**UNITED STATES**SECURITIES ANDEXCHANGE 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 OF 1934**

**For the quarterly period ended December 31, 2004**

 

**-OR-**

 

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

**For the transition period from             to             **

 

## **Commissionfile number 333-111378**

 

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**CENTERGISTICSOLUTIONS, INC.**

(Name of small business issuer as specified in its charter)

 
| **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 bySection 13 or 15(d) of the Exchange Act during the preceding twelve months ( orfor such shorter period that the issuer was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

Yes ý  No o

 

**Asof January 31, 2005, there were 10,699,312 shares of the issuer’s Common Stockoutstanding.**

** **

# ***Traditional Small Business Disclosure Format.  Yes *****o****       No ****ý**

 

 

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# **

# * *

## ****CENTERGISTICSOLUTIONS, INC.QUARTERLY REPORT ON FORM 10-QSBFOR THE PERIOD ENDED DECEMBER 31, 2004****

## ****TABLEOF CONTENTS****

## ** **

| **Part I. FINANCIAL INFORMATION**                                                | ** **   | ** **   |
|----------------------------------------------------------------------------------|--------------|--------------|
| ** **                                                                       | ** **   | ** **   |
| **Item 1. Financial Statements:**                                                | ** **   | ** **   |
| ** **                                                                       | ** **   | ** **   |
| ***Condensed  Consolidated Balance Sheet at December 31, 2004 (Unaudited)***     | *** *** | *** *** |
| *** ***                                                                     | *** *** | *** *** |
| Condensed Consolidated Statements of  Operations and Comprehensive Income (Loss) |         |         |
| For the Six and Three Months Ended December  31, 2004 and 2003 (Unaudited)       |         |         |
|                                                                             |         |         |
| Condensed Consolidated Statements of Cash  Flows                                 |         |         |
| For the Six Months Ended December 31, 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                                                                   |         |         |

 

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**CENTERGISTIC SOLUTIONS, INC.**

 

**CondensedConsolidated Balance Sheet**

 
| ** **                                                                                         | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                         | ** ** | **(Unaudited)**        | ** ** |
| **ASSETS**                                                                                         |       |                   |       |
| ** **                                                                                         |       |                   |       |
| **Current**                                                                                        |       |                   |       |
| Cash and cash equivalents                                                                          |       | $                      | 68,249     |   |
| Trade receivables, less allowance for  doubtful accounts of $55,890                                |       | 823,194                |       |
| Inventories                                                                                        |       | 200,425                |       |
| Prepaid expenses                                                                                   |       | 88,898                 |       |
| Miscellaneous receivables                                                                          |       | 29,118                 |       |
|                                                                                               |       |                   |       |
| Total current assets                                                                               |       | 1,209,884              |       |
|                                                                                               |       |                   |       |
| **Property, equipment, and lease hold improvements,** net of  accumulated depreciation of $642,783 |       | 138,405                |       |
|                                                                                               |       |                   |       |
| **Capitalized software development costs,**  net of accumulated amortization of $1,700,134         |       | 153,017                |       |
|                                                                                               |       |                   |       |
| **Other assets**                                                                                   |       |                   |       |
| Deferred offering costs                                                                            |       | 549,334                |       |
| Other                                                                                              |       | 36,693                 |       |
|                                                                                               |       |                   |       |
| Total other assets                                                                                 |       | 586,027                |       |
|                                                                                               |       |                   |       |
|                                                                                               |       | $                      | 2,087,333  |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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| ** **                                                                            | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                            | ** ** | **(Unaudited)**        | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                              | ** ** | ** **             | ** ** |
|                                                                                  |       |                   |       |
| **Current liabilities**                                                               |       |                   |       |
| Notes payables - related parties                                                      |       | $                      | 45,247     |   |
| Line of credit                                                                        |       | 150,000                |       |
| Accounts payable                                                                      |       | 461,283                |       |
| Accrued expenses                                                                      |       | 155,689                |       |
| Deferred income                                                                       |       | 240,703                |       |
|                                                                                  |       |                   |       |
| Total liabilities, all current                                                        |       | 1,052,922              |       |
|                                                                                  |       |                   |       |
| **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                                                                   |       | (2,277,657             | )          |
| Unearned stock compensation                                                           |       | (17,380                | )          |
| Common stock to be redeemed                                                           |       | (12,574                | )          |
|                                                                                  |       | 1,035,791              |       |
| Less notes receivable                                                                 |       | (1,380                 | )          |
|                                                                                  |       |                   |       |
| Total stockholders’ equity (deficit)                                             |       | 1,034,411              |       |
|                                                                                  |       |                   |       |
| Total liabilities and stockholders’ equity  (deficit)                            |       | $                      | 2,087,333  |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**CENTERGISTICSOLUTIONS, INC.**

 

**CondensedConsolidated Statements of Operations and Comprehensive Income (Loss)**

 

 
| ** **                                            | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**                      | ** ** | **(Unaudited)**                    | ** ** |
| **Revenues:**                                         |       |                                 |       |                               |       |   |   |   |   |
| Software and service revenues                         |       | $                                    | 849,366    |                               | $          | 822,329 |   | $ | 1,574,374 |   | $ | 1,476,181 |   |
| Professional services                                 |       | —                               |       | 41,240                             |       | 16,560 |   | 94,400 |   |
| Hardware sales                                        |       | 117,223                              |       | 262,359                            |       | 195,006 |   | 543,593 |   |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Total revenues                                        |       | 966,589                              |       | 1,125,928                          |       | 1,785,940 |   | 2,114,174 |   |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Cost of revenues:**                                 |       |                                 |       |                               |       |   |   |   |   |
| Software and service costs                            |       | 185,197                              |       | 140,386                            |       | 290,005 |   | 272,912 |   |
| Professional services                                 |       | —                               |       | 38,212                             |       | 4,780 |   | 81,810 |   |
| Hardware costs                                        |       | 91,237                               |       | 207,319                            |       | 163,909 |   | 395,167 |   |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Total cost of revenues                                |       | 276,434                              |       | 385,917                            |       | 458,694 |   | 749,889 |   |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Gross profit                                          |       | 690,155                              |       | 740,011                            |       | 1,327,246 |   | 1,364,285 |   |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Operating expenses:**                               |       |                                 |       |                               |       |   |   |   |   |
| Selling and marketing                                 |       | 181,593                              |       | 208,280                            |       | 363,919 |   | 402,974 |   |
| Research and development                              |       | 101,008                              |       | 119,368                            |       | 205,651 |   | 221,457 |   |
| General and administrative                            |       | 467,251                              |       | 427,857                            |       | 932,943 |   | 832,599 |   |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Total operating expenses                              |       | 749,852                              |       | 755,505                            |       | 1,502,513 |   | 1,457,030 |   |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Operating loss**                                    |       | (59,697                              | )          | (15,494                            | )          | (175,267 | ) | (92,745 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Other expense**                                     |       | (2,524                               | )          | 1,706                              |       | (4,682 | ) | (4,109 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Interest expense**                                  |       | (1,673                               | )          | (31,452                            | )          | (2,410 | ) | (129,160 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Loss before income taxes                              |       | (63,894                              | )          | (45,240                            | )          | (182,359 | ) | (226,014 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Income tax provision**                              |       | (3,200                               | )          | (3,200                             | )          | (3,200 | ) | (3,200 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Net loss**                                          |       | (67,094                              | )          | (48,440                            | )          | (185,559 | ) | (229,214 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Other comprehensive income, net of tax**            |       | —                               |       | —                             |       | — |   | 3,834 |   |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Comprehensive loss**                                |       | $                                    | (67,094    | )                                  | $          | (48,440 | ) | $ | (185,559 | ) | $ | (225,380 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Basic and diluted net loss per share                  |       | $                                    | (0.01      | )                                  | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Weighted-average number of common shares  outstanding |       | 10,619,312                           |       | 9,221,461                          |       | 10,413,813 |   | 9,214,768 |   |
|                                                       |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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#### ** **

#### **CENTERGISTIC SOLUTIONS,INC.**

#### ** **

#### **Condensed Consolidated Statements of Cash Flows**

#### ** **

| ** **                                                                              | ** ** | **Six Months Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                              | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| ** **                                                                              | ** ** | **(Unaudited)**                    | ** ** |
| **Cash flows from operating activities**                                                |       |                               |       |   |   |
| Net loss                                                                                |       | $                                  | (185,559   | ) | $ | (229,214 | ) |
|                                                                                    |       |                               |       |   |   |   |   |
| Adjustments to reconcile net loss to net  cash (used) provided by operating activities: |       |                               |       |   |   |
| Depreciation and amortization                                                           |       | 95,892                             |       | 112,687 |   |
| Provision for doubtful accounts                                                         |       | (4,310                             | )          | 20,014 |   |
| Stock compensation                                                                      |       | 3,726                              |       | 82,609 |   |
| Non-cash interest expense                                                               |       | —                             |       | 35,564 |   |
| Loss on sale of securities available for  sale                                          |       | —                             |       | 2,657 |   |
| Increase (decrease) from changes in assets  and liabilities:                            |       |                               |       |   |   |
| Trade receivables                                                                       |       | (154,765                           | )          | (127,659 | ) |
| Inventories                                                                             |       | (21,798                            | )          | (1,403 | ) |
| Prepaid expenses                                                                        |       | (12,380                            | )          | (1,500 | ) |
| Miscellaneous receivables                                                               |       | (4,959                             | )          | (56,494 | ) |
| Other assets                                                                            |       | —                             |       | (1,126 | ) |
| Patent cost                                                                             |       | —                             |       | (5,269 | ) |
| Accounts payable                                                                        |       | 47,445                             |       | 127,372 |   |
| Accrued expenses                                                                        |       | 17,292                             |       | 56,369 |   |
| Deferred income                                                                         |       | 83,321                             |       | 34,365 |   |
|                                                                                    |       |                               |       |   |   |
| Net cash (used) provided by operating  activities                                       |       | (136,095                           | )          | 48,972 |   |
| ** **                                                                              |       |                               |       |   |   |
| **Cash flows from investing activities**                                                |       |                               |       |   |   |
| Proceeds from sale of securities                                                        |       | —                             |       | 4,798 |   |
| Additions to capitalized software  development costs                                    |       | —                             |       | (11,065 | ) |
| Purchase of equipment                                                                   |       | (10,136                            | )          | (16,032 | ) |
|                                                                                    |       |                               |       |   |   |
| Net cash used by investing activities                                                   |       | (10,136                            | )          | (22,299 | ) |
|                                                                                         |            |                                    |            |  |  |  |  |  |

 

See accompanying notes to condensed consolidated financial statements.

