<PAGE>

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

                                   FORM 10-QSB
(Mark One)
[X]      QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934
             FOR THE TRANSITION PERIOD FROM __________ TO __________

                         Commission file number: 0-28560

                                  NETGURU, INC.
        (Exact name of small business issuer as specified in its charter)

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

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

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

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

The number of shares outstanding of the registrant's only class of Common Stock,
$.01 par value, was 17,907,154 on November 13, 2003.

Transitional Small Business disclosure Format (Check one):  Yes  [ ]  No [X]





<PAGE>

                                     PART I
                              FINANCIAL INFORMATION

                                                                            PAGE
Item 1.  Financial Statements

             Condensed Consolidated Statements of Operations for the three and
             six months ended September 30, 2003 and 2002 (unaudited)........  3

             Condensed Consolidated Balance Sheets as of
             September 30, 2003 (unaudited) and March 31, 2003...............  4

             Condensed Consolidated Statements of Cash Flows for the
             six months ended September 30, 2003 and 2002 (unaudited)........  5

             Notes to Condensed Consolidated Financial Statements (unaudited)  7

Item 2.      Management's Discussion and Analysis or Plan of
             Operation....................................................... 20

Item 3.      Controls and Procedures......................................... 35

                                     PART II
                                OTHER INFORMATION

Item 1.      Legal Proceedings............................................... 36

Item 2.      Changes in Securities........................................... 36

Item 3.      Defaults Upon Senior Securities................................. 36

Item 4.      Submission of Matters to a Vote of Security Holders............. 36

Item 5.      Other Information............................................... 36

Item 6.      Exhibits and Reports on Form 8-K................................ 36

Signatures................................................................... 38

Exhibits Filed with this Report on Form 10-QSB............................... 39

                                       2





<PAGE>
<TABLE>

                                                  PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                                  NETGURU, INC. AND SUBSIDIARIES
                                          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                                            (Unaudited)
                                        (In thousands, except share and per share amounts)
<CAPTION>

                                                      THREE MONTHS      THREE MONTHS      SIX MONTHS         SIX MONTHS
                                                          ENDED             ENDED            ENDED               ENDED
                                                      SEPTEMBER 30,      SEPTEMBER 30,    SEPTEMBER 30,      SEPTEMBER 30,
                                                          2003               2002             2003               2002
                                                                                                               (RESTATED)
                                                     ----------------------------------------------------------------------
<S>                                                  <C>                <C>                <C>                <C>
Net revenues:
    Engineering and collaborative software
      products and services                          $      2,674       $      2,390       $      5,396       $      4,261
    IT services                                             1,285              1,369              2,492              2,783
    Web-based telecommunications and travel
      services                                                348              1,984                810              3,116
                                                     -------------      -------------      -------------      -------------
           Total net revenues                              4,307             5,743             8,698            10,160

Cost of revenues:
    Engineering and collaborative software
      products and services                                   363                243                740                535
    IT services                                             1,043              1,024              1,961              2,100
    Web-based telecommunications and travel
      services                                                169              1,860                431              2,847
                                                     -------------      -------------      -------------      -------------
           Total cost of revenues                           1,575              3,127              3,132              5,482
                                                     -------------      -------------      -------------      -------------
           Gross profit                                     2,732              2,616              5,566              4,678
                                                     -------------      -------------      -------------      -------------

Operating expenses:
    Selling, general and administrative                     2,669              2,841              4,985              5,457
    Research and development                                  484                547                988              1,011
    Depreciation                                              239                274                494                542
    Impairment charge                                          --                 67                 --                 67
    Restructuring                                              --                 11                 --                104
                                                     -------------      -------------      -------------      -------------
           Total operating expenses                         3,392              3,740              6,467              7,181
                                                     -------------      -------------      -------------      -------------

           Operating loss                                    (660)            (1,124)              (901)            (2,503)
                                                     -------------      -------------      -------------      -------------

Other expense (income):
    Interest, net                                             114                 54                238                116
    Other                                                     (82)                (4)               (81)                (6)
                                                     -------------      -------------      -------------      -------------
           Total other expense                                 32                 50                157                110
                                                     -------------      -------------      -------------      -------------

Loss before income taxes and cumulative effect of a
   change in accounting principle                            (692)            (1,174)            (1,058)            (2,613)
Income tax (benefit) expense                                   75                 68                112               (301)
                                                     -------------      -------------      -------------      -------------
Loss before cumulative effect of a change in
   accounting principle                                      (767)            (1,242)            (1,170)            (2,312)
Cumulative effect of a change in accounting
   principle                                                   --                 --                 --             (5,824)
                                                     -------------      -------------      -------------      -------------
           Net loss                                  $       (767)      $     (1,242)      $     (1,170)      $     (8,136)
                                                     =============      =============      =============      =============
Basic and diluted loss per common share:
     Loss per common share before cumulative effect
       of a change in accounting principle           $      (0.04)      $      (0.07)      $      (0.07)      $      (0.13)
     Cumulative per share effect of a change in
       accounting principle                                    --                 --                 --              (0.34)
                                                     -------------      -------------      -------------      -------------
     Basic and diluted loss per common share         $      (0.04)      $      (0.07)      $      (0.07)      $      (0.47)
                                                     =============      =============      =============      =============

Common shares used in computing basic and
    diluted net loss per common share:                 17,341,152         17,326,965         17,333,195         17,306,583
                                                     =============      =============      =============      =============

                              See accompanying notes to condensed consolidated financial statements.
</TABLE>

                                                                3





<PAGE>
<TABLE>

                                             NETGURU, INC. AND SUBSIDIARIES
                                          CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (In thousands, except share and per share amounts)
                                                      (Unaudited)
<CAPTION>

                                                                                 SEPTEMBER 30,    MARCH 31,
                                                                                      2003          2003
                                                                                   ---------      ---------

                                                        ASSETS
<S>                                                                                <C>            <C>
Current assets:
    Cash and cash equivalents                                                      $  1,957       $  2,861
    Accounts receivable (net of allowance for doubtful accounts of $677 and
      $735, as of September 30, 2003 and March 31, 2003, respectively)                2,617          2,889
    Income tax receivable                                                                 -             88
    Notes and related party loans receivable                                             40            670
    Deposits                                                                             96
    Prepaid expenses and other current assets                                         1,163            858
                                                                                   ---------      ---------

           Total current assets                                                       5,873          7,366

Property, plant and equipment, net                                                    2,717          3,113
Goodwill (net of accumulated amortization of $4,438)                                  3,281          3,281
Other assets                                                                            435            553
                                                                                   ---------      ---------
                                                                                   $ 12,306       $ 14,313
                                                                                   =========      =========

                                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Current portion of long-term bank debt                                         $  1,205       $  1,340
    Current portion of capital lease obligations                                        374            412
    Accounts payable                                                                    678            802
    Accrued expenses                                                                    890          1,129
    Income taxes payable                                                                168             79
    Deferred revenues                                                                 1,598          2,094
    Other liabilities                                                                   191            234
    Accrued restructuring costs                                                          --            199
                                                                                   ---------      ---------

           Total current liabilities                                                  5,104          6,289

Long-term bank debt, net of current portion                                           1,138          1,270
Capital lease obligations, net of current portion                                       447            627
Deferred gain on sale-leaseback                                                         782            817
                                                                                   ---------      ---------

           Total liabilities                                                          7,471          9,003
                                                                                   ---------      ---------

Stockholders' equity:
    Preferred stock, par value $.01 (Authorized 5,000,000 shares; no shares
      issued and outstanding)                                                            --             --
    Common stock, par value $.01; authorized 150,000,000 shares; issued and
      outstanding 17,357,154 and 17,325,150 shares as of September 30, 2003
      and March 31, 2003, respectively                                                  174            173
    Additional paid-in capital                                                       33,940         33,322
    Accumulated deficit                                                             (28,504)       (27,334)
    Accumulated other comprehensive loss:
       Cumulative foreign currency translation adjustments                             (775)          (851)
                                                                                   ---------      ---------

           Total stockholders' equity                                                 4,835          5,310
                                                                                   ---------      ---------
                                                                                   $ 12,306       $ 14,313
                                                                                   =========      =========

                        See accompanying notes to condensed consolidated financial statements.
</TABLE>

                                                           4





<PAGE>
<TABLE>
                                             NETGURU, INC. AND SUBSIDIARIES
                                     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                       (Unaudited)
                                                     (In thousands)
<CAPTION>
                                                                                     SIX MONTHS
                                                                       SIX MONTHS       ENDED
                                                                          ENDED      SEPTEMBER 30,
                                                                      SEPTEMBER 30,       2002
                                                                           2003        (RESTATED)
                                                                      -------------  -------------
<S>                                                                       <C>           <C>
Cash flows from operating activities:
    Net loss                                                              $(1,170)      $(8,136)
    Adjustments to reconcile net loss to net cash used in operating
      activities:
        Depreciation and amortization                                         635           707
        Cumulative effect of a change in accounting principles                 --         5,824
        Bad debt expense                                                       34            68
        Deferred income taxes                                                  --          (172)
        Compensation expense recognized on issuance of stock options           --            (4)
        Restructuring                                                          --           104
        Impairment charge                                                      --            67
        Expense recognized on issuance of common stock                         37           236
        Loss on disposal of property                                           --             3
        Changes in operating assets and liabilities:
          Accounts receivable                                                 312           779
          Notes and related party loans receivable                             48           112
          Income tax receivable                                                (1)          300
          Prepaid expenses and other current assets                          (139)          554
          Deposits                                                            577            21
          Other assets                                                        (20)          (54)
          Accounts payable                                                   (135)         (123)
          Accrued expenses                                                   (224)         (353)
          Income taxes payable                                                 85          (174)
          Accrued restructuring costs                                        (199)         (195)
          Other current liabilities                                           (58)          (47)
          Deferred revenues                                                  (517)         (416)
          Deferred gain on sale-leaseback                                     (35)          (35)
                                                                          --------      --------

