ordinary course of our business. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Except
for the lawsuits identified below in this section, we are not presently a party to any legal proceedings, the adverse outcome of which, in managements opinion, would have a material adverse effect on our results of operations or financial
position.



Securities Class Action Lawsuit



Centra, certain of its officers and directors and the managing underwriters of Centras
initial public offering were named as defendants in an action filed in the United States District Court for the Southern District of New York. The plaintiffs filed an initial complaint on December 6, 2001 and purported to serve the Centra defendants
on or about March 18, 2002. The original complaint has been superseded by an amended complaint (complaint) filed in April 2002. The action, captioned in re Centra Software, Inc. Initial Public Offering Securities Litigation, No. 01 CV 10988, which
is being coordinated with an action captioned in re Initial Public Offering Securities Litigation, No. 21 MC 92, is purportedly brought on behalf of the class of persons who purchased Centras common stock between February 3, 2000 and December
6, 2000. The complaint asserts claims under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint alleges that, in connection with Centras initial public offering in
February 2000, the underwriters received undisclosed commissions from certain investors in exchange for allocating shares to them and also agreed to allocate shares to certain customers in exchange for the agreement of those customers to purchase
additional shares in the after-market at pre-determined prices. The complaint asserts that Centras registration statement and prospectus for the offering were materially false and misleading due to their failure to disclose these alleged
arrangements. The complaint seeks damages in an unspecified amount against Centra and the named individuals. The underwriter defendants and the Centra defendants joined in motions to dismiss the above-reference action on July 3 and July 15, 2002,
respectively. On October 9, 2002, the plaintiffs dismissed, without prejudice, the claims against the named Centra officers and directors in the above-referenced action. On February 19, 2003, the court issued an order denying the motion to dismiss
as to Centra and other defendants. On June 7, 2003, the plaintiffs announced a proposed settlement with all issuers, including Centra. Centra plans to participate in this settlement, which is expected to be fully funded by Centras insurers.
The settlement is subject to finalization and court approval. No amount has been accrued related to this matter and legal costs incurred in the defense of the matter are being expensed as incurred.



Winstar Bankruptcy Claim



The Company was named as a defendant in an adversary proceeding arising out of the Winstar
Communications, Inc. bankruptcy, which converted to a case under Chapter 7 on January 24, 2002. The claim alleged that Centra received a preferential transfer from the Debtor in the amount of $128,650, which amount was payment in full for a software
license and maintenance support beginning September 2000. The bankruptcy trustee filed suit against Centra, along with numerous other entities, on April 8, 2003. Centra and the bankruptcy trustee reached an agreement to settle this claim for $15,000
on December 5, 2003. On March 23, 2004, the United States Bankruptcy Court (for the District of Delaware) issued an order approving the settlement.



EdiSync Patent Claim



On August 19, 2003, a complaint was filed against the Company and two other defendants by EdiSync Systems, LLC, in the United States District Court for the District of Colorado (No. 03-D-1587 (OES)). The complaint
alleges infringement of two patents for a remote multiple user editing system and method and seeks permanent injunctive relief against continuing infringement, compensatory damages in an unspecified amount, and interest, costs and expenses
associated with the litigation. The Company has filed an answer to the complaint denying all of the allegations. The Company believes it has meritorious defenses and intends to vigorously defend this action. The Company filed a request for
re-examination of the patents at issue with the U.S. Patent and Trademark Office as patent counsel to the Company is of the opinion that claims of the patents involved in the suit are invalid. The re-examination request was accepted by the Patent
Office and the District Court has approved the parties motion to stay the court proceedings during the re-examination proceedings. Counsel has advised the Company that it has meritorious defenses and the Company intends to vigorously defend
this action.



Employment Claim



A former employee of the Company has filed a complaint with the Massachusetts Commission
Against Discrimination alleging the Company discriminated against the employee on the basis of age, race and gender in connection with the employees employment with the Company and subsequent termination. The complaint seeks damages in an
unspecified amount. The Company intends to file a timely response to the complaint, which it believes is without merit. The Company intends to vigorously defend this action.



Item 2. Changes in Securities and Use of Proceeds



| | (a) | Use of Proceeds from Sales of Registered Securities
| | --- | ---------------------------------------------------



On February 8, 2000, we closed the initial public offering of our common stock. The shares of common stock sold in the offering were



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registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (the
Registration Statement) (Registration No. 333-89817) that was declared effective by the Securities and Exchange Commission on February 3, 2000. Our net proceeds from the offering were approximately $73.2 million. From the effective date
through March 31, 2004, we used approximately $6.5 million for payments of dividends to preferred shareholders, $30.8 million to fund operations, $2.7 million for capital expenditures, $1.7 million for payment of MindLever debt, $3.3 million for the
MindLever acquisition and $5.2 million to pay amounts outstanding under our loans. As of March 31, 2004, we had approximately $23.0 million of net proceeds remaining, and pending use of these proceeds, we intend to invest such proceeds primarily in
highly liquid money market accounts and government-backed securities as defined in our current investment policy.



Item 6. Exhibits and Reports on Form 8-K



| | (a) | Exhibits
| | --- | --------



|        |  |                                                                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                    
|3.1     |  | Amended and Restated Certificate of Incorporation (filed as exhibit 3.2 to the Companys Registration Statement, on Form S-1, File No. 333-89817 and incorporated herein by
reference).                        
|        | 
|3.2     |  | Certificate of Designation, Preferences and Rights of Series A Participating Cumulative Preferred Stock of Centra Software, Inc. (filed as exhibit 4.2 to our Current Report on Form 8-K filed
April 22, 2002).
|        | 
|3.3     |  | Amended and Restated By-Laws (filed as exhibit 3.4 to the Companys Registration Statement, on Form S-1, File No. 333-89817 and incorporated herein by reference).                                             
|        | 
|31.1    |  | Form of Section 302 Certification signed by Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002                                                                                  
|        | 
|31.2    |  | Form of Section 302 Certification signed by Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002                                                                                  
|        | 
|32.1    |  | Form of Certification signed by Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002                                                      
|        | 
|32.2    |  | Form of Certification signed by Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002                                                      



| | (b) | Reports on Form 8-K
| | --- | -------------------



A report on Form 8-K was filed on April 5, 2004 regarding preliminary revenue and earnings results for the quarter ended March 31, 2004



A report on Form 8-K was filed on April 7, 2004 regarding changes in the
Companys certifying accountant



A report on Form 8-K was
filed on April 29, 2004 regarding the Companys earnings release for the three months ended March 31, 2004.



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SIGNATURES



In accordance with the requirements of
the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of May 10, 2004.



Centra Software, Inc.By:

/s/ Stephen A. JohnsonStephen A. Johnson Chief Financial Officer, Treasurer, and Secretary (duly authorized officer and principal financial and accounting officer)




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EXHIBIT INDEX



|(a) | Exhibits
|--- | --------



|        |  |                                                                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                              
|31.1    |  | Form of Section 302 Certification signed by Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002                            
|        | 
|31.2    |  | Form of Section 302 Certification signed by Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002                            
|        | 
|32.1    |  | Form of Certification signed by Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
|        | 
|32.2    |  | Form of Certification signed by Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002



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