<PAGE>

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

                                   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 DECEMBER 31, 2003

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

                         Commission file number: 0-28560

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

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

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

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

Indicate by check mark whether the 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 issuer's only class of common stock,
$.01 par value per share, was 18,087,154 on February 13, 2004.

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





<PAGE>

                                     PART I
                              FINANCIAL INFORMATION

                                                                            PAGE
Item 1.  Financial Statements (Unaudited)

              Condensed Consolidated Statements of Operations for the three
              and nine months ended December 31, 2003 and 2002...........     3

              Condensed Consolidated Balance Sheets as of
              December 31, 2003 and March 31, 2003.......................     5

              Condensed Consolidated Statements of Cash Flows for the
              nine months ended December 31, 2003 and 2002...............     6

              Notes to Condensed Consolidated Financial Statements.......     8

Item 2.  Management's Discussion and Analysis or Plan of Operation.......    23

Item 3.  Controls and Procedures.........................................    40

                                     PART II
                                OTHER INFORMATION

Item 1.  Legal Proceedings...............................................    41

Item 2.  Changes in Securities and Small Business Issuer Purchases of
         Equity Securities...............................................    41

Item 3.  Defaults Upon Senior Securities.................................    42

Item 4.  Submission of Matters to a Vote of Security Holders.............    42

Item 5.  Other Information...............................................    42

Item 6.  Exhibits and Reports on Form 8-K................................    43

Signatures...............................................................    44

Exhibits Filed with this Report on Form 10-QSB...........................    45

                                       2





<PAGE>
<TABLE>

                                        PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

                                                               THREE MONTHS                 NINE MONTHS
                                                 THREE MONTHS     ENDED       NINE MONTHS      ENDED
                                                    ENDED      DECEMBER 31,      ENDED      DECEMBER 31,
                                                 DECEMBER 31,      2002       DECEMBER 31,      2002
                                                     2003       (RESTATED)        2003       (RESTATED)
                                                 ------------------------------------------------------
<S>                                              <C>            <C>            <C>            <C>
Net revenues:
    Engineering and collaborative software
      products and services                      $  2,664       $  2,439       $  8,060       $  6,700
    IT services                                     1,215          1,436          3,707          4,219
    Web-based telecommunications services             258            599            911          2,841
                                                 ---------      ---------      ---------      ---------
           Total net revenues                       4,137          4,474         12,678         13,760

Cost of revenues:
    Engineering and collaborative software
      products and services                           333            279          1,073            814
    IT services                                       967          1,064          2,928          3,164
    Web-based telecommunications services             193            511            615          2,632
                                                 ---------      ---------      ---------      ---------
           Total cost of revenues                   1,493          1,854          4,616          6,610

                                                 ---------      ---------      ---------      ---------
           Gross profit                             2,644          2,620          8,062          7,150
                                                 ---------      ---------      ---------      ---------

Operating expenses:
    Selling, general and administrative             3,154          2,541          8,010          7,859
    Research and development                          529            481          1,517          1,492
    Depreciation                                      234            271            724            811
    Impairment charge                                  --             --             --             67
    Restructuring                                      --             90             --            194
                                                 ---------      ---------      ---------      ---------
           Total operating expenses                 3,917          3,383         10,251         10,423
                                                 ---------      ---------      ---------      ---------

           Operating loss                          (1,273)          (763)        (2,189)        (3,273)
                                                 ---------      ---------      ---------      ---------

Other expense (income):
    Interest, net                                     256             66            494            182
    Other                                             (26)             5           (108)             3
                                                 ---------      ---------      ---------      ---------
           Total other expense                        230             71            386            185
                                                 ---------      ---------      ---------      ---------

Loss from continuing operations before income taxes
   and cumulative effect of a change in
   accounting principle                            (1,503)          (834)        (2,575)        (3,458)
Income tax (benefit) expense                           53             46            164           (255)
                                                 ---------      ---------      ---------      ---------
Loss from continuing operations before cumulative
   effect of a change in accounting
   principle                                       (1,556)          (880)        (2,739)        (3,203)

Discontinued operations income (loss)                (462)            20           (449)            31

Cumulative effect of a change in accounting
   principle                                           --             --             --         (5,824)
                                                 ---------      ---------      ---------      ---------
           Net loss                              $ (2,018)      $   (860)      $ (3,188)      $ (8,996)
                                                 =========      =========      =========      =========
</TABLE>

                                                 (continued)

                                                      3





<PAGE>
<TABLE>

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

                                                               THREE MONTHS                 NINE MONTHS
                                                 THREE MONTHS      ENDED      NINE MONTHS      ENDED
                                                    ENDED       DECEMBER 31,     ENDED       DECEMBER 31,
                                                 DECEMBER 31,      2002       DECEMBER 31,      2002
                                                     2003       (RESTATED)        2003       (RESTATED)
                                                ---------------------------------------------------------
<S>                                             <C>            <C>            <C>            <C>
Basic and diluted loss per common share:
     Loss per common share from continuing
      operations                                $     (0.09)   $     (0.05)   $     (0.15)   $     (0.18)
     Loss from discontinued operations                (0.02)         --             (0.03)         --
     Cumulative per share effect of a
      change in accounting principle                  --             --             --             (0.34)
                                                ------------   ------------   ------------   ------------
     Basic and diluted net loss per common
      share                                     $     (0.11)   $     (0.05)   $     (0.18)   $     (0.52)
                                                ============   ============   ============   ============

Common shares used in computing basic and
    diluted net loss per common share:           17,701,176     17,325,150     17,456,417     17,304,649
                                                ============   ============   ============   ============

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

                                                      4





<PAGE>
<TABLE>

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

                                                                                  DECEMBER 31,    MARCH 31,
                                                                                      2003          2003
                                                                                   ---------      ---------

