<PAGE>


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

                               Amendment No. 1 to
                                   FORM 10-QSB

(Mark One)
[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                  For the quarterly period ended JUNE 30, 2004
                                       OR
[ ]  TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT
     For the transition period from __________ to __________

                        Commission file number: 000-28560

                                  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)

                                 NOT APPLICABLE
              (Former name, former address and former fiscal year,
                          if changed since last report)

Check whether the issuer: (1) 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,
$0.01 par value, was 19,117,154 on April 19, 2005.

Transitional Small Business Disclosure Format (check one)         Yes[ ]  No [X]





<PAGE>

                                EXPLANATORY NOTE
                       ----------------------------------


         netGuru, Inc. (the "Company") is filing this Amendment No. 1 to Form
10-QSB for the quarter ended June 30, 2004 to reflect the restatement of its
condensed consolidated financial statements for the quarter ended June 30, 2004.
The restatement arises from an interpretation of accounting for modification of
convertible debt. Specifically, in its previous filing for the quarter ended
June 30, 2004, the Company had recorded the amendment to one of its convertible
secured notes as a substantial modification of debt and, therefore, wrote off
the $133,000 unamortized debt discount rather than continuing to amortize this
amount over the remaining term of the debt. Upon further interpretation of
Emerging Issues Task Force ("EITF") No. 96-19, "Debtor's Accounting for a
Modification or Exchange of Debt Instruments," the Company determined the
modification was not substantial. Refer to Note 15 for a description and
quantification of the restatement.

         The Company has also reclassified the results of operations of its
Web-based telecommunications services division, which it discontinued in
September 2004. Refer to Note 14 for a description and quantification of the
reclassification.

         The information in this Amendment No. 1 to Form 10-QSB has not been
updated from the original filing of the Form 10-QSB except as required to
reflect the effects of the restatement and reclassification. The restatement and
reclassification include changes to Part I Items 1 and 2. Items included in the
original Form 10-QSB that are not included herein are not amended and remain in
effect as of the date of the original filing. Additionally, this Amendment No. 1
to Form 10-QSB does not purport to provide an update or a discussion of any
other developments at the Company subsequent to the original filing.

                                       2




<PAGE>


         PART I
                              FINANCIAL INFORMATION

                                                                            PAGE

Item 1.  Financial Statements..................................................4

         Condensed Consolidated Statements of Operations for the three
         months ended June 30, 2004 and 2003 (unaudited).......................4

         Condensed Consolidated Balance Sheets as of
         June 30, 2004 (unaudited) and March 31, 2004..........................5

         Condensed Consolidated Statements of Cash Flows for the
         three months ended June 30, 2004 and 2003 (unaudited).................6

         Notes to Condensed Consolidated Financial Statements (unaudited)......7

Item 2.  Management's Discussion and Analysis or Plan of Operation............17

                                     PART II
                                OTHER INFORMATION


Item 6.  Exhibits and Reports on Form 8-K.....................................28


Signatures....................................................................29

Exhibits Filed with this Amendment No. 1 to Quarterly Report on Form 10-QSB...30


                                       3




<PAGE>

                         PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<CAPTION>
                                                                         THREE MONTHS ENDED
                                                                             JUNE 30,
                                                                   -----------------------------
                                                                       2004             2003
                                                                    (RESTATED)
                                                                   -------------   -------------
<S>                                                                <C>             <C>
Net revenues:
    Engineering and collaborative software products and services   $      2,444    $      2,722
    IT services                                                           1,080           1,213

                                                                   -------------   -------------
           Total net revenues                                             3,524           3,935
                                                                   -------------   -------------

Cost of revenues:
    Engineering and collaborative software products and services            245             241
    IT services                                                             758             920

                                                                   -------------   -------------
           Total cost of revenues                                         1,003           1,161

                                                                   -------------   -------------
           Gross profit                                                   2,521           2,774
                                                                   -------------   -------------

Operating expenses:
    Selling, general and administrative                                   2,235           2,201
    Research and development                                                415             532
    Bad debt expense                                                        165              11
    Depreciation                                                            241             251

                                                                   -------------   -------------
           Total operating expenses                                       3,056           2,995
                                                                   -------------   -------------

           Operating loss                                                  (535)           (221)
                                                                   -------------   -------------

Other expense (income):
    Interest, net (Note 15)                                                 138             144
    Other income                                                            (33)             --

                                                                   -------------   -------------
           Total other expense                                              105             144
                                                                   -------------   -------------

Loss from continuing operations before income taxes                        (640)           (365)
Income tax expense                                                            6              37
                                                                   -------------   -------------
Net loss from continuing operations                                $       (646)   $       (402)
Gain (loss) from discontinued operations (Note 14)                           29              (1)
                                                                   -------------   -------------
                    Net loss                                               (617)           (403)
                                                                   =============   =============

Basic and diluted net loss per common share:
    Net loss per common share from continuing operations           $      (0.03)          (0.02)
                                                                   -------------   -------------
    Basic and diluted net loss per common share                    $      (0.03)   $      (0.02)
                                                                   =============   =============

Common shares used in computing net loss per common share            18,626,165      17,325,150
                                                                   =============   =============

             See accompanying notes to condensed consolidated financial statements.

