**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-QSB**

 

**ý****QUARTERLY REPORT UNDER SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

**For the quarterly period endedSeptember 30, 2004**

 

**-OR-**

 

**o****TRANSITION REPORT UNDER SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

**For the transition period from            to           **

 

**Commission file number 333-111378**

 

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**CENTERGISTIC SOLUTIONS, INC.**

(Name of small businessissuer as specified in its charter)

 

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| **CALIFORNIA**                                                  | ** ** | **95-2873122**                     |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (IRS Employer  identification No.) |
|                                                            |       |                               |
| **2045  West Orangewood Avenue, Orange, California 92868-1944** |
| (Address of principal  executive offices)                       |
|                                                            |       |                               |
| **(714)  935-9000**                                             |
| (Issuer’s telephone  number)                               |

 

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Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the preceding twelve months ( or for such shorter periodthat the issuer was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes ý  Noo

 

**As of October 31, 2004, therewere 10,699,312 shares of the issuer’s Common Stock outstanding.**

 

**Traditional Small BusinessDisclosure Format.  Yes****o     No****ý**

 

 

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****CENTERGISTIC SOLUTIONS, INC.QUARTERLY REPORT ON FORM 10-QSBFOR THE PERIOD ENDED SEPTEMBER 30, 2004****

 

****TABLE OF CONTENTS****

 
| Part I. FINANCIAL INFORMATION |                                                                                                                                                 |
|-------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|                          |                                                                                                                                                 |   |
|                          | Item 1. Financial Statements:                                                                                                                        |   |
|                          |                                                                                                                                                 |   |
|                          | **Condensed  Consolidated Balance Sheet at September 30, 2004 (Unaudited)**                                                                          |   |
|                          |                                                                                                                                                 |   |
|                          | Condensed  Consolidated Statements of Operations and Comprehensive Income (Loss)  For the Three Months Ended September 30, 2004 and 2003 (Unaudited) |   |
|                          |                                                                                                                                                 |   |
|                          | Condensed  Consolidated Statements of Cash Flows  For the Three Months Ended September 30, 2004 and 2003 (Unaudited)                                 |   |
|                          |                                                                                                                                                 |   |
|                          | Notes  to Unaudited Condensed Consolidated Financial Statements                                                                                      |   |
|                          |                                                                                                                                                 |   |
|                          | Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                                 |   |
|                          |                                                                                                                                                 |   |
|                          | Item 3. Controls and  Procedures                                                                                                                     |   |
|                          |                                                                                                                                                 |   |
| Part II. OTHER INFORMATION    |                                                                                                                                                 |
|                          |                                                                                                                                                 |   |
|                          | Item 1. Legal Proceedings                                                                                                                            |   |
|                          |                                                                                                                                                 |   |
|                          | Item  2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                                 |   |
|                          |                                                                                                                                                 |   |
|                          | Item 3.  Defaults Upon Senior Securities                                                                                                             |   |
|                          |                                                                                                                                                 |   |
|                          | Item  4. Submission of Matters to a Vote of Security Holders                                                                                         |   |
|                          |                                                                                                                                                 |   |
|                          | Item 5. Other Information                                                                                                                            |   |
|                          |                                                                                                                                                 |   |
|                          | Item 6. Exhibits                                                                                                                                     |   |
|                          |                                                                                                                                                 |   |
| SIGNATURES                    |                                                                                                                                                 |
|                          |                                                                                                                                                 |   |
| EXHIBIT INDEX                 |                                                                                                                                                 |

 

2

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**CENTERGISTICSOLUTIONS, INC.**

 

**CondensedConsolidated Balance Sheet**

 
| ** **                                                                                       | ** ** | **September 30,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                       | ** ** | **(Unaudited)**         | ** ** |
| **ASSETS**                                                                                       | ** ** | ** **              | ** ** |
| **Current**                                                                                      |       |                    |       |
| Cash and cash  equivalents                                                                       |       | $                       | 61,524     |   |
| Trade  receivables, less allowance for doubtful accounts of $54,148                              |       | 535,534                 |       |
| Inventories                                                                                      |       | 201,606                 |       |
| Prepaid expenses                                                                                 |       | 89,371                  |       |
| Miscellaneous  receivables                                                                       |       | 22,817                  |       |
|                                                                                             |       |                    |       |
| Total current  assets                                                                            |       | 910,852                 |       |
|                                                                                             |       |                    |       |
| **Property,  equipment, and leasehold improvements,**net of accumulated depreciation of $629,933 |       | 149,832                 |       |
|                                                                                             |       |                    |       |
| **Capitalized  software development costs,**net of accumulated amortization  of $1,683,218       |       | 169,933                 |       |
|                                                                                             |       |                    |       |
| **Other  assets**                                                                                |       |                    |       |
| Deferred  offering costs                                                                         |       | 506,644                 |       |
| Other                                                                                            |       | 36,693                  |       |
|                                                                                             |       |                    |       |
| Total other  assets                                                                              |       | 543,337                 |       |
|                                                                                             |       |                    |       |
|                                                                                             |       | $                       | 1,773,954  |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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| ** **                                                                            | ** ** | **September 30,  2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                            | ** ** | **(Unaudited)**         | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                               |       |                    |       |
|                                                                                  |       |                    |       |
| **Current  liabilities**                                                              |       |                    |       |
| Notes payables -  related parties                                                     |       | $                       | 42,549     |   |
| Accounts payable                                                                      |       | 391,447                 |       |
| Accrued expenses                                                                      |       | 94,941                  |       |
| Deferred income                                                                       |       | 146,111                 |       |
|                                                                                  |       |                    |       |
| Total  liabilities, all current                                                       |       | 675,048                 |       |
|                                                                                  |       |                    |       |
| **Commitments  and contingencies**(Notes 4 through 7)                                 |       |                    |       |
| ** **                                                                            |       |                    |       |
| **Stockholders’  equity (deficit)**                                              |       |                    |       |
| Common stock,  80,000,000 shares authorized; 10,699,312 shares issued and outstanding |       | 3,058,510               |       |
| Additional paid-in  capital                                                           |       | 284,892                 |       |
| Accumulated  deficit                                                                  |       | (2,210,563              | )          |
| Unearned stock  compensation                                                          |       | (19,243                 | )          |
| Common stock to  be redeemed                                                          |       | (12,574                 | )          |
|                                                                                  |       | 1,101,022               |       |
| Less notes  receivable                                                                |       | (2,116                  | )          |
|                                                                                  |       |                    |       |
| Total  stockholders’ equity (deficit)                                            |       | 1,098,906               |       |
|                                                                                  |       |                    |       |
| Total  liabilities and stockholders’ equity (deficit)                            |       | $                       | 1,773,954  |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

4

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**CENTERGISTICSOLUTIONS, INC.**

 

**Condensed Consolidated Statements ofOperations and Comprehensive Income (Loss)**

 
| ** **                                            | ** ** | **Three Months Ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                            | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**                       | ** ** |
| **Revenues:**                                         |       |                                  |       |   |   |
| Software and  service revenues                        |       | $                                     | 725,008    |   | $ | 653,852 |   |
| Professional  services                                |       | 16,560                                |       | 53,160 |   |
| Hardware sales                                        |       | 77,783                                |       | 281,234 |   |
|                                                  |       |                                  |       |   |   |
| Total revenues                                        |       | 819,351                               |       | 988,246 |   |
|                                                  |       |                                  |       |   |   |
| **Cost of  revenues:**                                |       |                                  |       |   |   |
| Software and  service costs                           |       | 104,808                               |       | 132,526 |   |
| Professional  services                                |       | 4,780                                 |       | 43,598 |   |
| Hardware costs                                        |       | 72,672                                |       | 187,848 |   |
|                                                  |       |                                  |       |   |   |
| Total cost of  revenues                               |       | 182,260                               |       | 363,972 |   |
|                                                  |       |                                  |       |   |   |
| Gross profit                                          |       | 637,091                               |       | 624,274 |   |
|                                                  |       |                                  |       |   |   |
| **Operating  expenses:**                              |       |                                  |       |   |   |
| Selling and  marketing                                |       | 182,326                               |       | 194,694 |   |
| Research and  development                             |       | 104,643                               |       | 102,089 |   |
| General and  administrative                           |       | 465,692                               |       | 404,742 |   |
|                                                  |       |                                  |       |   |   |
| Total operating  expenses                             |       | 752,661                               |       | 701,525 |   |
|                                                  |       |                                  |       |   |   |
| **Operating  loss**                                   |       | (115,570                              | )          | (77,251 | ) |
| ** **                                            |       |                                  |       |   |   |
| **Other  expense**                                    |       | (2,158                                | )          | (5,815 | ) |
| ** **                                            |       |                                  |       |   |   |
| **Interest  expense**                                 |       | (737                                  | )          | (97,708 | ) |
| ** **                                            |       |                                  |       |   |   |
| Loss before  income taxes                             |       | (118,465                              | )          | (180,774 | ) |
|                                                  |       |                                  |       |   |   |
| **Income  tax provision**                             |       | —                                |       | — |   |
| ** **                                            |       |                                  |       |   |   |
| **Net loss**                                          |       | (118,465                              | )          | (180,774 | ) |
| ** **                                            |       |                                  |       |   |   |
| **Other  comprehensive income, net of tax**           |       | —                                |       | 3,834 |   |
| ** **                                            |       |                                  |       |   |   |
| **Comprehensive  loss**                               |       | $                                     | (118,465   | ) | $ | (176,940 | ) |
|                                                  |       |                                  |       |   |   |
| Basis and  diluted net loss per share                 |       | $                                     | (0.01      | ) | $ | (0.02 | ) |
|                                                  |       |                                  |       |   |   |
| Weighted-average  number of common shares outstanding |       | 10,128,315                            |       | 9,221,416 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

5

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**CENTERGISTICSOLUTIONS, INC.**

 

**Condensed Consolidated Statements ofCash Flows**

 
| ** **                                                                   | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| ** **                                                                   | ** ** | **(Unaudited)**                       | ** ** |
| **Cash  flows from operating activities**                                    |       |                                  |       |   |   |
| Net loss                                                                     |       | $                                     | (118,465   | ) | $ | (180,774 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |                                  |       |   |   |
| Depreciation and  amortization                                               |       | 66,126                                |       | 59,154 |   |
| Provision for  doubtful accounts                                             |       | (6,052                                | )          | (9,143 | ) |
| Stock  compensation                                                          |       | 1,863                                 |       | 1,863 |   |
| Non-cash  interest expense                                                   |       | —                                |       | 89,851 |   |
| Loss on sale of  securities available for sale                               |       | —                                |       | 2,657 |   |
| Increase  (decrease) from changes in assets and liabilities:                 |       |                                  |       |   |   |
| Trade  receivables                                                           |       | 134,637                               |       | (204,678 | ) |
| Inventories                                                                  |       | (22,979                               | )          | 1,597 |   |
| Prepaid expenses                                                             |       | (12,853                               | )          | (48,697 | ) |
| Miscellaneous  receivables                                                   |       | 1,342                                 |       | 600 |   |
| Other assets                                                                 |       | —                                |       | (23,946 | ) |
| Accounts payable                                                             |       | (22,391                               | )          | 82,096 |   |
| Accrued expenses                                                             |       | (43,456                               | )          | 4,226 |   |
| Deferred income                                                              |       | (11,271                               | )          | 83,927 |   |
|                                                                         |       |                                  |       |   |   |
| Net cash used by  operating activities                                       |       | (33,499                               | )          | (141,267 | ) |
|                                                                         |       |                                  |       |   |   |
| **Cash  flows from investing activities**                                    |       |                                  |       |   |   |
| Proceeds from  sale of securities                                            |       | —                                |       | 4,798 |   |
| Purchase of  equipment                                                       |       | (8,713                                | )          | (7,490 | ) |
|                                                                         |       |                                  |       |   |   |
| Net cash used by  investing activities                                       |       | (8,713                                | )          | (2,692 | ) |
|                                                                              |            |                                       |            |  |  |  |  |

 

See accompanying notes tocondensed consolidated financial statements.