 

6

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#### ** **

| ** **                                                | ** ** | **Six Months Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| ** **                                                | ** ** | **(Unaudited)**                   | ** ** |
| **Cash flows from financing activities**                  |       |                              |       |   |   |
| Deferred offering costs                                   |       | (81,463                           | )          | (151,002 | ) |
| Principal payments on term loan and notes  payable        |       | -                                 |       | (60,000 | ) |
| Borrowings on short-term debt                             |       | 150,000                           |       | 460,000 |   |
| Repurchase of common stock                                |       | (5,363                            | )          | (7,730 | ) |
| Payments received on note receivable                      |       | 1,460                             |       | 1,375 |   |
|                                                      |       |                              |       |   |   |
| Net cash provided by financing activities                 |       | 64,634                            |       | 242,643 |   |
|                                                      |       |                              |       |   |   |
| **Net (decrease increase in cash and cash  equivalents)** |       | (81,597                           | )          | 269,316 |   |
|                                                      |       |                              |       |   |   |
| **Cash and cash equivalents,**beginning  of period        |       | 149,846                           |       | 32,012 |   |
|                                                      |       |                              |       |   |   |
| **Cash and cash equivalents,**  end of period             |       | $                                 | 68,249     |   | $ | 301,328 |   |
|                                                      |       |                              |       |   |   |
| *Supplemental Disclosures of Cash Flow Information:*      |       |                              |       |   |   |
|                                                      |       |                              |       |   |   |
| Cash payments for:                                        |       |                              |       |   |   |
|                                                      |       |                              |       |   |   |
| Interest                                                  |       | $                                 | 10,085     |   | $ | 4,277 |   |
|                                                      |       |                              |       |   |   |
| Income tax payments                                       |       | $                                 | 3,200      |   | $ | 3,997 |   |

#### ** **

#### **See accompanying notes to condensed consolidated financialstatements.**

#### ** **

7

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#### ** **

*SupplementalDisclosures of Non-Cash Investing and Financing Activities:*

 

During the six months endedDecember 31, 2003, in conjunction with the private debt offering discussed inNote 7, a vendor converted $30,000 of accounts payable owed to a convertiblepromissory note.

 

During the six months endedDecember 31, 2003, the Company issued warrants to purchase common stock as partof a private placement of debt.  Theestimated fair value of the warrants was $12,533.  In connection with the private placement, theCompany reclassified $53,616 of deferred offering costs to debt discount asthese costs were previously incurred for a pending financing transaction.  The cost of the debt discount is beingaccreted as non-cash interest expense over the term of the notes payable.

 

During the six months endedDecember 31, 2003, the Company agreed to purchase its common stock from ashareholder (Note 4).  The Company issueda note payable for $44,200 and recorded common stock to be redeemed as anoffset to stockholders’ equity (deficit). During that period, the Company paid down the note payable and redeemeda total of $15,787 of common stock.

 

See accompanying notes to condensed consolidated financial statements.

 

8

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**CENTERGISTICSOLUTIONS, INC.**

 

**Notes to Condensed Consolidated Financial Statements**

*(Information with Respect to the Three and Six Months EndedDecember 31, 2004 and 2003 is Unaudited)*

 

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

 

CentergisticSolutions, Inc. (the “Company”) was incorporated in the State of California onMarch 10, 1972.

 

The Companyprovides integrated information distribution and reporting systems, servingboth general business and contact center environments.  The products provide critical informationthroughout the enterprise to help companies improve performance and increasepersonnel productivity.

 

AffinitecCorporation, a wholly owned subsidiary, manufacturers and distributes softwarethat enables automatic call distribution management system users to obtainsophisticated reporting and communications tools to help manage their workforce, forecast staffing requirements, and schedule their agents.

 

Substantiallyall of the remaining operations are conducted by the Company’s Mexicansubsidiary, Centergistic Solutions, S. DE R.L. DE D.V. (formerly known as AACde Latin America).  The Mexicanoperations distribute products of its parent, as well as othertelecommunications products from third parties.

 

LYA, Inc., awholly owned subsidiary, is a consulting business for call centers and thetelecommunications industry.  Theoperations of this entity were merged into that of the parent company duringfiscal year 2005, and management stopped viewing it as an operating segment.

 

# ***2.*****                                     ****Summary of Significant Accounting Policies**

# * *

*Basis of Presentation*

* *

The accompanying unaudited condensedconsolidated financial statements as of December 31, 2004 and for the three andsix month periods ended December 31, 2004 and 2003 have been prepared inaccordance with accounting principles generally accepted in the United States ofAmerica for interim financial information and in accordance with theinstructions per Item 310(b) of Regulation SB. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In the opinion of management, all adjustments, consisting of normalrecurring adjustments, considered necessary for a fair presentation have beenincluded.  Operating results for thethree and six month period ended December 31, 2004 are not necessarilyindicative of the results that may be expected for the year ending June 30,2005.  These condensed consolidatedfinancial statements and notes thereto should be read with the consolidatedfinancial statements for the year ended June 30, 2004 included in the Company’sForm 10-KSB filed with the Securities and Exchange Commission.

 

9

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# *Principlesof Consolidation*

# * *

Theaccompanying condensed consolidated financial statements as of December 31,2004 and for the three and six months ended December 31, 2004 and 2003 includethe accounts of the Company and its wholly owned subsidiaries, AffinitecCorporation (“Affinitec”), Centergistic Solutions, S. DE R.L. DE D.V. (“CentergisticSolutions - Mexico”) and LYA, Inc. (“LYA”). All significant intercompany accounts and transactions have beeneliminated.

 

*Management’s Plans / Liquidity*

* *

During the sixmonths ended December 31, 2004, the Company incurred a net loss of $185,559 andan operating loss of $175,267, which includes depreciation and amortization of$95,892, and, as of December 31, 2004, the Company had working capital of$156,962.  The Company demonstratedimproved margins during the six months ended December 31, 2004, as the marginpercentage increased to 74% from 65% in the prior period.  This was achieved on a 16% decrease inrevenue of $328,234.  The Company hasimproved margins through increased sales of software and services and reducedhardware sales.  The Company anticipatesrevenue growth through an improved economy, increased sales of new softwareproducts to our European distributor, targeted sales and marketing efforts,addition of strategically placed sales personnel.  The Company expects the increased softwaresales trend to continue this fiscal year and produce operating profitsthroughout the next fiscal year.

 

Additionally,the Company has signed a letter of intent with an underwriter for the purposeof a private placement debt/equity offering of $3,000,000 commencing in March2005.  While there is no assurance suchan offering will be successful, the Company has seen interest in the offeringin the marketplace 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.

 

On November30, 2004, the Company entered into a line of credit agreement with VentureCommunications Corporation, a shareholder and related party.  The terms of the agreement call for a maximumadvance of $300,000 secured by a lien on all the assets of the Company.   The Company believes this line of creditwill provide sufficient working capital to sustain operations through theremainder of the fiscal year.  As ofDecember 31, 2004, outstanding borrowings under the line of credit totaled$150,000 and such amounts bore interest at an annual rate of 10% per annum.

 

10

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# * *

*SegmentReporting*

 

The Companyadopted Statement of Financial Accounting Standard (“SFAS”) No. 131, “DisclosuresAbout Segment of an Enterprise and Related Information,” beginning July2003.  SFAS No. 131 establishes standardsfor the way to report information about operating segments and relateddisclosures about products and services, geographic areas, and major customersin financial statements.  As of and forthe six months ended December 31, 2004, the Company views its operations andmanages its business in two segments: Centergistic Solutions and CentergisticSolutions — Mexico. For the six months ended December 31, 2003, the Companyalso viewed LYA as a segment.

 

The followingrepresents the total assets by segment:

 
| ** **                           | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| Centergistic Solutions               |       | $                     | 4,575,234  |   |
| Centergistic Solutions – Mexico |       | 663,513               |       |
|                                 | * *   | 5,238,747             | * *   |
| Eliminations                         |       | (3,151,414)           |       |
| Total  consolidated assets           |       | $                     | 2,087,333  |   |

* *

*The following represents the revenues, gross profit and netincome (loss) by segment:*

* *
| ** **                      | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | *** *** |
|---------------------------------|------------|--------------------------------------|------------|------------------------------------|--------------|
| ** **                      | ** ** | **2004**                             | ** ** | **2003**                           | ** **   | **2004** | ** ** | **2003** | ** ** |
| Centergistic Solutions          | * *   | * *                             | * *   | * *                           | * *     | * * | * * | * * | * * |
| * *                        | * *   | * *                             | * *   | * *                           | * *     | * * | * * | * * | * * |
| Revenues                        |       | $                                    | 564,914    |                               | $            | 803,366 |   | $ | 1,130,974 |   | $ | 1,486,978 |   |
| Gross profit                    |       | $                                    | 478,456    |                               | $            | 599,102 |   | $ | 967,065 |   | $ | 1,091,863 |   |
| Net income (loss)               |       | $                                    | (121,567   | )                                  | $            | (48,991 | ) | $ | (256,454 | ) | $ | (220,781 | ) |
| * *                        | * *   | * *                             | * *   | * *                           | * *     | * * | * * | * * | * * |
| Centergistic Solutions - Mexico | * *   | * *                             | * *   | * *                           | * *     | * * | * * | * * | * * |
| * *                        | * *   | * *                             | * *   | * *                           | * *     | * * | * * | * * | * * |
| Revenues                        |       | $                                    | 401,675    |                               | $            | 281,322 |   | $ | 654,966 |   | $ | 532,796 |   |
| Gross profit                    |       | $                                    | 211,699    |                               | $            | 137,881 |   | $ | 360,181 |   | $ | 259,832 |   |
| Net income (loss)               |       | $                                    | 54,473     |                               | $            | (3,623 | ) | $ | 70,895 |   | $ | (17,688 | ) |
| * *                        | * *   | * *                             | * *   | * *                           | * *     | * * | * * | * * | * * |
| LYA                             | * *   | * *                             | * *   | * *                           | * *     | * * | * * | * * | * * |
| * *                        | * *   | * *                             | * *   | * *                           | * *     | * * | * * | * * | * * |
| Revenues                        |       | $                                    | —     |                               | $            | 41,240 |   | $ | — |   | $ | 94,400 |   |
| Gross profit                    |       | $                                    | —     |                               | $            | 3,028 |   | $ | — |   | $ | 12,590 |   |
| Net income (loss)               |       | $                                    | —     |                               | $            | 4,174 |   | $ | — |   | $ | 9,255 |   |
|                                 |            |                                      |            |                                    |              |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

11

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# * *

*Net LossPer Share*

 

In accordancewith the provisions of SFAS No. 128, “Earnings Per Share,” the Company isrequired to disclose basic and diluted earnings (loss) per share.  Basic earnings (loss) per share is computedby dividing net income (loss), by the weighted average number of common sharesoutstanding during each period.  Dilutedearnings (loss) per share is similar to basic earnings (loss) per share, exceptthat the weighted average number of common shares outstanding is increased toreflect the dilutive effect of potential common shares, such as those issuableupon the exercise of stock or warrants, as if they had been issued.

 

For allperiods presented, there is no difference between basic and diluted loss percommon share, as the effects of stock options or warrants are anti-dilutive,given the net loss applicable to common shares for each period.