                  Net cash used in operating activities                      (770)         (934)
                                                                          --------      --------

Cash flows from investing activities:
    Purchase of property, plant and equipment                                 (40)         (203)
                                                                          --------      --------

                  Net cash used in investing activities                       (40)         (203)
                                                                          --------      --------

Cash flows from financing activities:
    Proceeds from issuance of bank debt                                       627             1
    Repayment of bank debt                                                   (527)         (132)
    Repayment of capital lease obligations                                   (217)         (208)
    Issuance of common stock                                                   --            55
                                                                          --------      --------

                  Net cash used in financing activities                      (117)         (284)
                                                                          --------      --------

    Effect of exchange rate changes on cash and cash equivalents               23            20
                                                                          --------      --------

                  Decrease in cash and cash equivalents                      (904)       (1,401)

Cash and cash equivalents, beginning of period                              2,861         3,466
                                                                          --------      --------

Cash and cash equivalents, end of period                                  $ 1,957       $ 2,065
                                                                          ========      ========
</TABLE>

                                   (Continued)

                                       5





<PAGE>
<TABLE>
                                        NETGURU, INC. AND SUBSIDIARIES

                          CONDENSED Consolidated Statements of Cash Flows (Continued)
                                                  (Unaudited)
                                                (In thousands)
<CAPTION>

                                                                                            SIX MONTHS
                                                                            SIX MONTHS        ENDED
                                                                               ENDED       SEPTEMBER 30,
                                                                           SEPTEMBER 30,        2002
                                                                                2003         (RESTATED)
                                                                           -------------   -------------
<S>                                                                        <C>             <C>
Supplemental disclosure of cash flow information: Cash paid for:
         Interest                                                          $       187     $       133
                                                                           ============    ============
         Income taxes                                                      $        24     $        25
                                                                           ============    ============

Supplemental disclosure of non-cash investing and financing activities:
Acquisition of equipment under capital leases                              $         -     $        28
Issuance of warrants                                                               201               -
                                                                           ============    ============

                    See accompanying notes to condensed consolidated financial statements.
</TABLE>
                                                      6





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2003
                                   (UNAUDITED)

1.  REPORT BY MANAGEMENT

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

         These condensed consolidated financial statements have been prepared by
the Company and include all adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position at September 30,
2003 and the results of operations and the cash flows for the three and six
months ended September 30, 2003 and 2002, pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States of America for annual consolidated financial
statements. Results of operations for the three and six months ended September
30, 2003 are not necessarily indicative of the results to be expected for the
full fiscal year ending March 31, 2004.

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

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

2.  FAIR VALUE OF FINANCIAL INSTRUMENTS

         Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures About Fair Value Of Financial Instruments," requires management to
disclose the estimated fair value of certain assets and liabilities defined by
SFAS No. 107 as financial instruments. At September 30, 2003, management
believed the carrying amounts of cash and cash equivalents, receivable and
payable amounts, and accrued expenses approximated fair value because of the
short maturity of these financial instruments. The Company also believed that
the carrying amounts of its capital lease obligations approximated their fair
values, as the interest rates approximated a rate that the Company could have
obtained under similar terms at the balance sheet date. The estimated fair value
of the Company's long-term debt at September 30, 2003, determined by using the
effective rate of interest on this indebtedness, was approximately $1.2 million.

3.  IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         On April 1, 2002, the Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested at least annually, or more frequently when events or changes
in circumstances indicate that the assets might be impaired, by comparing the
carrying value to the fair value of the reporting unit to which they are
assigned.

                                       7





<PAGE>

         The Company considers the following operating segments - engineering
and collaborative software products and services, IT services, and Web-based
telecommunications and travel services - to be its reporting units for purposes
of testing for impairment, as the components within each operating segment have
similar economic characteristics and thus do not represent separate reporting
units.

         The Company assessed the fair value of its three reporting units by
considering their projected cash flows, using risk-adjusted discount rates and
other valuation techniques, and concluded that as of April 1, 2002, an
impairment write-down for its IT services division was required. The Company
recorded an impairment charge of $5,824,000 to IT services goodwill in fiscal
2003 as a cumulative effect of a change in accounting principle. In accordance
with SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements,"
the Company has restated the accompanying condensed consolidated statement of
operations for the six months ended September 30, 2002, to present the
cumulative effect of the adoption of SFAS No. 142 as of the beginning of the
year of adoption.

         There was no impairment of goodwill during the six months ended
September 30, 2003.

         In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
requires the Company to record the fair value of an asset retirement obligation
as a liability in the period in which it incurs a legal obligation associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development or normal use of the assets. The Company
is also required to record a corresponding asset, which is depreciated over the
life of the asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period to reflect
the passage of time and changes in the estimated future cash flows underlying
the obligation. The Company adopted SFAS No. 143 on April 1, 2003. The adoption
of SFAS No. 143 did not materially impact the Company's consolidated financial
condition or results of operations.

         In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operations, plant closing, or other exit or disposal activities.
The Company adopted the provisions of SFAS No. 146 on January 1, 2003. This
statement applies on a prospective basis to exit or disposal activities that are
initiated after December 31, 2002. The adoption of SFAS No. 146 did not
materially impact the Company's consolidated financial condition or results of
operations.

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-An Amendment of FASB
Statement No. 123." This amendment provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirement of SFAS No. 123, "Accounting for Stock-Based
Compensation," to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No. 148
is effective for fiscal years ending after December 15, 2002. Since the Company
is continuing to account for stock-based compensation according to Accounting
Principles Bulletin No. 25, "Accounting for Stock Issued to Employees," the
adoption of SFAS No. 148 in the first quarter of fiscal 2004 requires the
Company to provide prominent disclosures about the effects of SFAS No. 123 on
reported income (loss) and requires it to disclose these effects in its interim
financial statements (see note 9).

                                       8





<PAGE>

         The Company adopted the initial recognition and measurement provisions
of FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," on January 1, 2003, which provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company adopted the
disclosure provisions of FIN No. 45 during the quarter ended March 31, 2003. In
the ordinary course of business, the Company is not subject to potential
obligations under guarantees that fall within the scope of FIN No. 45 except for
standard indemnification and warranty provisions that are contained within many
of its customer license and service agreements, and these give rise only to the
disclosure requirements prescribed by FIN No. 45. In addition, under previously
existing accounting principles generally accepted in the United States, the
Company continues to monitor the conditions that are subject to the guarantees
and indemnifications to identify whether it is probable that a loss has
occurred, and will recognize any such losses under the guarantees and
indemnifications when those losses are estimable.

         Indemnification and warranty provisions contained within the Company's
customer license and service agreements are generally consistent with those
prevalent in the Company's industry. The duration of the Company's service
warranties generally does not exceed 15 days following completion of its
services. The Company has not incurred significant obligations under customer
indemnification or warranty provisions historically and does not expect to incur
significant obligations in the future. Accordingly, the Company does not
maintain accruals for potential customer indemnification or warranty-related
obligations. The maximum potential amount of future payments that the Company
could be required to make is generally limited under the indemnification
provisions in its customer license and service agreements.

         On January 17, 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities," which requires extensive disclosures and requires
companies to evaluate variable interest entities created after January 31, 2003
and existing entities to determine whether to apply the interpretation's
consolidation approach to them. Companies must apply the interpretation to
entities with which they are involved if the entity's equity has specified
characteristics. If it is reasonably possible that a company will have a
significant variable interest in a variable interest entity at the date the
interpretation's consolidation requirements become effective, the company must
disclose the nature, purpose, size and activities of the variable interest
entity and the consolidated enterprise's maximum exposure to loss resulting from
its involvement with the variable interest entity in all financial statements
issued after January 31, 2003, regardless of when the variable interest entity
was created. Since the Company has no interest in any variable interest entity,
the adoption of this interpretation did not impact the Company's consolidated
financial condition or results of operations.

4.  SOFTWARE DEVELOPMENT COSTS AND PURCHASED TECHNOLOGY

         The Company capitalizes costs related to the development of certain
software products in accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed." Capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. As of September 30,
2003, capitalized costs of approximately $207,000, net of accumulated
amortization, were included in other assets. Approximately $114,000 of this
amount represents software developed in-house and $93,000 represents the cost of
software developed on the Company's behalf by third parties. Additions to
capitalized software were $0 and $28,000 during the six months ended September
30, 2003 and 2002, respectively.

                                       9





<PAGE>

         The Company amortizes capitalized software development costs and
purchased technology using the straight-line method over two to five years, or
the ratio of actual sales to anticipated sales, whichever is greater.
Amortization of software development costs and purchased technology charged to
operations was approximately $69,000 for the three months ended September 30,
2003 and 2002 and $139,000 and $112,000 for the six months ended September 30,
2003 and 2002, respectively. Accumulated amortization on capitalized software
was $777,000 and $444,000 as of September 30, 2003 and 2002, respectively.

5.  REVENUE RECOGNITION

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

         Revenue from software sales is recognized upon shipment if no
significant post-contract support obligations remain outstanding and collection
of the resulting receivable is deemed probable. Since July 1, 2002, the Company
has provided at the time of sale a 15-day right of return on the purchase of a
product during which time the customer may return the product subject to a $50
restocking fee per item returned. Customers may choose to purchase maintenance
contracts that include telephone, e-mail and other methods of support, and the
right to receive upgrades. Revenue from these maintenance contracts is deferred
and recognized ratably over the life of the contract, usually twelve months.

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

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

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

                                       10





<PAGE>

         Revenues from providing IT services are recognized primarily on a time
and materials basis, with time at a marked-up rate and materials and other
reasonable expenses at cost, once the services are completed and no significant
obligations remain. Certain IT services contracts are fixed price contracts
where progress toward completion is measured by mutually agreed upon
pre-determined milestones for which the Company recognizes revenue upon
achieving such milestones. Fixed price IT contracts are typically for a short
duration of one to three months.