                                               4
</TABLE>




<PAGE>

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

<CAPTION>
                                                              JUNE 30,   MARCH 31,
                                                               2004        2004
                                                            (Unaudited)
                                                            (Restated)
                                                             ---------   ---------
                                     ASSETS
<S>                                                          <C>         <C>
Current assets:
    Cash and cash equivalents                                $  2,341    $  1,646
    Short-term investment                                         100         100
    Accounts receivable (net of allowance for
      doubtful accounts of $707 and $615, as
      of June 30, 2004 and March 31, 2004,
      respectively)                                             3,046       3,340
    Income tax receivable                                          16          16
    Notes and related party loans receivable                       33          35
    Deposits                                                      102          67
    Prepaid expenses and other current assets                   1,192       1,174
    Assets of subsidiary held for sale                             57         327
                                                             ---------   ---------

           Total current assets                                 6,887       6,705

Property, plant and equipment, net                              2,088       2,215
Goodwill                                                        3,104       2,891
Other assets                                                      155         219
                                                             ---------   ---------
                                                             $ 12,234    $ 12,030
                                                             =========   =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Current portion of long-term bank debt,
      net of discount of $206 and $186, as
      of June 30, 2004 and March 31, 2004,
      respectively                                           $    964    $    975
    Current portion of capital lease obligations                  120         109
    Accounts payable                                              499         600
    Accrued expenses                                            1,007       1,160
    Income taxes payable                                           63          55
    Deferred revenues                                           1,908       1,834
    Other liabilities                                             164         208
    Liabilities of subsidiary held for sale                        66         186
                                                             ---------   ---------

           Total current liabilities                            4,791       5,127

Long-term bank debt, net of current portion,
  net of discount of $255 and $185, as of June
  30, 2004 and March 31, 2004, respectively                     1,491       1,382
Capital lease obligations, net of current portion                 403         368
Deferred gain on sale-leaseback                                   730         747
                                                             ---------   ---------

           Total liabilities                                    7,415       7,624
                                                             ---------   ---------
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; 18,812,154 shares outstanding as of June
      30, 2004 and 18,087,154 shares outstanding as of
      March 31, 2004                                              188         181

    Additional paid-in capital                                 36,380      35,352
    Accumulated deficit                                       (31,061)    (30,444)
    Accumulated other comprehensive loss:
       Cumulative foreign currency translation adjustments       (688)       (683)
                                                             ---------   ---------

           Total stockholders' equity                           4,819       4,406
                                                             ---------   ---------
                                                             $ 12,234    $ 12,030
                                                             =========   =========

             See accompanying notes to condensed consolidated financial statements.

                                               5
</TABLE>




<PAGE>

<TABLE>
                                         NETGURU, INC. AND SUBSIDIARIES
                                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                   (Unaudited)
                                                 (In thousands)

<CAPTION>
                                                                           THREE MONTHS    THREE MONTHS
                                                                              ENDED           ENDED
                                                                          JUNE 30, 2004   JUNE 30, 2003
                                                                           (RESTATED)
                                                                           -----------     -----------
<S>                                                                        <C>             <C>
Cash flows from operating activities:
    Net loss                                                               $     (617)     $     (402)
    Gain (loss) from discontinued operations                                       29              (1)
                                                                           -----------     -----------
    Loss from continuing operations                                              (646)           (403)
    Adjustments to reconcile net loss to net cash used in operating
      activities:
        Depreciation and amortization                                             310             320
        Bad debt expense                                                          165              11
        Amortization of debt discount                                              63              --
        Consulting expense recognized on issuance of warrants and stock            35              --
        Changes in operating assets and liabilities:
          Accounts receivable                                                      41             213
          Notes and related party loans receivable                                  2              44
          Prepaid expenses and other current assets                               (74)           (120)
          Deposits                                                                (39)            591
          Other assets                                                             (5)             (5)
          Accounts payable                                                        (81)             21
          Accrued expenses                                                       (176)           (403)
          Income taxes payable                                                      9              30
          Accrued restructuring costs                                              --            (188)
          Other current liabilities                                               (41)            (49)
          Deferred revenues                                                        84            (241)
          Deferred gain on sale-leaseback                                         (18)            (17)
                                                                           -----------     -----------
                  Net cash used in operating activities                          (371)           (196)
                                                                           -----------     -----------
Cash flows from investing activities:
    Purchase of property, plant and equipment                                     (98)            (12)
    Proceeds from sale of property, plant and equipment                             1              --
    Payments to acquire companies, net of cash acquired                           (24)             --
    Proceeds from sale of subsidiary                                              155              --
                                                                           -----------     -----------
                  Net cash used in investing activities                            34             (12)
                                                                           -----------     -----------
Cash flows from financing activities:
    Proceeds from issuance of bank debt                                         1,703              43
    Repayment of bank debt                                                       (781)           (310)
    Repayment of capital lease obligations                                        (32)            (67)
    Issuance of common stock                                                       25              --
                                                                           -----------     -----------

                  Net cash provided by (used in) financing activities             915            (334)
                                                                           -----------     -----------

    Effect of exchange rate changes on cash and cash equivalents                   90              46
                                                                           -----------     -----------
                  Net cash provided by (used in) continuing operations            668            (495)
                  Net cash provided by (used in) discontinued operations           27            (155)

                                                                           -----------     -----------
Cash and cash equivalents, beginning of period                                  1,646           2,772
                                                                           -----------     -----------
Cash and cash equivalents, end of period                                   $    2,341      $    2,122
                                                                           ===========     ===========

Supplemental disclosure of cash flow information: Amounts paid for:
         Interest                                                          $       80      $      107
         Income taxes                                                      $        4      $        8
Supplemental disclosure of non-cash investing and financing activities:
         Acquisition of equipment under capital lease                      $       78      $       --
         Repayment of convertible debt with common stock                   $      910      $       --
         Acquisition of a company                                          $      150      $       --

                     See accompanying notes to condensed consolidated financial statements.

                                                        6
</TABLE>




<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (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 June 30, 2004 and
the results of operations and the cash flows for the three months ended June 30,
2004 and 2003, 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 months ended June 30, 2004 are not necessarily
indicative of the results to be expected for the full year ending March 31,
2005. It is suggested that the accompanying condensed consolidated financial
statements be read in conjunction with the Company's audited consolidated
financial statements included in the Company's annual report on Form10-KSB for
the year ended 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 2004
consolidated financial statements to conform to the fiscal 2005 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 June 30, 2004, the Company's
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's
management 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 June 30,
2004, was approximately $2.9 million.

3.  IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

    REVENUE RECOGNITION

         The Emerging Issues Task Force, or EITF, 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


                                       7




<PAGE>

over different periods. The Company 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 the Company's 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 (for example, 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. The Company adopted the
consensus in October 2003. The adoption of EITF 03-5 did not materially impact
the Company's consolidated financial condition or results of operations.

    FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY

         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. The
adoption of SFAS No. 150 did not materially 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 June 30, 2004,
there were no unamortized capitalized software costs.

         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 and $70,000 for the quarters ended June 30,
2004 and 2003, respectively. Accumulated amortization on capitalized software
was $982,000 and $703,000 as of June 30, 2004 and 2003, 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 and IT services.

         Revenue from software sales is recognized when persuasive
evidence of an arrangement exists, delivery has been completed and if no
significant post-contract support obligations remain outstanding, the price
to the Company's buyer is fixed or determinable and collection
of the resulting receivable is deemed probable. Since July 1, 2002, the Company
has provided a 15-day right of return (from the date of purchase) on the
purchase of a product



                                       8




<PAGE>

during which time the customer may return the product subject to a $50
restocking fee per item returned. Since the Company's product returns have
historically not been material, the Company does not make any provisions for
such returns. 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.

         In October 1997, the Accounting Standards Executive Committee ("AcSEC")
of the 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 modifies 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.

         The Company sells its engineering and collaborative software along with
a maintenance package. This constitutes a multiple element arrangement. The
price charged for the maintenance portion is the same as when the maintenance is
sold separately. The fair values of the maintenance contracts sold in all
multiple element arrangements are recognized over the terms of the maintenance
contracts. The engineering and collaborative software portion is recognized when
persuasive evidence of an arrangement exits, price is fixed and determinable,
when delivery is complete, collection of the resulting receivable is probable
and no significant obligations remain.

         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 six months. The Company did not have any fixed price
contracts at June 30, 2004.

                                       9




<PAGE>

6.  DEFERRED REVENUES

         The Company defers revenues for its maintenance contracts and for its
collaborative software sales 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.

7.  LONG-TERM DEBT

         On December 13, 2002, the Company entered into a Securities Purchase
Agreement ("Agreement") with Laurus Master Fund, Ltd. ("Laurus"). Pursuant to
the Agreement, the Company issued to Laurus a 6% Convertible Note ("2002 Note")
in the principal amount of $2,000,000 maturing on December 12, 2004 and a
five-year warrant to purchase up to 200,000 shares of the Company's common stock
at exercise prices ranging from $1.76 to $2.40 per share.

         On August 4, 2003, the terms of the 2002 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.

         In April 2004, Laurus converted $650,000 of principal balance on the
2002 Note into 500,000 shares of the Company's common stock. At June 30, 2004,
the Company had a principal balance of $80,000, excluding unamortized fees and
beneficial conversion adjustments, under the 2002 Note.

         On July 31, 2003, the Company obtained a three-year, renewable,
$4,000,000 revolving accounts receivable credit facility from Laurus
("Facility"). The amount available under this Facility is reduced by the
balances outstanding on the 2002 Note and the Amended 2003 Note (defined below).

         Borrowings under the Facility accrued interest, initially, at an annual
rate equal to the greater of 5% or the prime rate plus 1%. Beginning November 1,
2003, the interest rate may be adjusted every month based on certain
registration requirements and on the volume weighted average price of the
Company's common stock. No adjustments were made to the interest rate during the
period ended June 30, 2004. Obligations owed under this 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, as described in the Facility. The Facility has a
three-year term. 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, under certain conditions, the flexibility to borrow additional
amounts up to $1,000,000 above what is available based upon eligible accounts
receivable. Any such additional borrowings will accrue interest at a rate of
0.6% per month, payable monthly.

         In connection with this Facility, the Company issued to Laurus a
five-year warrant to purchase 180,000 shares of the Company's common stock,
exercisable at various prices. 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


                                       10




<PAGE>

outstanding obligation under the Facility is converted to equity. As of June 30,
2004, none of the additional five-year warrants had been issued. The Facility is
secured by a general security interest in the assets of the Company and its
subsidiaries and prohibits the Company from paying any dividends on its common
stock without Laurus' permission.

         On December 4, 2003, the outstanding balance of $900,000 under the
Facility was refinanced with Laurus along with $500,000 of additional borrowings
into a three-year, 5% secured convertible note ("2003 Note"). At June 30, 2004,
the Company had no borrowings under the Facility.

         The interest rate on the 2003 Note is equal to the greater of 5% or the
prime rate plus 1%. The fixed conversion price, upon which potential issuances
of the Company's common stock to satisfy the obligations of the 2003 Note are
based, is $1.30. In April 2004, the 2003 Note was amended ("Amended 2003 Note")
to include $1,000,000 in additional borrowings. The Amended 2003 Note requires
monthly principal payments of $50,000 plus accrued interest (payable in arrears)
commencing August 1, 2004, with the entire remaining principal balance becoming
due on December 3, 2006. The Company recorded approximately $173,000 as
additional discount to the Amended 2003 Note, which included the $11,000 in fees
it paid to an affiliate of Laurus and the $162,000 it recorded in April 2004 due
to the beneficial conversion rate of the debt related to the additional
borrowings. This additional discount, along with approximately $133,000 in
unamortized discount remaining at the time of the amendment for a total discount
of $306,000, is being amortized to interest expense over the remainder of the
term of the Amended 2003 Note. In April 2004, Laurus also converted $260,000 of
the principal balance into 200,000 shares of the Company's common stock. At June
30, 2004, the Company had an outstanding balance of $2,110,000, excluding
unamortized fees and unamortized beneficial conversion adjustments, under the
Amended 2003 Note.

         The 2002 Note and the Amended 2003 Note are secured by a general
security interest in the assets of the Company and its domestic subsidiaries.
The Company was required to use the net proceeds from the 2002 Note and the
Amended 2003 Note for general corporate purposes only. The Company is also
required not to permit for any fiscal quarter commencing April 1, 2003, the net
operating cash flow deficit to be greater than $500,000, excluding extraordinary
items, as determined by Laurus. At June 30, 2004, the Company was in compliance
with this covenant.

8.  STOCKHOLDERS' EQUITY

         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.