 

*Concentrations*

* *

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

* *

*TheCompany maintains its cash balances at financial institutions that managementbelieves possess high-credit quality, and related cash balances are insured bythe Federal Deposit Insurance Corporation up to $100,000 and the SecuritiesInvestor Protection Corporation up to $500,000. At December 31, 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 December 31, 2004, the Company’s largest customer accounted for 8%of total trade receivables.  For each ofthe six months ended December 31, 2004 and 2003, the Company’s largest customeraccounted for 21% and 26% of total Company net revenues, respectively.  There were no other customers that exceeded10% of such amounts as of each respective period-end.*

* *

*As ofDecember 31, 2004, customers of the Company’s Mexican subsidiary accounted for38% of total trade receivables, respectively. For each of the six months ended December 31, 2004 and 2003 sales tocustomers of the Company’s Mexican subsidiary account for 37% and 25%,respectively, of total Company net revenues.*

* *

*12*

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* *

*Deferred Offering Costs*

* *

*TheCompany has engaged the services of investment bankers to assist with thepotential funding of future operations through private investors.  As of December 31, 2004, the Companycapitalized a net amount of $549,334 for these services and such are includedin the accompanying condensed consolidated balance sheets as deferred offeringcosts. During the year ended June 30, 2004, the Company completed a debtoffering (Note 7).  As part of thistransaction, the Company reclassified $53,615 from deferred offering costs to acontra-liability account.  Such amountrepresented that portion of the balance that related directly to the costs ofissuing the notes payable discussed in Note 7. The remaining capitalized deferred offering costs relate to a pendingequity transaction.  There can be noassurance that 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 areterminated.*

* *

*Accounting for 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 establishesfinancial accounting 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.*

# * *

13

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*Inaccordance with APB Opinion No. 25, the Company has incurred compensationcost aggregating $67,753 through December 31, 2004 for stock option grants, ofwhich $3,726 was recognized during the six-month periods ended December 31,2004 and 2003.  Had compensation cost forthe stock-based compensation plan been determined based on the fair value ofawards (the method described in SFAS No. 123), the reported net loss would havebeen as shown below:*

* *
| ** **                                                                                                                                           | ** ** | **Six Months  Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| Net loss, as reported                                                                                                                                |       | $                                  | (185,559   | ) | $ | (229,214 | ) |
| Add: Stock compensation expense recorded in  accordance with APB Opinion No. 25                                                                      |       | 3,726                              |       | 3,726 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all stock  options, net of related tax effects |       | (17,834                            | )          | (31,831 | ) |
| * *                                                                                                                                             | * *   | * *                           | * *   | * * | * * |
| Pro forma net loss                                                                                                                                   |       | $                                  | (199,667   | ) | $ | (257,319 | ) |
| * *                                                                                                                                             | * *   | * *                           | * *   | * * | * * |
| Pro forma net loss per share                                                                                                                         |       | $                                  | (0.02      | ) | $ | (0.02 | ) |

* *

*Thefair value of each grant is estimated at the grant date using the followingassumptions: no stock price volatility; no dividends for all years; risk-freeinterest rates of 3.25% and 2.00% for the six month periods ended December 31,2004 and 2003, respectively, and expected lives of ten years for all grants.*

 

14

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*Revenue Recognition*

* *

*TheCompany typically provides bundled software and services through a distributornetwork. Each component of a bundled solution is separately identified basedupon vendor specific objective evidence. The components of revenue are recognized as follows:*

* *

*•*                  Software license fees for site licenses and masterlicense agreements are recognized as revenue upon delivery of the software, andwhen remaining obligations are not significant. The Company’s software licensing agreement provides the customer with a90-day warranty and return provision, including a limited time to test thesoftware.  If the customer can prove thatthe software is not functioning, the Company has the opportunity to remedy theproblem and, if not resolved, the customer may return the software.  The Company considers the need for a reservefor warranty and returns on a quarterly basis; however, such occurrences havehistorically not been significant.

* *

*•*                  Advance contract payments for software services,consisting primarily of software maintenance and support, are recorded asdeferred 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 to distributors arerecognized upon delivery since title passes upon delivery.  The distributor is subject to a restockingfee of 10%-25% if an order is returned; however, historically, such returnshave been insignificant.  Special ordersare non-cancelable.

* *

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

* *

*•*                  Revenues from the sale of computer and displayhardware are recognized upon shipment, which is generally concurrent with thepassage of title.

* *

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

* *

*15*

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* *

# ***3.*****                                     ****Capitalized Software Development Costs**

# * *

*Researchand development, which includes design, development, and testing of newsoftware, software maintenance, and enhancement costs, is expensed as incurreduntil technological feasibility has been established for the product.  Technological feasibility is defined as acompletion of detail program design. Thereafter, certain costs, such as coding and testing, are capitalizeduntil the product is available for general release to customers.*

* *

*Softwarecosts are amortized on a product-by-product basis using the straight-linemethod over the remaining estimated economic life of the software product,which is typically three to five years. Actual future sales and remaining economic life of the product coulddiffer significantly from these estimates. Amortization of software costs for the six months ended December 31,2004 and 2003 was $40,916 and $62,065, respectively, and is included generaland administrative expenses in the accompanying condensed consolidatedstatements of operations and comprehensive income (loss).*

* *

*Thefollowing describes the components of capitalized software development costs asof December 31, 2004 and the related estimated lives:*

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

 

The followingsummarizes the costs capitalized by product as of December 31, 2004:

 
| CenterStats                 |     | $          | 398,998  |     |
|-----------------------------|----------|------------|----------|----------|
| AgentView (fully amortized) |     | 307,476    |     |
| Fully amortized products    |     | 1,146,677  |     |
|                        | * * | 1,853,151  | * * |
| * *                    | * * | * *   | * * |
| Accumulated amortization    |     | (1,700,134 | )        |
|                        | * * | $          | 153,017  | * * |

* *

*16*

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* *

***4.*****                                     ****Line of Credit and Notes Payable — Related Parties**

* *

*OnNovember 30, 2004, the Company entered into a line of credit agreement withVenture Communications Corporation, a shareholder and related party.  The terms of the agreement call for a maximumadvance of $300,000 secured by a lien on all the assets of the Company.Interest on the advances are payable monthly at 10% per annum.*

* *

*Advancesand unpaid interest on the line are due on July 1, 2005.  Advances on the line are personallyguaranteed in equal amounts by the President/CEO and Vice President/COO/CFO ofthe Company.  The balance of the line atDecember 31, 2004 is $150,000.*

* *

*OnDecember 31, 2002, the Company entered into two notes payable to two of itsofficers for an aggregate $24,975.  Suchnotes bear interest at 6% and the principal and interest are due and payable ondemand.  These notes are secured by allof the assets of the Company.*

* *

*InApril 2004, the Company entered into a note payable with an employee of theCompany for $5,000.  The note bearsinterest at 6% and the principal and interest are due on demand.  The note is secured by all of the assets ofthe Company.*

* *

*In July2003, the Company agreed to purchase 148,328 shares of Company common stockfrom a former employee for $44,220 and issued a secured promissory note payablein such amount.  The note bears interestat 5% per annum, and monthly payments in the amount of $2,750 are due andpayable on the note commencing after December 31, 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 December 31, 2004is $15,272.*

* *

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

* *

*ConsultingAgreement*

 

As of October1, 2003, the Company entered into an Independent Consulting Agreement (the “Agreement”)with a firm whereby the firm is to assist the Company in the listing of itsshares on a stock exchange, the sale of its business or other debt or equityfinancings.  Pursuant to the Agreement,the Company is obligated to pay a success fee of up to $37,500 in stock uponreceipt by the Company of up to $3,000,000 in aggregate financing under theterms of the Agreement.

* *

*17*

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* *

*Off-BalanceSheet Arrangement*

 

The Companyprovides indemnifications of varying scope and size to certain customersagainst claims of intellectual property infringement made by third partiesarising from the use of the Company’s products. Management evaluates estimated losses for such indemnifications underSFAS No. 5, “Accounting for Contingencies,” as interpreted by FASBInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees.”  Management considers suchfactors as the degree of probability of an unfavorable outcome and the abilityto make a reasonable estimate of the amount of the loss.  As of December 31, 2004, the Company has notencountered material costs as a result of such obligations and has not accruedany liabilities related to such indemnifications in the accompanying condensedconsolidated financial statements.

 

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

* *

*Stock Option Plans*

* *

*Thestockholders of the Company have approved the Centergistic Solutions, Inc.Incentive Stock Option Plan (the “Plan”), which provides for the issuance of upto 2,800,000 shares of its common stock. Options granted under the Plan are not exercisable until two years afterthey are issued and expire ten years after the date of issue.  The options vest at a rate of 25% per yearover a four-year period.  AtDecember 31, 2004, 320,000 shares were available for grant under the termsof this Plan.*

* *

*InJanuary 1998, the stockholders of the Company approved a nonqualified stockoption plan for the directors of the Company. The plan provides for issuance of up to 800,000 shares of its commonstock to directors.  Options are grantedbased on attendance at board meetings. At December 31, 2004, 524,800 shares were available for grant under theterms of this plan.*

* *

*Asummary of the status of the plans, and changes during the six months endedDecember 31, 2004 is as follows:*

* *
| **Fixed Options**                                                 | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Outstanding at beginningof period                                 |       | 2,418,800  |       | $                                      | .54        |   |
| Expired                                                           |       | (181,600   | )          | (.44                                   | )          |
| Granted                                                           |       | 518,000    |       | .41                                    |       |
| Outstanding at end of period                                      |       | 2,755,200  |       | $                                      | .52        |   |
|                                                              |       |       |       |                                   |       |
| Exercisable at end of period                                      |       | 1,472,000  |       | $                                      | .64        |   |
|                                                              |       |       |       |                                   |       |
| Weighted average fair value of options  granted during the period |       |       |       | $                                      | .42        |   |

* *

*18*

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* *

*Asummary of stock options outstanding at December 31, 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    |       | 1,542,400               |       | 8.52                                                |       | $ | .39 |   | 261,600 |   | $ | .40 |   |
| $0.52 to $0.79    |       | 1,212,800               |       | 3.20                                                |       | .69 |   | 1,210,400 |   | .69 |   |
|              |       |                    |       |                                                |       |   |   |   |   |   |   |
|              |       | 2,755,200               |       |                                                |       | $ | .52 |   | 1,472,000 |   | $ | .64 |   |

* *

*Common Stock Purchase Warrants*

* *

*Inconjunction with a subordinated debt financing with a related party in 1998,the Company issued warrants to purchase 480,000 shares of common stock at$0.676 per share, which are exercisable at any time prior to September2005.  All of these warrants wereoutstanding at December 31, 2004.*

* *

*Inconnection with the agreement to sell the rights to the proceeds from anoutstanding lawsuit in fiscal year 2001, the Company issued warrants (the “Fiscal2001 Warrants”) to purchase 4,528,000 shares of common stock at $0.4375 pershare, which are exercisable at any time prior to September 2005.  Pursuant to the terms of the Fiscal 2001Warrants, should the Company issue a warrant or stock option to any person orentity who is not an employee, director or consultant of the Company providingfor an exercise price of less than $0.654 per share, then the exercise price ofthe Fiscal 2001 Warrants shall be reduced to 110% of the lowest such exerciseprice (the “Anti-dilution Provision”). In accordance with the provisions of SFAS No. 123, the value of thelawsuit warrants was estimated to be $101,332. All of these warrants were outstanding as of December 31, 2004.*