                                                    ASSETS
<S>                                                                                <C>            <C>
Current assets:
    Cash and cash equivalents                                                      $  1,667       $  2,772
    Accounts receivable (net of allowance for doubtful accounts of $607 and
      $695, as of December 31, 2003 and March 31, 2003, respectively)                 3,026          2,654
    Income tax receivable                                                                --             88
    Notes and related party loans receivable                                             37            670
    Deposits                                                                             87             --
    Prepaid expenses and other current assets                                         1,184            857
    Assets of subsidiary held for sale                                                  231            709
                                                                                   ---------      ---------
           Total current assets                                                       6,232          7,750

Property, plant and equipment, net                                                    2,377          3,099
Goodwill (net of accumulated amortization of $3,652)                                  2,941          2,941
Other assets                                                                            312            523
                                                                                   ---------      ---------
                                                                                   $ 11,862       $ 14,313
                                                                                   =========      =========

                                     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Current portion of long-term debt                                              $    795       $  1,340
    Current portion of capital lease obligations                                        148            412
    Accounts payable                                                                    566            763
    Accrued expenses                                                                    946          1,117
    Income taxes payable                                                                205             79
    Deferred revenues                                                                 1,950          2,094
    Other liabilities                                                                   265            234
    Accrued restructuring costs                                                          --            199
    Liabilities of subsidiary held for sale                                              62             51
                                                                                   ---------      ---------
           Total current liabilities                                                  4,937          6,289

Long-term debt, net of current portion                                                1,746          1,270
Capital lease obligations, net of current portion                                       363            627
Deferred gain on sale-leaseback                                                         765            817
                                                                                   ---------      ---------

           Total liabilities                                                          7,811          9,003
                                                                                   ---------      ---------

Stockholders' equity:
    Preferred stock, par value $.01 (Authorized 5,000,000 shares; no shares
      issued and outstanding)                                                            --             --
    Common stock, par value $.01; authorized 150,000,000 shares; issued and
      outstanding 17,907,154 and 17,325,150 shares as of December 31, 2003
      and March 31, 2003, respectively                                                  179            173
    Additional paid-in capital                                                       35,105         33,322
    Accumulated deficit                                                             (30,522)       (27,334)
    Accumulated other comprehensive loss:
       Cumulative foreign currency translation adjustments                             (711)          (851)
                                                                                   ---------      ---------

           Total stockholders' equity                                                 4,051          5,310
                                                                                   ---------      ---------
                                                                                   $ 11,862       $ 14,313
                                                                                   =========      =========

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

                                                      5





<PAGE>
<TABLE>

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

                                                                         NINE MONTHS   NINE MONTHS
                                                                            ENDED         ENDED
                                                                         DECEMBER 31,  DECEMBER 31,
                                                                             2003          2002
                                                                           --------      --------
<S>                                                                        <C>           <C>
Cash flows from operating activities:
    Net loss                                                               $(3,188)      $(8,996)
    Less: Income (loss) from discontinued operations                          (449)           31
        Cumulative effect of change in accounting principle                     --        (5,824)
                                                                           --------      --------
    Loss from continuing operations                                         (2,739)       (3,203)
    Adjustments to reconcile net loss to net cash used in operating
      activities:
        Depreciation and amortization                                          938         1,062
        Bad debt expense                                                        50            83
        Deferred income taxes                                                   --          (173)
        Compensation expense recognized on issuance of stock options            --            (4)
        Restructuring                                                           --           195
        Impairment charge                                                       --            67
        Expense recognized on issuance of stock-based compensation             622            56
        Loss on disposal of property                                            --             3
        Changes in operating assets and liabilities:
          Accounts receivable                                                 (279)          (28)
          Notes and related party loans receivable                              51           165
          Income tax receivable                                                 (7)          300
          Prepaid expenses and other current assets                           (181)          (53)
          Deposits                                                             587            --
          Other assets                                                           4           (31)
          Accounts payable                                                    (214)         (279)
          Accrued expenses                                                      13          (285)
          Income taxes payable                                                 116          (154)
          Accrued restructuring costs                                         (199)         (135)
          Other current liabilities                                             (2)          (19)
          Deferred revenues                                                   (198)          140
          Deferred gain on sale-leaseback                                      (52)          (52)
                                                                           --------      --------

                  Net cash used in operating activities                     (1,490)       (2,345)
                                                                           --------      --------

Cash flows from investing activities:
    Purchase of property, plant and equipment                                  (78)         (195)
    Proceeds from sale of property, plant, and equipment                       150            --
                                                                           --------      --------

                  Net cash provided by (used in) investing activities           72          (195)
                                                                           --------      --------

Cash flows from financing activities:
    Proceeds from issuance of long-term debt                                 2,101         2,221
    Financing fees                                                              --          (214)
    Repayment of long-term debt                                             (1,371)         (196)
    Repayment of capital lease obligations                                    (528)         (314)
    Issuance of common stock                                                    --            55
                                                                           --------      --------

                  Net cash provided by financing activities                    202         1,552
                                                                           --------      --------

    Effect of exchange rate changes on cash and cash equivalents               111           316
                                                                           --------      --------

                  Decrease in cash and cash equivalents                     (1,105)         (672)

Cash and cash equivalents, beginning of period                               2,772         3,177
                                                                           --------      --------

Cash and cash equivalents, end of period                                   $ 1,667       $ 2,505
                                                                           ========      ========
</TABLE>

                                                       (Continued)

                                                           6





<PAGE>
<TABLE>

                                             NETGURU, INC. AND SUBSIDIARIES

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

                                                                             NINE MONTHS        NINE MONTHS
                                                                                ENDED              ENDED
                                                                             DECEMBER 31,       DECEMBER 31,
                                                                                 2003               2002
                                                                           ---------------    ---------------
<S>                                                                        <C>                <C>
Supplemental disclosure of cash flow information:
  Cash paid for:
         Interest                                                          $           262    $           192
                                                                           ================   ================
         Income taxes                                                      $            53    $            31
                                                                           ================   ================

Supplemental disclosure of non-cash investing and financing activities:
Acquisition of equipment under capital leases                              $             -    $            28
Conversion of long-term debt to equity                                                 715                  -
                                                                           ================   ================

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

                                                           7





<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003
                                   (UNAUDITED)

1.  REPORT BY MANAGEMENT

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

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

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

         Certain reclassifications have been made to the fiscal 2003
consolidated financial statements to conform to the fiscal 2004 presentation.
The fiscal 2003 condensed consolidated statement of operations have been
restated to reflect the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142 as of April 1, 2002.