         Revenues from call termination services are recognized at gross sales
value, with the applicable cost separately stated in the cost of revenues.
Revenues from the Company's own phone card sales are deferred and recognized
based on usage, whereas revenues from resale of third-party phone cards are
recognized net of returns since no significant obligations remain once the
product is delivered. The Company recognizes revenues from certain travel
services, where the Company is a ticket consolidator and where the Company has
entered into a firm purchase commitment with the airlines, at the gross sales
value, with purchase costs stated as a separate cost of revenues in accordance
with Emerging Issues Task Force ("EITF") No. 99-19, "Recording Revenue Gross as
a Principal Versus Net as an Agent." As of September 30, 2003, the Company had
no firm purchased commitments with any airlines. Other products and services
sold via Internet portals, including certain travel services, where the Company
is a travel discounter or an agent, or a ticket consolidator but has not entered
into any firm purchase commitments, are recognized net of purchase costs when
the products and services are delivered and collection is probable.

6.  DEFERRED REVENUES

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

7.  PROVISIONS FOR RESTRUCTURING OPERATIONS

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

         With regard to the Company's ISP initiatives in India, the Company
redirected its primary focus toward communication and connectivity services
targeted at the corporate market. The total amount charged for the refocus of
ISP operations in fiscal 2001 was $1,998,000.

         With regard to the Internet portal business, the Company redirected its
primary focus toward the telephony and travel services offered through the
portal. The initial restructuring charge, related to the refocus of the portal
business was $194,000, which was paid in fiscal 2001. During fiscal 2002, the
Company paid an additional $67,000 relating to contractual obligations for the
portal operations.

                                       11





<PAGE>

         In March 2001, the Company closed its Boston technical support office
as part of consolidating the Company's technical support activities. Technical
support activities previously offered from the Boston office were consolidated
into the California facility. The closing of this office resulted in the
termination of two employees. The restructuring charge related to the
consolidation of technical support facilities was $166,000, of which $49,000
related to accrued severance payments for the two terminated employees and
$117,000 related to contractual lease obligations for the vacated space. The
Company made cash payments totaling $58,000 in fiscal 2002 toward settlement of
obligations related to this activity. During fiscal 2003, the Company made cash
payments of $55,000 for severance expenses relating to the termination of one of
the employees and $47,000 for lease payments for the vacated office space.
During the first six months of fiscal 2004, the Company made cash payments of
$19,000 for lease payments for the vacated office space. As of September 30,
2003, the Company had no remaining unpaid obligations related to this activity.

         The elimination of the in-house legal department primarily consisted of
the termination of one employee whose position was not refilled. Legal services
are being obtained from the Company's continuing external legal counsel. In
fiscal 2001, the Company estimated the restructure charge related to the
elimination of the in-house legal department to be $42,000. However, in fiscal
2002, the Company paid $52,000 toward this restructuring charge. Additional
charges of $41,000 and $199,000 were recognized in fiscal 2002 and in fiscal
2003, respectively, since the original estimate of severance expenses was
insufficient. During the year ended March 31, 2003, the Company paid $50,000
toward settlement of obligations due to the terminated employee. During the
first quarter of fiscal 2004, the Company paid the remaining settlement
obligation of $180,000. As of September 30, 2003, the Company had no remaining
unpaid obligations related to this activity.

                                       12





<PAGE>

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

<TABLE>
<CAPTION>
                          REFOCUS OF    REFOCUS OF   CONSOLIDATION  ELIMINATION
                              ISP         PORTAL      OF TECHNICAL   OF LEGAL
                          OPERATIONS    OPERATIONS      SUPPORT     DEPARTMENT      TOTAL
                          ----------    ----------    ------------  ----------    --------
<S>                       <C>           <C>           <C>           <C>           <C>
March 31, 2000                 --            --            --            --            --
Restructuring charge      $ 1,998       $   194       $   166       $    42       $ 2,400
Cash payments              (1,897)         (194)           --            --        (2,091)
                          --------      --------      --------      --------      --------

March 31, 2001               101           --             166            42          309
                          --------      --------      --------      --------      --------

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

March 31, 2002                34           --              92           31          157
                          --------      --------      --------      --------      --------

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

March 31, 2003                --           --              19           180         199
                          --------      --------      --------      --------      --------

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

                          --------      --------      --------      --------      --------
September 30, 2003        $    --       $    --       $    --       $    --       $    --
                          ========      ========      ========      ========      ========
</TABLE>

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

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

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

8. DEBT

         On July 31, 2003, the Company obtained a three-year, renewable,
$4,000,000 revolving accounts receivable credit facility from Laurus Master
Fund, Ltd. ("Laurus"). The amount available under this revolving credit facility
will be reduced by the balance outstanding on the Company's $2 million, 6%
convertible note issued to Laurus on December 13, 2002. On August 4, 2003, the
terms of the convertible note were amended as follows: (1) the interest rate on
the convertible note was amended from 6% to the greater of 5% or prime rate plus
1%, payable in arrears; (2) the amortization period was extended from 20 months
ending on November 13, 2004 to 24 months ending on July 31, 2005; (3) the
penalty for repayments of the outstanding balance in cash was removed; and (4)
the fixed conversion price, upon which potential issuances of the Company's
common stock to satisfy the obligations of the convertible note are based, was
reduced from $1.60 to $1.30. As a result of the reduction in the conversion
price from $1.60 to $1.30, a beneficial conversion amount of $302,000,
estimated using the Black-Scholes option pricing model, was
recorded as discount to the convertible debt, which is being amortized over
the life of the note using the effective interest rate method.

         Borrowings against the revolving credit facility accrued interest,
initially, at an annual rate equal to the greater of 5% or the prime rate plus
1%, payable monthly in arrears. Beginning November 1, 2003, interest rate per
annum on the borrowings may be adjusted every month based on certain

                                       13





<PAGE>

registration requirements and on the volume weighted average price of the
Company's common stock. Obligations owed under this revolving credit facility
may be repaid at the Company's option in cash or through the issuance of shares
of the Company's common stock at the fixed conversion price of $1.30 per share,
subject to volume limitations, provided the shares are registered with the
Securities and Exchange Commission for public resale and the then current market
price is greater than 110% of the fixed conversion price. The fixed conversion
price may be adjusted upward under certain circumstances. Also, the fixed
conversion price is subject to standard anti-dilution provisions for
stock-splits, stock dividends, reclassifications, and the like, and is subject
to downward adjustment for certain issuances at prices below the then fixed
conversion price. The accounts receivable credit facility has a three-year term,
which automatically renews every three years unless cancelled in writing by the
Company or by Laurus under certain conditions. An early termination fee of up to
$120,000 will be payable if the facility is terminated prior to August 1, 2006.
The facility also provides the Company the flexibility to access additional
amounts above what is available based upon eligible accounts receivable. Any
such additional amounts will accrue interest at a rate of 0.6% per month,
payable monthly.

         In connection with this credit facility, the Company paid Laurus a fee
of $140,000 and issued to Laurus a five-year warrant to purchase 180,000 shares
of the Company's common stock exercisable at various prices as follows: 115% of
the then effective fixed conversion price per share for the purchase of up to
60,000 shares; 125% of the then effective fixed conversion price per share for
the purchase of an additional 60,000 shares; and 145% of the then effective
fixed conversion price per share for the purchase of an additional 60,000
shares. Based on the initial fixed conversion price of $1.30, the exercise
prices would be $1.495 per share for the purchase of up to 60,000 shares; $1.625
per share for the purchase of an additional 60,000 shares; and $1.885 per share
for the purchase of an additional 60,000 shares. The fair market value of these
warrants estimated using the Black-Scholes option pricing model was $201,000
which was recorded as a discount. Laurus may also receive additional five-year
warrants to purchase up to 400,000 shares of the Company's common stock at an
exercise price equal to 125% of the fixed conversion price based upon how much
of the outstanding obligation under the credit facility is converted to equity.
At September 30, 2003, the Company had borrowed $600,000 under this credit
Facility and recognized approximately $77,000 in beneficial conversion
adjustment as a discount on the amount borrowed during the three-months ended
September 30, 2003. As of September 30, 2003, none of the additional five-year
warrants have been issued. The revolving credit facility is secured by a general
security interest in the assets of the Company and its subsidiaries.

         Laurus has contractually agreed to two separate beneficial ownership
limitations that restrict conversion of the convertible note and the exercise of
the warrant issued on December 13, 2002. Laurus has agreed that the convertible
note shall not be converted and the warrant shall not be exercised to the extent
that conversion of the convertible note or exercise of the warrant would result
in Laurus, together with its affiliates, beneficially owning in excess of 4.99%
of the number of shares of the Company's common stock outstanding at that time.
Laurus may terminate this 4.99% limitation by providing us 75 days' advance
notice of its intention to do so. This 4.99% limitation does not preclude
conversion of the convertible note or exercise of the warrant over time, so long
as Laurus' beneficial ownership of the Company's common stock, together with its
affiliates, does not exceed the limitation amount. This 4.99% limitation
automatically becomes void upon an event of default under the convertible note.

         Laurus has also contractually agreed to two separate beneficial
ownership limitations that restrict conversion of the borrowings under the
revolving credit facility, the exercise of the warrant issued on July 31, 2003
and the exercise of any additional warrants that may be issued upon conversion
of the borrowings under the revolving credit facility. Laurus has agreed that
the borrowings under the revolving credit facility shall not be converted and
the warrant shall not be exercised to the extent that conversion of the
convertible note or exercise of the warrant would result in Laurus, together
with its affiliates, beneficially owning in excess of 4.99% of the number of
shares of the Company's common stock outstanding at that time. Laurus may
terminate this 4.99% limitation by providing us 75 days advance

                                       14





<PAGE>

notice of its intention to do so. This 4.99% limitation does not preclude
conversion of the borrowings under the credit facility or exercise of the
warrant over time, so long as Laurus' beneficial ownership of the Company's
common stock, together with its affiliates, does not exceed the limitation
amount. This 4.99% limitation automatically becomes void upon an event of
default under the credit facility.