* *

*19*

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* *

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

* *

*Subsequent to June 30, 2003 and through December 31,2003, the Company entered into a total of 16 Note and Warrant PurchaseAgreements (the “Agreements”).  Under theAgreements, the lenders agreed to loan the Company an aggregate $490,000($30,000 of which was issued upon conversion of accounts payable) in exchangefor convertible subordinated promissory notes (the “Notes”).  The Notes, excluding all accrued interest,were convertible into shares of common stock of the Company.  The principal amount of the Notes wereconverted at a price of $0.3975 per share effective June 15, 2004.  Interest accrued at a rate of 6% per annumand was paid in full in September 2004. The notes contained a beneficial conversion feature, the value of whichwas determined to be $8,618.  Such wasrecorded as a component of the debt discount and was accreted as non-cashinterest expense over the term of the Notes.*

* *

*In consideration for entering into the Notes, the Companyalso issued warrants (the “Notes Warrants”) entitling the note holder topurchase shares up to an aggregate of 74,016 shares of the Company’s commonstock that will be received by the note holder upon conversion of the Notesdiscussed above.  The Notes Warrants areexercisable in whole, but not in part, at any time from the date of issuance ofthe Notes Warrants and ending on August 31, 2005 at a price of $0.3975 pershare of common stock.  The Companyestimated the value of these warrants at $8,618, which was accreted as non-cashinterest expense over the term of the Notes.*

* *

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

* *

*In connection with the above-described transactions, theCompany paid, as a financial consulting fee, $20,750 in cash and issuedwarrants, exercisable at a price of $0.466 per share to purchase 44,512 sharesof common stock.  The Company estimatedthe value of the warrants 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.*

* *

*20*

----

* *

*Upon issuance of the Notes, the Company reclassified $53,615of related costs from deferred offering costs to a contra-liabilityaccount.  Such was accreted as non-cashinterest expense over the term of the Notes.*

* *

*Upon conversion of the Notes, the remaining discountrecorded was fully amortized as non-cash interest expense.*

* *

*Pursuant to the Anti-dilution Provision of the Fiscal 2001Warrants discussed in Note 6, such warrants were repriced to $0.4375 uponissuance of the Notes Warrants.  As such,the Fiscal 2001 Warrants were revalued in accordance with SFAS No. 123,resulting in additional expense of $82,609. Such amount was recorded as effective interest expense .*

* *

*On July 1, 2003, the Company also entered into twoconsulting agreements with Hanover Capital Corp. (“Hanover”) pursuant to whichthe Company agreed to pay to Hanover a monthly retainer of $5,000 for a periodof 12 months, but cancelable by either party at any time with ten days writtennotice prior 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 August 2004.*

* *

*21*

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* *

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

** **

**A NOTE ABOUT FORWARD-LOOKING STATEMENTS**

 

### **Thestatements, other than statements of historical fact, included in this reportare forward-looking statements.  Forward-looking statements generally canbe identified by the use of forward-looking terminology such as “may,” “will,” “expect,”“intend,” “estimate,” “anticipate,” “plan,” “seek,” or “believe.”  Webelieve that the 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 Future Results”section of this report.  You shouldnot unduly rely on these forward-looking statements, which speak only as of thedate of this report.  Except as required by law, we are not obligated torelease publicly any revisions to these forward-looking statements to reflectevents or circumstances occurring after the date of this report or to reflectthe 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.

 

Business performance and intelligencemanagement software uses historical and real-time data and metrics to providemanagers with visibility on the business operations in real-time. We providecall/contact center managers with powerful reporting and analytic toolsallowing the constant monitoring of the operational effectiveness andefficiency. While our current market focus is on the call/contact center, weoffer software to all operational areas of the enterprise to gauge performanceand profitable improvement. We also offer consulting, training, technicalsupport and programming services for our customers and partners.

 

Our company operates through its domesticheadquarters and our wholly-owned Mexican subsidiary located in Mexico City,Mexico. Our domestic operation sells AgentView, CenterStats, and the relatedhardware necessary to run these applications or display statistics derived fromthese applications, training and educational services, installation, customprogramming and support services.  OurLynch Young & Company Professional Services Group wound up operations in June 2004and was subsequently merged into the operations of Centergistic.

 

Centergistic Solutions, Inc., Inc. wasincorporated in Los Angeles, California on March 13, 1972. Lynch YoungInc. (dba Lynch Young & Company) was incorporated in California on October 16,1980. Centergistic Solutions, Inc. Latina America S. de R.L. de C.V., a limitedliability partnership, was formed in Mexico City, Mexico on May 19, 2000.This partnership was a successor to Centergistic Solutions, Inc. Latina AmericaS.A. de C.V., a Mexican corporation originally formed July 1, 1993.

 

Our Lynch Young & Company ProfessionalServices Group operated as a consulting firm selling consulting services to thecall/contact center market. We ended our separate operations of Lynch Young& Company in June 2004.  OurMexican subsidiary acts as a distribution company selling our AgentView andCenterStats products along with other vendor sourced products to a variety ofdistributors and end-users in Latin and South America. They also sell trainingand educational services, installation and product support packages.

 

In 2001, we completed development on our mainproduct, CenterStats. During fiscal year (“FY”) 2002 and 2003, we devoted whatlittle internally generated capital was available (approximately $100,000 ineach of these fiscal years) to actively promote, market, and sell CenterStats.The money was spent on a salesperson focusing on selling CenterStats, andvarious marketing initiatives intended to promote market awareness ofCenterStats. However, due to limited resources, we have never conducted aformal product launch and kickoff for CenterStats. In addition, during FY 2002and 2003, there has been a global economic slowdown, and particularly, adecrease in corporate spending on infrastructure and technology. These factorshave had an adverse impact on our ability to market and sell CenterStats, aswell as the results of our operations.

 

22

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We face several significant challenges commonin our industry: continued revenue growth; market segment risk; technologicalchanges; and liquidity and capital resources.

 

We face challenges in growing our revenuesbecause our CenterStats product has not been installed in a large number ofclients to date, and has not achieved wide customer acceptance due to limitedmarketing and sales activities. We are dependent upon the sale of CenterStatsto substantially grow our revenues. We have developed a sales and marketingplan to achieve this revenue growth, but need capital necessary to implementthe plan.

 

We currently sell our products and servicesinto the call/contact center market. We generally sell in two different typesof environments. In one instance, our products are part of a bundled sale atthe time of a new call/contact center purchase and installation. We aredependent on our distributors for a majority of these types of sales. In theother instance, we sell to established call/contact centers that perceive alack of data, statistics, and metrics to effectively manage and monitor theperformance of their centers. We generate revenue in this arena through bothdirect end-user sales and distribution channel sales. We face challenges thatour distributors could find new sources of this type product or even internallydevelop their own product. We also face challenges that the call/contact centermarket undergoes significant changes, restructuring, contraction, or evolutioninto different technologies.

 

We are subject to a rapidly changingtechnological environment. Our ability to keep current with the demands oftechnology is critical to our success. Each time the data flow of a particularapplication in the call/contact center changes or new applications are created,we must be able to retrieve that data. Our products must be changed also sothat we may retrieve that data. If we cannot continue to stay atop thetechnology curve, we will not be able to compete effectively in this marketspace. To combat this challenge, we have developed technology partnerships withmany of the industry application providers such as Avaya, Cisco, Concerto,Genesys, Microsoft, and Nortel to name a few. These partnerships allow us theenvironment to test our products and certify that our products work with aspecific vendor application and to get updates as their technology changes.

 

**Current Conditions**

 

In May 2003 we opened a development center inDelhi, India. We hired three developers and currently have a staff of five.India was chosen as the site of our center because of its available base ofskilled and technological competent developers and a lower cost structure. Weplan to increase the staffing level to ten upon a successful raise of capital.Primarily, these developers will develop interfaces to enable our products to workwith “best of breed” call/contact center applications. Best-of-Breed (BOB)software can be defined as the use of a specific software program or packagefor each specific application or requirement. Many companies prefer, as policy,to incorporate a Best-of-Breed software approach to make sure they are usingthe most highly developed and tested solution for each application. The Indiadevelopment center currently costs approximately $5,000 to $6,000 per month tomaintain.

 

We derive a substantial portion of ourrevenues from sales to customers in Mexico, Latin America and SouthAmerica.  For the six month periods endedDecember 31, 2004 and 2003, these customers represented approximately 37%and 25%, respectively, of our total net revenues.

 

Our revenues in these countries are derivedfrom our subsidiary, Centergistic Solutions, Inc. Latin America S. R. L. deC.V., a limited liability partnership. Its office is located in Mexico City andhouses 18 employees. This company acts primarily as a distributor, selling ourAgentView and CenterStats products along with others sourced from third partyvendors such as PC call accounting, voicemail products, data collectiondevices, and LED display boards. This company sells its products primarily tocompanies such as Avaya, Siemens and Alcatel.

 

On September 30, 2003, we completed aprivate funding round of convertible promissory notes. The gross proceedsgenerated from this raise was $490,000, the net cash received was $460,000. Theproceeds were used to begin to implement our sales and marketing plan forbringing CenterStats to the market and to pay the fees and costs associatedwith the preparation and processing of a registration statement filed with theSEC relating to a selling stockholder offering. We used $100,000 towards theimplementation of our sales and marketing strategy. The remaining $360,000 wasused as follows: $100,000 for accounting fees and related services, $100,000for consulting and advisory fees, $65,000 for principal payments of notespayable, $55,000 for legal fees, $20,000 for printing expenses (includingEDGARizing expenses) and $20,000 for general working capital.

 

On November 30, 2004, we entered into aline of credit agreement with Venture Communications Corporation, a shareholderand related party.  The terms of theagreement call for a maximum advance of $300,000 secured by a lien on all theassets of the Company.  Advances on theline are personally guaranteed in equal amounts by the President/CEO and VicePresident/COO/CFO of the Company.  Webelieve that this line of credit will provide sufficient working capital tosustain operations through the remainder of the fiscal year.

 

23

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We intend to raise up to an additional$3,000,000 in a private offering. If this raise is successful, as to whichthere is no assurance, those proceeds will be used to more fully implement oursales and marketing strategy. We intend to begin the capital raise in March 2005.This capital raise is critical to the implementation of our sales and marketingstrategy described in this report.  Ifthe raise is not successful, management has created several cost cuttingstrategies and will implement them as business conditions necessitate.

 

We must have capital to successfullyimplement our sales and marketing strategy. We are not likely to seesignificant revenue growth without the sales and marketing activities we intendto initiate with the proceeds of our intended capital raise.

 

**Critical Accounting Policies**

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities and equity and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reported period. Actual results maydiffer from these estimates under different assumptions or conditions.