2.  FAIR VALUE OF FINANCIAL INSTRUMENTS

         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 December 31,
2003, 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 it's 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 December 31, 2003, determined by using the effective rate of interest on this
indebtedness, was approximately $1.8 million.

3.  IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

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

                                       8





<PAGE>

         Until September 30, 2003, the Company considered the following
operating segments - engineering and collaborative software products and
services, IT services, and Web-based telecommunications and travel services - to
be its reporting units for purposes of testing for impairment, as the components
within each operating segment have similar economic characteristics and thus do
not represent separate reporting units. In its efforts to focus on its core
software products and IT services businesses, during the three months ended
December 31, 2003, the Company's management committed to a plan to sell the
travel services subsidiary. The Company has begun to actively market the
subsidiary to potential buyers and expects to complete the sale within the next
twelve months.

         The Company assessed the fair value of its three reporting units by
considering their projected cash flows, using risk-adjusted discount rates and
other valuation techniques, and concluded that as of April 1, 2002, an
impairment write-down for its IT services division was required. The Company
recorded an impairment charge of $5,824,000 to IT services goodwill in fiscal
2003 as a cumulative effect of a change in accounting principle. In accordance
with SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements,"
the Company has restated the accompanying condensed consolidated statement of
operations for the nine months ended December 31, 2002, to present the
cumulative effect of the adoption of SFAS No. 142 as of the beginning of the
year of adoption.

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

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

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-An Amendment of FASB
Statement No. 123." This amendment provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirement of SFAS No. 123, "Accounting for Stock-Based
Compensation," to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee

compensation and the effect of the method used on reported results. SFAS No. 148
is effective for fiscal years ending after December 15, 2002. Since the Company

                                       9





<PAGE>

is continuing to account for stock-based compensation according to Accounting
Principles Bulletin No. 25, "Accounting for Stock Issued to Employees," the
adoption of SFAS No. 148 required the Company to provide prominent disclosures
about the effects of SFAS No. 123 on reported income (loss) and requires it to
disclose these effects in its interim financial statements (see note 10).

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

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

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments that have characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that is within its
scope as a liability (or as an asset in some circumstances). Many of those
instruments were previously classified as equity. This statement is effective
for financial instruments entered into or modified after May 31, 2003, and is
generally effective for the Company's fiscal quarter ended September 30, 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 December 31,
2003, capitalized software costs of approximately $138,000, net of accumulated
amortization, were included in other assets. Approximately $76,000 of this
amount represents software developed in-house and $62,000 represents the cost of
software developed on the Company's behalf by third parties. Additions to
capitalized software were $0 and $28,000 during the nine months ended December
31, 2003 and 2002, respectively.

                                       10





<PAGE>

         The Company amortizes capitalized software development costs and
purchased technology using the straight-line method over two to five years, or
the ratio of actual sales to anticipated sales, whichever is greater.
Amortization of software development costs and purchased technology charged to
cost of revenues was approximately $69,000 and $61,000 for the three months
ended December 31, 2003 and 2002, respectively, and $139,000 and $173,000 for
the nine months ended December 31, 2003 and 2002, respectively. Accumulated
amortization on capitalized software was $848,000 and $508,000 as of December
31, 2003 and 2002, respectively.

5.  REVENUE RECOGNITION

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

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

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

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

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

                                       11





<PAGE>

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

         Revenues from call termination services are recognized at gross sales
value, with the applicable cost separately stated in the cost of revenues.
Revenues from the Company's own phone card sales are deferred and recognized
based on usage, whereas revenues from resale of third-party phone cards are
recognized net of returns since no significant obligations remain once the
product is delivered. The Company recognizes revenues from products and services
sold via Internet portals, where the Company is an agent, net of purchase costs
when the products and services are delivered and collection is probable.

6.  DEFERRED REVENUES

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

7.  PROVISIONS FOR RESTRUCTURING OPERATIONS

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

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

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

                                       12





<PAGE>

         In March 2001, the Company closed its Boston technical support office
as part of consolidating the Company's technical support activities. Technical
support activities previously offered from the Boston office were consolidated
into the California facility. The closing of this office resulted in the
termination of two employees. The restructuring charge recorded in March 2001
related to the consolidation of technical support facilities was $166,000, of
which $49,000 related to accrued severance payments for the two terminated
employees and $117,000 related to contractual lease obligations for the vacated
space. The Company made cash payments totaling $58,000 in fiscal 2002 toward
settlement of obligations related to this activity. During fiscal 2003, the
Company made cash payments of $55,000 for severance costs relating to the
termination of one employee and $47,000 for lease payments for the vacated
office space. During the first six months of fiscal 2004, the Company paid the
remaining $19,000 for lease payments for the vacated office space. As of
December 31, 2003, the Company had no remaining unpaid obligations related to
this activity.