                                       11




<PAGE>

         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):

                                                                 THREE MONTHS
                                                                ENDED JUNE 30,
                                                                 2004     2003
                                                               -------  --------

              Net loss - as reported                           $ (617)  $  (403)
              Deduct:  Stock-based compensation expense
                  determined under the fair value based
                  method for all awards, net of tax                34        55
                                                               -------  --------
              Net loss - pro forma                             $ (651)  $  (458)
                                                               =======  ========
              Basic  and diluted net loss per share -
                  as reported                                  $(0.03)  $ (0.02)
                                                               =======  ========
                   pro forma                                   $(0.04)  $ (0.03)
                                                               =======  ========
              Weighted average fair value of options
                  granted                                      $   --   $    --
                                                               =======  ========


                                                                 THREE MONTHS
                                                                ENDED JUNE 30,
                                                                 2004     2003
                                                               -------  --------

              Black-Scholes option pricing model
                  assumptions:
                       Dividend yield                             --       --
                       Expected volatility                      60.2%   111.9%
                       Risk-free interest rate                   3.9%     2.9%
                       Expected option lives (in years)          6.4      6.8

9.  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 balance sheet. Gains and losses
resulting from foreign currency transactions are included in operations and were
not material to the first quarters of fiscal 2005 and 2004.

10. 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 $621,000 and $321,000 for the quarters ended June 30, 2004 and 2003,
respectively.

                                       12




<PAGE>

11. 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
                                                                             JUNE 30,
                                                                       ---------------------
                                                                         2004         2003
                                                                       ---------   ---------
<S>                                                                    <C>         <C>
         Numerator:
         Net loss and numerator for basic and diluted loss per share   $   (617)   $   (403)
                                                                       =========   =========

         Denominator:
         Denominator for basic net loss per share - average
            number of common shares outstanding during the period        18,626      17,325
         Incremental common shares attributable to exercise of
            outstanding options, warrants and other common stock
            equivalents                                                      --          --
                                                                       ---------   ---------
         Denominator for diluted net loss per share                      18,626      17,325
                                                                       =========   =========

         Basic and diluted net loss per share                          $  (0.03)   $  (0.02)
                                                                       =========   =========
</TABLE>

         Options, warrants and other common stock equivalents amounting to
1,847,000 and 1,179,000 potential common shares were excluded from the
computations of diluted EPS for the quarters ended June 30, 2004 and 2003,
respectively, because the Company reported net losses and, therefore, the effect
would have been anti-dilutive. Potential common shares amounting to 1,685,000
from the possible conversion of the convertible notes issued to Laurus were
excluded from the computation of diluted loss per share for the quarter ended
June 30, 2004, as their effect would have been anti-dilutive.

12. SEGMENT AND GEOGRAPHIC DATA

         The Company is an integrated Internet and IT technology and services
company. Prior to December 31, 2003, the Company reported the results of its
travel subsidiary, e-Destinations, and its Web-based telecommunications services
division in a separate segment called the "Web-based travel and
telecommunications services" segment. In its continuing efforts to focus on its
core software products and IT services businesses, the Company finalized the
sale of e-Destinations in April 2004.

         During the quarter ended March 31, 2004, the Company reported the
results of its telecommunications services division in a separate segment called
Web-based telecommunications services. During the quarter ended September 30,
2004, the Company sold its telecommunications services division (see
"Discontinued Operations"). The following presents the results of operations for
the three months ended June 30, 2004 as if the Company operated in two segments
- (1) engineering and collaborative software products and services and (2) IT
services, with the assets and liabilities of the discontinued operations shown
separately as "held for sale." Prior period presentation has been revised to be
consistent with the current period presentation for the discontinued operations.

         The Company's management reports unallocable expenses related to the
Company's corporate activities in a separate "Center."

                                       13




<PAGE>

         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.

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

                                                             THREE MONTHS ENDED
                                                                  JUNE 30,
                                                            --------------------
                                                              2004        2003
                                                            --------    --------
                                                               (IN THOUSANDS)
          NET REVENUE
              Engineering and collaborative software        $ 2,444     $ 2,722
                products and services
              IT services                                     1,080       1,213
                                                            --------    --------
                   Consolidated                             $ 3,524     $ 3,935
                                                            ========    ========

          GROSS PROFIT
              Engineering and collaborative software        $ 2,199     $ 2,481
                products and services
              IT services                                       322         293
                                                            --------    --------
                   Consolidated                             $ 2,521     $ 2,774
                                                            ========    ========

          OPERATING (LOSS) INCOME
              Engineering and collaborative software        $  (113)    $    91
                products and services
              IT services                                        28         (10)
              Center                                           (450)       (301)
                                                            --------    --------
                   Consolidated                             $  (535)    $  (221)
                                                            ========    ========

         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:

                                                             THREE MONTHS ENDED
                                                                  JUNE 30,
                                                            --------------------
                                                              2004        2003
                                                            --------    --------
                                                               (IN THOUSANDS)

                NET REVENUE
                United States                               $ 1,584     $ 2,011
                The Americas (other than U.S.)                  165         158
                Europe                                          770       1,126
                Asia-Pacific                                  1,005         640
                                                            --------    --------

                         Consolidated                       $ 3,524     $ 3,935
                                                            ========    ========

                EXPORT SALES
                United States                               $   405     $   663
                                                            ========    ========

                                       14




<PAGE>

                                                                    AS OF
                                                            --------------------
                                                             JUNE 30,  MARCH 31,
                                                              2004        2004
                                                            --------    --------
                                                              (IN THOUSANDS)

                LONG-LIVED ASSETS
                United States                               $ 3,843     $ 4,036
                Europe                                          221         204
                Asia-Pacific                                  1,283       1,085
                                                            --------    --------

                         Consolidated                       $ 5,347     $ 5,325
                                                            ========    ========


13. CONTINGENCIES

         The Company is party to various litigation matters arising in the
normal course of business. Management believes the resolution of these matters
will not have a material adverse effect on the Company's consolidated results of
operations or financial condition.