 

6

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| ** **                                                | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| ** **                                                | ** ** | **(Unaudited)**                       | ** ** |
| **Cash  flows from financing activities**                 |       |                                  |       |   |   |
| Deferred  offering costs                                  |       | (38,773                               | )          | (71,676 | ) |
| Principal  payments on term loan and notes payable        |       | —                                |       | (60,000 | ) |
| Borrowings on  short-term debt                            |       | —                                |       | 460,000 |   |
| Repurchase of  common stock                               |       | (8,061                                | )          | — |   |
| Payments  received on note receivable                     |       | 724                                   |       | 682 |   |
|                                                      |       |                                  |       |   |   |
| Net cash (used)  provided by financing activities         |       | (46,110                               | )          | 329,006 |   |
|                                                      |       |                                  |       |   |   |
| **Net  (decrease) increase in cash and cash equivalents** |       | (88,322                               | )          | 185,047 |   |
|                                                      |       |                                  |       |   |   |
| **Cash  and cash equivalents,** beginning of period       |       | 149,846                               |       | 32,012 |   |
| ** **                                                |       |                                  |       |   |   |
| **Cash  and cash equivalents,**end of period              |       | $                                     | 61,524     |   | $ | 217,059 |   |
|                                                      |       |                                  |       |   |   |
| *Supplemental  Disclosures of Cash Flow Information:*     |       |                                  |       |   |   |
|                                                      |       |                                  |       |   |   |
| Cash payments  for:                                       |       |                                  |       |   |   |
|                                                      |       |                                  |       |   |   |
| Interest                                                  |       | $                                     | 8,862      |   | $ | 4,283 |   |
|                                                      |       |                                  |       |   |   |
| Income tax  payments                                      |       | $                                     | —     |   | $ | 797 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

7

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*Supplemental Disclosures of Non-Cash Investing andFinancing Activities:*

 

During the three months ended September 30, 2003, in conjunction withthe private debt offering discussed in Note 7, a vendor converted $30,000 ofaccounts payable owed to a convertible promissory note.

 

During the three months ended September 30, 2003, the Company issuedwarrants to purchase common stock as part of a private placement of debt.  The estimated fair value of the warrants was$12,533.  In connection with the privateplacement, the Company reclassified $53,616 of deferred offering costs to debtdiscount as these costs were previously incurred for a pending financingtransaction.  The cost of the debtdiscount is being accreted as non-cash interest expense over the term of thenotes payable.

 

During the three months ended September 30, 2003, the Company agreed topurchase its common stock from a shareholder (Note 4).  The Company issued a note payable for $44,220and recorded common stock to be redeemed as an offset to stockholders’ equity(deficit).  During that period, theCompany paid down the note payable and redeemed a total of $15,787 of commonstock.

 

See accompanying notes tocondensed consolidated financial statements.

 

8

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**CENTERGISTIC SOLUTIONS, INC.**

** **

**Notes to Condensed ConsolidatedFinancial Statements**

*(Information with Respect to theThree Months Ended*

*September 30, 2004 and 2003 isUnaudited)*

 

**1.****                                      Organizationand Nature of Business**

 

Centergistic Solutions, Inc. (the “Company”) wasincorporated in the State of California on March 10, 1972.

 

The Company provides integrated informationdistribution and reporting systems, serving both general business and contactcenter environments.  The productsprovide critical information throughout the enterprise to help companiesimprove performance and increase personnel productivity.

 

The Company also manufacturers and distributessoftware that enables automatic call distribution management system users toobtain sophisticated reporting and communications tools to help manage theirwork force, forecast staffing requirements, and schedule their agents.

 

Substantially all of the remaining operations areconducted by the Company’s Mexican subsidiary, Centergistic Solutions, S. DER.L. DE D.V. (formerly known as AAC de Latin America).  The Mexican operations distribute products ofits parent, as well as other telecommunications products from third parties.

 

LYA, Inc., a wholly owned subsidiary, is a consultingbusiness for call centers and the telecommunications industry.  The operations of this entity were mergedinto that of the parent company during fiscal year 2005, and management stoppedviewing it as an operating segment.

 

**2.****                                      Summaryof Significant Accounting Policies**

 

*Basis of Presentation*

 

Theaccompanying unaudited condensed consolidated financial statements as ofSeptember 30, 2004 and for the three month periods ended September 30,2004 and 2003 have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation and in accordance with the instructions per Item 310(b) ofRegulation SB.  Accordingly, they do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.  In the opinion ofmanagement, all adjustments, consisting of normal recurring adjustments,considered necessary for a fair presentation have been included.  Operating results for the three month periodended September 30, 2004 are not necessarily indicative of the results that maybe expected for the year ending June 30, 2005. These condensed consolidated financial statements and notes theretoshould be read with the consolidated financial statements for the year endedJune 30, 2004 included in the Company’s Form 10-KSB filed with the Securitiesand Exchange Commission.

 

9

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** **

**2.             Summaryof Significant Accounting Policies (continued)**

* *

*Principles of Consolidation*

 

The accompanying condensed consolidated financialstatements as of September 30, 2004 and for the three months ended September30, 2004 and 2003 include the accounts of the Company and its wholly ownedsubsidiaries, Affinitec Corporation (“Affinitec”), Centergistic Solutions, S.DE R.L. DE D.V. (“Centergistic Solutions - Mexico”) and LYA, Inc. (“LYA”).  All significant intercompany accounts andtransactions have been eliminated.

 

*Management’sPlans / Liquidity*

 

During the three months ended September 30, 2004, theCompany incurred a net loss of $118,465 and an operating loss of $115,570,which includes depreciation and amortization of $66,126, and, as of September30, 2004, the Company had working capital of $235,804.  The Company demonstrated improved marginsduring the three months ended September 30, 2004, as the margin percentageincreased to 78% from 63% in the prior period. This was achieved on a 17% decrease in revenue, of $168,895.  The Company has improved margins throughincreased sales of software and services and reduced hardware sales.  The Company anticipates revenue growththrough an improved economy, targeted sales and marketing efforts, addition ofstrategically placed sales personnel, and expects the increased software salestrend to continue this fiscal year and produce operating profits throughout thenext fiscal year.

 

Additionally, the Company has signed a letter ofintent with an underwriter for the purpose of a private placement debt/equityconversion offering of $3,000,000 commencing in December 2004.  While there is no assurance such an offeringwill be successful, the Company has seen interest in the offering in themarketplace and anticipates the proceeds will be raised.  However, the Company has created severaldifferent cost cutting measures and will reduce expenses as necessary shouldthe offering not be successful and operating conditions necessitate suchactions.

 

*Segment Reporting*

 

The Company adopted Statement of Financial AccountingStandard (“SFAS”) No. 131, “Disclosures About Segment of an Enterprise andRelated Information,” beginning July 2003. SFAS No. 131 establishes standards for the way to report informationabout operating segments and related disclosures about products and services,geographic areas, and major customers in financial statements.  As of and for the three months endedSeptember 30, 2004, the Company views its operations and manages its businessin two segments: Centergistic Solutions and Centergistic Solutions — Mexico.For the three months ended September 30, 2003, the Company also viewed LYA as asegment.

 

10

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**2.             Summaryof Significant Accounting Policies (continued)**

 

The following represents the total assets by segment:

 
| ** **                            | ** ** | **September 30, 2004** | ** ** |
|---------------------------------------|------------|------------------------|------------|
|                                  |       |                   |       |
| Centergistic  Solutions               |       | $                      | 4,372,186  |   |
| Centergistic  Solutions – Mexico |       | 555,756                |       |
|                                  |       | 4,927,942              |       |
| Eliminations                          |       | (3,153,988             | )          |
| Total  consolidated assets            |       | $                      | 1,773,954  |   |

 

The following represents the revenues, gross profitand net income (loss) by segment:

 
| ** **                       | ** ** | **Three Months Ended  September 30,** | *** *** |
|----------------------------------|------------|---------------------------------------|--------------|
| ** **                       | ** ** | **2004**                              | ** **   | **2003** | *** *** |
|                             |       |                                  |         |   |   |
| Centergistic  Solutions          |       |                                  |         |   |   |
|                             |       |                                  |         |   |   |
| Revenues                         |       | $                                     | 566,060      |   | $ | 683,612 | * * |
| Gross profit                     |       | $                                     | 488,609      |   | $ | 492,761 | * * |
| Net income  (loss)               |       | $                                     | (134,887     | ) | $ | (171,790 | ) |
|                             |       |                                  |         |   |   |
| Centergistic  Solutions - Mexico |       |                                  |         |   |   |
|                             |       |                                  |         |   |   |
| Revenues                         |       | $                                     | 253,291      |   | $ | 251,474 | * * |
| Gross profit                     |       | $                                     | 148,482      |   | $ | 121,951 | * * |
| Net income  (loss)               |       | $                                     | 16,422       |   | $ | (14,065 | ) |

 
|               |   | **Three  Months Ended  September 30,** |       |
|--------------------|--------|----------------------------------------|------------|
|               |   | **2004**                               | ** ** | **2003** |   |
| LYA                |   | ** **                             | ** ** | ** ** |   |
|               |   | ** **                             | ** ** | ** ** |   |
| Revenues           |   | $                                      | —     |   | $ | 53,160 | * * |
| Gross profit       |   | $                                      | —     |   | $ | 9,562 | * * |
| Net income  (loss) |   | $                                      | —     |   | $ | 5,081 | * * |

 

11

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**2.             Summaryof Significant Accounting Policies (continued)**

 

*Net Loss Per Share*

 

In accordance with the provisions of SFAS No. 128,“Earnings Per Share,” the Company is required to disclose basic and dilutedearnings (loss) per share.  Basicearnings (loss) per share is computed by dividing net income (loss), by theweighted average number of common shares outstanding during each period.  Diluted earnings (loss) per share is similarto basic earnings (loss) per share, except that the weighted average number ofcommon shares outstanding is increased to reflect the dilutive effect ofpotential common shares, such as those issuable upon the exercise of stock orwarrants, as if they had been issued.