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

                                       13





<PAGE>

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

<TABLE>
<CAPTION>

                          REFOCUS OF    REFOCUS OF   CONSOLIDATION  ELIMINATION
                              ISP         PORTAL      OF TECHNICAL    OF LEGAL
                          OPERATIONS    OPERATIONS      SUPPORT      DEPARTMENT    TOTAL
                         -----------    ----------   -------------  -----------   --------
<S>                       <C>               <C>       <C>           <C>           <C>
March 31, 2000                 --            --            --            --            --

Restructuring charge      $ 1,998           194       $   166       $    42       $ 2,400
Cash payments              (1,897)         (194)           --            --        (2,091)
                          --------      --------      --------      --------      --------

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

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

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

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

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

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

December 31, 2003         $    --       $    --       $    --       $    --       $    --
                          ========      ========      ========      ========      ========
</TABLE>

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

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

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

8. DISCONTINUED OPERATIONS

         In its efforts to focus on its core software products and IT services
businesses, during the three months ended December 31, 2003, the Company
committed to a plan to sell its travel services subsidiary. The Company has
begun to actively market the subsidiary to potential buyers and expects to
complete the sale within the next twelve months. Pursuant to SFAS No.144,
"Accounting for the Impairment or Disposal of Long Lived Assets," the results of
operations of the travel services subsidiary are shown in the Company's
condensed consolidated statement of operations under "discontinued operations,"
and the assets and liabilities of this subsidiary are shown separately in the
Company's condensed consolidated balance sheets. In addition, prior periods
presentations have been reclassified to conform to the current period
presentation.

                                       14





<PAGE>

              The following table summarizes financial information for the
discontinued operation:

<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED       NINE MONTHS ENDED
                                               DECEMBER 31,            DECEMBER 31,
                                         -----------------------  ----------------------
                                           2003         2002        2003        2002
                                         -------      -------     -------      -------
<S>                                      <C>          <C>         <C>          <C>
Discontinued operations:
-----------------------
e-Destinations, Inc. revenues            $   99       $  627      $  255       $1,500
                                         =======      =======     =======      =======

Income (loss) from
  operations of e-Destinations, Inc.     $ (146)      $   20      $ (133)      $   31
Impairment loss                            (316)          --        (316)          --
                                         -------      -------     -------      -------

Income (loss) from discontinued
     operations                          $ (462)      $   20      $ (449)      $   31
                                         =======      =======     =======      =======
</TABLE>

                                                   DECEMBER 31,      MARCH 31,
                                                       2003             2003
                                                  -------------    -------------

         E-DESTINATIONS, INC.
         Current assets                           $        231     $        709
         Current liabilities                                62               51
                                                  =============    =============

9.  LONG-TERM DEBT

         On July 31, 2003, the Company obtained a three-year, renewable,
$4,000,000 revolving accounts receivable credit facility from Laurus Master
Fund, Ltd. ("Laurus"). The amount available under this revolving credit facility
is reduced by the balances outstanding on the Company's $2,000,000, 6%
convertible note issued to Laurus on December 13, 2002 ("2002 Note") and the
2003 Note (defined below). 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.
The transaction was accounted for as a modification of debt under EITF 96-19,
"Debtor's Accounting for a Modification or Exchange of Debt Instruments." As a
result of the reduction in the conversion price from $1.60 to $1.30, a
beneficial conversion amount of $302,000, estimated using the Black-Scholes
option pricing model, was recorded as a discount to the convertible debt, which
is being amortized over the life of the note using the effective interest rate
method.

         Borrowings under the revolving credit 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 December 31, 2003. Obligations owed under this
revolving credit facility may be repaid at the Company's option in cash or
through the

                                       15

<PAGE>

         issuance of shares of the Company's common stock at the fixed
conversion price of $1.30 per share, subject to volume limitations, provided the
shares are registered with the Securities and Exchange Commission for public
resale and the then current market price is greater than 110% of the fixed
conversion price. The fixed conversion price may be adjusted upward under
certain circumstances. Also, the fixed conversion price is subject to standard
anti-dilution provisions for stock-splits, stock dividends, reclassifications,
and the like, and is subject to downward adjustment for certain issuances at
prices below the then fixed conversion price. The accounts receivable credit
facility has a three-year term, which automatically renews every three years
unless cancelled in writing by the Company or by Laurus under certain
conditions. An early termination fee of up to $120,000 will be payable if the
facility is terminated prior to August 1, 2006. The facility also provides the
Company, under certain conditions, the flexibility to borrow additional amounts
up to one million dollars 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 revolving credit facility, the Company paid
Laurus a fee of $140,000 and issued to Laurus a five-year warrant to purchase
180,000 shares of the Company's common stock exercisable at various prices as
follows: 115% of the then effective fixed conversion price per share for the
purchase of up to 60,000 shares; 125% of the then effective fixed conversion
price per share for the purchase of an additional 60,000 shares; and 145% of the
then effective fixed conversion price per share for the purchase of an
additional 60,000 shares. Based on the initial fixed conversion price of $1.30,
the exercise prices would be $1.495 per share for the purchase of up to 60,000
shares; $1.625 per share for the purchase of an additional 60,000 shares; and
$1.885 per share for the purchase of an additional 60,000 shares. The fair
market value of these warrants estimated using the Black-Scholes option-pricing
model was $201,000, which was recorded as a discount. Laurus may also receive
additional five-year warrants to purchase up to 400,000 shares of the Company's
common stock at an exercise price equal to 125% of the fixed conversion price
based upon how much of the outstanding obligation under the credit facility is
converted to equity. As of December 31, 2003, none of the additional five-year
warrants have been issued. The credit facility is secured by a general security
interest in the assets of the Company and its subsidiaries.