14. DISCONTINUED OPERATIONS

         In its continuing efforts to focus on its core software products and IT
services businesses, the Company finalized the sale of its travel services
subsidiary, "e-Destinations," in April 2004 for the approximate fair value of
$155,000 and its Web-based telecommunications services division in September
2004 for $130,000. The Company has excluded the results of the operations of the
travel services subsidiary and Web-based telecommunications services division
from continuing operations and has reported them as "discontinued operations."

         Gain from the discontinued operations for the three months ended June
30, 2004 was $29,000 compared to a loss from the discontinued operations for the
three months ended June 30, 2003 of $1,000. The Company recorded no gain or loss
from the sale of e-Destinations since e-Destinations was written down to its
potential recoverable value at March 31, 2004. The Company recorded a gain of
$29,000 from the discontinued Web-based telecommunications services division.

         The total sales price was $155,000 for the sale of e-Destinations in
April 2004 and $130,000 for the sale of the Web-based telecommunications
services division in September 2004. The Company received the entire proceeds
from the sale of e-Destinations in April 2004. Of the total sales price of
$130,000 for the Web-based telecommunications services division, the Company
received $36,000 in cash during the period ended September 30, 2004. The balance
of the sales price is receivable in two monthly installments of $30,000 each in
October and November 2004, with the remainder to be received in consecutive
monthly installments through April 15, 2005.

                                      15




<PAGE>

         The following table summarizes financial information for the
discontinued operations, with prior period presentation reclassified to conform
to the current period presentation:

                                                             THREE MONTHS ENDED
                                                                  JUNE 30,
                                                          ----------------------
                                                            2004          2003
                                                          --------      --------
                                                               (IN THOUSANDS)

    Gain (loss) from operations of
         e-Destinations, Inc.                             $    --       $    --
         Web-based telecommunications
           services division                                   29            (1)
                                                          --------      --------
                   Total                                  $    29       $    (1)
                                                          ========      ========

15.  RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

         In its original Form 10-QSB filing for the quarter ended June 30, 2004,
the Company had recorded the amendment to the 2003 Note as a substantial
modification of debt and had written off $133,000 in unamortized discount to
loss on substantial modification of debt. Upon further interpretation of EITF
No. 96-19, the Company determined the modification was not substantial and that
a restatement was therefore necessary.

         The following table shows the effects of this restatement and the
reclassification of results of the discontinued operations described in Note 14:

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED
                                                                       JUNE 30,
                                                            -----------------------------
(In thousands, except share and per share data)                 2004            2004
                                                             (PREVIOUSLY   (RESTATED)
                                                              REPORTED)
                                                            -------------   -------------

<S>                                                         <C>             <C>
Operating loss                                              $       (507)   $       (535)
                                                            -------------   -------------
Other expense (income):
    Interest, net                                                    125             138
    Other income                                                     (33)            (33)
    Loss on substantial modification of debt                         133              --
                                                            -------------   -------------
           Total other expense                                       225             105
                                                            -------------   -------------

Loss from continuing operations before income taxes                 (732)           (640)
Income tax expense                                                     6               6
                                                            -------------   -------------
Loss from continuing operations                                     (738)           (646)
Gain from discontinued operations (Note 14)                           --              29
                                                            -------------   -------------
                     Net loss                               $       (738)   $       (617)
                                                            =============   =============
Basic and diluted net loss per common share:
     Net loss per common share from continuing operations   $      (0.04)   $      (0.03)
                                                            -------------   -------------
     Basic and diluted net loss per common share            $      (0.04)   $      (0.03)
                                                            =============   =============

Common shares used in computing net loss per common share     18,626,165      18,626,165
                                                            =============   =============
</TABLE>


                                       16




<PAGE>

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


    EFFECTS OF RESTATEMENT AND RECLASSIFICATION

         This Management's Discussion and Analysis or Plan of Operation
discussion has been revised to reflect the effects of the restatement described
in Note 15 and the reclassification described in Note 14 to the accompanying
condensed consolidated financial statements.

    FORWARD-LOOKING STATEMENTS

         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 the forward-looking
statements be subject to the safe harbors created by those sections. The
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 business plans,
              including our business process outsourcing (BPO) plans;
         o    our ability to attract and retain 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.


                                       17




<PAGE>

    OVERVIEW

         We operate in the following two business segments:

         o    Engineering and collaborative software products and services for
              businesses worldwide; and
         o    Information technology, or IT, services (including value-added IT
              services).

         Our net revenues during the three months ended June 30, 2004 were
$3,524,000, a decrease of 10.4% over the corresponding prior year period, of
which engineering and collaborative software products and services net revenues
declined $278,000 (10.2%), and IT services net revenues declined $138,000
(11.4%).

         Although historically our software sales and revenues have increased
during the second half of the fiscal year, we offer no assurance that increases
in software sales and revenues will materialize since our sales and revenues
depend upon, among other factors, our customers' continued acceptance of our
products and services as well as our customers' economic conditions.

         We believe our IT services business will see growth in revenues due to
our expansion into the BPO market. Currently, our BPO services address the
production of structural steel detailing drawings. Although we believe our BPO
services will contribute additional revenues to the IT services segment, we
offer no assurance as to the amount of additional revenues that may materialize
since we have a limited history in this segment of the business, competition for
such services is intense as there are relatively few barriers to entry.

         As of June 30, 2004, our indebtedness under our convertible notes
totaled approximately $2,190,000, out of a total availability of $4,000,000.
During the three months ended June 30, 2004, we converted a portion of the
outstanding convertible debt into equity. We anticipate that additional
convertible debt will be converted to equity in the coming months.

    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    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; and
         o    IT 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 requests, 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.

                                       18




<PAGE>

         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.

         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 six months.

    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.



                                       19




<PAGE>

    IMPAIRMENT OF LONG-LIVED ASSETS, INCLUDING GOODWILL

         We apply the provisions of SFAS No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed," to 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.

         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 and IT services - to be our
reporting units for purposes of testing for impairment.

         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.

         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.