 

***Revenue Recognition***

 

Our revenue recognition policy is significantbecause revenue is a key component of our results of operations. We derive ourrevenue primarily from sales of our various products. As described below,significant management judgments and estimates must be made and used inconnection with revenue recognized in any accounting period. If our managementmakes different judgments or uses different estimates, material differences mayresult in the amount and timing of our revenue for any period. We recognizerevenue from the sale of our products when: 

 

•                  we havepersuasive evidence that an arrangement exists. For all sales, we use a bindingpurchase order and sales order confirmation as evidence of an arrangement.Sales through certain of our distributors are evidenced by a master agreementgoverning the relationship, together with binding purchase orders on atransaction by transaction basis;

 

•                  the product isdelivered to the customer under the terms of the arrangement and title passes.Passage of title generally occurs when the product is delivered to a commoncarrier, but in some cases occurs when the customer receives the product;

 

•                  the revenue isfixed and determinable. At the time of the transaction, we assess whether thefee associated with our revenue transactions is fixed and determinable based onthe payment terms associated with the transaction. If a significant portion ofa fee is due after our normal payment terms, which are 30 to 75 days frominvoice date, then we account for the fee as not being fixed and determinable.In these cases, we recognize revenue as the fees become due; and

 

•                  collection ofthe resulting receivable is reasonably assured. We assess collection based on anumber of factors, including past transaction history with the customer and thecredit-worthiness of the customer. We do not request collateral from ourcustomers. If we determine that collection of a fee is not reasonably assured,then we defer the fee and recognize revenue at the time collection becomesreasonably assured, which generally is upon receipt of cash.

 

We derive revenues from licensing oursoftware products, selling computer and display hardware, and providingcustomer support, training, installation, and consulting services. Softwarelicense fees for site licenses and master license agreements are recognized asrevenue upon delivery of the software, and when remaining obligations are notsignificant. Sales to distributors are recognized upon delivery as ourdistributors generally have customer orders in hand before ordering from us.Should orders be cancelled, our distributors are subject to restocking chargesof 10%-25% except for custom orders which are non-cancelable.

 

Our software licensing agreement provides thecustomer with certain warranty provisions, including a limited time to test thesoftware. If the customer can prove the software is not functioning, we havethe opportunity to remedy the problem, and if not resolved, the customer canreturn the software. Historically, returns and warranty costs have not beensignificant.

 

Advance contract payments for services,consisting primarily of software customer support, are recorded as deferredincome until after the expiration of the software warranty period, at whichtime the revenue is recognized ratably over the term of the maintenance period.All subsequent software support is billed separately and recognized ratablyover the life of the support period.

 

Revenue from computer and display hardware isrecognized upon shipment, and consulting service revenue is recognized asservices are rendered.

 

***Allowance forDoubtful Accounts***

 

Our management estimates the uncollectabilityof our accounts receivable for losses that may result from the inability of ourcustomers to make required payments. Management specifically analyzes accountsreceivable and historical bad debts, customer

 

24

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concentrations, customer credit-worthiness, current economic trends andchanges in customer payment terms when evaluating the adequacy of the allowancefor doubtful accounts. If our customers’ financial condition deteriorates suchthat it impairs their ability to make payments to us, additional allowances maybe required. As of December 31, 2004 and June 30, 2004, our accountsreceivable balances were $823,000 and $876,000, respectively, net of ourestimated allowances for doubtful accounts of $56,000 and $36,000,respectively.

 

The accounts receivable balance decreasedduring the six month period ended December 31, 2004. The Company achievedlower revenue volumes during this period and received collections on severalolder accounts.  We do expect theaccounts receivable balance to 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 taken steps to address this trend byrequiring staged payments on these contracts when milestones are completed. Wenow typically require 25% of the contract amount due upon signing, 50 to 65%upon delivery, and the remaining balance due 30 days thereafter. We do notexpect this trend to significantly impact us as we believe revenues willcontinue to grow sufficiently to enable us to generate enough cash flow tosustain operations.

 

The accounts receivable turnover at December 31,2004 has improved to 58 days. We attribute this improvement to lower salesvolume and collection of several older invoices.  We do expect the turnover to slow down as weincrease sales of CenterStats with larger invoice amounts and longer paymentcycle.

 

***Capitalized SoftwareDevelopment Costs***

 

We account for software development costs inaccordance with Statement of Financial Accounting Standards (“SFAS”)No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased,or Otherwise Marketed.” SFAS No. 86 specifies that software developmentcosts incurred internally should be expensed as incurred until technologicalfeasibility has been established. Once technological feasibility has beenestablished, all software development costs should be capitalized until theproduct is available for general release to customers. Technologicalfeasibility is defined as a completion of detail program design. Amortizationof capitalized software costs totaled $41,000 and $62,000 for the six monthperiods ended December 31, 2004 and 2003, respectively.

 

***Long-Lived Assets***

 

During fiscal year 2003, we adopted SFASNo. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets,”which addresses significant issues relating to the implementation of SFASNo. 121 and develops a single accounting model, based on the frameworkestablished in SFAS No. 121 for long-lived assets to be disposed of bysale, whether such assets are or are not deemed to be a business. SFASNo. 144 also modifies the accounting and disclosure rules for discontinuedoperations. Implementation of such standard has not had a material effect onthe accompanying consolidated financial statements. As of December 31,2004, no such indicators of impairment were identified by management.

 

***Stock-BasedCompensation***

 

From time to time, we provide compensation inthe form of shares of our common stock as well as options or warrants toacquire shares of our common stock.

 

We derive the value of rights to acquire ourcommon stock granted to non-employees, such as options or warrants, frompricing models that consider current market and contractual prices for ourstock, as well as time value and yield curve or volatility factors. Pricingmodels and their underlying assumptions impact the amount and timing ofunrealized gains and losses we recognize, and use of different pricing modelsor assumptions could produce different financial results.

 

Options granted to employees are valued usingthe intrinsic value method which bases compensation on the difference betweenthe market value of the underlying shares of common stock and the exerciseprice at the date of grant.

 

**Results of Operations for the Six MonthsEnded December 31, 2004 as Compared to the Six Months Ended December 31,2003**

 

We believe there is some improvement in theeconomy in general and corporate infrastructure technology spending inspecific. We saw decreases in revenue in almost all lines of business this pastquarter, but expect to see improvement in our revenue as long as corporateinfrastructure technology spending remains consistent. Our biggest riskscontinue to be revenue growth, and the capital raise necessary to implement oursales and marketing strategy.

 

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***Revenues***

 
| ** **                 | ** ** | **Six Month Period Ended December 31,** | ** ** |
|----------------------------|------------|----------------------------------------------|------------|
| ** **                 | ** ** | **(In thousands)**                           | ** ** |
| ** **                 | ** ** | **2004**                                     | ** ** | **%** | ** ** | **2003** | ** ** | **%** | ** ** |
| Centergistic (U.S.)        |       | $                                            | 1,131      |   | 63.3 |   | $ | 1,487 |   | 70.3 |   |
| Mexico and  Latin America  |       | $                                            | 655        |   | 36.7 |   | $ | 533 |   | 25.2 |   |
| Lynch Young  & Company |       | $                                            | —     |   | 0.0 |   | $ | 94 |   | 4.5 |   |
| Total                      |       | $                                            | 1,786      |   | 100.0 |   | $ | 2,114 |   | 100.0 |   |

 

Total net revenues decreased by $328,000 or16% for the six month period ended December 31, 2004 (“PE 2004”) ascompared to the six month period ended December 31, 2003 (“PE 2003”).Revenues from U.S. based operations decreased by $356,000 or 24% from the PE2003. Revenues from Lynch Young & Company also decreased as compared to theprior period as we concluded our operations in this company in June 2004.  Revenues from Mexico increased by $122,000 or23% during PE 2004.

 

In the U.S. based operations, direct sales ofAgentView decreased $226,000 or 44% compared to PE 2003. The majority of thedecrease is due to one large ($150,000) purchase during PE 2003. We arestarting to see increased interest from customers requiring multiple datasources and a high number of agents. This will help our revenue in the futureas one of our AgentView products is priced on a “per agent” basis. We alsocharge additional amounts for multiple data sources. As corporateinfrastructure technology spending is increasing, we expect our revenue toincrease.

 

Distribution revenue in the U.S. dropped by$134,000 or 19% from PE 2003.  Revenuefrom our largest distributor, Dacon, fell by $175,000 or 32% from PE 2003.  We believe we will recover this shortfall aswe expect to receive our first software order for CenterStats sold to BritishTelecom in the quarter ending March 31, 2005.  We expect business from Dacon to increaseduring the next six months as we hope to see increased volume as an upgradeprogram will soon be introduced to the British Telecom (“BT”) installed base,and an expected roll out of our CenterStats product to that base as well.

 

Installation and training revenues increasedby $6,000 or 10% from PE 2003. We expect these revenues to increase as moreAgent View and CenterStats products are sold.

 

Mexico and Latin America revenues increasedby $122,000 or 23% as compared to PE 2003. The Mexican economy has stabilizedand we except this trend to continue through the remainder of the fiscal year.  We expect to see our revenues begin tosteadily improve through the remainder of our fiscal year, with an improvingtrend as the economy improves.

 

Lynch Young revenues decreased by $94,000 ascompared to PE 2003.  The drop in revenueis related to the completion of the Department of Water and Power contractduring the fiscal year ended June 30, 2004.  The revenues from PE 2003 were substantiallyderived 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 have combinedits operations with Centergistic Solutions, Inc. U.S. based operations. Thiscaused an impairment of the remaining amount of goodwill in our balance sheetof $23,600 associated with Lynch Young and such amount was written off at theconclusion of our fiscal year ended June 30, 2004 as the contractconcluded. 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 of revenues decreased to $459,000 or 26%of revenues as compared to $750,000 or 36% of revenues in PE 2003. Costsassociated with hardware and third party products sales decreased by nearly$231,000 and consulting expenses related to the Lynch Young contract withDepartment of Water and Power decreased $77,000. As a lesser portion of ourrevenue over this past six months ended December 31, 2004 was derived fromhardware sales, our costs related to hardware sales decreased accordingly. Weare at risk of hardware and third party vendors passing on price increases thatwill affect our profitability.  We expectthis trend of declining hardware revenues and costs to continue throughout thisfiscal year resulting in improved cost of revenue percentages.

 

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**Gross Profit**

 

Gross profitimproved to 74% of revenues in PE 2004, or $1,327,000, as compared to 64%, or$1,364,000, in PE 2003.  The improvementis gross profit percentage is attributable to the mix of revenue away fromhardware 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 and marketing expenses decreased$39,000 or 10% as compared to PE 2003. We spent less on commissions due to thedecreased sales volume.  Commissionexpense was lower by $47,000 due to the lower sales volume, trade show expenseswere lower by $16,000, and travel expenses were lower by $8,000.  This decrease was offset by increases inadvertising ($19,000) and sales salaries ($15,000).  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 strategy will continue to slowly fund oursales and marketing programs by investing any cash generated by operations.Absent any outside funding, we will continue this process for the foreseeablefuture. However, we are planning to raise capital through the financingcontemplated to begin in March 2005, and will use the funds to hire salesand marketing professionals, development staff, and implement marketingprograms for CenterStats. We plan to hire up to 10 sales professionals and upto 10 developers. If we are not successful in raising the capital, we willreduce our planned hires to the level that can be sustained from our existingoperational cash flow.