9.  STOCKHOLDERS' EQUITY

         In April 2000, the Company issued 25,000 shares of common stock as a
portion of the purchase price for the acquisition of Allegria Software, Inc. The
recipients of these shares were given the right to demand that the Company
repurchase these shares at a price of $28.60 per share at the end of one year.
In April 2001, each of the former owners exercised this right. The total
repurchase price was $715,000. Agreements were reached with all parties to
extend cash payment for this repurchase over a twelve-month period.

         As of September 30, 2003, the Company had paid $172,000 to one of the
former owners for the repurchase of 6,000 shares. The repurchase of 6,000 shares
from another former owner was settled for a total of $100,000, which was paid in
full as of June 30, 2003. Effective August 13, 2003, the Company reached a
settlement agreement with the owner of the remaining 13,000 shares. Pursuant to
this settlement agreement, the owner retained the 13,000 shares and received an
additional 32,004 shares from the Company. Approximately $37,000 reflecting the
fair market value of these shares was recorded as an expense during the three
months ended September 30, 2003.

         The Company continues to follow the guidance of APB No. 25. Pursuant to
APB No. 25, compensation related to stock options is measured as the difference
between the grant price and the fair market value of the underlying common
shares at the grant date. Generally, the Company issues options to employees
with a grant price equal to the market value of its common stock on the grant
date. Accordingly, the Company has recognized no compensation expense on its
grants of employee stock options.

         The following represents pro forma information as if the Company
recorded compensation cost using the fair value of the issued compensation
instrument under SFAS No. 123 (in thousands, except amounts per share):

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED             SIX MONTHS ENDED
                                                            SEPTEMBER 30,                 SEPTEMBER 30,
                                                 --------------------------------------------------------------
                                                                                                      2002
                                                         2003            2002           2003        (RESTATED)
                                                 --------------------------------------------------------------
        <S>                                           <C>             <C>            <C>            <C>
        Net loss - as reported                        $    (767)      $  (1,242)     $  (1,170)     $  (8,136)
                                                 ==============================================================
        Net loss - pro forma                          $    (845)      $  (1,459)     $  (1,327)     $  (8,569)
                                                 ==============================================================
        Basic net loss per share -
             as reported                              $   (0.04)      $   (0.07)     $   (0.07)     $   (0.47)
             pro forma                                    (0.05)          (0.08)         (0.08)         (0.50)
        Diluted net loss per share -
             as reported                                  (0.04)          (0.07)         (0.07)         (0.47)
             pro forma                                    (0.05)          (0.08)         (0.08)         (0.50)
        Weighted average fair value of options
             granted                                          -               -              -              -

                                                                     SIX MONTHS ENDED
                                                                       SEPTEMBER 30,
                                                                    --------------------
                                                                    2003           2002
              Black-Scholes option pricing model
               assumptions:
                  Dividend yield                                      -             -
                  Expected volatility                              120.2%         116.5%
                  Risk-free interest rate                           3.13%          3.50%
                  Expected option lives (in years)                  6.92           6.82
</TABLE>

                                       15





<PAGE>

10. FOREIGN CURRENCY TRANSLATION

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

11. COMPREHENSIVE INCOME (LOSS)

         The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which prescribes rules for the reporting and display of
comprehensive income (loss) and its components. SFAS No. 130 requires foreign
currency translation adjustments, which are reported separately in stockholders'
equity, to be included in other comprehensive income (loss). Total comprehensive
loss was $773,000 and $1,213,000 for the three months ended September 30, 2003
and 2002, respectively, and was $1,093,000 and $8,013,000 for the six months
ended September 30, 2003 and 2002, respectively.

12. NET LOSS PER SHARE

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

         The following table illustrates the computation of basic and diluted
net loss per share (in thousands except per share amounts):

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED           SIX MONTHS ENDED
                                                       SEPTEMBER 30,                SEPTEMBER 30,
                                                 --------------------------------------------------
                                                                                           2002
                                                    2003         2002         2003      (RESTATED)
                                                 --------------------------------------------------
<S>                                              <C>           <C>           <C>           <C>
Numerator:
Net loss and numerator for basic and
  diluted loss per share                            (767)       (1,242)       (1,170)       (8,136)
                                                 ==================================================
Denominator:
Denominator for basic net loss per share
  - average number of common shares
  outstanding during the period                   17,341        17,327        17,333        17,307
Incremental common shares attributable to
  exercise of outstanding options, warrants
  and other common stock equivalents                  --            --            --            --
                                                 --------------------------------------------------
Denominator for diluted net loss per
share                                             17,341        17,327        17,333        17,307
                                                 ==================================================

Basic and diluted net loss per share             $ (0.04)      $ (0.07)      $ (0.07)      $ (0.47)
                                                 ==================================================
</TABLE>

         Options, warrants and other common stock equivalents amounting to
1,689,000 and 1,561,000 potential common shares for the three and six month
periods ended September 30, 2003, respectively, and 493,000 and 614,000
potential common shares for the three and six month periods ended September 30,
2002, respectively, were excluded from the computation of diluted EPS for the
periods presented because the Company reported net losses and, therefore, the

                                       16





<PAGE>

effect would be antidilutive. Potential common shares from the possible
conversion of the convertible note issued to Laurus and possible conversion of
the borrowings under the credit facility amounting to 1,686,000 and 1,536,000
were excluded from the computation of diluted loss per share for the three and
six months ended September 30, 2003, respectively, as their effect would have
been anti-dilutive.

13. SEGMENT AND GEOGRAPHIC DATA

         The Company is an integrated information technology and services
company operating in three primary business segments: (1) engineering and
collaborative software products and services; (2) IT services; and (3) Web-based
telecommunications and travel services.

         The Company applies the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires
segments to be determined and reported based on how management measures
performance and makes decisions about allocating resources.

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

                                       17





<PAGE>

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

<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED             SIX MONTHS ENDED
                                            SEPTEMBER 30,                 SEPTEMBER 30,
                                      ------------------------      ------------------------
                                         2003           2002           2003           2002
                                                                                   (RESTATED)
                                      ---------      ---------      ---------      ---------
<S>                                   <C>            <C>            <C>            <C>
         NET REVENUE
Engineering and collaborative
  software products and services      $  2,674       $  2,390       $  5,396       $  4,261
IT services                              1,285          1,369          2,492          2,783
Web-based telecommunications and
  travel services                          348          1,984            810          3,116
Center                                      --             --             --             --
                                      ---------      ---------      ---------      ---------
     Consolidated                     $  4,307       $  5,743       $  8,698       $ 10,160
                                      =========      =========      =========      =========

         GROSS PROFIT

Engineering and collaborative
  software products and services      $  2,311       $  2,147       $  4,656       $  3,726
IT services                                242            345            531            683
Web-based telecommunications and
  travel services                          179            124            379            269
  Center                                    --             --             --             --
                                      ---------      ---------      ---------      ---------
     Consolidated                     $  2,732       $  2,616       $  5,566       $  4,678
                                      =========      =========      =========      =========

   OPERATING (LOSS)/INCOME

Engineering and collaborative
  software products and services      $   (351)      $   (527)      $   (278)      $ (1,284)
IT services                                (82)           (70)           (96)          (119)
Web-based telecommunications and
  travel services                          (18)          (231)           (30)          (399)
  Center                                  (209)          (296)          (497)          (701)
                                      ---------      ---------      ---------      ---------
     Consolidated                     $   (660)      $ (1,124)      $   (901)      $ (2,503)
                                      =========      =========      =========      =========
</TABLE>

                                       18





<PAGE>

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

<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED         SIX MONTHS ENDED
                                         SEPTEMBER 30,             SEPTEMBER 30,
                                    ---------------------     ---------------------
                                      2003         2002         2003         2002
                                    --------     --------     --------     --------
<S>                                 <C>          <C>          <C>          <C>
             NET REVENUE
United States                       $ 2,304      $ 4,073      $ 4,708      $ 7,273
The Americas (other than U.S.)          147          223          305          330
Europe                                  812          614        1,938        1,109
Asia-Pacific                          1,044          833        1,747        1,448
                                    --------     --------     --------     --------

         Consolidated               $ 4,307      $ 5,743      $ 8,698      $10,160
                                    ========     ========     ========     ========

             EXPORT SALES
United States                       $   312      $   444      $   975      $   676
                                    ========     ========     ========     ========
</TABLE>

                                  SEPTEMBER 30,   MARCH 31,
                                      2003         2003
                                    -------       -------
                                       (IN THOUSANDS)
         LONG-LIVED ASSETS
         United States              $5,078        $5,434
         Europe                        214           324
         Asia-Pacific                1,141         1,189
                                    -------       -------

                  Consolidated      $6,433        $6,947
                                    =======       =======

                                       19





<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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

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

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

         Any of the factors described above or in the "Risk Factors" section of
our latest annual report on Form 10-KSB could cause our financial results,
including our net income (loss) or growth in net income (loss) to differ
materially from prior results, which in turn could, among other things, cause
the price of our common stock to fluctuate substantially.

     OVERVIEW

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

         o        Engineering and collaborative software products and services
                  for businesses worldwide;
         o        Information technology, or IT, services (including value-added
                  IT services); and
         o        Web-based telecommunications and travel services (including
                  long-distance communication services that include call
                  termination services and prepaid phone cards, and travel
                  services).