         We are required to perform 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.

         Our annual test for impairment is performed as of March 31 every year.
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 goodwill impairment write-down during the three months
ended June 30, 2004. As of June 30, 2004, our goodwill balance was $3,104,000.

                                       20




<PAGE>

CONSOLIDATED RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2004 VERSUS
THREE MONTHS ENDED JUNE 30, 2003

CONTINUING OPERATIONS

NET REVENUES

         The following table presents our net revenues by segment (dollars in
thousands):

                                                           THREE MONTHS ENDED
                                                                 JUNE 30,
                                                        ------------------------
NET REVENUE                                               2004           2003
                                                        ---------      ---------
    Engineering and collaborative
      software products and services                    $ 2,444        $ 2,722
    % of total net revenues                                69.4 %         69.2 %

    IT services                                         $ 1,080        $ 1,213
    % of total net revenues                                30.6 %         30.8 %

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

     Total net revenues                                 $ 3,524        $ 3,935
                                                        =========      =========

         Net revenues for the three months ended June 30, 2004 decreased by
$411,000 (10.4%), compared to the three months ended June 30, 2003. Our revenues
consisted primarily of revenues from (1) engineering and collaborative software
products and services, and (2) IT services.

         Net revenues from engineering and collaborative software products and
services for the three months ended June 30, 2004 decreased by $278,000 (10.2%)
compared to the three months ended June 30, 2003. The decrease in net revenues
for the three months ended June 30, 2004 was primarily because $450,000 in
engineering software and support revenues recognized during the three months
ended June 30, 2003 in connection with a large domestic project did not recur
during the three months ended June 30, 2004. This decrease was partially offset
by increases in domestic net revenues from new products such as our 3-D
engineering design modeling software and advanced bridge design software as well
as increases in engineering software revenues from Europe and Asia. Net revenues
from Europe increased due to increased focus on higher margin products and
services. Net revenues from Asia increased due to an increase in infrastructure
projects requiring our engineering software, effective anti-piracy initiatives,
and training programs. Net revenues from collaborative software products and
services decreased $143,000 for the three months ended June 30, 2004 because no
new projects were completed during this period compared to the three months
ended June 30, 2003 when a large project was completed.

         Historically, our engineering software sales during the second half of
a fiscal year have been higher than during the first half of a fiscal year. We
believe this trend will continue in the current fiscal year, provided our
customers' continued acceptance of our products and economic conditions occur as
anticipated.

         The trend of decreasing IT services net revenues continued for the
three months ended June 30, 2004, compared to the same period in the prior
fiscal year. IT services net revenues decreased $133,000 (11.0%) for the three
months ended June 30, 2004, compared to the three months ended June 30, 2003.
Net revenues from IT services have decreased due to scaling back one of our
domestic IT services offices and to decreases in IT services revenues from
Europe. These decreases were offset by an increase in IT services net revenues


                                       21




<PAGE>

from India, primarily due to our acquisition of a small IT consulting company.
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 we do not anticipate significant recovery in the IT services sector, we
anticipate that our BPO efforts that began during the later part of last fiscal
year will contribute to a recovery in our IT services net revenues during fiscal
2005.

GROSS PROFIT AND GROSS MARGIN

         The following table presents our gross profit by segment and gross
profit as a percentage of each segment's net revenue, or gross margin (dollars
in thousands):


                                                             THREE MONTHS ENDED
                                                                  JUNE 30,
                                                           ---------------------
                                                             2004        2003
                                                           ---------   ---------
GROSS PROFIT
    Engineering and collaborative
      software products and services                       $ 2,199     $ 2,481
    IT services                                                322         293

                                                           ---------   ---------
         Consolidated                                      $ 2,521     $ 2,774
                                                           =========   =========
GROSS MARGIN
    Engineering and collaborative
      software products and services                          90.0 %      91.1 %
    IT services                                               29.8 %      24.2 %

         Consolidated                                         71.5 %      70.5 %


         Gross margin in the engineering and collaborative software products and
services segment decreased by 1.1 percentage points for the three months ended
June 30, 2004, compared to the three months ended June 30, 2003, due to a
decrease in net revenues without a comparable decrease in cost of revenues,
since some of the costs are fixed and do not change with the volume of sales.
Absence of net revenues from a large project with minimal related costs also
contributed to the lower gross margin. Our engineering and collaborative
software products and services segment generally produces a higher gross margin
than our other segments due to the relatively lower costs associated with each
sale. The cost of revenues for the engineering and collaborative software
products and services 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.

         Gross margin in the IT services segment increased by 5.6 percentage
points for the three months ended June 30, 2004, compared to the three months
ended June 30, 2003. This increase was primarily the result of scaling back one
of the domestic offices as well as our acquisition of a higher margin IT
services company engaged in steel detailing services in India. 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.

                                       22




<PAGE>

OPERATING EXPENSES

         The following table presents our operating expenses in dollars and as a
percentage of total net revenues (dollars in thousands):

                                                   THREE MONTHS ENDED
                                                        JUNE 30,
                                             -----------------------------
                                                2004               2003
                                             ----------         ----------
OPERATING EXPENSES
    Selling, general and
      administrative expenses                $  2,235           $  2,201
    % of total net revenues                      63.4 %             65.9 %

    Research and development                 $    415           $    532
    % of total net revenues                      11.8 %             13.5 %

    Bad debt expense                         $    165           $     11
    % of total net revenues                       4.7 %              0.3 %

    Depreciation                             $    241           $    251
     % of total net revenues                      6.8 %              6.4 %

    Total operating expenses                 $  3,056           $  2,995
    % of total net revenues                      86.7 %             76.1 %

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative ("SG&A") expenses remained
relatively flat, increasing by $34,000 (1.6%) for the three months ended June
30, 2004, compared to the three months ended June 30, 2003. A $62,000 decrease
in salaries and related expenses due to terminations and a $38,000 decrease in
professional fees were partially offset by a $42,000 increase in dealer
commissions due to higher sales through dealers and a $19,000 increase in travel
expenses, contributing to the relatively flat SG&A expenses. We continue to
monitor our SG&A expenses but do not make any assurances that we will be able to
cut SG&A expenses from levels attained in the first three months of fiscal 2005.
In addition, obtaining profitability may be difficult even with reduced expenses
because some of the areas of expense cutting, such as sales and marketing and
research and development, involve activities that we ordinarily undertake with
the expectation that they will contribute to future revenues. Even if near-term
profitability can be achieved through cost-cutting, it will not be sustainable
if the effect of cost-cutting is to impede future revenue growth.