 

For all periods presented, there is no differencebetween basic and diluted loss per common share, as the effects of stockoptions or warrants are anti-dilutive, given the net loss applicable to commonshares for each period.

 

*Concentrations*

 

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist principally of temporary cash investments and trade accountsreceivable.

 

The Companymaintains its cash balances at financial institutions that management believespossess high-credit quality, and related cash balances are insured by theFederal Deposit Insurance Corporation up to $100,000 and the SecuritiesInvestor Protection Corporation up to $500,000. At September 30, 2004, the Company did not have any amounts held in thebank in excess of federally insured limits.

 

Managementbelieves that concentrations of credit, with respect to trade receivables, areminimized by the Company’s customer base. As of September 30, 2004, the Company’s largest customer accounted for11% of total trade receivables.  For eachof the three months ended September 30, 2004 and 2003, the Company’s largestcustomer accounted for 24% and 25% of total Company net revenues,respectively.  There were no othercustomers that exceeded 10% of such amounts as of each respective period-end.

 

As of September30, 2004, customers of the Company’s Mexican subsidiary accounted for 49% oftotal trade receivables, respectively. For each of the three months ended September 30, 2004 and 2003sales to customers of the Company’s Mexican subsidiary account for 31% and 25%,respectively, of total Company net revenues.

 

 

12

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**2.             Summaryof Significant Accounting Policies (continued)**

 

*DeferredOffering Costs*

 

The Company hasengaged the services of investment bankers to assist with the potential fundingof future operations through private investors. As of September 30, 2004, the Company capitalized a net amount of$506,644 for these services and such are included in the accompanying condensedconsolidated balance sheets as deferred offering costs. During the year endedJune 30, 2004, the Company completed a debt offering (Note 7).  As part of this transaction, the Companyreclassified $53,615 from deferred offering costs to a contra-liability account.  Such amount represented that portion of thebalance that related directly to the costs of issuing the notes payablediscussed in Note 7.  The remainingcapitalized deferred offering costs relate to a pending equitytransaction.  There can be no assurancethat the Company will receive funding from private investors.  If the Company is able to receive privatefunding, the deferred offering costs will be offset against the proceedsreceived; otherwise, such will be expensed when the offering efforts are terminated.

 

*Accountingfor Stock-based Compensation*

 

The Company has adopted SFAS No. 123, “Accounting forStock-based Compensation,” as amended by SFAS No. 148, “Accounting forStock-based Compensation-Transition and Disclosure,” which establishes financialaccounting and reporting standards for stock-based compensation.  SFAS No. 123 generally suggests, but does notrequire, stock-based employee compensation transactions be accounted for basedon the fair value of the consideration received, or the fair value of theequity instruments issued, whichever is more reliably measurable.  Companies that do not elect to change theiraccounting for stock-based employee compensation are required to disclose theeffect on net income as if the provisions of SFAS No. 123 were followed.  The Company has decided to retain theprovisions of APB Opinion No. 25, and related interpretations thereof, forrecognizing stock-based employee compensation expense, which includes membersof the board of directors.  Non-employeestock compensation is recorded at fair value in accordance with SFAS No. 123.

 

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**2.             Summaryof Significant Accounting Policies (continued)**

 

In accordance withAPB Opinion No. 25, the Company has incurred compensation cost aggregating$61,980 through September 30, 2004 for stock option grants, of which $1,863 wasrecognized during the three-month periods ended September 30, 2004 and2003.  Had compensation cost for the stock-basedcompensation plan been determined based on the fair value of awards (the methoddescribed in SFAS No. 123), the reported net loss would have been as shownbelow:

 
| ** **                                                                                                                                           | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| Net loss, as  reported                                                                                                                               |       | $                                     | (118,465   | ) | $ | (180,774 | ) |
| Add: Stock  compensation expense recorded in accordance with APB Opinion No. 25                                                                      |       | 1,863                                 |       | 1,863 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all stock options, net of related tax effects |       | (9,811                                | )          | (15,922 | ) |
|                                                                                                                                                 |       |                                  |       |   |   |
| Pro forma net  loss                                                                                                                                  |       | $                                     | (126,413   | ) | $ | (194,833 | ) |
|                                                                                                                                                 |       |                                  |       |   |   |
| Pro forma net  loss per share                                                                                                                        |       | $                                     | (0.01      | ) | $ | (0.02 | ) |

 

The fair value ofeach grant is estimated at the grant date using the following assumptions: nostock price volatility; no dividends for all years; risk-free interest rates of2.75% and 3.99% for the three month periods ended September 30, 2004 and 2003,respectively, and expected lives of ten years for all grants.

 

 

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**2.             Summaryof Significant Accounting Policies (continued)**

 

*Revenue Recognition*

 

The Companytypically provides bundled software and services through a distributor network.Each component of a bundled solution is separately identified based upon vendorspecific objective evidence.  Thecomponents of revenue are recognized as follows:

 

**•**                  Software license fees for site licensesand master license agreements are recognized as revenue upon delivery of thesoftware, and when remaining obligations are not significant.  The Company’s software licensing agreementprovides the customer with a 90-day warranty and return provision, including alimited time to test the software.  Ifthe customer can prove that the software is not functioning, the Company hasthe opportunity to remedy the problem and, if not resolved, the customer mayreturn the software.  The Companyconsiders the need for a reserve for warranty and returns on a quarterly basis;however, such occurrences have historically not been significant.

 

**•**                  Advance contract payments for softwareservices, consisting primarily of software maintenance and support, arerecorded as deferred income until the services are provided.  After the expiration of the software licensewarranty period, the Company commences recognition of the contract paymentsratably over the term of the maintenance period.  All subsequent software maintenance andsupport is billed separately and recognized ratably over the life of themaintenance period.

 

**•**                  Revenues from software sold todistributors are recognized upon delivery since title passes upondelivery.  The distributor is subject toa restocking fee of 10%-25% if an order is returned; however, historically,such returns have been insignificant. Special orders are non-cancelable.

 

**•**                  Software and service revenues includeservices related to maintenance, time and materials contracts, installation andtraining.  Such revenues are recognizedas the services are rendered.

 

**•**                  Revenues from the sale of computer anddisplay hardware are recognized upon shipment, which is generally concurrentwith the passage of title.

 

**•**                  Professional services revenues arederived from the services provided by the Company’s consulting business.  Such revenues are recognized as the servicesare rendered.

 

 

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**3.****                                     CapitalizedSoftware Development Costs**

 

Research and development, which includes design, development, andtesting of new software, software maintenance, and enhancement costs, isexpensed as incurred until technological feasibility has been established forthe product.  Technological feasibilityis defined as a completion of detail program design.  Thereafter, certain costs, such as coding andtesting, are capitalized until the product is available for general release tocustomers.

 

Software costs areamortized on a product-by-product basis using the straight-line method over theremaining estimated economic life of the software product, which is typicallythree to five years.  Actual future salesand remaining economic life of the product could differ significantly fromthese estimates.  Amortization ofsoftware costs for the three months ended September 30, 2004 and 2003 was$24,000 and $31,000, respectively, and is included general and administrativeexpenses in the accompanying condensed consolidated statements of operationsand comprehensive income (loss).

 

The followingdescribes the components of capitalized software development costs as ofSeptember 30, 2004 and the related estimated lives:

 
| ** **  | ** ** | **Date Technological  Feasibility  Established** | ** ** | **Estimated  Life** | ** ** |
|-------------|------------|--------------------------------------------------|------------|---------------------|------------|
|        |       |                                             |       |                |       |
| CenterStats |       | December 2001                                    |       | 5 years             |       |
| AgentView   |       | June 1999                                        |       | 5 years             |       |

 

The following summarizes the costs capitalized byproduct as of September 30, 2004:

 
| CenterStats                  |   | $          | 398,998 |   |
|------------------------------|--------|------------|---------|--------|
| AgentView (fully  amortized) |   | 307,476    |    |
| Fully amortized  products    |   | 1,146,677  |    |
|                         |   | 1,853,151  |    |
|                         |   |       |    |
| Accumulated amortization     |   | (1,683,218 | )       |
|                         |   | $          | 169,933 |   |

 

**4.             NotesPayable – Related Parties**

 

On December 31,2002, the Company entered into two notes payable to two of its officers for anaggregate $24,975.  Such notes bearinterest at 6% and the principal and interest are due and payable ondemand.  These notes are secured by allof the assets of the Company.

 

 

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**4.             NotesPayable – Related Parties (continued)**

 

In April 2004, the Company entered into a note payable with an employeeof the Company for $5,000.  The notebears interest at 6% and the principal and interest are due on demand.  The note is secured by all of the assets ofthe Company.

 

In July 2003, the Company agreed to purchase 148,328 shares of Companycommon stock from a former employee for $44,220 and issued a secured promissorynote payable in such amount.  The notebears interest at 5% per annum, and monthly payments in the amount of $2,750are due and payable on the note commencing after September 30, 2003.  As each payment is made, the Company cancelsand retires 8,728 shares.  Payment of thenote is secured by substantially all of the Company’s assets.  The balance of the note at September 30, 2004is $12,574.

 

**5.****                                     ****Commitments and Contingencies**

 

*Consulting Agreement*

 

As of October 1, 2003, the Company entered into anIndependent Consulting Agreement (the “Agreement”) with a firm whereby the firmis to assist the Company in the listing of its shares on a stock exchange, thesale of its business or other debt or equity financings.  Pursuant to the Agreement, the Company isobligated to pay a success fee of up to $37,500 in stock upon receipt by theCompany of up to $3,000,000 in aggregate financing under the terms of theAgreement.

 

*Off-Balance Sheet Arrangement*

 

The Company provides indemnifications of varying scopeand size to certain customers against claims of intellectual propertyinfringement made by third parties arising from the use of the Company’sproducts.  Management evaluates estimatedlosses for such indemnifications under SFAS No. 5, “Accounting forContingencies,” as interpreted by FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees.”  Management considers such factors as thedegree of probability of an unfavorable outcome and the ability to make areasonable estimate of the amount of the loss. As of September 30, 2004, the Company has not encountered material costsas a result of such obligations and has not accrued any liabilities related tosuch indemnifications in the accompanying condensed consolidated financialstatements.

 

 

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**6.****                                     ****Stockholders’ Equity**

 

*StockOption Plans*

 

The stockholders of the Company have approved the CentergisticSolutions, Inc. Incentive Stock Option Plan (the “Plan”), which provides forthe issuance of up to 2,800,000 shares of its common stock.  Options granted under the Plan are notexercisable until two years after they are issued and expire ten years afterthe date of issue.  The options vest at arate of 25% per year over a four-year period. At September 30, 2004, 822,000 shares were available for grant under theterms of this Plan.

 

In January 1998, the stockholders of the Company approved anonqualified stock option plan for the directors of the Company.  The plan provides for issuance of up to800,000 shares of its common stock to directors.  Options are granted based on attendance atboard meetings.  At September 30, 2004,531,200 shares were available for grant under the terms of this plan.