         During the three months ended September 30, 2003, the Company borrowed
$600,000 under this credit facility and recognized approximately $77,000 of debt
discount as a result of the beneficial conversion rate of debt. During the three
months ended December 31, 2003, the Company borrowed an additional $300,000
under this facility and recognized a $63,000 of debt discount as a result of the
beneficial conversion rate of debt. On December 4, 2003, the outstanding balance
of $900,000 under the revolving credit facility was refinanced with the same
lender along with $500,000 of additional borrowings and we issued a three-year,
5% secured convertible note ("2003 Note"). Interest rate on the 2003 Note is
equal to the greater of the prime rate plus one percent (1.0%) or five percent
(5%) and is payable in arrears commencing January 1, 2004 and on the first
business day of each consecutive calendar month thereafter. Beginning in April
1, 2004, if not previously paid with shares, the Company is required to make
monthly payments of $30,000 plus accrued but unpaid interest to that date. The
2003 Note terminates on December 3, 2006. 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. At December 31, 2003, the Company had no
borrowings under the revolving credit facility and a balance of $1,244,000, net
of fees and beneficial conversion adjustments, under the 2003 Note.

         The Company is required to use the net proceeds from this financing 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 December 31, 2003, the Company was in compliance with this covenant.

                                       16

<PAGE>

         Laurus has contractually agreed to two separate beneficial ownership
limitations that restrict conversion of the 2002 Note, the exercise of the
warrant issued on December 13, 2002 and the 2003 Note. Laurus has agreed that
the convertible notes shall not be converted and the warrant shall not be
exercised to the extent that conversion of the convertible notes or exercise of
the warrant would result in Laurus, together with its affiliates, beneficially
owning in excess of 4.99% of the number of shares of the Company's common stock
outstanding at that time. Laurus may terminate this 4.99% limitation by
providing us 75 days' advance notice of its intention to do so. This 4.99%
limitation does not preclude conversion of the convertible notes or exercise of
the warrant over time, so long as Laurus' beneficial ownership of the Company's
common stock, together with its affiliates, does not exceed the limitation
amount. This 4.99% limitation automatically becomes void upon an event of
default under the convertible notes.

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

         During the three months ended December 31, 2003, the Company converted
$715,000 of the principal balance of the 2002 Note plus accrued interest into
equity by issuing 550,000 shares of common stock to Laurus at the fixed
conversion price of $1.30. At December 31, 2003, the balance on the 2002 Note
was approximately $753,000, net of unamortized fees and discount.

10.  STOCKHOLDERS' EQUITY

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

         As of December 31, 2003, the Company had paid $172,000 to one of the
former owners for the repurchase of 6,000 shares. The repurchase of 6,000 shares
from another former owner was settled for a total of $100,000, which was paid in
full as of June 30, 2003. Effective August 13, 2003, the Company reached a
settlement agreement with the owner of the remaining 13,000 shares. Pursuant to
this settlement agreement, the owner retained the 13,000 shares and received an
additional 32,004 shares from the Company. Approximately $37,000 reflecting the
fair market value of these shares was recorded as an expense during the three
months ended September 30, 2003.

         On December 31, 2003, the Company issued three five-year warrants to
purchase an aggregate of 485,000 shares of the Company's common stock at
exercise prices ranging from $1.00 to $1.40 for past and future strategic
consulting and investor relations' services. The warrants were valued at
$504,000 using the Black-Scholes option-pricing model. Approximately $410,000 of
this expense was for past services and was recognized during the three months
ended December 31, 2003. The remaining $94,000 representing a prepayment has
been capitalized.

                                       17

<PAGE>

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

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

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED             NINE MONTHS ENDED
                                                              DECEMBER 31,                    DECEMBER 31,
                                                  -----------------------------------------------------------------

                                                                                                          2002
                                                           2003           2002            2003         (RESTATED)
                                                   ----------------------------------------------------------------
        <S>                                         <C>             <C>             <C>             <C>
        Net loss - as reported                      $      (2,018)  $        (860)  $      (3,188)  $      (8,996)

        Compensation expense per SFAS No. 123       $         119   $         222   $         276  $          655
                                                   ================================================================
        Net loss - pro forma                        $      (2,137)  $      (1,082)  $      (3,464)  $      (9,651)
                                                   ================================================================

        Basic net loss per share -
             as reported                            $       (0.11)  $       (0.05)  $       (0.18)  $       (0.52)
             pro forma                              $       (0.12)  $       (0.06)  $       (0.20)  $       (0.56)
        Diluted net loss per share -
             as reported                            $       (0.11)          (0.05)          (0.18)          (0.52)
             pro forma                              $       (0.12)          (0.06)          (0.20)          (0.56)
        Weighted average fair value of options
             granted                                $        1.44   $        -      $        1.37   $        1.97
</TABLE>

                                                          NINE MONTHS ENDED
                                                             DECEMBER 31,

        Black-Scholes option pricing model                 2003           2002
                                                   -------------  -------------
              assumptions:
                  Dividend yield                               -              -
                  Expected volatility                     115.7%         108.3%
                  Risk-free interest rate                  3.51%          3.63%
                  Expected option lives (in years)         6.84           6.84

                                       18


<PAGE>

11. FOREIGN CURRENCY TRANSLATION

         The financial condition and results of operations of the Company's
foreign subsidiaries are accounted for using the local currency as the
functional currency. Assets and liabilities of the subsidiaries are translated
into United States dollars (the reporting currency) at the exchange rate in
effect at the end of the interim period. Statements of operations accounts are
translated at the average rate of exchange prevailing during the respective
interim periods. Translation adjustments arising from the use of differing
exchange rates from period to period are included in accumulated other
comprehensive income (loss) in the consolidated statements of stockholders'
equity. Gains and losses resulting from foreign currency transactions are
included in operations and were not material to the three and nine-month periods
ended December 31, 2003 and 2002.