         RESEARCH AND DEVELOPMENT EXPENSES

         Research and development ("R&D") expenses consist primarily of software
developers' wages. R&D expenses decreased by $117,000 (22.0%) for the three
months ended June 30, 2004, compared to the three months ended June 30, 2003.
The decrease in R&D expenses is primarily related to employee terminations and a
reduction in consulting expenditures. We believe R&D expenses will remain at
current levels for the foreseeable future.

         BAD DEBT EXPENSE

         Bad debt expense increased by $154,000 to $165,000 for the three months
ended June 30, 2004 from $11,000 for the three months ended June 30, 2003. The
increase in bad debt expense was primarily due to one collaborative software
customer.

                                       23




<PAGE>

         DEPRECIATION

         Depreciation expenses (excluding amounts charged to cost of revenues)
stayed relatively flat, decreasing $10,000 (4.0%) for the three months ended
June 30, 2004, compared to the three months ended June 30, 2003. As a result of
our continuing efforts to control costs, additions to capital equipment have
been minimal. We anticipate that depreciation expenses will remain at this lower
level through the end of fiscal 2005.

OTHER EXPENSE (INCOME)

         The following table presents our other expense (income) in dollars and
as a percentage of total net revenues (dollars in thousands):

                                                   THREE MONTHS ENDED
                                                        JUNE 30,
                                             -----------------------------
                                                2004               2003
                                             ----------         ----------
OTHER EXPENSE (INCOME)
    Interest, net                            $    138           $    144
    % of total net revenues                       3.9 %              3.7 %

    Other (income) expense                   $    (33)          $     --
     % of total net revenues                     (0.9)%              0.0 %

    Total other expense                      $    105           $    144
     % of total net revenues                      3.0 %              3.7 %

         INTEREST EXPENSE

         Net interest decreased by $6,000 (4.1%) for the three months ended June
30, 2004 compared to the three months ended June 30, 2003. The decrease in net
interest expense was primarily due to a reduction in interest rate on the
convertible debt to 5% from 6% in July 2003, pursuant to the amendment to our
2002 Note with Laurus. Interest expense in the upcoming quarters may decrease if
additional portions of debt outstanding under the 2002 Note and Amended 2003
Note are converted into equity or may increase if we borrow additional amounts.

         OTHER (INCOME) EXPENSE

         Other income increased by $33,000 for the three months ended June 30,
2004, compared to the three months ended June 30, 2003 primarily due to the sale
of certain assets that were previously written off.

INCOME TAXES

         We recorded an income tax expense of $6,000 for the three months ended
June 30, 2004 compared to $37,000 during the same period in the prior fiscal
year. Tax expense for the three months ended June 30, 2004 resulted from
provisions for domestic income taxes.

DISCONTINUED OPERATIONS

         In our continuing efforts to focus on our core software products and IT
services businesses, we finalized the sale of our travel services subsidiary,
"e-Destinations," in April 2004 for its approximate fair value of $155,000 and
our Web-based telecommunication services division in September 2004 for
$130,000. We have excluded the results of the operations of the travel services
subsidiary and Web-based telecommunications services division from continuing
operations and have them reported as "discontinued operations."

                                       24




<PAGE>

         Gain from the discontinued operations for the three months ended June
30, 2004 was $29,000 compared to a loss from the discontinued operations for the
three months ended June 30, 2003 of $1,000. We recorded no gain or loss from the
sale of e-Destinations since it was written down to its potential recoverable
value at the end of March 31, 2004, and a gain of $29,000 from the Web-based
telecommunications services division.

         The total sales price was $155,000 for the sale of e-Destinations in
April 2004 and $130,000 for the sale of the Web-based telecommunications
services division. We received the entire proceeds from the sale of
e-Destinations in April 2004. Of the total sales price of $130,000 for the
Web-based telecommunications services division, we received $36,000 in cash
during the period ended September 30, 2004. The balance of the sales price is
receivable in two monthly installments of $30,000 each in October and November
2004, with the remainder to be received in consecutive monthly installments
through April 15, 2005.


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.

         Our principal sources of liquidity at June 30, 2004 consisted of
$2,341,000 of cash and cash equivalents and a revolving credit facility
described below. Cash and cash equivalents increased by $695,000 (42.2%) during
the three months ended June 30, 2004. The primary reason for this increase was
the additional borrowing from Laurus, which was partially offset by cash used in
operations.

         Net cash used in operations was $371,000 during the three months ended
June 30, 2004 compared to $198,000 during the three months ended June 30, 2003,
an increase of $173,000. Net loss was the primary reason for cash used in
operations in both periods. The following primarily contributed to cash usage
during the three months ended June 30, 2004:

         o    A $176,000 decrease in accrued expenses primarily due to payment
              of severance payments and professional fees;
         o    An $81,000 decrease in accounts payable due to payments; and
         o    A $74,000 increase in prepaid expenses and other current assets
              due to prepayment of rent and product packaging materials.

The above were partially offset by an $84,000 increase in deferred revenues
primarily from collaborative software services.

         The following contributed to cash usage during the three months ended
June 30, 2003:

         o    A $403,000 decrease in accrued expenses due to payment of a legal
              settlement and professional fees;
         o    A $241,000 decrease in deferred revenues due to a lower level of
              unrecognized revenues;
         o    A $188,000 decrease in accrued restructuring costs due to
              payments; and
         o    A $120,000 increase in prepaid expenses and other current assets
              primarily due to prepaid digital media costs.