 

A summary of the statusof the plans, and changes during the three months ended September 30, 2004is as follows:

 
| **Fixed Options**                                                 | ** ** | **Shares** | ** ** | **Weighted Average Exercise Price** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|-------------------------------------|------------|
|                                                              |       |       |       |                                |       |
| Outstanding at  beginning of period                               |       | 2,418,800  |       | $                                   | 0.54       |   |
| Expired                                                           |       | (181,600   | )          | (0.44                               | )          |
| Granted                                                           |       | 9,600      |       | 0.41                                |       |
|                                                              |       |       |       |                                |       |
| Outstanding at  end of period                                     |       | 2,246,800  |       | $                                   | 0.54       |   |
|                                                              |       |       |       |                                |       |
| Exercisable at  end of period                                     |       | 1,388,400  |       | $                                   | 0.65       |   |
|                                                              |       |       |       |                                |       |
| Weighted average  fair value of options granted during the period |       |       |       | $                                   | 0.41       |   |

 

 

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**6.****                                      Stockholders’Equity (continued)**

 

A summary of stockoptions outstanding at September 30, 2004 is as follows:

 
| ** **        | ** **    | **Options Outstanding** | ** ** | **Options Exercisable**                         | ** ** |
|-------------------|---------------|-------------------------|------------|-------------------------------------------------|------------|
| **Fixed Options** | ** **    | **Number Outstanding**  | ** ** | **Weighted Average Remaining Contractual Life** | ** ** | **Weighted Average Exercise Price** | ** ** | **Number Exercisable** | ** ** | **Weighted Average Exercise Price** | ** ** |
|              |          |                    |       |                                            |       |   |   |   |   |   |   |
| $                 | 0.30 to $0.47 |                    | 1,034,000  |                                            | 8.14       |   | $ | 0.38 |   | 186,800 |   | $ | 0.40 |   |
| $                 | 0.52 to $0.79 |                    | 1,212,800  |                                            | 3.45       |   | 0.69 |   | 1,201,600 |   | 0.69 |   |
|              |          |                    |       |                                            |       |   |   |   |   |   |   |
|              |          | 2,246,800               |       |                                            |       | $ | 0.54 |   | 1,388,400 |   | $ | 0.65 |   |

 

*CommonStock Purchase Warrants*

 

In conjunctionwith a subordinated debt financing with a related party in 1998, the Companyissued warrants to purchase 480,000 shares of common stock at $0.676 per share,which are exercisable at any time prior to September 2005.  All of these warrants were outstanding atSeptember 30, 2004.

 

In connection with the agreement to sell the rights tothe proceeds from an outstanding lawsuit in fiscal year 2001, the Companyissued warrants (the “Fiscal 2001 Warrants”) to purchase 4,528,000 shares ofcommon stock at $0.4375 per share, which are exercisable at any time prior toSeptember 2005.  Pursuant to the terms ofthe Fiscal 2001 Warrants, should the Company issue a warrant or stock option toany person or entity who is not an employee, director or consultant of theCompany providing for an exercise price of less than $0.654 per share, then theexercise price of the Fiscal 2001 Warrants shall be reduced to 110% of thelowest such exercise price (the “Anti-dilution Provision”).  In accordance with the provisions of SFAS No.123, the value of the lawsuit warrants was estimated to be $101,332.  All of these warrants were outstanding as ofSeptember 30, 2004.

 

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**7.****                                     ****Private Placement of Debt**

 

Subsequent to June 30, 2003 and through September 30, 2003, the Companyentered into a total of 16 Note and Warrant Purchase Agreements (the“Agreements”).  Under the Agreements, thelenders agreed to loan the Company an aggregate $490,000 ($30,000 of which wasissued upon conversion of accounts payable) in exchange for convertiblesubordinated promissory notes (the “Notes”). The Notes, excluding all accrued interest, were convertible into sharesof common stock of the Company.  Theprincipal amount of the Notes were converted at a price of $0.3975 per shareeffective June 15, 2004.  Interestaccrued at a rate of 6% per annum and was paid in full in September 2004.  The notes contained a beneficial conversionfeature, the value of which was determined to be $8,618.  Such was recorded as a component of the debtdiscount and was accreted as non-cash interest expense over the term of theNotes.

 

In consideration for entering into the Notes, the Company also issuedwarrants (the “Notes Warrants”) entitling the note holder to purchase shares upto an aggregate of 74,016 shares of the Company’s common stock that will bereceived by the note holder upon conversion of the Notes discussed above.  The Notes Warrants are exercisable in whole,but not in part, at any time from the date of issuance of the Notes Warrantsand ending on August 31, 2005 at a price of $0.3975 per share of commonstock.  The Company estimated the valueof these warrants at $8,618, which was accreted as non-cash interest expenseover the term of the Notes.

 

Of the aggregate loan amount of $490,000, an aggregate $70,000 wasloaned by two officers and a relative of an officer with an aggregate of 10,576warrants being issued to such individuals.

 

In connection with the above-described transactions, the Company paid,as a financial consulting fee, $20,750 in cash and issued warrants, exercisableat a price of $0.466 per share to purchase 44,512 shares of common stock.  The Company estimated the value of thewarrants at $3,915 which was recorded as a debt discount.  The financial consulting fee and warrantswere accreted as non-cash interest expense over the term of the Notes.

 

 

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**7.****                                      PrivatePlacement of Debt (continued)**

 

Upon issuance of the Notes, the Company reclassified $53,615 of relatedcosts from deferred offering costs to a contra-liability account.  Such was accreted as non-cash interestexpense over the term of the Notes.

 

Upon conversion of the Notes, the remaining discount recorded was fullyamortized as non-cash interest expense.

 

Pursuant to the Anti-dilution Provision of the Fiscal 2001 Warrantsdiscussed in Note 6, such warrants were repriced to $0.4375 upon issuance ofthe Notes Warrants.  As such, the Fiscal2001 Warrants were revalued in accordance with SFAS No. 123, resulting inadditional expense of $82,609.  Suchamount was recorded as effective interest expense.

 

On July 1, 2003, the Company also entered into two consultingagreements with Hanover Capital Corp. (“Hanover”) pursuant to which the Companyagreed to pay to Hanover a monthly retainer of $5,000 for a period of 12months, but cancelable by either party at any time with ten days written noticeprior to the end of each monthly period. The Company also issued shares of common stock to Hanover as follows:(i) 200,000 shares upon filing of the Company’s proposed registration statementor Form SB-2; (ii) 50,000 shares upon completion of a forward split of theCompany’s common stock; and (iii) 100,000 shares upon approval of the FormSB-2.  These shares were issued in August2004.

 

 

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**ITEM 2.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**A NOTE ABOUT FORWARD-LOOKING STATEMENTS**

 

The statements, other than statements of historicalfact, included in this report are forward-looking statements. Forward-looking statements generally can be identified by the use offorward-looking terminology such as “may,” “will,” “expect,” “intend,”“estimate,” “anticipate,” “plan,” “seek,” or “believe.”  We believe thatthe expectations reflected in such forward-looking statements areaccurate.  However, we cannot assure you that such expectations willoccur.  Our actual future performance could differ materially from such statements.  These forward-looking statements are subjectto risks and uncertainties that could cause actual results and events to differmaterially.  For a detailed discussion ofthese risks and uncertainties please see the “Factors That May Affect FutureResults” section of this report.  Youshould not unduly rely on these forward-looking statements, which speak only asof the date of this report.  Except as required by law, we are notobligated to release publicly any revisions to these forward-looking statementsto reflect events or circumstances occurring after the date of this report orto reflect the occurrence of unanticipated events.

 

**General**

 

Weare a provider of business performance and intelligence management softwarethat enables companies to translate data into critical and meaningful metricsallowing for improved financial and operational performance. Our softwareprovides managers with customizable reporting and analysis tools. These toolsallow for real-time monitoring of and reporting against crucial benchmarks inan organization. This enables constant monitoring of a company’s progressagainst financial and operational goals, and helps achieve optimal operationalperformance.

 

Businessperformance and intelligence management software uses historical and real-timedata and metrics to provide managers with visibility on the business operationsin real-time. We provide call/contact center managers with powerful reportingand analytic tools allowing the constant monitoring of the operationaleffectiveness and efficiency. While our current market focus is on thecall/contact center, we offer software to all operational areas of theenterprise to gauge performance and profitable improvement. We also offerconsulting, training, technical support and programming services for ourcustomers and partners.

 

Our companyoperates through its domestic headquarters and our wholly-owned Mexicansubsidiary located in Mexico City, Mexico. Our domestic operation sellsAgentView, CenterStats, the related hardware necessary to run theseapplications or display statistics derived from these applications, trainingand educational services, installation, custom programming and supportservices. Our Lynch Young & Company Professional Services Group wound upoperations in June 2004 and was subsequently merged into the operatons ofCentergisitc.

 

CentergisticSolutions, Inc., Inc. was incorporated in Los Angeles, California onMarch 13, 1972. Lynch Young Inc. (dba Lynch Young & Company) wasincorporated in California on October 16, 1980. Centergistic Solutions,Inc. Latina America S. de R.L. de C.V., a limited liability partnership, wasformed in Mexico City, Mexico on May 19, 2000. This partnership was asuccessor to Centergistic Solutions, Inc. Latina America S.A. de C.V., aMexican corporation originally formed July 1, 1993.

 

Our LynchYoung  & Company Professional Services Group operated as a consultingfirm selling consulting services to the call/contact center market. We endedour separate operations of Lynch Young & Company in June 2004.  Our Mexican subsidiary acts as a distributioncompany selling our AgentView and CenterStats products along with other vendorsourced products to a variety of distributors and end-users in Latin and SouthAmerica. They also sell training and educational services, installation andproduct support packages.

 

In 2001, wecompleted development on our main product, CenterStats. During fiscal year(“FY”) 2002 and 2003, we devoted what little internally generated capital wasavailable (approximately $100,000 in each of these fiscal years) to activelypromote, market, and sell CenterStats. The money was spent on a salespersonfocusing on selling CenterStats, and various marketing initiatives intended topromote market awareness of CenterStats. However, due to limited resources, wehave never conducted a formal product launch and kickoff for CenterStats. Inaddition, during FY 2002 and 2003, there has been a global economic slowdown,and particularly, a decrease in corporate spending on infrastructure andtechnology. These factors have had an adverse impact on our ability to marketand sell CenterStats, as well as the results of our operations.

 

We faceseveral significant challenges common in our industry: continued revenuegrowth; market segment risk; technological changes; and liquidity and capitalresources.

 

We facechallenges in growing our revenues because our CenterStats product has not beeninstalled in a large number of clients to date, and has not achieved widecustomer acceptance due to limited marketing and sales activities. We aredependent upon the sale of CenterStats to substantially grow our revenues. Wehave developed a sales and marketing plan to achieve this revenue growth, butneed capital necessary to implement the plan.