12. 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 $1,954,000 and $723,000 for the three months ended December 31, 2003
and 2002, respectively, and was $3,048,000 and $8,736,000 for the nine months
ended December 31, 2003 and 2002, respectively.

13. 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            NINE MONTHS ENDED
                                                             DECEMBER 31,                  DECEMBER 31,
                                                  -------------------------------------------------------------
                                                                                                      2002
                                                         2003           2002           2003        (RESTATED)
                                                  -------------------------------------------------------------
        <S>                                               <C>             <C>            <C>            <C>
        Numerator:
        Net loss and numerator for basic and
        diluted loss per share                            (2,018)           (860)        (3,188)        (8,996)
                                                    =============  ==============  =============  =============
        Denominator:
        Denominator for basic net loss per share -
          average number of common shares
          outstanding during the period                   17,701          17,325         17,456         17,305
        Incremental common shares attributable to
          exercise of outstanding options, warrants
          and other common stock equivalents                   -               -              -              -
                                                  -------------------------------------------------------------
        Denominator for diluted net loss per
        share                                             17,701          17,325         17,456         17,305
                                                  =============================================================

        Basic and diluted net loss per share              $(0.11)         $(0.05)        $(0.18)        $(0.52)
                                                  =============================================================
</TABLE>

         Options, warrants and other common stock equivalents amounting to
1,540,000 and 1,133,000 potential common shares for the three and nine month
periods ended December 31, 2003, respectively, and 426,000 and 621,000 potential
common shares for the three and nine month periods ended December 31, 2002,
respectively, were excluded from the computation of diluted EPS for the periods

                                       19





<PAGE>

presented because the Company reported net losses and, therefore, the effect
would be antidilutive. Potential common shares from the possible conversion of
the 2002 Note and 2003 Note and possible conversion of the borrowings under the
revolving credit facility amounting to 1,520,000 and 1,110,000 were excluded
from the computation of diluted loss per share for the three and nine months
ended December 31, 2003, respectively, as their effect would have been
anti-dilutive.

14. SEGMENT AND GEOGRAPHIC DATA

         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 Company is an integrated information technology and services
company. Through September 30, 2003, the Company operated in three primary
business segments: (1) engineering and collaborative software products and
services; (2) IT services; and (3) Web-based telecommunications and travel
services. During the quarter ended December 31, 2003, the Company's management
committed to sell its travel subsidiary. Accordingly, the results of the travel
subsidiary's operations are excluded from the Web-based telecommunications
services segment and reported as "discontinued operations". Therefore, since
October 1, 2003, the Company's three primary business segments have been: (1)
engineering and collaborative software products and services; (2) IT services;
and (3) Web-based telecommunications services. Prior period presentation has
been revised to provide comparable information.

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

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

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED        NINE MONTHS ENDED
                                           DECEMBER 31,              DECEMBER 31,
                                      ----------------------    ---------------------
                                                     2002                     2002
                                        2003      (RESTATED)      2003      (RESTATED)
                                      --------     --------     --------     --------
<S>                                   <C>          <C>          <C>          <C>
         NET REVENUE
Engineering and collaborative
  software products and services      $ 2,664      $ 2,439      $ 8,060      $ 6,700
IT services                             1,215        1,436        3,707        4,219
Web-based telecommunications
  services                                258          599          911        2,841
Center                                     --           --           --           --
                                      --------     --------     --------     --------
     Consolidated                     $ 4,137      $ 4,474      $12,678      $13,760
                                      ========     ========     ========     ========
</TABLE>

                                       20





<PAGE>

<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED         NINE MONTHS ENDED
                                            DECEMBER 31,               DECEMBER 31,
                                      -----------------------     ----------------------
                                                     2002                        2002
                                        2003       (RESTATED)       2003       (RESTATED)
                                      --------      --------      --------      --------
<S>                                   <C>           <C>           <C>           <C>
       GROSS PROFIT
Engineering and collaborative
  software products and services      $ 2,331       $ 2,160       $ 6,987       $ 5,886
IT services                               248           372           779         1,055
Web-based telecommunications
  services                                 65            88           296           209
Center                                     --            --            --            --

                                      --------      --------      --------      --------
     Consolidated                     $ 2,644       $ 2,620       $ 8,062       $ 7,150
                                      ========      ========      ========      ========

    OPERATING (LOSS)/INCOME
Engineering and collaborative
  software products and services      $  (983)      $  (224)      $(1,288)      $(1,547)
IT services                               (44)            9          (140)         (111)
Web-based telecommunications
  services                                (37)         (162)          (56)         (530)
Center                                   (209)         (386)         (705)       (1,085)

                                      --------      --------      --------      --------
     Consolidated                     $(1,273)      $  (763)      $(2,189)      $(3,273)
                                      ========      ========      ========      ========
</TABLE>

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

<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED        NINE MONTHS ENDED
                                          DECEMBER 31,             DECEMBER 31,
                                    ---------------------     ---------------------
                                      2003         2002         2003         2002
                                    --------     --------     --------     --------
<S>                                 <C>          <C>          <C>          <C>
             NET REVENUE
United States                       $ 2,073      $ 2,275      $ 6,624      $ 8,675
The Americas (other than U.S.)          238          279          543          609
Europe                                  931        1,041        2,869        2,150
Asia-Pacific                            895          879        2,642        2,326
                                    --------     --------     --------     --------

         Consolidated               $ 4,137      $ 4,474      $12,678      $13,760
                                    ========     ========     ========     ========

             EXPORT SALES
United States                       $   507      $   693      $ 1,483      $ 1,368
                                    ========     ========     ========     ========
</TABLE>

                                       21





<PAGE>

                                            DECEMBER 31,       MARCH 31,
                                                2003              2003
                                          ---------------   ---------------
                                                   (IN THOUSANDS)
                LONG-LIVED ASSETS
                United States             $        4,313    $        5,050
                Europe                               229               324
                Asia-Pacific                       1,088             1,189
                                          ---------------   ---------------

                         Consolidated     $        5,630    $        6,563
                                          ===============   ===============

                                       22





<PAGE>

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

         This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended, (the "Exchange Act)." We intend that 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 initiative;
         o        our ability to attract strategic partners, alliances and
                  advertisers;
         o        our ability to hire and retain qualified personnel;
         o        the risks of uncertainty of trademark protection;
         o        risks associated with existing and future governmental
                  regulation to which we are subject; and
         o        uncertainties relating to economic conditions in the markets
                  in which we currently operate and in which we intend to
                  operate in the future.