 

*General and Administrative*

 

General and administrative expenses increasedby $100,000 or 12% as compared to PE 2003. Our telephone expense increased by$6,000 due to a refund received in PE 2003 for prior overcharging.  Salaries increased by $60,000 due to addingan operations management position and some administrative help in Mexico.  Fringe benefits (insurance and payrollrelated costs) increased by $11,000. Rent increased by $6,000. Professional fees also increased by $16,000 due to our public reportingcompany status.

 

We anticipate general and administrativeexpenses to increase as we add staff. As a result of obtaining public reportingcompany status, our professional fees in upcoming fiscal years are expected togreatly increase. We anticipate general and administrative costs to increase by$100,000 to $150,000 per year due to increased professional fees, director andofficer liability insurance, and increased employee benefit costs.

 

*Research and Development*

 

Research and development expenses decreasedby $15,000 or 7% over the same period as last year primarily due to decreaseduse of an outside consultant ($9,000) and decreased travel to India this fiscalyear ($6,000) as the office was set up last year.  The costs for running this office averaged$4,000 a month for the PE 2003 as we ramped up to a staff of five. We saw themonthly cost grow to approximately $5,000 per month during PE 2004.  By the end of our fiscal year in June 2005,we expect these costs to rise to approximately $7,000 per month.

 

We plan to increase the staffing level to tenupon a successful raise of additional capital. Primarily, these developers willdevelop interfaces to enable our products to work with “best of breed”call/contact center applications.

 

**Other (Expense) Income**

 

The interest expense during PE 2003 wasrelated to interest on the convertible debt, amortization of the debt issuancecosts and beneficial conversion feature, and repricing of certain existingwarrants.  This expense will decrease asthe warrant repricing was a one-time occurrence, certain debt was converted tocommon stock, and the debt issuance costs and beneficial conversion featurewere fully amortized by June 2004. We had minimal interest expense during PE 2004, but did incur approximately$7,000 in exchange rate losses from funds in Mexico and the U.K.   In November 2004, we entered into a newcredit facility with a related party, and accordingly, we expect interestexpense to increase in future quarters.

 

**Net Income(Loss)**

 

Net loss decreased to $186,000 as compared to$225,000 in PE 2003, a $39,000 or 18% improvement. The improvement wasprimarily due to a decrease in interest expense offset by lower revenue levelsachieved in the quarter.

 

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We anticipated generating an operating lossgiven that we planned to invest any excess cash flow back into operationsthrough increased sales and marketing and development expenditures.

 

**Liquidity and Capital Resources**

 

Prior to fiscal year 2003, we were primarilyfinanced through cash flow from operations, sale of company assets, and to alesser extent, limited bank financing. During PE 2003, we receivedapproximately $25,000 in loans from officers and gross proceeds of $490,000through a private offering of convertible subordinated debt. We used theproceeds from the convertible debt to primarily fund the legal, accounting, andpromotion fees associated with our attempted capital raise, and spent $100,000to fund sales and marketing programs.

 

Net cash used in operating activities was$136,000 in PE 2004 and net cash of $49.000 was provided in PE 2003. The netcash used for operations in PE 2004 was comprised primarily of loss fromoperations of $186,000 offset by depreciation and amortization of $96,000, anda net decrease from changes in assets and liabilities of $46,000.  The net cash provided from operations in PE2003 was comprised primarily of the loss from operations of $229,000 offset bynon-cash interest expenses of $35,000, depreciation and amortization of$113,000, repricing of warrants of $90,000 and a net increase from changes inassets and liabilities of $24,000.

 

Net cash from investing activities used$10,000 in PE 2004 as compared to a use of $22,000 in PE 2003. The cash used inboth period ends were primarily due to purchase of fixed assets.

 

Net cash provided from financing activitieswas $65,000 in PE 2004 as compared to $243,000 in PE 2003.  The amount provided in PE 2004 was primarilydue to borrowings of $150,000 offset by additions to deferred offering costs of$81,000.  The PE 2003 amount came from anet $460,000 in borrowings (which were subsequently converted to equity)partially offset by a pay down of $60,000 in debt and deferred offering costsof $151,000.

 

We had working capital of $157,000 at December 31,2004.

 

In March 2002, we received two loansfrom our officers and directors, Ricardo Brutocao and David Cunningham. Thetotal of these two loans is $24,975. The loans are payable on demand and bearinterest at 6%. As of December 31, 2004, the balance of these loans is$24,975.

 

In July 2003, we agreed to purchase148,328 shares of our common stock from Al Wild, a former employee, for $44,220and issued our secured promissory note payable to Mr. Wild in such amount.Our note bears interest at the rate of 5% per annum, and 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.

 

In November 2003, we entered into a lineof credit agreement with Venture Communications Corporation, a shareholder andrelated party.  The agreement calls for amaximum advance of $300,000 secured by a lien on all the assets of the Company.  The balance of this line at December 31,2004 was $150,000.

 

As of December 31, 2004, including theresults of operations for the six months then ended, our working capitaldecreased to $157,000. We believe that we will be able to convert this working capital,along with the advances available under our line of credit, into the cashnecessary to continue operations for the balance of fiscal year 2005.

 

We intend to raise up to an additional$3,000,000 in a private offering tentatively commencing in March 2005.  We intend to begin the capital raiseapproximately 30 days after our stock commences trading on the OTC BulletinBoard.  If this raise is successful, asto which there is no assurance, we intend to use the proceeds to add salesmanagement and staff, conduct a marketing launch of CenterStats, form strategicpartnerships with consulting organizations such as Accenture, EDS, IBM GlobalServices and Perot Systems, and heavily advertise and promote our products andservices during our next two fiscal years. As of the date of this filing, wehave not entered into any agreement or had any material discussions with anysuch consulting organizations regarding the formation of a strategicpartnership.

 

We face the risk that we will not be able toraise the necessary capital to fully fund our sales and marketing plan. If weare not successful on our $3,000,000 capital raise, we will have to scale backour plans for the future. This will impact our future revenue growth andprofitability.

 

If the capital raise is not successful, wewill reduce our planned hires to the level that can be sustained from ourexisting operational cash flow. We will also scale back our future productlaunch and marketing of CenterStats to the level that they will be

 

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funded by operational cash flow. We will also implement, necessitated on business conditions, severalcost cutting strategies identified by management.

 

We have entered into consulting agreementswith Hanover Capital and The Bosphorous Group. These consultants were hired toact as financial advisors. Hanover received 350,000 shares of our common stockfor achieving certain milestones. The Bosphorous Group agreement calls paymentof a success fee upon completion of certain financing transactions.

 

We currently have not entered into anyagreements nor are we currently in discussions with any potential merger oracquisition candidate. However, we intend to pursue an acquisition strategyupon successful completion of a capital raise and the listing of our stock onthe OTC Bulletin Board. As we believe our current market space has a number ofrelatively small companies, our strategy will be to increase market share,customer base, and technology by acquiring these companies. We also believethat acquiring certain key distributors, thereby securing our sales channels,makes sound business sense. We may possibly seek to acquire one or moredistributors in the future.

 

**Results of Operations for the Three MonthsEnded December 31, 2004 as Compared to the Three Months Ended December 31,2003**

 

We believe there is some improvement in theeconomy in general and corporate infrastructure technology spending inspecific. We saw decreases in revenue in almost all lines of business this pastquarter, but expect to see improvement in our revenue as long as corporateinfrastructure technology spending remains consistent. Our biggest riskscontinue to be revenue growth, and the capital raise necessary to implement oursales and marketing strategy.

 

***Revenues***

 
| ** **                 | ** ** | **Three Month Period Ended December 31,** | ** ** |
|----------------------------|------------|------------------------------------------------|------------|
| ** **                 | ** ** | **(In thousands)**                             | ** ** |
| ** **                 | ** ** | **2004**                                       | ** ** | **%** | ** ** | **2003** | ** ** | **%** | ** ** |
|                       |       |                                           |       |
| Centergistic (U.S.)        |       | $                                              | 565        |   | 58.4 |   | $ | 804 |   | 71.1 |   |
| Mexico and  Latin America  |       | $                                              | 402        |   | 41.6 |   | $ | 281 |   | 25.3 |   |
| Lynch Young  & Company |       | $                                              | —     |   | 0.0 |   | $ | 41 |   | 3.6 |   |
| Total                      |       | $                                              | 967        |   | 100.0 |   | $ | 1,126 |   | 100.0 |   |

 

Total net revenues decreased by $159,000 or14% for the three month period ended December 31, 2004 (“PE 2004”) ascompared to the three month period ended December 31, 2003 (“PE 2003”).Revenues from U.S. based operations decreased by $235,000 or 29% from the PE2003. Revenues from Lynch Young & Company also decreased as compared to theprior period as we concluded our operations in this company in June 2004.  Revenues from Mexico increased by $122,000 or23% during PE 2004.

 

In the U.S. based operations, direct sales ofAgentView decreased $120,000 or 42% compared to PE 2003. The decrease is due toone large ($150,000) purchase during PE 2003. We are starting to see increasedinterest from customers requiring multiple data sources and a high number ofagents. This will help our revenue in the future as one of our AgentViewproducts is priced on a “per agent” basis. We also charge additional amountsfor multiple data sources. As corporate infrastructure technology spending isincreasing, we expect our revenue to increase.

 

Distribution revenue in the U.S. dropped by$73,000 or 22% from PE 2003.  Revenuefrom our largest distributor, Dacon, fell by $125,000 or 37% from PE 2003.  We believe we will recover this shortfall aswe expect to receive our first software order for CenterStats sold to BritishTelecom in the quarter ending March 31, 2005.  We expect business from Dacon to increaseduring the next six months as we hope to see increased volume as an upgradeprogram will soon be introduced to the British Telecom (“BT”) installed base,and an expected roll out of our CenterStats product to that base as well.

 

Installation and training revenues decreasedby $9,000 or 20% from PE 2003 due to the decreased sales of AgentView andCenterStats. We expect these revenues to increase as more Agent View andCenterStats products are sold.

 

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Mexico and Latin America revenues increasedby $117,000 or 41% as compared to PE 2003. The Mexican economy has stabilizedand we except this trend to continue through the remainder of the fiscalyear.  We expect to see our revenuesbegin to steadily improve through the remainder of our fiscal year, with animproving trend as the economy improves.

 

Lynch Young revenues decreased by $41,000 ascompared to PE 2003.  The drop in revenueis related to the completion of the Department of Water and Power contractduring the fiscal year ended June 30, 2004.  The revenues from PE 2003 were substantiallyderived 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 have combined itsoperations with Centergistic Solutions, Inc. U.S. based operations. This causedan 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 contractconcluded. 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 of revenues decreased to $276,000 or 29%of revenues as compared to $386,000 or 34% of revenues in PE 2003. Costsassociated with hardware and third party products sales decreased by $116,000and consulting expenses related to the Lynch Young contract with Department ofWater and Power decreased $38,000. As a lesser portion of our revenue over thispast three months ended December 31, 2004 was derived from hardware sales,our costs related to hardware sales decreased accordingly. We are at risk ofhardware and third party vendors passing on price increases that will affectour profitability.  We expect this trendof declining hardware revenues and costs to continue throughout this fiscalyear resulting in improved cost of revenue percentages.