                                       20





<PAGE>

         We have provided computer-aided engineering software solutions to our
customers for over 22 years. For the past 20 years, we have supported our
engineering software business with our India-based software programming and IT
resources. In 1999, we acquired two IT services companies in the United States,
which further expanded our IT resources and capabilities. Our Internet portal
services were started in 1999 and were refocused in fiscal 2001 toward
telecommunications and travel services. A more expansive discussion of our
business and services is contained in the "Business" section of our latest
annual report on Form 10-KSB.

         In November 2003, we announced our plans to enter the EBPO market by
providing engineering services to address the production of structural steel
detailing drawings and the provision of high-level technical support for
engineering software. We plan to leverage our existing, technical support
infrastructure in India, our telephony switch in the United States and our
collaborative software technology to offer these services to companies looking
to outsource these functions.

     CRITICAL ACCOUNTING POLICIES

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

         o        revenue recognition;
         o        accounting for software development costs and purchased
                  technology;
         o        allowance for accounts receivable; and
         o        impairment of long-lived assets, including goodwill.

     REVENUE RECOGNITION

         We derive revenues from:

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

         We recognize revenues when the following criteria are met:

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

         Revenues from our pre-packaged engineering software products are
recognized upon shipment, provided no significant post-contract support
obligations remain outstanding and collection of the resulting receivable is
deemed probable. At the time of sale, we provide a 15-day right of return on the
purchase of the product during which time the customer may return the product to
us subject to a $50 restocking fee on each returned item. Customers may choose
to purchase ongoing maintenance contracts that include telephone, e-mail and
other methods of support, and the right to receive upgrades. Revenue from the
maintenance contracts is deferred and recognized ratably over the life of the
contract, usually twelve months.

                                       21





<PAGE>

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

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

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

         We recognize revenues from our IT services primarily on a time and
materials basis, with time at a marked-up rate and materials and other
reasonable expenses at cost, as we perform IT services. Certain IT services
contracts are fixed price contracts where we measure progress toward completion
by mutually agreed upon pre-determined milestones and recognize revenue upon
reaching those milestones. Our fixed price IT contracts typically are for a
short duration of one to three months.

         We recognize revenues from call termination services at gross sales
value, with the applicable cost separately stated in cost of revenues. We
recognize revenues from sales of our own phone cards based on usage. We
recognize revenues from our resale of third-party phone cards net of returns
because no significant obligations remain once the phone cards are delivered. We
recognize revenues from certain travel services, where we are a ticket
consolidator and where we have entered into a firm purchase commitment with the
airlines, at the gross sales value, with purchase costs stated as a separate
cost of revenues in accordance with Emerging Issues Task Force ("EITF") No.
99-19, "Recording Revenue Gross as a Principal Versus Net as an Agent." We
recognize revenues from other products and services sold via Internet portals,
including travel services, where we are a travel discounter or an agent, net of
purchase costs when the products and services are delivered and collection is
probable.

     ACCOUNTING FOR SOFTWARE DEVELOPMENT COSTS AND PURCHASED TECHNOLOGY

         We develop software in-house, employ third parties to develop software
for us and purchase software technology for sale to our customers. We capitalize
costs related to the development of software products for sale. Capitalization
of costs begins when technological feasibility is established, and ends when the
product is available for general release to customers. We expense any additional
costs to enhance products after release as those costs are incurred.

                                       22





<PAGE>

         We amortize capitalized software development costs and purchased
technology using either the straight-line method over two to five years, or the
ratio of actual sales to anticipated sales, whichever is greater. We
periodically review the resulting net book value of the capitalized software
asset for recoverability based on estimated future revenues from products based
on that particular technology. When significant uncertainties exist with respect
to the recoverability of the capitalized cost of the asset, we write the cost of
the asset down to its potential recoverable value, which may materially affect
the future results of our operations.

         We estimate future revenues from a product as part of our budgeting
process. These estimates include various assumptions, risks and uncertainties
inherent in such estimates, including market conditions, availability of
competing products, and continued acceptance of our product in the marketplace.

     ALLOWANCE FOR ACCOUNTS RECEIVABLE

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

     IMPAIRMENT OF LONG-LIVED ASSETS, INCLUDING GOODWILL

         Through March 31, 2002, we applied the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. We measured
recoverability of an asset to be held and used by comparing the carrying amount
of the asset to future net undiscounted cash flows expected to be generated by
the asset. If we considered the asset impaired, we recognized an impairment loss
equal to the amount by which the carrying value of the asset exceeded the fair
value of the asset. We reported assets to be disposed of at the lower of their
carrying amounts or fair values less costs to sell. In August 2001, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment of long-lived assets and
superseded SFAS No. 121, and the accounting and reporting provisions of APB No.
30, "Reporting the Results of Operations for a Disposal of a Segment of a
Business." SFAS No. 144 became effective for fiscal years beginning after
December 15, 2001. We adopted SFAS No. 144 beginning April 1, 2002. The adoption
of SFAS No. 144 did not materially impact our consolidated financial condition
or results of operations.

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

                                       23





<PAGE>

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

         We consider the following operating segments- engineering and
collaborative software products and services, IT services, and Web-based
telecommunications and travel services - to be our reporting units for purposes
of testing for impairment because the components within each operating segment
have similar economic characteristics and thus do not represent separate
reporting units.

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

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

         The additional reviews involve a comparison of the implied fair value
of the reporting unit goodwill with its carrying amount, both of which are
measured as of the end of the period being reported. If the implied fair value
of the reporting unit goodwill is less than the carrying amount of the reporting
unit goodwill, we write down the carrying amount of the reporting unit goodwill
to its implied fair value and recognize an impairment loss equal to the
difference between the implied fair value and the carrying amount of reporting
unit goodwill. If, in subsequent periods, the implied fair value of the
reporting unit goodwill is higher than its carrying amount, we do not reverse an
impairment loss recognized earlier or adjust the carrying amount to the higher
amount.

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

         Our annual test of impairment will be performed as of March 31, 2004.

         The evaluation of goodwill impairment involves assumptions about the
fair values of assets and liabilities of each reporting unit. If these
assumptions are materially different from actual outcomes, the carrying value of
goodwill will be incorrect. In addition, future results of operations could be
materially impacted by the write-down of the carrying amount of goodwill to its
estimated fair value. There was no impairment write-down during the three and
six months ended September 30, 2003.

                                       24





<PAGE>

     NEW ACCOUNTING PRONOUNCEMENTS

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

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments that have characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that is within its
scope as a liability (or as an asset in some circumstances). Many of those
instruments were previously classified as equity. This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective for our quarter ended September 30, 2003. The adoption of
SFAS No. 150 did not materially impact our consolidated financial condition or
results of operations.

         In July 2003, the EITF reached a consensus on EITF 03-5, "Applicability
of AICPA SOP 97-2 to Non-Software Deliverables." EITF 03-5 provides accounting
guidance on whether non-software deliverables (e.g., non-software related
equipment or services) included in an arrangement that contains software are
within the scope of SOP 97-2. In general, any non-software deliverables are
within the scope of SOP 97-2 if the software deliverable is essential to the
functionality of the non-software deliverables. Companies are required to adopt
this consensus in the first reporting period (annual or interim) beginning after
ratification by the Financial Accounting Standards Board. We believe the
adoption of EITF 03-5 will not materially impact our consolidated financial
condition or results of operations.

                                       25





<PAGE>

     RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of our net revenues.

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED            SIX MONTHS ENDED
                                                           SEPTEMBER 30,                 SEPTEMBER 30,
                                                     ------------------------      ------------------------
                                                        2003           2002           2003           2002
                                                     ---------      ---------      ---------      ---------
                                                                                                  (RESTATED)
                                                                                                  ----------
<S>                                                    <C>            <C>            <C>            <C>
Engineering and collaborative
    software products and services                      62.1%          41.6%          62.0%          41.9%
IT services                                             29.8           23.8           28.7           27.4
Web-based telecommunications and travel
    services                                             8.1           34.6            9.3           30.7
                                                     ---------      ---------      ---------      ---------
 Total net revenues                                    100.0          100.0          100.0          100.0
                                                     ---------      ---------      ---------      ---------

Cost of revenues                                        36.6           54.4           36.0           54.0

Engineering and collaborative
    software products and services                      86.4           89.8           86.3           87.4
IT services                                             18.8           25.2           21.3           24.5
Web-based telecommunications and travel
    services                                            51.4            6.3           46.8            8.6
                                                     ---------      ---------      ---------      ---------
Total gross profit                                      63.4           45.6           64.0           46.0
                                                     ---------      ---------      ---------      ---------

Selling, general and administrative expenses            62.0           49.5           57.3           53.7
Research and development expenses                       11.2            9.5           11.4           10.0
Depreciation                                             5.5            4.8            5.7            5.3
Impairment charge                                       --              1.2           --              0.6
Restructuring                                           --              0.2           --              1.0
                                                     ---------      ---------      ---------      ---------
       Total operating expenses                         78.7           65.2           74.4           70.6

Operating loss                                         (15.3)         (19.6)         (10.4)         (24.6)

Interest (income) expense, net                           2.6            0.9            2.7            1.2
Other (income) expense, net                             (1.8)          (0.1)          (0.9)          (0.1)
                                                     ---------      ---------      ---------      ---------

Loss before income taxes and cumulative
   effect of a change in accounting principle          (16.1)         (20.4)         (12.2)         (25.7)
Income tax expense (benefit)                             1.7            1.2            1.3           (2.9)
                                                     ---------      ---------      ---------      ---------
Loss before cumulative effect of a change
    accounting principle                               (17.8)         (21.6)         (13.5)         (22.8)
Cumulative effect of a change in
    accounting principle                                --             --             --            (57.3)
                                                     ---------      ---------      ---------      ---------
Net loss                                               (17.8)%        (21.6)%        (13.5)%        (80.1)%
                                                     =========      =========      =========      =========
</TABLE>

         NET REVENUES. Net revenues for the three months ended September 30,
2003 decreased by $1,436,000 (25.0%) to $4,307,000, from $5,743,000 for the
three months ended September 30, 2002. Net revenues for the six months ended
September 30, 2003 decreased by $1,462,000 (14.4%) to $8,698,000, from
$10,160,000 for the six months ended September 30, 2002. Our revenues consisted
primarily of revenues from (1) engineering and collaborative software products
and services (2) IT services, and (3) Web-based telecommunications and travel
services.