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

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

     OVERVIEW

         We operate in three business segments.  They are:

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

                                       23





<PAGE>

         Our net revenues in three months ended December 31, 2003 was
$4,137,000, a decrease of 7.5% over the corresponding prior year period, of
which IT services revenue declined $221,000 (15.4%), and Web-based
telecommunications services declined $341,00 (56.9%). This decline was partially
offset by an increase in net revenues of $225,000, or 9.2% in engineering and
collaborative software. Although overall net revenues declined, total gross
profit increased. Gross profit percentage increased to 63.9% of total net
revenue as compared to 58.6% for the same period in the previous year.

         These increases in total gross profit are consistent with our strategy
to emphasize and grow our higher gross margin segments.

         We anticipate continued growth in both domestic and international sales
of engineering and collaborative software in the quarter ending March 31, 2004
and for the upcoming fiscal year 2005. Historically, our software sales and
revenues increase during the second half of the fiscal year. We believe IT
Services would see growth in revenues due to the expansion into the business
process outsourcing (BPO) market. The BPO initiative will provide high-level
engineering and other technical services to address the growing need for
cost-effective solutions. Initially, we plan to provide services to address the
production of structural steel detailing drawings and the provision of
high-level technical support software. We plan to leverage our existing
technical support infrastructure, our telephony capabilities and our
collaborative software technology to offer these services to a broad array of
companies looking to outsource these functions. Although we believe that the BPO
service business will bring additional revenues to the IT Services segment, we
cannot offer assurance that we will be successful in this new initiative due to
competition for such services and relatively few barriers to entry since BPO
services are not capital-intensive.

         During the three months ended December 31, 2003, we committed to
dispose of our less profitable and non-core businesses and began to actively
market our travel services subsidiary to potential buyers. As a result, travel
services are no longer included in our operations. This action resulted in a
loss from discontinued operations of $462,000 during the three months ended
December 31, 2003. We have also severely reduced our focus on the
telecommunication services business since we do not believe that the revenues
from this segment would improve in the foreseeable future.

         As of December 31, 2003, our indebtedness under our convertible notes
totaled approximately $2,300,000, out of a total availability of $4,000,000.
During the three months ended December 31, 2003, 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        accounting for software development costs and purchased
                  technology;
         o        allowance for accounts receivable; and
         o        impairment of long-lived assets, including goodwill.

                                       24





<PAGE>

     REVENUE RECOGNITION

         We derive revenues from:

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

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

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

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

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

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

                                       25





<PAGE>

         We recognize revenues from call termination services at gross sales
value, with the applicable cost separately stated in cost of revenues. We
recognize revenues from sales of our own phone cards based on usage. We
recognize revenues from our resale of third-party phone cards net of returns
because no significant obligations remain once the phone cards are delivered. We
recognize revenues from products and services sold via Internet portals net of
purchase costs when the products and services are delivered and collection is
probable.

     ACCOUNTING FOR SOFTWARE DEVELOPMENT COSTS AND PURCHASED TECHNOLOGY

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

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

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

     ALLOWANCE FOR ACCOUNTS RECEIVABLE

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

     IMPAIRMENT OF LONG-LIVED ASSETS, INCLUDING GOODWILL

         Through March 31, 2002, we applied the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. We measured
recoverability of an asset to be held and used by comparing the carrying amount
of the asset to future net undiscounted cash flows expected to be generated by

                                       26





<PAGE>

the asset. If we considered the asset impaired, we recognized an impairment loss
equal to the amount by which the carrying value of the asset exceeded the fair
value of the asset. We reported assets to be disposed of at the lower of their
carrying amounts or fair values less costs to sell. In August 2001, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment of long-lived assets and
superseded SFAS No. 121 and the accounting and reporting provisions of APB No.
30, "Reporting the Results of Operations for a Disposal of a Segment of a
Business." SFAS No. 144 became effective for fiscal years beginning after
December 15, 2001. We adopted SFAS No. 144 beginning April 1, 2002. Pursuant to
SFAS No. 144, during the three months ended December 31, 2003, we wrote down the
net assets of our travel subsidiary that is being held for sale, to its
potential recoverable value. As a result, we recorded a loss on discontinued
operations of $462,000, including an impairment loss of $316,000.

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

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

         We consider the following operating segments- engineering and
collaborative software products and services, IT services, and Web-based
telecommunications 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.

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

         The additional reviews involve a comparison of the implied fair value
of the reporting unit goodwill with its carrying amount, both of which are
measured as of the end of the period being reported. If the implied fair value
of the reporting unit goodwill is less than the carrying amount of the reporting

                                       27





<PAGE>

unit goodwill, we write down the carrying amount of the reporting unit goodwill
to its implied fair value and recognize an impairment loss equal to the
difference between the implied fair value and the carrying amount of reporting
unit goodwill. If, in subsequent periods, the implied fair value of the
reporting unit goodwill is higher than its carrying amount, we do not reverse an
impairment loss recognized earlier or adjust the carrying amount to the higher
amount.