 

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We currentlysell our products and services into the call/contact center market. Wegenerally sell in two different types of environments. In one instance, ourproducts are part of a bundled sale at the time of a new call/contact centerpurchase and installation. We are dependent on our distributors for a majorityof these types of sales. In the other instance, we sell to establishedcall/contact centers that perceive a lack of data, statistics, and metrics toeffectively manage and monitor the performance of their centers. We generaterevenue in this arena through both direct end-user sales and distributionchannel sales. We face challenges that our distributors could find new sourcesof this type product or even internally develop their own product. We also facechallenges that the call/contact center market undergoes significant changes,restructuring, contraction, or evolution into different technologies.

 

We aresubject to a rapidly changing technological environment. Our ability to keepcurrent with the demands of technology is critical to our success. Each timethe data flow of a particular application in the call/contact center changes ornew applications are created, we must be able to retrieve that data. Ourproducts must be changed also so that we may retrieve that data. If we cannotcontinue to stay atop the technology curve, we will not be able to competeeffectively in this market space. To combat this challenge, we have developedtechnology partnerships with many of the industry application providers such asAvaya, Cisco, Concerto, Genesys, Microsoft, and Nortel to name a few. Thesepartnerships allow us the environment to test our products and certify that ourproducts work with a specific vendor application and to get updates as theirtechnology changes.

 

**Current Conditions**

 

In May 2003we opened a development center in Delhi, India. We hired three developers andcurrently have a staff of five. India was chosen as the site of our centerbecause of its available base of skilled and technological competent developersand a lower cost structure. We plan to increase the staffing level to ten upona successful raise of capital. Primarily, these developers will developinterfaces to enable our products to work with “best of breed” call/contactcenter applications. Best-of-Breed (BOB) software can be defined as the use ofa specific software program or package for each specific application orrequirement. Many companies prefer, as policy, to incorporate a Best-of-Breedsoftware approach to make sure they are using the most highly developed andtested solution for each application. The India development center currentlycosts approximately $5,000 to $6,000 per month to maintain.

 

We derive asubstantial portion of our revenues from sales to customers in Mexico, LatinAmerica and South America.  For the threemonth periods ended September 30, 2004 and 2003, these customersrepresented approximately 31% and 25%, respectively, of our total net revenues.

 

Our revenuesin these countries are derived from our subsidiary, Centergistic Solutions,Inc. Latin America S. R. L. de C.V., a limited liability partnership. Itsoffice is located in Mexico City and houses 18 employees. This company actsprimarily as a distributor, selling our AgentView and CenterStats productsalong with others sourced from third party vendors such as PC call accounting,voicemail products, data collection devices, and LED display boards. Thiscompany sells its products primarily to companies such as Avaya, Siemens andAlcatel.

 

OnSeptember 30, 2003, we completed a private funding round of convertiblepromissory notes. The gross proceeds generated from this raise was $490,000,the net cash received was $460,000. The proceeds were used to begin toimplement our sales and marketing plan for bringing CenterStats to the marketand to pay the fees and costs associated with the preparation and processing ofa registration statement filed with the SEC relating to a selling stockholderoffering. We used $100,000 towards the implementation of our sales andmarketing strategy. The remaining $360,000 was used as follows: $100,000 foraccounting fees and related services, $100,000 for consulting and advisoryfees, $65,000 for principal payments of notes payable, $55,000 for legal fees,$20,000 for printing expenses (including EDGARizing expenses) and $20,000 forgeneral working capital.

 

We intend toraise up to an additional $3,000,000 in a private offering. If this raise issuccessful, as to which there is no assurance, those proceeds will be used tomore fully implement our sales and marketing strategy. We intend to begin thecapital raise in December 2004. This capital raise is critical to theimplementation of our sales and marketing strategy described in this report.  If the raise is not successful, managementhas created several cost cutting strategies and will implement them as businessconditions necessitate.

 

We must havecapital to successfully implement our sales and marketing strategy. We are notlikely to see significant revenue growth without the sales and marketingactivities we intend to initiate with the proceeds of our intended capitalraise.

 

**Critical Accounting Policies**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets, liabilities andequity and disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenue and expenses duringthe reported period. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

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***Revenue Recognition***

 

Our revenuerecognition policy is significant because revenue is a key component of ourresults of operations. We derive our revenue primarily from sales of ourvarious products. As described below, significant management judgments andestimates must be made and used in connection with revenue recognized in anyaccounting period. If our management makes different judgments or usesdifferent estimates, material differences may result in the amount and timingof our revenue for any period. We recognize revenue from the sale of ourproducts when: 

 

**•**                                          wehave persuasive evidence that an arrangement exists. For all sales, we use abinding purchase order and sales order confirmation as evidence of anarrangement. Sales through certain of our distributors are evidenced by amaster agreement governing the relationship, together with binding purchaseorders on a transaction by transaction basis; 

 

**•****                                         **theproduct is delivered to the customer under the terms of the arrangement andtitle passes. Passage of title generally occurs when the product is deliveredto a common carrier, but in some cases occurs when the customer receives theproduct; 

 

**•****                                         **therevenue is fixed and determinable. At the time of the transaction, we assesswhether the fee associated with our revenue transactions is fixed anddeterminable based on the payment terms associated with the transaction. If asignificant portion of a fee is due after our normal payment terms, which are30 to 75 days from invoice date, then we account for the fee as not beingfixed and determinable. In these cases, we recognize revenue as the fees becomedue; and 

 

**•****                                         **collectionof the resulting receivable is reasonably assured. We assess collection basedon a number of factors, including past transaction history with the customerand the credit-worthiness of the customer. We do not request collateral fromour customers. If we determine that collection of a fee is not reasonablyassured, then we defer the fee and recognize revenue at the time collectionbecomes reasonably assured, which generally is upon receipt of cash. 

 

We deriverevenues from licensing our software products, selling computer and displayhardware, and providing customer support, training, installation, andconsulting services. Software license fees for site licenses and master licenseagreements are recognized as revenue upon delivery of the software, and whenremaining obligations are not significant. Sales to distributors are recognizedupon delivery as our distributors generally have customer orders in hand beforeordering from us. Should orders be cancelled, our distributors are subject torestocking charges of 10%-25% except for custom orders which arenon-cancellable.

 

Our softwarelicensing agreement provides the customer with certain warranty provisions,including a limited time to test the software. If the customer can prove thesoftware is not functioning, we have the opportunity to remedy the problem, andif not resolved, the customer can return the software. Historically, returnsand warranty costs have not been significant.

 

Advance contractpayments for services, consisting primarily of software customer support, arerecorded as deferred income until after the expiration of the software warrantyperiod, at which time the revenue is recognized ratably over the term of themaintenance period. All subsequent software support is billed separately andrecognized ratably over the life of the support period.

 

Revenue fromcomputer and display hardware is recognized upon shipment, and consultingservice revenue is recognized as services are rendered.

 

***Allowance forDoubtful Accounts***

 

Ourmanagement estimates the uncollectability of our accounts receivable for lossesthat may result from the inability of our customers to make required payments.Management specifically analyzes accounts receivable and historical bad debts,customer concentrations, customer credit-worthiness, current economic trendsand changes in customer payment terms when evaluating the adequacy of theallowance for doubtful accounts. If our customers’ financial condition deterioratessuch that it impairs their ability to make payments to us, additionalallowances may be required. As of September 30, 2004 and June 30, 2004,our accounts receivable balances were $536,000 and $876,000, respectively, netof our estimated allowances for doubtful accounts of $54,000 and $36,000,respectively.

 

The accountsreceivable balance decreased during the three month period endedSeptember 30, 2004. The Company achieved lower revenue volumes during thisperiod and received collections on several older accounts.  We do expect the accounts receivable balanceto grow as we increase our sales of CenterStats.   The payment cycle on these types of saleswill stretch to 75-90 days from our typical experience of 45-60 days.

 

We have takensteps to address this trend by requiring staged payments on these contractswhen milestones are completed. We now typically require 25% of the contractamount due upon signing, 50 to 65% upon delivery, and the remaining balance due30 days thereafter. We do not expect this trend to significantly impact usas we believe revenues will continue to grow sufficiently to enable us togenerate enough cash flow to sustain operations.

 

The accountsreceivable turnover at September 30, 2004 has improved to 58 days. Weattribute this improvement to lower sales volume and collection of severalolder invoices.  We do expect theturnover to slow down as we increase sales of CenterStats with larger invoiceamounts and longer payment cycle.

 

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***CapitalizedSoftware Development Costs***

 

We accountfor software development costs in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 86, “Accounting for the Costs ofComputer Software to be Sold, Leased, or Otherwise Marketed.” SFAS No. 86specifies that software development costs incurred internally should beexpensed as incurred until technological feasibility has been established. Oncetechnological feasibility has been established, all software development costsshould be capitalized until the product is available for general release tocustomers. Technological feasibility is defined as a completion of detailprogram design. Capitalization of software costs has been minor during thethree months ended September 30, 2004. Amortization of capitalized software costs totaled $24,000 and $31,000for the three month periods ended September 30, 2004 and 2003,respectively.

 

***Long-Lived Assets***

 

During fiscalyear 2003, we adopted SFAS No. 144, “Accounting for the Impairment ofDisposal of Long-Lived Assets,” which addresses significant issues relating tothe implementation of SFAS No. 121 and develops a single accounting model,based on the framework established in SFAS No. 121 for long-lived assetsto be disposed of by sale, whether such assets are or are not deemed to be abusiness. SFAS No. 144 also modifies the accounting and disclosure rulesfor discontinued operations. Implementation of such standard has not had amaterial effect on the accompanying consolidated financial statements. As ofSeptember 30, 2004, no such indicators of impairment were identified bymanagement.

 

***Stock-BasedCompensation***

 

From time totime, we provide compensation in the form of shares of our common stock as wellas options or warrants to acquire shares of our common stock.

 

We derive thevalue of rights to acquire our common stock granted to non-employees, such asoptions or warrants, from pricing models that consider current market andcontractual prices for our stock, as well as time value and yield curve orvolatility factors. Pricing models and their underlying assumptions impact theamount and timing of unrealized gains and losses we recognize, and use ofdifferent pricing models or assumptions could produce different financialresults.

 

Optionsgranted to employees are valued using the intrinsic value method which basescompensation on the difference between the market value of the underlyingshares of common stock and the exercise price at the date of grant.

 

**Results of Operations for the ThreeMonths Ended September 30, 2004 as Compared to the Three Months Ended September30, 2003**

 

We believethere is some improvement in the economy in general and corporateinfrastructure technology spending in specific. We saw decreases in revenue inalmost all lines of business this past quarter, but expect to see improvementin our revenue as long as corporate infrastructure technology spending remainsconsistent. Our biggest risks continue to be revenue growth, and the capitalraise necessary to implement our sales and marketing strategy.