                                       26





<PAGE>

         Net revenues from engineering and collaborative software products and
services increased as a percentage of total net revenues to 62.1% and 62.0% in
the three and six months ended September 30, 2003 from 41.6% and 41.9%,
respectively, from the same periods in the prior fiscal year primarily due to an
increase in net revenues from engineering and collaborative software products
and services offset by decreases in other segments, particularly Web-based
telecommunications and travel services. In dollar terms, net revenues from
engineering and collaborative software products and services were $2,674,000 and
$5,396,000 during three and six months ended September 30, 2003 compared to
$2,390,000 and $4,261,000 during the same periods in the prior fiscal year, an
increase of $284,000 or 11.9% and $1,135,000 or 26.6%, respectively. The
increases in net revenues during the three and six months ended September 30,
2003, consisted of $401,000 and $1,105,000 increases in engineering software and
support net revenues, respectively, compared to the same periods in the prior
fiscal year. The increase in engineering software and support net revenues was
primarily due to additional revenues from the new international regional offices
that were established during the prior fiscal year. In addition, the completion
of a large project during the early part of the fiscal year also contributed to
the increase in net revenues from engineering software and support sales during
the six months ended September 30, 2003. Collaborative software sales decreased
$117,000 during the three months ended September 30, 2003 but increased $30,000
during the six months ended September 30, 2003. During the three months ended
September 30, 2003, no collaborative software projects were completed, which
resulted in the decrease in net revenues, since revenues for such projects are
recognized upon completion when no significant obligations remain.

         Historically, our engineering software sales have improved during the
second half of each fiscal year. We expect this trend to continue in the current
fiscal year. Additionally, we anticipate improvements in engineering software
sales as a result of our efforts to engage our domestic and international
channel partners. However, we cannot assure you that net revenues from
engineering and collaborative software will not decline during the remainder of
the fiscal year due to unanticipated factors or events.

         IT services net revenues continued to decline during the three and
six-month periods ended September 30, 2003, compared to the same periods in the
prior fiscal year. IT services net revenues represented 29.8% and 28.7% of total
net revenues for the three and six month periods ended September 30, 2003,
respectively, compared to 23.8% and 27.4% for the same periods in the prior
fiscal year. In dollar terms, IT services net revenues were $1,285,000 and
$2,492,000 during the three and six month periods ended September 30, 2003,
respectively, compared to $1,369,000 and $2,783,000 during the same periods in
the prior fiscal year, decreases of 6.1% and 10.5%, respectively. In the past
several quarters, the IT services industry had been adversely affected by a slow
economy, and many of our customers reduced, and continue to reduce, spending on
technology consulting and systems integration services. Although the IT services
business seems to have recovered somewhat as evidenced by the slowdown in the
decline in net revenues during the three and six months ended September 30,
2003, we do not anticipate significant recovery to occur in the IT services
segment as we expect that this period of economic uncertainty may continue to
impact our IT services net revenues adversely throughout fiscal 2004.

         Web-based telecommunications and travel services net revenues decreased
as a percentage of total net revenues to 8.1% and 9.3%, respectively, in the
three and six months ended September 30, 2003 from 34.5% and 30.7%,
respectively, during the same periods in the prior fiscal year primarily due to
declines in call termination services net revenues. In dollar terms, net
revenues from this segment were $348,000 and $810,000 during the three and six

                                       27





<PAGE>

months ended September 30, 2003 as compared to $1,984,000 and $3,116,000 during
the same periods in the prior fiscal year, representing decreases of $1,636,000
(82.5%) and $2,306,000 (74.0%) for the three and six months ended September 30,
2003 as compared to the same periods in the prior fiscal year. These decreases
were due to (1) decreases of $1,092,000 and $1,423,000, respectively, in call
termination services during the three and six months ended September 30, 2003
and (2) decreases of $381,000 and $721,000, respectively, in travel services net
revenues during the three and six months ended September 30, 2003. Due to the
recent turmoil in the telecommunications industry, which has increased the
uncertainty of the viability of smaller services providers, some of whom are our
customers, and due to the higher operating costs of the call termination
services business, we have shifted our focus from call terminations services to
the retail phone card business, resulting in lower revenues from call
termination services. Travel services net revenues were lower during the three
and six months ended September 30, 2003 compared to the same periods in the
prior fiscal year, because during the three and six months ended September 30,
2003, we recognized revenues from tickets sold as a ticket consolidator net of
purchase costs, since we did not renew our purchase commitment on such tickets.
In the same periods of the previous fiscal year, we had entered into a firm
purchase commitment for such tickets and were subject to risk of loss if we did
not fulfill the purchase commitment. In accordance with EITF No. 99-19, the
revenues from the sale of such tickets were allowed gross revenue treatment with
purchase costs stated as a separate cost of revenue. For the remainder of fiscal
2004, we do not expect our Web-based telecommunications and travel services net
revenues to improve significantly from current levels due to the uncertainty in
the telecommunications and travel services industries.

         GROSS PROFIT. Gross profit as a percentage of net revenues increased to
63.4% and 64.0%, respectively, for the three and six months ended September 30,
2003 from 45.6% and 46.0%, respectively, for the same periods in the prior
fiscal year. In dollar terms, total gross profit increased by $116,000 (4.4%)
and $888,000 (19.0%), respectively, to $2,732,000 and $5,566,000 during the
three and six months ended September 30, 2003, respectively, compared to the
same periods in the prior fiscal year. The increase is mainly due to the
increases in gross profit from our engineering and collaborative software
products and services segment and our Web-based telecommunications and travel
services segment offset by decrease in gross profit from our IT services
business.

         Gross profit percentage in the engineering and collaborative software
products and services segment decreased to 86.4% and 86.3% during the three and
six months ended September 30, 2003, respectively, from 89.8% and 87.4%,
respectively, during the same periods in the prior fiscal year. The decrease in
gross profit percentage is due to lower levels of revenue from digital media and
animation services during the three and six months ended September 30, 2003 with
no corresponding decrease in the cost of providing such services.

         In dollar terms, gross profit increased by $164,000 and $930,000 during
the three and six months ended September 30, 2003, respectively, compared to the
same periods in the prior fiscal year. Engineering and collaborative software
services gross profit increased by $228,000 and $1,007,000, respectively, during
the three and six months ended September 30, 2003, compared to the same periods
in the prior fiscal year, and were offset by $64,000 and $77,000 reductions in
gross profit, from digital media and animation services during the three and six
months ended September 30, 2003, respectively, compared to the same periods in
the prior fiscal year. Our engineering and collaborative software products and
services segment generally produces higher gross margin than our other segments
due to the low costs associated with each sale. The cost of revenues for the
software sales and support segment includes printing services, direct supplies
such as hardware locks, which are security devices that are attached to the
central processing unit to prevent unauthorized access to licensed software,
salaries for the technical support employees, freight out, and software
amortization expense.

                                       28





<PAGE>

         Gross profit percentage in the IT services segment decreased to 18.8%
and 21.3% during the three and six months ended September 30, 2003,
respectively, from 25.2% and 24.5%, during the same periods in the prior fiscal
year. In dollar terms, IT services gross profit decreased by $103,000 and
$152,000 during the three and six months ended September 30, 2003 compared to
the same periods in the prior fiscal year. Historically, gross profit percentage
from the IT services segment has been lower than gross profit percentage from
the engineering and collaborative software products and services segment due to
the higher cost of labor associated with IT services. The cost of revenues for
IT services includes the salaries, bonuses, and benefits for the consulting
employees. Our IT services consultants generally receive higher salaries than
our technical support employees. As a result of the market slowdown for the IT
industry, net revenues from this segment have been decreasing significantly over
the past several quarters. Although we cut our costs of providing IT services in
response to this continuing decline, the net revenues from this segment were not
adequate to maintain consistent gross profit percentages.

         Gross profit percentage in the Web-based telecommunications and travel
services segment increased to 51.4% and 46.8% during the three and six months
ended September 30, 2003, respectively, from 6.3% and 8.6%, during the same
periods in the prior fiscal year. In dollar terms, gross profit from the
Web-based telecommunications and travel services segment increased by $55,000
and $110,000, respectively, to $179,000 and $379,000 during the three and six
months ended September 30, 2003, respectively, compared to the same periods in
the prior fiscal year. During the three and six months ended September 30, 2003,
the cost of revenues for Web-based telecommunications and travel services
included only the cost of buying minutes from another carrier. In the same
periods of the prior fiscal year, the cost of revenues for Web-based
telecommunications and travel services included both the cost of buying minutes
from another carrier and the cost of purchasing certain airline tickets where we
served as a ticket consolidator and had inventory risk for the tickets purchased
under a firm purchase commitment with a certain airline. Gross profit from
Web-based telecommunications services during the three and six months ended
September 30, 2003 increased due to reduced focus on higher cost call
termination services and due to the lower cost of purchased minutes for our
phone card services. Gross profit from travel services increased due to the
recognition of travel services revenues net of cost of tickets, in the three and
six months ended September 30, 2003, respectively, compared to recognition of
the cost of certain tickets separately from the associated revenues during the
same periods in the prior fiscal year. Although gross profit from Web-based
telecommunications and travel services increased during the three and six months
ended September 30, 2003, compared to the same periods of the prior fiscal year,
we are not certain the trend will continue. Pricing pressures in the
telecommunications industry, continuing threats in the worldwide political
climate, competition from other online travel services and reductions in travel
agency commissions due to pricing pressures may continue to negatively impact
the gross profit from our Web-based communications and travel businesses for the
foreseeable future.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses decreased by $172,000 (6.1%) and $472,000
(8.6%), respectively, during the three and six month periods ended September 30,
2003 to $2,669,000 and $4,985,000, respectively. The decrease in SG&A expenses
for the three months ended September 30, 2003 is due primarily to a $163,000
reduction in salaries and related expenses due to employee terminations, a
$107,000 reduction in dealer sales commissions due to a decrease in dealer
sales, a $129,000 reduction in rent, and a $54,000 reduction in marketing
consulting expenses due to continuing cost control measures, offset by a
$165,000 increase in professional fees, a $49,000 increase in employee insurance

                                       29





<PAGE>

benefits and $30,000 increase in amortization of deferred fees. The decrease in
SG&A expenses for the six months ended September 30, 2003 is due primarily to a
$278,000 reduction in salaries and related benefits due to employee
terminations, a $142,000 reduction in rent, a $107,000 reduction in marketing
consulting expenses due to continuing cost control measures, an $80,000
reduction in advertising expenses due to continuing cost control measures, and a
$43,000 reduction in bad debt expense due to improved collections, offset by a
$183,000 increase in professional fees and a $57,000 increase in amortization of
deferred loan fees. We continue to monitor our SG&A expenses but do not make any
assurances that we can continue to maintain or further cut SG&A expenses from
levels attained in the first six months of fiscal 2004.

         RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D")
expenses consist primarily of software developers' wages. During the three and
six months ended September 30, 2003, R&D expenses decreased by $63,000 (11.5%)
and $23,000 (2.3%), respectively, to $484,000 and $988,000 from $547,000 and
$1,011,000, respectively, during the same periods in the prior fiscal year. The
decrease in R&D expenses is primarily due to our continuing efforts to control
overall costs.

         DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and other
amortization expenses (excluding goodwill amortization and amounts charged to
cost of revenues) decreased by $35,000 (12.8%) and $48,000 (8.9%) to $239,000
and $494,000, respectively, from $274,000 and $542,000, respectively, during the
three and six months ended September 30, 2003 due to fully depreciated assets
not being replaced at the same rate. As a result of our continuing efforts to
control cost, additions to capital equipment have been minimal. We anticipate
that depreciation and amortization expenses will remain at this lower level
through the end of fiscal 2004.

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

         With regard to our ISP initiatives in India, we redirected our primary
focus toward communication and connectivity services targeted at the corporate
market. The total amount charged for the refocus of ISP operations in fiscal
2001 was $1,998,000.

         In the Internet portal business, we redirected our primary focus toward
the telephony and travel services offered through the portal. The initial
restructuring charge related to the refocus of the portal business was $194,000,
which was paid in fiscal 2001. During fiscal 2002, an additional $67,000
relating to contractual obligations for the portal operations was paid.

         In March 2001, we closed our Boston technical support office as part of
consolidating our technical support activities. Technical support activities
previously offered from that office have been consolidated into the California
facility. The closing of this office resulted in the termination of two
employees. The restructuring charge related to the consolidation of technical
support facilities was $166,000, of which $49,000 related to accrued severance
payments for the two terminated employees and $117,000 related to contractual
lease obligations for the vacated space. We made cash payments totaling $58,000
in fiscal 2002 toward settlement of obligations related to this activity. By
consolidating the technical support functions, beginning in April 2001, we

                                       30





<PAGE>

reduced employee costs by approximately $221,000 per year and reduced facility
costs by approximately $51,000 per year. During fiscal 2003, we made cash
payments of $55,000 for severance expenses relating to the termination of one
employee and $47,000 for lease payments for the vacated office space. During the
first six months of fiscal 2004, we made cash payments of $19,000 to payoff the
remaining lease payments for the vacated office space.

         The elimination of the in-house legal department primarily consisted of
the termination of one employee whose position was not refilled. Due to the size
of our operations, a full-fledged internal legal department was unnecessary. We
are able to obtain cost-effective legal services, as and when needed, from our
continuing external legal counsel. By eliminating the in-house legal department,
we reduced employee costs by approximately $127,000 per year beginning in April
2001. In fiscal 2001, we estimated the restructuring charge related to the
elimination of the in-house legal department to be $42,000. Additional charges
of $41,000 and $199,000 were recorded in fiscal 2002 and in fiscal 2003,
respectively, since the original estimate of severance expenses was
insufficient. During fiscal 2002 and fiscal 2003, we paid $52,000 and $50,000,
respectively, toward settlement of obligations due to the terminated employee.
During the first quarter of fiscal 2004, we paid off the remaining settlement
obligation of $180,000.

         IMPAIRMENT CHARGE. We recorded an impairment charge of $67,000 during
the three and six months ended September 30, 2002 as a result of the write-down
of a capitalized software asset to its net realizable value.

         INTEREST EXPENSE. Net interest for the three and six months ended
September 30, 2003 increased by $60,000 and $122,000, respectively, to $114,000
and $238,000, respectively, from the same periods in the prior fiscal year. The
increase during the three and six months ended September 30, 2003 was primarily
due to an increase in debt obligations.

         INCOME TAXES. We recorded an income tax expense of $112,000 during the
six months ended September 2003 compared to an income tax benefit of $301,000
during the same period in the prior fiscal year. Due to our net operating loss
position, we reversed tax liabilities recorded in prior periods that were no
longer required, which resulted in a tax benefit in the prior fiscal year. Tax
expense in the three and six months ended September 30, 2003 resulted from
provisions for foreign taxes.

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

LIQUIDITY AND CAPITAL RESOURCES

         Historically, we have relied upon cash from financing activities to
fund most of the cash requirements of our operating and investing activities.
Currently, we finance our operations (including capital expenditures) primarily
through existing cash and cash equivalent balances and borrowings under our
credit facilities. We have used debt and equity financing when appropriate and
practicable. In December 2002, we issued to Laurus Master Fund, Ltd., or Laurus,
a $2,000,000, 6% convertible note. On July 31, 2003, we obtained a three-year,
renewable, $4,000,000 revolving accounts receivable credit facility from Laurus.
Our principal sources of liquidity at September 30, 2003 consisted of $1,957,000
of cash and cash equivalents. Cash and cash equivalents decreased by $904,000
(31.6%) during the six months ended September 30, 2003. The primary reasons for
this decrease were repayment of debt, payment of capital lease obligations and
usage of cash in operations. During the six months ended September 30, 2003, our
consolidated average monthly net cash outflow from operations was approximately
$128,000, compared to approximately $156,000 during the same period in the prior
fiscal year.

                                       31





<PAGE>

         Net cash used in operations was $770,000 during six months ended
September 30, 2003 compared to $934,000 during the same period in the prior
fiscal year. Net loss was the primary reason for cash used in operations in both
periods. A $517,000 decrease in deferred revenues, a $224,000 decrease in
accrued expenses, a $199,000 decrease in accrued restructuring costs, a $139,000
increase in prepaid expenses and other current assets and a $135,000 decrease in
accounts payable contributed to the usage of cash in the six months ended
September 30, 2003, and were offset by a $577,000 decrease in deposits and a
$312,000 decrease in accounts receivable. A $416,000 decrease in deferred
revenues, a $353,000 decrease in accrued expenses, a $195,000 decrease in
accrued restructuring costs, a $174,000 decrease in income taxes payable and a
$123,000 decrease in accounts payable contributed to the usage of cash, offset
by cash provided by a $779,000 decrease in accounts receivable, a $554,000
decrease in prepaid and other current assets, a $300,000 decrease in income tax
receivable and a $112,000 decrease in notes and related party loan receivable
during the six months ended September 30, 2002.

         Net cash used in investing activities during the six months ended
September 30, 2003 consisted solely of capital expenditures of $40,000 compared
to $203,000 of capital expenditures during the six months ended September 30,
2003.

         Cash used by financing activities during the six months ended September
2003 primarily resulted from $527,000 in repayments of debt, offset by proceeds
of $627,000. Of this amount $289,000 related to the convertible debt we issued
to Laurus on December 13, 2002 (amended July 31, 2003), as described below. In
addition, repayments of capital lease obligations amounted to $217,000. During
the same period of the prior fiscal year, we used $132,000 to repay debt and
$208,000 to repay capital lease obligations.

         We incurred net losses of $1,170,000 and $8,136,000 and used cash in
operations of $770,000 and $934,000 during the six months ended September 30,
2003 and 2002, respectively. Our future capital requirements will depend upon
many factors, including sales and marketing efforts, the development of new
products and services, possible future strategic acquisitions, the progress of
research and development efforts, and the status of competitive products and
services.

                                       32





<PAGE>

         The following table summarizes our contractual obligations and
commercial commitments at September 30, 2003 (in thousands of dollars):

<TABLE>
<CAPTION>
                                         ------------------------------------------------------------------------
                                                                     PAYMENTS DUE BY PERIOD
                                         ------------------------------------------------------------------------
                                                           LESS THAN
CONTRACTUAL OBLIGATIONS                       TOTAL         1 YEAR       1-3 YEARS     4-5 YEARS   AFTER 5 YEARS
-----------------------                       -----         ------       ---------     ---------   -------------
<S>                                           <C>            <C>             <C>           <C>           <C>
Long-Term Debt                                2,343          1,205           885           170           83
Capital Lease Obligations                       821            374           408            39            -
Operating Leases                              3,645            513           835           645        1,652
                                         ------------------------------------------------------------------------
Total Contractual Cash Obligations            6,809          2,092         2,128           854        1,735
                                         ========================================================================
                                         TOTAL AMOUNTS     LESS THAN
OTHER COMMERCIAL COMMITMENTS               COMMITTED        1 YEAR         1-3 YEARS     4-5 YEARS  OVER 5 YEARS
----------------------------             -------------     ---------      ---------     ---------  ------------
Letter of Credit                              10              10                 -            -             -
                                         ------------------------------------------------------------------------
Total Commercial Commitments                  10              10                 -            -             -
                                         ========================================================================
</TABLE>

         As indicated above, we historically have relied upon cash from
financing activities to fund most of the cash requirements of our operating and
investing activities. We have not been able to generate sufficient cash from our
operating activities in the past, and there is no assurance we will be able to
do so in the future. However, we believe that current and future available
capital resources, including amounts available under the revolving credit
facility from Laurus, will be adequate to fund our operations for the next
twelve months, because we are continuing to implement cost containment measures
in an effort to reduce net cash outflow both domestically and abroad and are
working to increase sales of our software products. The results of these
combined efforts have reduced our consolidated monthly net cash outflow from
operations to approximately $128,000 per month.