                                       25




<PAGE>

         The above were offset by a $591,000 decrease in deposits due to payment
of a legal settlement and a $213,000 decrease in accounts receivable due to
better collections of receivables.

         Although we anticipate our cash needs will increase in the upcoming
quarters as a result of increases in expenses related to our BPO services, we
believe this increase will be more than offset by revenues we anticipate earning
from such services. However, the combined effect of such transactions may not
result in net cash provided by operations, if actual level of expenses and
revenues from our BPO services differ from anticipated levels due to
unanticipated increases in labor costs or decreased demand, competition, or
other factors.

         Net cash provided by investing activities during the three months ended
June 30, 2004 consisted of $155,000 in net proceeds from the sale of a
subsidiary offset by capital expenditures of $98,000 and payment to acquire
companies of $24,000, compared to net cash used in investing activities
consisting of $12,000 of capital expenditures during the three months ended June
30, 2003. We expect our capital expenditures to stay at the current level for
the next twelve months.

         Cash provided by financing activities during the three months ended
June 30, 2004 primarily resulted from long-term borrowings of $1,703,000
(including $990,000 in additional borrowings, net of fees, under the Amended
2003 Note) offset by $781,000 in long-term debt repayments. In addition,
repayments of capital lease obligations amounted to $32,000 for the three months
ended June 30, 2004. Proceeds from long-term borrowings during the three months
ended June 30, 2003 were $43,000. Additionally, we repaid $310,000 of long-term
debt and $67,000 in capital lease obligations during the three months ended June
30, 2003.

         We incurred net losses from continuing operations of $617,000 and
$403,000 and used cash in operations of $371,000 and $198,000 during the three
months ended June 30, 2004 and 2003, 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.

         The following table summarizes our contractual obligations and
commercial commitments at June 30, 2004 (in thousands):

<TABLE>
<CAPTION>
                                                     PAYMENTS DUE BY PERIOD
                                      --------------------------------------------------
                                                LESS THAN                       AFTER 5
     CONTRACTUAL OBLIGATIONS           TOTAL     1 YEAR   3-4 YEARS  4-5 YEARS   YEARS
                                      --------  --------  ---------  ---------  --------

<S>                                   <C>       <C>       <C>        <C>        <C>
Long-Term Debt*                       $ 2,916   $   968   $  1,936   $      9   $     3
Capital Lease Obligations                 523       120        264        139        --
Operating Leases                        3,829       499        872        733     1,725

                                      --------  --------  ---------  ---------  --------
Total Contractual Cash Obligations    $ 7,268   $ 1,587   $  3,072   $    881   $ 1,728
                                      ========  ========  =========  =========  ========

                                                LESS THAN                       AFTER 5
     CONTRACTUAL OBLIGATIONS           TOTAL     1 YEAR   3-4 YEARS  4-5 YEARS   YEARS
                                      --------  --------  ---------  ---------  --------
Letter of Credit                      $   100   $   100   $     --   $     --   $    --

                                      --------  --------  ---------  ---------  --------
Total Contractual Commitments         $   100   $   100   $     --   $     --   $    --
                                      ========  ========  =========  =========  ========
* Excludes debt discount of $461.
</TABLE>

                                       26




<PAGE>

         As indicated above, historically we 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 and to develop our BPO
services.

         On July 31, 2003, we obtained $4,000,000 revolving credit facility from
Laurus. The availability of funds under this credit facility is limited by the
amount of the unpaid balances on the 2002 Note and the Amended 2003 Note
(collectively, the "Laurus Notes"). At June 30, 2004, we had no borrowings under
the revolving credit facility, $2,190,000 in principal balance, excluding fees
and beneficial conversion adjustments, under the 2002 Note and the Amended 2003
Note, and availability of $1,810,000.

         We are required to use the net proceeds from this financing for general
corporate purposes only. We are also required not to permit for any fiscal
quarter commencing April 1, 2003, the net operating cash flow deficit to be
greater than $500,000, excluding extraordinary items, as determined by Laurus.
We were in compliance with such covenant as of June 30, 2004.

         We believe we will be able to generate sufficient 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 generate sufficient cash from operations or 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 availability under 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 implemented, and will continue to implement,
cost containment measures 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.

         We may borrow additional amounts under the revolving credit facility
from time to time, which would increase the principal balance that could
potentially be converted into shares of our common stock in the future. As a
result, if the entire principal balances of the Laurus Notes and/or any
additional amounts we may borrow under the revolving credit facility were
converted at their initial fixed conversion prices, substantial dilution of the
voting power of our stockholders' investments and of our earnings per share
would occur.

                                       27





<PAGE>

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

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

              10.1     Amended and Restated Convertible Note dated December 4,
                       2003 in the principal amount of $2,400,000 made by
                       netGuru, Inc. in favor of 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 (2)

              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 (2)
__________


(1)      Filed as an exhibit to our Form 8-K that was filed with the Securities
         and Exchange Commission on June 3, 2004 (File No. 000-28560) and
         incorporated herein by reference

(2)      Attached as an exhibit to this Amendment No. 1 to Form 10-QSB

         (b)  Reports on Form 8-K

                     On April 28, 2004, we filed a Form 8-K for April 16, 2004
                     that contained Item 5-Other Events and Item 7-Financial
                     Statements, Pro Forma Financial Information and Exhibits.
                     The Form 8-K contained a press release announcing the
                     completion of the sale of our travel subsidiary,
                     eDestinations, Inc.

                     On June 3, 2004, we filed a Form 8-K for April 27, 2004
                     that contained Item 5-Other Events and Item 7-Financial
                     Statements, Pro Forma Financial Information and Exhibits.
                     The Form 8-K contained information on the amendment and
                     restatement of our convertible note issued to Laurus Master
                     Fund on December 4, 2003.

                                       28




<PAGE>

                                   SIGNATURES
                                   ----------

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


Date:  April 20, 2005

                                  NETGURU, INC.


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

                                       29




<PAGE>

   EXHIBITS FILED WITH THIS AMENDMENT NO. 1 TO 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

                                       30