 

***Revenues***

 
| ** **                 | ** ** | **Three Month Period Ended September 30,  (In thousands)** | ** ** |
|----------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                 | ** ** | **2004**                                                        | ** ** | **%** | ** ** | **2003** | ** ** | **%** | ** ** |
|                       |       |                                                            |       |   |   |   |   |   |   |
| Centergistic  (U.S.)       |       | $                                                               | 566        |   | 69.1 |   | $ | 687 |   | 69.5 |   |
| Mexico and Latin  America  |       | $                                                               | 253        |   | 30.9 |   | $ | 248 |   | 25.1 |   |
| Lynch Young  & Company |       | $                                                               | —     |   | 0.0 |   | $ | 53 |   | 5.4 |   |
| Total                      |       | $                                                               | 819        |   | 100.0 |   | $ | 988 |   | 100.0 |   |

 

Total netrevenues decreased by $169,000 or 17% for the three month period endedSeptember 30, 2004 (“PE 2004”) as compared to the three month period endedSeptember 30, 2003 (“PE 2003”). Revenues from U.S. based operationsdecreased by $121,000 or 18% from the PE 2003. Revenues from Lynch Young &Company also decreased as compared to the prior period as we concluded ouroperations in this company in June 2004. Revenues from Mexico increased by $5,000 or 2% during PE 2004.

 

In the U.S.based operations, direct sales of AgentView decreased $62,000 or 28% comparedto PE 2003. The decrease is due to one large ($150,000) purchase during PE2003. We are starting to see increased sales activity from customers requiringmultiple data sources and a high number of agents. This will help our revenuein the future as one of our AgentView products is priced on a “per 

 

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agent” basis. We alsocharge additional amounts for multiple data sources. As corporateinfrastructure technology spending is increasing, we expect our revenue toincrease.

 

Distributionrevenue in the U.S. dropped by $99,000 or 27% from PE 2003.  Revenue from our largest distributor, Dacon,fell by $118,000 or 37% from PE 2003.  Webelieve we will recover this shortfall as we received a software order for$100,000 from Dacon in October.  Weexpect business from Dacon to increase during the next nine months as we hopeto see increased volume as an upgrade program will soon be introduced to theBritish Telecom installed base, and an expected roll out of our CenterStatsproduct to that base as well.

 

Installationand training revenues decreased by $14,000 or 45% from PE 2003 due to the decreasedsales of AgentView and CenterStats. We expect these revenues to increase asmore Agent View and CenterStats products are sold.

 

Mexico andLatin America revenues increased by $5,000 or 2% as compared to PE 2003. TheMexican economy remains relatively sluggish and according to the AmericanBusiness Chamber of Commerce (the “Chamber”) in Mexico, this trend continuedthrough June 2004.  The Chamber projectsthat the Mexican economy will begin to improve in the July-December 2004 timeframe. We expect to see our revenues begin to steadily improve through theremainder of our fiscal year, with an improving trend as the economy improves.

 

Lynch Youngrevenues decreased by $53,000 as compared to PE 2003.  The drop in revenue is related to the windingdown of the Department of Water and Power contract.  The revenues from both period ends weresubstantially derived from the Department of Water and Power contract.  We completed that contract in June 2004.After the completion of the contract, we did not foresee a need to operateLynch Young as an independent consulting company any longer, and will combineits operations with Centergistic Solutions, Inc. U.S. based operations. Thiscaused an impairment of the remaining amount of goodwill in our balance sheet of$23,600 associated with Lynch Young and such amount was written off at theconclusion of our fiscal year ended June 30, 2004 as the contractconcludes. We expect to see a decline in the Lynch Young revenues in this 2005fiscal year, but this decline should be partially offset by consulting revenuesproduced under the Centergistic Solutions, Inc. U.S. based operations.

** **

**Cost of Revenues**

 

Cost ofrevenues decreased to $182,000 or 22% of revenues as compared to $364,000 or37% of revenues in PE 2003. Costs associated with hardware and third partyproducts sales decreased by nearly $115,000 and consulting expenses related tothe Lynch Young contract with Department of Water and Power decreased $40,000.As a lesser portion of our revenue over this past three months endedSeptember 30, 2004 was derived from hardware sales, our costs related tohardware sales decreased accordingly. We are at risk of hardware and thirdparty vendors passing on price increases that will affect our profitability.

 

**Gross Profit**

** **

Gross profit improved to 78% of revenues in PY 2004, or $637,000, ascompared to 63%, or 624,000, in PY 2003. The improvement is gross profit percentage is attributable to the mix ofrevenue away from hardware and third-party sourced products to software products.  We expect this trend to continue as we sellmore AgentView and CenterStats to direct end-users.

 

**Operating Expenses**

* *

*Sales and Marketing*

 

Sales andmarketing expenses decreased $13,000 or 7% as compared to PE 2003. We spentless on commissions due to the decreased sales volume.  Commission expense was lower by $22,000 dueto the lower sales volume, and travel expenses were lower by $6,000.  This decrease was offset by increases inadvertising ($9,000) and sales salaries ($10,000).  We face the risk of not having the necessarycapital ($3,000,000) to fully implement our sales and marketing strategy nextfiscal year. If we do not receive the capital, we will scale back ourimplementation of the sales and marketing strategy, and this will adverselyaffect our revenue and profitability in our future fiscal periods.

 

Our strategywill continue to slowly fund our sales and marketing programs by investing anycash generated by operations. Absent any outside funding, we will continue thisprocess for the foreseeable future. However, we are planning to raise capitalthrough the financing contemplated to begin in December 2004, and will use thefunds to hire sales and marketing professionals, development staff, andimplement marketing programs for CenterStats. We plan to hire up to 10 salesprofessionals and up to 10 developers. If we are not successful in raising thecapital, we will reduce our planned hires to the level that can be sustainedfrom our existing operational cash flow.

* *

*General and Administrative*

 

General andadministrative expenses increased by $61,000 or 15% as compared to PE 2003. Weincreased depreciation and amortization by $7,000.  Our telephone expense increased by $4,000 dueto a refund received in PE 2003 for prior overcharging.

 

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Salaries increased by$10,000 due to adding some administrative help in Mexico.  Fringe benefits (insurance and payrollrelated costs) increased by $8,000.  Rentincreased by $5,000.  Professional feesalso increased by $5,000 due to our public reporting company status.

 

We anticipategeneral and administrative expenses to increase as we add staff. As a result ofobtaining public reporting company status, our professional fees in upcomingfiscal years are expected to greatly increase. We anticipate general andadministrative costs to increase by $100,000 to $150,000 per year due toincreased professional fees, director and officer liability insurance, andincreased employee benefit costs.

 

*Research and Development*

 

Research anddevelopment expenses increased by $2,000 or 2% over the same period as lastyear primarily due to opening our development center in India in May 2003. Thecosts for running this office averaged $4,000 a month for the PE 2003 as weramped up to a staff of five. We saw the monthly cost grow to approximately$5,000 per month during PE 2004.  By theend of our fiscal year in June 2005, we expect these costs to rise toapproximately $7,000 per month.

 

We plan toincrease the staffing level to ten upon a successful raise of additionalcapital. Primarily, these developers will develop interfaces to enable ourproducts to work with “best of breed” call/contact center applications.

** **

**Other (Expense) Income**

 

The interestexpense during PE 2003 was related to interest on the convertible debt,amortization of the debt issuance costs and beneficial conversion feature, andrepricing of certain existing warrants. This expense will decrease as the warrant repricing was a one-timeoccurrence, certain debt was converted to common stock, and the debt issuancecosts and beneficial conversion feature were fully amortized by June 2004.  We had minimal interest expense during PE2004, but did incur approximately $3,000 in exchange rate losses from funds inMexico and the U.K.

** **

**Net Income(Loss)**

 

Net lossdecreased to $118,000 as compared to $181,000 in PE 2003, a $63,000 or 35%improvement. The improvement was primarily due to a decrease in interestexpense offset by lower revenue levels achieved in the quarter.

 

We anticipatedgenerating an operating loss given that we planned to invest any excess cashflow back into operations through increased sales and marketing and developmentexpenditures.

** **

**Liquidity and Capital Resources**

 

Prior tofiscal year 2003, we were primarily financed through cash flow from operations,sale of company assets, and to a lesser extent, limited bank financing. DuringPE 2003, we received approximately $25,000 in loans from officers and grossproceeds of $490,000 through a private offering of convertible subordinateddebt. We used the proceeds from the convertible debt to primarily fund thelegal, accounting, and promotion fees associated with our attempted capitalraise, and spent $100,000 to fund sales and marketing programs.

 

Net cash usedin operating activities was $33,000 and $141,000 in PE 2004 and 2003,respectively. The net cash used for operations in PE 2004 was comprisedprimarily of depreciation and amortization of $66,000, and a net increase inassets and liabilities of $24,000.  Thenet cash used for operations in PE 2003 was comprised primarily of non-cashinterest expenses of $90,000, depreciation and amortization of $59,000, and anet decrease in assets and liabilities of $123,000.

 

Net cash frominvesting activities used $9,000 in PE 2004 as compared to a use of $3,000 inPE 2003. The cash used in both period ends were primarily due to purchase offixed assets.

 

Net cash usedfrom financing activities was $46,000 in PE 2004 as compared to generating$329,000 in PE 2003.  The PE 2004 use wasprimarily due to additions to deferred offering costs of $39,000.  The PE 2003 amount came from a net $460,000in borrowings (which were subsequently converted to equity) partially offset bya paydown of $60,000 in debt and deferred offering costs of $72,000.

 

We hadworking capital of $236,000 at September 30, 2004.

 

In March2002, we received two loans from our officers and directors, Ricardo Brutocaoand David Cunningham. The total of these two loans is $24,975. The loans arepayable on demand and bear interest at 6%. As of September 30, 2004, thebalance of these loans is $24,975.

 

In July 2003,we agreed to purchase 148,328 shares of our common stock from Al Wild, a formeremployee, for $44,220 and issued our secured promissory note payable toMr. Wild in such amount. Our note bears interest at the rate of 5% perannum, and 

 

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monthly payments ofprincipal and interest in the amount of $2,700 are due and payable on the notecommencing September 30, 2003. As each monthly payment is made on ournote, we may cancel and retire 8,728 of the shares. Mr. Wild may cancelour note at any time and elect to receive the remainder of the shares wepurchased from him that have not been cancelled and retired by us in accordancewith our agreement. Payment of our note to Mr. Wild is secured by all of ourassets.

 

As ofSeptember 30, 2004, including the results of operations for the threemonths then ended, our working capital decreased to $236,000. We believe thatwe will be able to convert this working capital into the cash necessary tocontinue operations for the balance of fiscal year 2004.

 

We intend toraise up to an additional $3,000,000 in a private offering tentativelycommencing in December 2004.  We intend tobegin the capital raise approximately 30 days after our stock commences tradingon the OTC Bulletin Board.  If this raiseis successful, as to which there is no assurance, we intend to use the proceedsto add sales management and staff, conduct a marketing launch of CenterStats,form strategic partnerships with consulting organizations such as Accenture,EDS, IBM Global Services and Perot Systems, and heavily advertise and promoteour products and services during our next two fiscal years. As of the date ofthis filing, we have not entered into any agreement or had any materialdiscussions with any such consulting organizations regarding the formation of astrategic partnership.

 

We face therisk that we will not be able to raise the necessary capital to fully fund oursales and marketing plan. If we are not successful on our $3,000,000 capitalraise, we will have to scale back our plans for the future. This will impactour future revenue growth and profitability.