         Our former bank line of credit expired in August 2001, and our $500,000
line of credit from a major stockholder expired March 31, 2003. On December 13,
2002, we issued a $2.0 million, 6% convertible note to Laurus. On July 31, 2003,
we amended this note to include the following: (1) the interest rate on the
convertible note was amended from 6% per annum to the greater of 5% or the prime
rate plus 1% per annum, payable monthly in arrears; (2) the amortization period
was extended from 20 months ending on November 2004 to 24 months ending on July
2005; (3) the penalty for repayments of the outstanding balance in cash was
removed; and (4) the fixed conversion price upon which potential issuance of our
common stock to satisfy the obligations of the convertible note is based, was
reduced from $1.60 to $1.30. As a result of the reduction in the conversion
price from $1.60 to $1.30, a beneficial conversion amount of $302,000
estimated using the Black-Scholes option pricing model was
recorded as discount to the convertible debt, which is being amortized over
the life of the note using the effective interest rate method.

         On July 31, 2003, we also obtained a three-year, renewable, $4,000,000
revolving accounts receivable credit facility from Laurus. The balance
outstanding on the convertible note will reduce the amount available under this
revolving credit facility.

         Borrowings against this credit facility will accrue interest,
initially, at an annual rate equal to the greater of 5% or prime rate plus 1%
per annum, payable monthly in arrears. Beginning in November 2003, interest rate
per annum on the borrowings will be adjusted every month based on certain
conditions and on the volume weighted average price of our common stock.
Obligations owed under this revolving credit facility may be repaid at our
option in cash or through the issuance of shares of our common stock at the

                                       33





<PAGE>

fixed conversion price of $1.30 per share, subject to volume limitations,
provided the shares are registered with the Securities and Exchange Commission
for public resale and the then current market price is greater than 110% of the
fixed conversion price. The fixed conversion price may be adjusted upward under
certain circumstances. Also, the fixed conversion price is subject to standard
anti-dilution provisions for stock-splits, stock dividends, reclassifications,
and the like, and is subject to downward adjustment for certain issuances at
prices below the then fixed conversion price. The accounts receivable credit
facility has a three-year term, which automatically renews every three years
unless cancelled in writing by us or by Laurus under certain conditions. An
early termination fee of up to $120,000 will be payable if the facility is
terminated prior to August 1, 2006. The facility also provides us the
flexibility to access additional amounts above what is available based upon
eligible accounts receivable. Any such additional amounts would accrue interest
at a rate of 0.6% per month, payable monthly.

         In connection with this financing, we paid a $140,000 fee to an
affiliate of Laurus and issued to Laurus a five-year warrant to purchase 180,000
shares of our common stock, exercisable at various exercise prices as follows:
115% of the then effective fixed conversion price per share for the purchase of
up to 60,000 shares; 125% of the then effective fixed conversion price per share
for the purchase of an additional 60,000 shares; and 145% of the then effective
fixed conversion price per share for the purchase of an additional 60,000
shares. Based on the initial fixed conversion price of $1.30, the exercise
prices would be $1.495 per share for the purchase of up to 60,000 shares; $1.625
per share for the purchase of an additional 60,000 shares; and $1.885 per share
for the purchase of an additional 60,000 shares. The fair market value of these
warrants estimated using the Black-Scholes option pricing model was $201,000,
which was recorded as a discount. Laurus may also receive additional five-year
warrants to purchase up to 400,000 shares of our common stock at an exercise
price equal to 125% of the fixed conversion price based upon how much of the
outstanding obligation under the credit facility is converted to equity. At
September 30, 2003, we had borrowed $600,000 under this credit facility and
recognized approximately $77,000 in beneficial conversion adjustment as a
discount on the amount borrowed during the three-months ended September 30,
2003. As of September 30, 2003, none of the additional five-year warrants have
been issued. The revolving credit facility is secured by a general security
interest in the assets of netGuru and its subsidiaries.

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

         We believe that our current cash and cash equivalents balances, along
with the revolving credit facility mentioned above, will be sufficient to meet
our working capital needs at currently anticipated levels for the next twelve
months. We have made, and will continue to make, budget cuts to maintain
adequate capital reserves. However, if we are unable to execute our operational
plan for the next twelve months, we may be required to raise additional funds
through public or private equity or debt financing. We cannot be certain that
additional financing will be available, if needed, or, if available, will be on
terms favorable to us. In addition, any future financing may cause significant
dilution to existing stockholders. Any debt financing or other financing of
securities senior to our common stock likely will include financial and other
covenants that may restrict our flexibility. At a minimum, we expect these
covenants to include restrictions on our ability to pay dividends on our common
stock.

                                       34





<PAGE>

         With the recognition of the $5,824,000 impairment charge to our IT
services reporting unit in fiscal 2003, along with our operating loss in fiscal
2003, our stockholders' equity declined below The Nasdaq National Market's
minimum continued listing requirement of $10,000,000. On September 8, 2003, we
applied to transfer our listing to The Nasdaq Small Cap Market. On October 9,
2003, we transferred our listing to The Nasdaq SmallCap Market. By moving from
The Nasdaq National Market to The Nasdaq SmallCap Market, our stock price could
decline and the ability of our stockholders and of any potential or future
investors to achieve liquidity from our common stock could be severely limited.
This could impact our ability to raise any needed additional working capital
through equity offerings on acceptable terms.

ITEM 3.  CONTROLS AND PROCEDURES.

         Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of September 30, 2003, that the design and
operation of our "disclosure controls and procedures" (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange
Act")) are effective to ensure that information required to be disclosed by us
in the reports filed or submitted by us under the Exchange Act is accumulated,
recorded, processed, summarized and reported to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding whether or not disclosure is required.

         During the quarter ended September 30, 2003, there were no changes in
our "internal control over financial reporting" (as defined in Rule 13a-15(f)
under the Exchange Act) that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.

                                       35





<PAGE>

                          PART II -- OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS

             None

ITEM 2.      CHANGES IN SECURITIES AND USE OF PROCEEDS

             None

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

             None

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

             During the quarter ended September 30, 2003, no matters were
             submitted to a vote of our common stockholders.

ITEM 5.      OTHER INFORMATION

             None

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K.

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

                  10.1     Security Agreement dated July 31, 2003 by and between
                           netGuru, Inc. and Laurus Master Fund, Ltd. (1)

                  10.2     Secured Convertible Note dated July 31, 2003 made by
                           netGuru, Inc. in favor of Laurus Master Fund, Ltd.
                           (1)

                  10.3     Common Stock Purchase Warrant dated July 31, 2003
                           issued by netGuru, Inc. in favor of Laurus Master
                           Fund, Ltd. (1)

                  10.4     Registration Rights Agreement dated July 31, 2003 by
                           and between netGuru, Inc. and Laurus Master Fund,
                           Ltd. (1)

                  10.5     Amendment No. 2 to Securities Purchase Agreement
                           dated August 4, 2003 by and between netGuru, Inc. and
                           Laurus Master Fund, Ltd. (1)

                  10.6     Amendment No. 2 to Secured Convertible Note dated
                           August 4, 2003 by and between netGuru, Inc. and
                           Laurus Master Fund, Ltd. (1)

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

                                       36





<PAGE>

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

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

         (1) Filed as an exhibit to our Form 8-K for July 25, 2003 that was
         filed with the Securities and Exchange Commission on August 8, 2003
         (File No. 0-28560) and incorporated herein by reference.

         (b)      Reports on Form 8-K

                  We filed a Form 8-K for July 25, 2003 that contained "Item 5 -
                  Other Events" and "Item 7 - Financial Statements and
                  Exhibits." The Form 8-K contained a press release and an
                  announcement regarding the credit facility we secured with
                  Laurus Master Fund, Ltd. The Form 8-K also contained
                  information regarding changes to our board of directors.

                  We filed a Form 8-K for September 12, 2003. The Form 8-K
                  contained a press release announcing our application to
                  transfer our common stock listing to The Nasdaq SmallCap
                  Market.

                  We filed a Form 8-K for October 8, 2003. The Form 8-K
                  contained a press release announcing that we moved our common
                  stock listing from The Nasdaq National Market to The Nasdaq
                  SmallCap Market and that the stock would begin trading on the
                  Nasdaq SmallCap Market on October 9, 2003.

                  We filed a Form 8-K/A No. 1 for July 25, 2003. The Form 8-K/A
                  No. 1 contained "Item 5-Other Events and Required FD
                  Disclosures" and discussed our settlement agreement with GRAL,
                  Inc.

                                       37





<PAGE>

                                   SIGNATURES

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

Date:  November 14, 2003

                                                NETGURU, INC.

                                                By: /S/ BRUCE K. NELSON
                                                    -------------------
                                                    Bruce K. Nelson
                                                    Chief Financial Officer
                                                    (principal financial officer
                                                    and duly authorized officer)

                                       38





<PAGE>

            EXHIBITS FILED WITH THIS QUARTERLY REPORT ON FORM 10-QSB

                  Exh. No.                 Description
                  --------                 -----------

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

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

                                       39