 

**Gross Profit**

 

Gross profitimproved to 71% of revenues in PE 2004, or $690,000, as compared to 66%, or$740,000, in PE 2003.  The improvement isgross profit percentage is attributable to the mix of revenue away fromhardware 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 and marketing expenses decreased$26,000 or 13% as compared to PE 2003. We spent less on commissions due to thedecreased sales volume.  Commissionexpense was lower by $23,000 due to the lower sales volume, trade show expenseswere reduced by $10,000, and travel expenses were lower by $4,000.  This decrease was offset by increases inadvertising ($13,000).  We face the riskof not having the necessary capital ($3,000,000) to fully implement our salesand marketing strategy next fiscal year. If we do not receive the capital, wewill scale back our implementation of the sales and marketing strategy, andthis will adversely affect our revenue and profitability in our future fiscalperiods.

 

Our strategy will continue to slowly fund oursales and marketing programs by investing any cash generated by operations.Absent any outside funding, we will continue this process for the foreseeablefuture. However, we are planning to raise capital through the financingcontemplated to begin in March 2005, and will use the funds to hire salesand marketing professionals, development staff, and implement marketingprograms for CenterStats. We plan to hire up to 10 sales professionals and upto 10 developers. If we are not successful in raising the capital, we willreduce our planned hires to the level that can be sustained from our existingoperational cash flow.

 

*General and Administrative*

 

General and administrative expenses increasedby $39,000 or 9% as compared to PE 2003. We increased depreciation andamortization by $7,000.  Our telephoneexpense increased by $17,000 due to a refund received in PE 2003 for priorovercharging.   Professional fees alsoincreased by $14,000 due to our public reporting company status.

 

We anticipate general and administrativeexpenses to increase as we add staff. As a result of obtaining public reportingcompany status, our professional fees in upcoming fiscal years are expected togreatly increase. We anticipate general and administrative costs to increase by$100,000 to $150,000 per year due to increased professional fees, director andofficer liability insurance, and increased employee benefit costs.

 

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*Research and Development*

 

Research and development expenses decreasedby $19,000 or 16% over the same period as last year primarily due to opening ourdevelopment center in India in May 2003. Salaries decreased by $6,000 due tothe reduction of one head in the U.S., travel costs decreased by $7,000 due tonot traveling to India as frequently, and the elimination of an outsidecontractor ($8,000).  We saw the monthlycost of maintaining the India center grow to approximately $5,000 per monthduring PE 2004.  By the end of our fiscalyear in June 2005, we expect these costs to rise to approximately $7,000per month.

 

We plan to increase the staffing level to tenupon a successful raise of additional capital. Primarily, these developers willdevelop interfaces to enable our products to work with “best of breed”call/contact center applications.

 

**Other (Expense) Income**

 

The interest expense during PE 2003 wasrelated to interest on the convertible debt, amortization of the debt issuancecosts and beneficial conversion feature. This expense will decrease as certain debt was converted to commonstock, and the debt issuance costs and beneficial conversion feature were fullyamortized by June 2004.  We hadminimal interest expense during PE 2004, but did incur approximately $2,000 inexchange rate losses from funds in Mexico and the U.K.  In November 2004, we entered into a newcredit facility with a related party, and accordingly, we expect interestexpense to increase in future quarters.

 

**Net Income(Loss)**

 

Net loss increased to $67,000 as compared to$45,000 in PE 2003, a $22,000 or 49% increase. The increase was primarily dueto lower revenue levels achieved in the quarter.

 

We anticipated generating an operating lossgiven that we planned to invest any excess cash flow back into operationsthrough increased sales and marketing and development expenditures.

 

**Factors That May Affect Future Results**

 

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

 

We incurred a net loss of $186,000 during the six months ended December 31,2004, and as of such date our accumulated deficit was $2,278,000.  We expect that our operating expenses willincrease significantly as we continue to expand our business. As a result, wewill need to generate significantly more revenues from sales of our CenterStatsproduct to achieve profitability. We have a limited operating history with ourCenterStats product and we are not able to estimate when, if ever, our revenueswill increase sufficiently to cover these expenses. We cannot assure you thatour revenue will grow in the future or that additional capital will be made availableto us. If revenues grow slower than we anticipate, or if operating expensesexceed our expectations or cannot be reduced accordingly, or if we cannotobtain additional capital, our business, operating results and financialcondition will be materially and adversely affected, which could cause ourinvestors to lose all or part of their investment in our common stock.

 

**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. Ourmarketing efforts to date have been very limited because we lack sufficientcapital to implement our sales and marketing strategy. Revenues for the sixmonth periods ended December 31, 2004 and 2003 were $1,786,000 and$2,114,000, 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 factors including competitive pressures ortechnological advances by others, our business, operating results and financialcondition will be materially and adversely affected.

 

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**We need additional capital to implement ourcurrent business strategy, which may not be available to us, and if we raiseadditional capital, it may dilute our investor’s, ownership in us.**

 

We believe that the proceeds of ouranticipated private placement offering, together with cash generated fromoperations, will be sufficient to meet our anticipated needs for businessexpansion, capital expenditures, working capital and general corporate purposesfor the foreseeable future, but no less than a period of 12 months after thedate of this report.  Thereafter, we mayneed to raise additional funds.

 

If additional funds are raised through theissuance of equity or convertible debt securities, the percentage ownership ofour shareholders will be reduced, shareholders may experience additionaldilution and such securities may have rights, preferences and privileges seniorto those of the Common Stock and may have covenants which impose restrictionson our operations.  There can be noassurance that any necessary additional financing will be available on termsfavorable to us or at all.  If adequatefunds are not available or are not available on acceptable terms, we may not beable to fund our marketing needs or expansion, to take advantage ofunanticipated acquisition opportunities, to develop or enhance services orproducts or to respond to competitive pressures.  This inability could have a material adverseeffect on our value, prospects, business, results of operations and financialcondition.

 

**Our quarterly operating results, revenues andexpenses may fluctuate significantly which could have an adverse effect on themarket price of our common stock.**

 

Our operating results, revenues and expensesmay fluctuate significantly from quarter to quarter due to a variety of factorsincluding:

 

•                  marketacceptance of our CenterStats product,

 

•                  the timing, sizeand execution of orders and shipments,

 

•                  lengthy andunpredictable sales cycles,

 

•                  the timing ofintroduction and market acceptance of new products or product enhancements byus or our competitors,

 

•                  Product andprice competition,

 

•                  the relativeproportions of revenues derived from license fees and services,

 

•                  Changes in ouroperating expenses,

 

•                  our success inincreasing our direct sales force,

 

•                  our success inmaintaining relationships with our third-party distributors and adding newones, and

 

•                  fluctuations ingeneral economic conditions.

 

We believe that period-to period comparisonsof our results of operations are not a good indication of future performance.There can be no assurance that future revenues and results of operations willnot vary substantially. It is also possible that in future quarters; ouroperating results will be below the expectations of public market analysts andinvestors. In that event, the trading price of our common stock may fall.

 

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

 

We sell a substantial portion of our productsto Dacon PLC, which is based in the United Kingdom and has been a distributorof our products for the past 12 years. For the six month periods ended December 31, 2004 and 2003, Daconaccounted for 21% and 26%, respectively, of net revenues, and 8% of total tradereceivables as of December 31, 2004. The loss of Dacon PLC as a customerwould have a material adverse effect on our business, operating results andfinancial condition.

 

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**We face risks associated with operations inMexico, Latin America and South America which could adversely affect ourbusiness, operating results and financial condition.**

 

We derive a substantial portion of ourrevenues from sales to customers in Mexico, Latin America and SouthAmerica.  For the six month periods endedDecember 31, 2004 and 2003, these customers represented approximately 37%and 25%, respectively, of our total net revenues.

 

We face certain risks inherent in conductingbusiness internationally, and such specific risks in Mexico, Latin America andSouth America as languages and cultural differences, legal and governmentalregulatory requirements and potential political and economic unrest. Any ofthese factors could seriously harm our ability to generate future revenues fromthese customers, and, consequently, our business, operating results andfinancial condition.

 

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

 

The market for our products and services isintensely competitive and subject to technological change. Competitors vary insize and in the scope and breadth of the products and services they offer. Weencounter competition from a number of sources, all of which offer performancemanagement reporting systems to the call/contact center market. We expectadditional competition from other established and emerging companies as themarket for performance management reporting solutions and complementaryproducts continues to develop and expand. We encounter competition in theUnited States from a number of sources, including Symon and Innova, all ofwhich offer performance management reporting systems to the call/contact centermarket. Some of our current and many of our potential competitors have longeroperating histories, greater name recognition, larger client bases andsignificantly greater financial, engineering, technical, marketing and otherresources than we do. As a result, these companies may be able to respond morequickly to new or emerging technologies and changes in customer demands or todevote greater resources to the development, promotion and sale of theirproducts than we can.

 

In addition, current potential competitorshave established or may establish cooperative relationships among themselves orwith third parties to increase the ability of their products to address theneeds of our prospective customers. Accordingly, it is possible that newcompetitors or alliances among competitors may emerge and acquire significantmarket share. We expect that the call/contact center market will continue toattract new competitors and new technologies, possibly involving alternativetechnologies that are more sophisticated and cost-effective than ourtechnology. New product introductions by our competitors could cause a declinein sales, a reduction in the sales price, or a loss of market acceptance of ourexisting products. There can be no assurance that we will be able to competesuccessfully against current or future competitors or that competitivepressures faced by us will not materially adversely affect our business,financial condition and results of operations.

 

**We rely in part, on third-party distributorsto market and distribute our products, and their failure to do so successfullycould significantly harm our ability to maintain and expand our customer base,which would adversely affect our operating results and financial condition.**

 

Our sales and marketing strategy includeschannels of third party distributors. We have developed a number of theserelationships and intend to develop new ones. Our inability to attract newdistributors or their inability to penetrate their respective market segmentsor the loss of any of our third-party distributors as a result of competitiveproducts offered by other companies, or products similar to ours that aredeveloped internally by them or otherwise, could harm our ability to maintainand expand our customer base. Our ability to achieve revenue growth in thefuture will depend in part on our success in developing and maintainingsuccessful relationships with these third-party distributors. If we are unableto develop or maintain our relationships with these third-party distributors,our operating results and financial condition will suffer.

 

**We must increase our direct sales force tosell our products, and if we are unable to hire and train new sales personnel,our future growth will be impaired.**

 

Our direct sales force currently consists ofthree persons. Our sales and marketing strategy includes increasing the levelof direct sales. Our ability to achieve revenue growth in the future willdepend on our ability to recruit, train, and retain qualified direct salespersonnel. If we are not able to obtain additional capital, we will not be ableto increase the size of our direct sales force. Even if we are successful inobtaining additional capital, there is no assurance that we will be successfulin recruiting and retaining qualified sales personnel. Our inability toincrease the size and productivity of our direct sales force could impair ourgrowth and adversely affect our operating results and financial condition.