 

If thecapital raise is not successful, we will reduce our planned hires to the levelthat can be sustained from our existing operational cash flow. We will alsoscale back our future product launch and marketing of CenterStats to the levelthat they will be funded by operational cash flow.  We will also implement, necessitated onbusiness conditions, several cost cutting strategies identified by management.

 

We haveentered into consulting agreements with Hanover Capital and The BosphorousGroup. These consultants were hired to act as financial advisors. Hanoverreceived 350,000 shares of our common stock for achieving certain milestones.The Bosphorous Group agreement calls payment of a success fee upon completionof certain financing transactions.

 

We currentlyhave not entered into any agreements nor are we currently in discussions withany potential merger or acquisition candidate. However, we intend to pursue anacquisition strategy upon successful completion of a capital raise and thelisting of our stock on the OTC Bulletin Board. As we believe our currentmarket space has a number of relatively small companies, our strategy will beto increase market share, customer base, and technology by acquiring thesecompanies. We also believe that acquiring certain key distributors, therebysecuring our sales channels, makes sound business sense. We may possibly seekto acquire one or more distributors in the future.

 

**Factors That May Affect Future Results**

 

**We have experienced losses in thepast, anticipate losses for the foreseeable future and may never achieveprofitability.**

 

We incurred a net loss of $118,000 during the three months endedSeptember 30, 2004, and as of such date our accumulated deficit was$2,210,000.  We expect that our operatingexpenses will increase significantly as we continue to expand our business. Asa result, we will need to generate significantly more revenues from sales ofour CenterStats product to achieve profitability. We have a limited operatinghistory with our CenterStats product and we are not able to estimate when, if ever,our revenues will increase sufficiently to cover these expenses. We cannotassure you that our revenue will grow in the future or that additional capitalwill be made available to us. If revenues grow slower than we anticipate, or ifoperating expenses exceed our expectations or cannot be reduced accordingly, orif we cannot obtain additional capital, our business, operating results andfinancial condition will be materially and adversely affected, which couldcause our investors to lose all or part of their investment in our commonstock.

 

**We have not generated any significantrevenues from the sale of our CenterStats product and if we are unable toincrease sales, our business, operating results and financial condition will bematerially adversely affected.**

 

We began marketing our CenterStats product in March 2002. Our marketingefforts to date have been very limited because we lack sufficient capital toimplement our sales and marketing strategy. Revenues for the three monthperiods ended September 30, 2004 and 2003 were $819,000 and $988,000,respectively.

 

Our future revenues will depend significantly on our ability topenetrate the call/contact center or business intelligence software marketspace. We have developed a sales and marketing strategy to achieve revenuegrowth, but we need additional capital to implement it. If we are notsuccessful in selling our products in our targeted market due to insufficientadditional capital or other 

 

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factors including competitive pressures or technological advances byothers, our business, operating results and financial condition will bematerially and adversely affected.

 

**We need additional capital toimplement our current business strategy, which may not be available to us, andif we raise additional capital, it may dilute our investor’s, ownership in us.**

 

We believe that the proceeds of our anticipatedprivate placement offering, together with cash generated from operations, willbe sufficient to meet our anticipated needs for business expansion, capitalexpenditures, working capital and general corporate purposes for theforeseeable future, but no less than a period of 12 months after the date ofthis report.  Thereafter, we may need toraise additional funds.

 

If additionalfunds are raised through the issuance of equity or convertible debt securities,the percentage ownership of our shareholders will be reduced, shareholders mayexperience additional dilution and such securities may have rights, preferencesand privileges senior to those of the Common Stock and may have covenants whichimpose restrictions on our operations. There can be no assurance that any necessary additional financing willbe available on terms favorable to us or at all.  If adequate funds are not available or arenot available on acceptable terms, we may not be able to fund our marketingneeds or expansion, to take advantage of unanticipated acquisitionopportunities, to develop or enhance services or products or to respond tocompetitive pressures.  This inabilitycould have a material adverse effect on our value, prospects, business, resultsof operations and financial condition.

 

**Our quarterly operating results,revenues and expenses may fluctuate significantly which could have an adverseeffect on the market price of our common stock.**

 

Our operatingresults, revenues and expenses may fluctuate significantly from quarter toquarter due to a variety of factors including: 

 

**•     **marketacceptance of our CenterStats product, 

 

**•     **thetiming, size and execution of orders and shipments, 

 

**•     **lengthyand unpredictable sales cycles, 

 

**•     **thetiming of introduction and market acceptance of new products or productenhancements by us or our competitors, 

 

**•     **productand price competition, 

 

**•     **therelative proportions of revenues derived from license fees and services, 

 

**•     **changesin our operating expenses, 

 

**•     **oursuccess in increasing our direct sales force, 

 

**•     **oursuccess in maintaining relationships with our third-party distributors andadding new ones, and 

 

**•     **fluctuationsin general economic conditions.

 

We believethat period-to period comparisons of our results of operations are not a goodindication of future performance. There can be no assurance that futurerevenues and results of operations will not vary substantially. It is alsopossible that in future quarters, our operating results will be below theexpectations of public market analysts and investors. In that event, thetrading price of our common stock may fall.

 

**The loss of Dacon PLC as a customerwould materially adversely affect our business, operating results and financialcondition.**

 

We sell asubstantial portion of our products to Dacon PLC, which is based in the UnitedKingdom and has been a distributor of our products for the past 12 years.  For the three month periods endedSeptember 30, 2004 and 2003, Dacon accounted for 24% and 32%,respectively, of net revenues, and 11% of total trade receivables as ofSeptember 30, 2004. The loss of Dacon PLC as a customer would have amaterial adverse effect on our business, operating results and financialcondition.

 

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**We face risks associated withoperations in Mexico, Latin America and South America which could adverselyaffect our business, operating results and financial condition.**

 

We derive asubstantial portion of our revenues from sales to customers in Mexico, LatinAmerica and South America.  For the threemonth periods ended September 30, 2004 and 2003, these customersrepresented approximately 31% and 25%, respectively, of our total net revenues.

 

We facecertain risks inherent in conducting business internationally, and suchspecific risks in Mexico, Latin America and South America as languages andcultural differences, legal and governmental regulatory requirements andpotential political and economic unrest. Any of these factors could seriouslyharm our ability to generate future revenues from these customers, and,consequently, our business, operating results and financial condition.

 

**We operate in a competitive businessenvironment and if we cannot compete effectively, we may face price reductionsand decreased demand for our products.**

 

The marketfor our products and services is intensely competitive and subject totechnological change. Competitors vary in size and in the scope and breadth ofthe products and services they offer. We encounter competition from a number ofsources, all of which offer performance management reporting systems to thecall/contact center market. We expect additional competition from otherestablished and emerging companies as the market for performance managementreporting solutions and complementary products continues to develop and expand.We encounter competition in the United States from a number of sources,including Symon and Innova, all of which offer performance management reportingsystems to the call/contact center market. Some of our current, and many of ourpotential competitors have longer operating histories, greater namerecognition, larger client bases and significantly greater financial,engineering, technical, marketing and other resources than we do. As a result,these companies may be able to respond more quickly to new or emergingtechnologies and changes in customer demands or to devote greater resources tothe development, promotion and sale of their products than we can.

 

In addition,current potential competitors have established or may establish cooperativerelationships among themselves or with third parties to increase the ability oftheir products to address the needs of our prospective customers. Accordingly,it is possible that new competitors or alliances among competitors may emergeand acquire significant market share. We expect that the call/contact centermarket will continue to attract new competitors and new technologies, possiblyinvolving alternative technologies that are more sophisticated andcost-effective than our technology. New product introductions by ourcompetitors could cause a decline in sales, a reduction in the sales price, ora loss of market acceptance of our existing products. There can be no assurancethat we will be able to compete successfully against current or futurecompetitors or that competitive pressures faced by us will not materiallyadversely affect our business, financial condition and results of operations.

 

**We rely in part, on third-partydistributors to market and distribute our products, and their failure to do sosuccessfully could significantly harm our ability to maintain and expand our customerbase, which would adversely affect our operating results and financialcondition.**

 

Our sales andmarketing strategy includes channels of third party distributors. We havedeveloped a number of these relationships and intend to develop new ones. Ourinability to attract new distributors or their inability to penetrate theirrespective market segments or the loss of any of our third-party distributorsas a result of competitive products offered by other companies, or productssimilar to ours that are developed internally by them or otherwise, could harmour ability to maintain and expand our customer base. Our ability to achieverevenue growth in the future will depend in part on our success in developingand maintaining successful relationships with these third-party distributors.If we are unable to develop or maintain our relationships with thesethird-party distributors, our operating results and financial condition willsuffer.

 

**We must increase our direct salesforce to sell our products, and if we are unable to hire and train new salespersonnel, our future growth will be impaired.**

 

Our directsales force currently consists of three persons. Our sales and marketingstrategy includes increasing the level of direct sales. Our ability to achieverevenue growth in the future will depend on our ability to recruit, train, andretain qualified direct sales personnel. If we are not able to obtainadditional capital, we will not be able to increase the size of our directsales force. Even if we are successful in obtaining additional capital, thereis no assurance that we will be successful in recruiting and retainingqualified sales personnel. Our inability to increase the size and productivityof our direct sales force could impair our growth and adversely affect ouroperating results and financial condition.

 

**If we fail to keep pace with rapidtechnological changes in our industry, we could lose existing customers and beunable to attract new business.**

 

Our market ischaracterized by rapidly changing technologies, frequent new product andservice introductions and evolving industry standards. The introduction ofproducts embodying new technologies and the emergence of new industry standardscan render our existing products obsolete and unmarketable in short periods oftime. We expect new products and services, and enhancements to existingproducts and services to continue to be developed and introduced by others,which will compete with, and reduce the demand 

 

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for, our products andservices. Our future success will depend, in part, on our ability to enhancethe performance features and reliability of our current products and introducenew products that keep pace with technological developments and emerging industrystandards and to address the increasingly sophisticated needs of our customers.We may have to raise additional capital to successfully improve the featuresand reliability of our products and services. We may not be able to obtain thecapital or obtain it on terms acceptable to us. There can be no assurance thatwe will be successful in developing, marketing and selling new products orproduct enhancements that meet these changing demands, that we will notexperience difficulties that could delay or prevent the successful development,introduction and marketing of these products or that our new products andproduct enhancements will adequately meet the demands of the marketplace andachieve market acceptance.

 

**We may lose sales, or sales may bedelayed, due to the long sales cycle for our products, which would reduce ourrevenues.**

 

Our customersgenerally involve many people in the decision to purchase our products andconsulting and other services. As a result, we may wait many months before asale can actually be completed. During this long sales cycle, events may occurthat affect the size or timing of the order or even cause it to be canceled.For example, our competitors may introduce new products, or the customer’s ownbudget and purchasing priorities may change. If these events were to occur,sales of our products may be cancelled or delayed, which would reduce ourrevenues.