 

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**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 is characterized by rapidlychanging technologies, frequent new product and service introductions andevolving industry standards. The introduction of products embodying newtechnologies and the emergence of new industry standards can render ourexisting products obsolete and unmarketable in short periods of time. We expectnew products and services, and enhancements to existing products and servicesto continue to be developed and introduced by others, which will compete with,and reduce the demand for, our products and services. Our future success willdepend, in part, on our ability to enhance the performance features andreliability of our current products and introduce new products that keep pacewith technological developments and emerging industry standards and to addressthe increasingly sophisticated needs of our customers. We may have to raiseadditional capital to successfully improve the features and reliability of ourproducts and services. We may not be able to obtain the capital or obtain it onterms acceptable to us. There can be no assurance that we will be successful indeveloping, marketing and selling new products or product enhancements thatmeet these changing demands, that we will not experience difficulties thatcould delay or prevent the successful development, introduction and marketingof these products or that our new products and product enhancements willadequately meet the demands of the marketplace and achieve market acceptance.

 

**We may lose sales, or sales may be delayed,due to the long sales cycle for our products, which would reduce our revenues.**

 

Our customers generally involve many peoplein the decision to purchase our products and consulting and other services. Asa result, we may wait many months before a sale can actually be completed.During this long sales cycle, events may occur that affect the size or timingof the order or even cause it to be canceled. For example, our competitors mayintroduce new products, or the customer’s own budget and purchasing prioritiesmay change. If these events were to occur, sales of our products may becancelled or delayed, which would reduce our revenues.

 

**If we do not retain our senior management andother key employees, we may not be able to successfully implement our businessstrategy.**

 

Our future success depends to a significantextent on the continued services of our senior management, particularly,Ricardo Brutocao, Chief Executive Officer, and David Cunningham, ChiefOperating and Financial Officer, and other key personnel, particularly, RamaIyer, Vice President, Technology and Product Management. The loss of theservices of any of these persons could have a material adverse effect on ourbusiness, results of operations and financial condition. We have no employmentagreements with Mr. Cunningham or Mr. Iyer. We do not maintain “keyperson” life insurance for any of our personnel at this time but may decide toin the future. Competition for qualified personnel in our industry is intenseand we compete for these personnel with other companies that have greaterfinancial and other resources than we do. Our future success will depend inlarge part upon on our ability to attract, retain and motivate highly qualifiedpersonnel, and there can be no assurance that we will be able to do so. If wehave any difficulty in hiring needed qualified personnel, our business,financial condition and results of operations could be materially adverselyaffected.

 

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

 

While the Company as a whole is not dependentupon the telecommunications industry, our AgentView legacy products aresubstantially positioned in the sector. Our business would be adverselyaffected to the extent that the telecommunications industry continues tocontract through consolidation and advances in technology, or does not achievesustainable growth particularly usage by companies who use multiple softwareapplications. A number of factors may inhibit the telecommunications industry’sgrowth, including:

 

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

 

•                  competitiveconcerns centered around large-scale price cutting;

 

•                  reluctance ofindustry companies to place purchase orders for capital expenditures; and

 

•                  lack ofincreasing customer demand for premium and high-speed services.

 

If these conditions continue to occur in thefuture, the telecommunications industry, as well as the purchase of our productsby 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 a combination of trademarks,copyrights, trade secret laws and contractual provisions to protect ourintellectual rights. We also have a patent pending for an informationmanagement system. We cannot assure our investors that our patent applicationwill result in any patent being issued to us or, if issued, that any patent claimswill be of sufficient scope or strength to provide any meaningful protection orany competitive advantage to us. There can be no assurance that theseprotections will be adequate to prevent our competitors from misappropriatingour technology or that our competitors will not independently developtechnologies that are

 

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substantially equivalent or superior to our technology. To protect ourtrade secrets and other proprietary information, we require employees,consultants and others to enter into confidentiality agreements. We cannotassure our investors that these agreements will provide meaningful protectionfor our trade secrets, know-how or other proprietary information in the eventof any unauthorized use, misappropriation or disclosure of such trade secrets,know-how or other proprietary information.

 

**If we are found to infringe the proprietaryrights of others, we could be required to redesign our products, pay royaltiesor enter into license agreements with third parties.**

 

Although we have never been the subject of amaterial intellectual property dispute, there can be no assurance that a thirdparty will not assert that our technology violates its intellectual propertyrights in the future. As the number of software products in our target marketincreases and the functionality of these products further overlap, we believethat software developers may become increasingly subject to infringementclaims. Any claims, whether with or without merit, could: 

 

•                  be expensive andtime consuming to defend,

 

•                  cause us tocease making, licensing or using products that incorporate the challengedintellectual property,

 

•                  require us toredesign our products, if feasible,

 

•                  divertmanagement’s attention and resources, and

 

•                  require us toenter into royalty or licensing agreements in order to obtain the right to usenecessary technologies.

 

There can be no assurance that third partieswill not assert infringement claims against us in the future with respect toour current or future products or that any such assertion will not require usto enter into royalty arrangements (if available) or litigation that could becostly to us.

 

**A large percentage of our stock is owned byrelatively few people, including officers and directors, and their interest maybe different from and conflict with yours.**

 

As of December 31, 2004 our officers anddirectors beneficially owned a total of 11,625,808 shares (includingshares issuable upon exercise of options, warrants or convertible securitiesbeneficially owned by them that are exercisable or convertible within60 days after December 31, 2004), or approximately 70% of ouroutstanding common stock.  You may besubject to certain risks due to the concentrated ownership of our common stock.For example, these stockholders, if acting together, would be able to influenceor control matters requiring approval by our stockholders, including theelection of directors and the approval of mergers, acquisitions or otherextraordinary transactions. They may also have interests that differ from yoursand may vote in a way with which you disagree and which may be adverse to yourinterests. The concentration of ownership may have the effect of delaying,preventing or deterring a change of control of our company, could deprive ourstockholders of an opportunity to receive a premium for their common stock aspart of a sale of our company and might ultimately affect the market price ofour common stock.

 

**Future sales of shares of our common stockwhich are eligible for sale by our stockholders may decrease the price of ourcommon stock.**

 

We had 10,699,312 shares of common stockoutstanding on December 31, 2004. All of these shares are “restrictedsecurities” under Rule 144 of the Securities Act of 1933. An additional7,881,728 shares underlying options and warrants outstanding on December 31,2004 will be restricted securities if and when they are issued. Restrictedsecurities may be sold only if they are registered under the Securities Act orif an exemption from the registration requirements of the Securities Act isavailable. Generally, stockholders may sell restricted securities withoutregistration after holding them for one year and subject to certain volumelimitations. Actual sales or the prospect of sales by our present stockholdersor by future holders of restricted securities, pursuant to a registrationstatement, under Rule 144, or otherwise, may, in the future, have adepressive effect on the market price of our common stock. A decline in the priceof shares of our common stock might impede our ability to raise capital throughthe issuance of additional shares of our common stock or other equitysecurities.

 

**There is no market for our common stock andwe cannot assure you that a market will develop or what the market price of ourcommon stock will be.**

 

Although our common stock has not yet beguntrading in the over-the-counter market on the OTC Electronic Bulletin Board, weexpect, but can give no assurance, that trading will commence by the end of March 2005.If an active trading market does not develop or is not sustained, it may bedifficult for you to sell your shares of common stock at an attractive price orat all. We cannot predict the

 

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prices at which our common stock will trade. It is possible that infuture quarters our operating results may be below the expectations of publicmarket analysts and investors and, as a result of these and other factors, theprice of our common stock may decline.

 

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

 

If a market ever develops for our commonstock, our common stock will be deemed to be penny stock as that term isdefined in Rule 3a51-1 of the Securities Exchange Act of 1934 (the “ExchangeAct”). Penny Stocks are stocks: (i) with a price of less than five dollarsper share; (ii) that are not traded on a recognized national exchange;(iii) whose prices are not quoted on the NASDAQ automated quotation system(NASDAQ listed stocks must still meet requirement (i) above); or(iv) in issuers with net tangible assets less than $2,000,000 (if theissuer has been in continuous operation for at least three years) or $5,000,000(if in continuous operation for less than three years) or, with averagerevenues of less than $6,000,000 for the last three years.

 

Section 15(g) of the Exchange Act andRule 15g-2 of the Exchange Act require broker-dealers dealing in pennystocks to provide potential investors with a document disclosing the risks ofpenny stocks and to obtain a manually signed and dated written receipt of thedocument before effecting any transaction in a penny stock for the investor’saccount. Potential investors in our common stock are urged to obtain and readsuch disclosures carefully before purchasing any shares that are deemed to bepenny stock.

 

Moreover, Rule 15g-9 of the Exchange Actrequires broker-dealers in penny stocks to approve the account of any investorfor transactions in such stocks before selling any penny stock to thatinvestor. This procedure requires the broker-dealer to: (i) obtain fromthe investor information concerning his or her financial situation, investmentexperience and investment objectives; (ii) reasonably determine, based on thatinformation, that transaction in penny stocks are suitable for the investor andthat the investor has significant knowledge and experience to be reasonablycapable of evaluating the risks of penny stock transactions; (iii) providethe investor with a written statement setting forth the basis on which thebroker-dealer made the determination in (ii) above; and (iv) receivea signed and dated copy of such statement from such investor, confirming thatit accurately reflects the investor’s financial situation, investmentexperience and investment objects. Compliance with these requirements may makeit more difficult for investors in our common stock to resell the shares tothird parties or to otherwise dispose of them.

 

**No dividends anticipated to be paid**.

 

We have never paid any cash dividends on ourcommon stock and we do not anticipate paying cash dividends on our common stockin the future. The future payment of dividends is directly dependent upon ourfuture earnings, capital requirements, financial requirements and other factorsto be determined by our Board of Directors. It is anticipated that futureearnings, if any, which may be generated from our operations will be used tofinance our growth, and that cash dividends will not be paid to ourstockholders.

 

**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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**PART II. OTHER INFORMATION**

 

***ITEM 1.  LEGAL PROCEEDINGS***

*** ***

None.

 

***ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS***

*** ***

None.

 

***ITEM3.  DEFAULTS UPON SENIOR SECURITIES***

*** ***

As of the date of this report, the Company is in default on twoseparate notes payable to two of its officers that aggregate $24,975.  Related borrowings were not repaid by theCompany when due pursuant to their contractual terms, and accordingly, suchamounts are due on demand.  These notesare secured by all of the the assets of the Company.

 

The Company also has a note payable to a former employee in connectionwith a stock repurchase agreement that requires monthly payments of $2,750pursuant to contractual terms.  Thecurrent balance of the note payable is $15,272 and the Company’s most recentpayment under the note agreement was in August 2004.  The note is secured by substantially all ofthe Company’s assets.

 

***ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS***

*** ***

None.

 

***ITEM5.  OTHER INFORMATION***

*** ***

***None.***

*** ***

***ITEM 6.  EXHIBITS***

*** ***

None.

 

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# *SIGNATURES*

# * *

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| ** **                   | ** ** | **CENTERGISTIC  SOLUTIONS, INC.**                                                                         |
|------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
| ** **                   | ** ** |
| Date: February 11, 2005 |       |                                                                                                      | /s/ Ricardo G. Brutocao |   |
|                         |       | Ricardo G. Brutocao,  President                                                                           |
|                         |       |
| Date: February 11, 2005 |       |                                                                                                      | /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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