 

**If we do not retain our seniormanagement and other key employees, we may not be able to successfullyimplement our business strategy.**

 

Our futuresuccess depends to a significant extent on the continued services of our seniormanagement, particularly, Ricardo Brutocao, Chief Executive Officer, and DavidCunningham, Chief Operating and Financial Officer, and other key personnel,particularly, Rama Iyer, Vice President, Technology and Product Management. Theloss of the services of any of these persons could have a material adverseeffect on our business, results of operations and financial condition. We haveno employment agreements with Mr. Cunningham or Mr. Iyer. We do notmaintain “key person” life insurance for any of our personnel at this time butmay decide to in the future. Competition for qualified personnel in ourindustry is intense and we compete for these personnel with other companiesthat have greater financial and other resources than we do. Our future successwill depend in large part upon on our ability to attract, retain and motivatehighly qualified personnel, and there can be no assurance that we will be ableto do so. If we have any difficulty in hiring needed qualified personnel, ourbusiness, financial condition and results of operations could be materiallyadversely affected.

 

**Our success depends on growth in thetelecommunications industry.**

 

While the Companyas a whole is not dependent upon the telecommunications industry, our AgentViewlegacy products are substantially positioned in the sector. Our business wouldbe adversely affected to the extent that the telecommunications industrycontinues to contract through consolidation and advances in technology, or doesnot achieve sustainable growth particularly usage by companies who use multiplesoftware applications. A number of factors may inhibit the telecommunicationsindustry’s growth, including: 

 

**•     **financialdifficulties and recent bankruptcies of major providers such as Global Crossingand Worldcom; 

 

**•     **competitiveconcerns centered around large-scale price cutting; 

 

**•     **reluctanceof industry companies to place purchase orders for capital expenditures; and 

 

**•     **lackof increasing customer demand for premium and high-speed services. 

 

If theseconditions continue to occur in the future, the telecommunications industry, aswell as the purchase of our products by it, could grow more slowly or decline.

 

**Our limited ability to protect ourproprietary technology and other rights may adversely affect our ability tocompete.**

 

We rely on acombination of trademarks, copyrights, trade secret laws and contractualprovisions to protect our intellectual rights. We also have a patent pendingfor an information management system. We cannot assure our investors that ourpatent application will result in any patent being issued to us or, if issued,that any patent claims will be of sufficient scope or strength to provide anymeaningful protection or any competitive advantage to us. There can be noassurance that these protections will be adequate to prevent our competitorsfrom misappropriating our technology, or that our competitors will notindependently develop technologies that are substantially equivalent orsuperior to our technology. To protect our trade secrets and other proprietaryinformation, we require employees, consultants and others to enter intoconfidentiality agreements. We cannot assure our investors that theseagreements will provide meaningful protection for our trade secrets, know-howor other proprietary information in the event of any unauthorized use,misappropriation or disclosure of such trade secrets, know-how or otherproprietary information.

 

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**If we are found to infringe theproprietary rights of others, we could be required to redesign our products,pay royalties or enter into license agreements with third parties.**

 

Although wehave never been the subject of a material intellectual property dispute, therecan be no assurance that a third party will not assert that our technologyviolates its intellectual property rights in the future. As the number ofsoftware products in our target market increases and the functionality of theseproducts further overlap, we believe that software developers may becomeincreasingly subject to infringement claims. Any claims, whether with orwithout merit, could: 

 

**•     **beexpensive and time consuming to defend, 

 

**•     **causeus to cease making, licensing or using products that incorporate the challengedintellectual property, 

 

**•     **requireus to redesign our products, if feasible, 

 

**•     **divertmanagement’s attention and resources, and 

 

**•     **requireus to enter into royalty or licensing agreements in order to obtain the rightto use necessary technologies. 

 

There can beno assurance that third parties will not assert infringement claims against usin the future with respect to our current or future products or that any suchassertion will not require us to enter into royalty arrangements (if available)or litigation that could be costly to us.

 

**A large percentage of our stock isowned by relatively few people, including officers and directors, and theirinterest may be different from and conflict with yours.**

 

As ofSeptember 30, 2004 our officers and directors beneficially owned a totalof 11,619,408 shares (including shares issuable upon exercise of options,warrants or convertible securities beneficially owned by them that are exercisableor convertible within 60 days after September 30, 2004), orapproximately 70% of our outstanding common stock.  You may be subject to certain risks due tothe concentrated ownership of our common stock. For example, thesestockholders, if acting together, would be able to influence or control mattersrequiring approval by our stockholders, including the election of directors andthe approval of mergers, acquisitions or other extraordinary transactions. Theymay also have interests that differ from yours and may vote in a way with whichyou disagree and which may be adverse to your interests. The concentration ofownership may have the effect of delaying, preventing or deterring a change ofcontrol of our company, could deprive our stockholders of an opportunity toreceive a premium for their common stock as part of a sale of our company andmight ultimately affect the market price of our common stock.

 

**Future sales of shares of our commonstock which are eligible for sale by our stockholders may decrease the price ofour common stock.**

 

We had10,699,312 shares of common stock outstanding on September 30, 2004.All of these shares are “restricted securities” under Rule 144 of theSecurities Act of 1933. An additional 7,373,328 shares underlying options,and warrants outstanding on September 30, 2004 will be restrictedsecurities if and when they are issued. Restricted securities may be sold onlyif they are registered under the Securities Act or if an exemption from theregistration requirements of the Securities Act is available. Generally,stockholders may sell restricted securities without registration after holdingthem for one year and subject to certain volume limitations. Actual sales, orthe prospect of sales by our present stockholders or by future holders ofrestricted securities, pursuant to a registration statement,  under Rule 144, or otherwise, may, inthe future, have a depressive effect on the market price of our common stock. Adecline in the price of shares of our common stock might impede our ability toraise capital through the issuance of additional shares of our common stock orother equity securities.

 

**There is no market for our commonstock and we cannot assure you that a market will develop or what the marketprice of our common stock will be.**

 

Although ourcommon stock has not yet begun trading in the over-the-counter market on theOTC Electronic Bulletin Board, we expect, but can give no assurance, thattrading will commence by the end of December 2004. If an active trading marketdoes not develop or is not sustained, it may be difficult for you to sell yourshares of common stock at an attractive price or at all. We cannot predict theprices at which our common stock will trade. It is possible that in futurequarters our operating results may be below the expectations of public marketanalysts and investors and, as a result of these and other factors, the priceof our common stock may decline.

 

**Our common stock will be deemed to bepenny stock which may make it difficult for investors to sell their shares.**

 

If a marketever develops for our common stock, our common stock will be deemed to be pennystock as that term is defined in Rule 3a51-1 of the Securities ExchangeAct of 1934 (the “Exchange Act”). Penny Stocks are stocks: (i) with aprice of less than five dollars per share; (ii) that are not traded on arecognized national exchange; (iii) whose prices are not quoted on theNASDAQ automated quotation system (NASDAQ listed stocks must still meetrequirement (i) above); or (iv) in issuers with net tangible assetsless than $2,000,000 (if the issuer has been in continuous operation for atleast three years) or $5,000,000 (if in continuous operation for less thanthree years) or, with average revenues of less than $6,000,000 for the lastthree years.

 

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Section 15(g)of the Exchange Act and Rule 15g-2 of the Exchange Act requirebroker-dealers dealing in penny stocks to provide potential investors with adocument disclosing the risks of penny stocks and to obtain a manually signedand dated written receipt of the document before effecting any transaction in apenny stock for the investor’s account. Potential investors in our common stockare urged to obtain and read such disclosures carefully before purchasing anyshares that are deemed to be penny stock.

 

Moreover,Rule 15g-9 of the Exchange Act requires broker-dealers in penny stocks toapprove the account of any investor for transactions in such stocks beforeselling any penny stock to that investor. This procedure requires thebroker-dealer to: (i) obtain from the investor information concerning hisor her financial situation, investment experience and investment objectives;(ii) reasonably determine, based on that information, that transaction in pennystocks are suitable for the investor and that the investor has significantknowledge and experience to be reasonably capable of evaluating the risks ofpenny stock transactions; (iii) provide the investor with a writtenstatement setting forth the basis on which the broker-dealer made thedetermination in (ii) above; and (iv) receive a signed and dated copyof such statement from such investor, confirming that it accurately reflectsthe investor’s financial situation, investment experience and investmentobjects. Compliance with these requirements may make it more difficult forinvestors in our common stock to resell the shares to third parties or tootherwise dispose of them.

 

**No dividends anticipated to be paid**.

 

We have neverpaid any cash dividends on our common stock and we do not anticipate payingcash dividends on our common stock in the future. The future payment ofdividends is directly dependent upon our future earnings, capital requirements,financial requirements and other factors to be determined by our Board ofDirectors. It is anticipated that future earnings, if any, which may begenerated from our operations will be used to finance our growth, and that cashdividends will not be paid to our stockholders.

 

**ITEM 3. CONTROLS AND PROCEDURES**

 

Asof the last day covered by this report, the Company carried out an evaluation,under the supervision and with the participation of the Company’s management,including the Company’s Chief Operating Officer who is also the Company’s ChiefFinancial Officer, of the effectiveness of the design, and operation of theCompany’s disclosure controls and procedures pursuant to Rule 13a-14 of theSecurities Exchange Act of 1934 (the “Exchange Act”).  Based upon that evaluation, the ChiefOperating Officer concluded that the Company’s disclosure controls andprocedures are effective in timely alerting him to material informationrelating to the Company (including its consolidated subsidiary) required to beincluded in the Company’s Exchange Act filings.

 

Therehas not been any change in the Company’s internal controls over financialreporting during the quarter covered by this report that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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**PARTII.  OTHER INFORMATION**

* *

**ITEM 1. LEGAL PROCEEDINGS**

* *

None.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

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

 

None.

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

**ITEM 6. EXHIBITS**

 

None.

 

 

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**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                    |   | **CENTERGISTIC SOLUTIONS, INC.**                                                    |
|-------------------------|--------|-------------------------------------------------------------------------------------|
|                    |   |                                                                                |
| Date: November 10, 2004 |   |                                                                                | /s/ Ricardo G. Brutocao |
|                    |   | Ricardo G. Brutocao,                                                                |
|                    |   | President                                                                           |
|                    |   |                                                                                |
| Date: November 10, 2004 |   |                                                                                | /s/ David M. Cunningham |
|                    |   | David M. Cunningham,                                                                |
|                    |   | Chief Operating Officer and Chief Financial  Officer (Principal Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **No.**    | ** ** | ** ** | **Description**                                                                                                           |
|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** ** | ** **                                                                                                                |
| 31.1       |       |       | Certification of CEO – Rule 13a – 14(a) or 15d –  14(a)*                                                   |
|       |       |       |                                                                                                                      |
| 31.2       |       |       | Certification of CFO – Rule 13a – 14(a) or 15d –  14(a)*                                                   |
|       |       |       |                                                                                                                      |
| 32         |       |       | Certification pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002+ |

 

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| *      |   | Filed herewith     |
|--------|--------|--------------------|
|   |   |               |
| +      |   | Furnished herewith |

 

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