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

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

         The evaluation of goodwill impairment involves assumptions about the
fair values of assets and liabilities of each reporting unit. If these
assumptions are materially different from actual outcomes, the carrying value of
goodwill will be incorrect. In addition, future results of operations could be
materially impacted by the write-down of the carrying amount of goodwill to its
estimated fair value. There were no goodwill impairment write-downs during the
three and nine months ended December 31, 2003. As of December 31, 2003, goodwill
balance, net of amortization, was $2,941,000.

     NEW ACCOUNTING PRONOUNCEMENTS

         The 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 over different periods. We adopted this
consensus on July 1, 2003. Under EITF No. 00-21, revenue must be allocated to
all deliverables regardless of whether an individual element is incidental or
perfunctory. The adoption of EITF No. 00-21 did not materially impact our
consolidated financial condition or results of operations.

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

         In July 2003, the EITF reached a consensus on EITF 03-5, "Applicability
of AICPA SOP 97-2 to Non-Software Deliverables." EITF 03-5 provides accounting
guidance on whether non-software deliverables (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. We adopted consensus in October
2003. The adoption of EITF 03-5 did not materially impact our consolidated
financial condition or results of operations.

                                       28

<PAGE>

CONSOLIDATED RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED DECEMBER 31,
2003 VERSUS THREE AND NINE MONTHS ENDED DECEMBER 31, 2002

CONTINUING OPERATIONS

NET REVENUES

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

<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED       NINE MONTHS ENDED
                                            DECEMBER 31,             DECEMBER 31,
                                      ----------------------    ---------------------
                                        2003         2002         2003        2002
                                      --------     --------     --------     --------
<S>                                   <C>          <C>          <C>          <C>
NET REVENUE
Engineering and collaborative
  software products and services      $ 2,664      $ 2,439      $ 8,060      $ 6,700
% of total revenue                     64.4 %       54.5 %       63.6 %       48.7 %

IT services                           $ 1,215      $ 1,436      $ 3,707      $ 4,219
% of total revenue                     29.4 %       32.1 %       29.2 %       30.7 %

Web-based telecommunications
  services                            $   258      $   599      $   911      $ 2,841
 % of total revenue                     6.2 %       13.4 %        7.2 %       20.6 %
                                      --------     --------     --------     --------

 Total Revenue                        $ 4,137      $ 4,474      $12,678      $13,760
                                      ========     ========     ========     ========
</TABLE>

         Net revenues for the three and nine months ended December 31, 2003
decreased by $337,000 (7.50%) and $1,082,000 (7.9%), respectively, compared to
the three and nine months ended December 31, 2002. Our revenues consisted
primarily of revenues from (1) engineering and collaborative software products
and services, (2) IT services, and (3) Web-based telecommunications services.

         Net revenues from engineering and collaborative software products and
services increased $225,000 (9.2%) and $1,360,000 (20.3%) for the three and nine
months ended December 31, 2003, respectively, as compared to the same periods in
the prior fiscal year. The increase in net revenues during the three months
ended December 31, 2003 was primarily due to an increase of $65,000 in
engineering software and support revenues and an increase of $160,000 in
collaborative software revenues. The engineering software sales increased due to
a sales promotion that was offered where we added an additional module with an
upgrade to our STAAD Suite Package. The collaborative software sales increased
as compared to the same period in the prior fiscal year primarily due to the
completion of a large contract amounting to $120,000. In the prior fiscal year,
there were no large contracts that were completed and recognized. The increase
in net engineering and collaborative software revenues during the nine months
ended December 31, 2003 was due to an increase in net engineering software and
support revenues of $1,170,000 and an increase in collaborative software net
revenues of $190,000. Engineering software and support net revenues increased
due to the completion and recognition of a large service project in the
beginning of the current fiscal year amounting to approximately $450,000,
additional revenues from the new international regional offices that were

                                       29





<PAGE>

established during the prior fiscal year, and certain sales promotions that were
offered throughout the fiscal year. Collaborative software sales increased
during the nine months ended December 31, 2003 due to the recognition of
revenues from completion of a higher number of projects. In the prior fiscal
year, our collaborative software sales efforts were primarily by the domestic
sales office, whereas in the current fiscal year additional collaborative
software projects have been obtained by the combined efforts of both the
domestic and international sales offices.

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

         IT services net revenues continued to decline during the three and nine
months ended December 31, 2003, compared to the same periods in the prior fiscal
year. IT services net revenues decreased $221,000 (15.4%) and $512,000 (12.1%)
during the three and nine months ended December 31, 2003, respectively, as
compared to the same periods in the prior fiscal year. Net revenues from IT
services have decreased due to scaling down one of our IT services offices and
due to lowering the prices we charge our customers in order to be able to
compete with our competitors and to retain our current customers. In the past
several quarters, the IT services industry had been adversely affected by a slow
economy, and many of our customers reduced, and continue to reduce, spending on
technology consulting and systems integration services. Although the IT services
business seems to have recovered somewhat as evidenced by the slowdown in the
decline in net revenues during the three and nine months ended December 31,
2003, we do not anticipate significant recovery to occur in the IT services
segment as we expect that this period of economic uncertainty may continue to
impact our IT services net revenues adversely throughout fiscal 2004. Beginning
in November 2003, we have initiated expansion of our IT services into the BPO
market leveraging our existing, technical support infrastructure in India, our
telecommunications switch in the United States and our collaborative software
technology to offer these services to a broad array of companies looking to
outsource these functions. Although we anticipate that our BPO services business
will bring in additional revenues for the IT services segment and stop or
reverse the decline in IT services net revenues, we cannot assure you that we
will be successful in this initiative, due to competition for such
services and relatively few barriers to entry since BPO services are not
capital-intensive.

         Web-based telecommunications services net revenues decreased $341,000
(56.9%) and $1,930,000 (67.9%) for the three and nine months ended December 31,
2003, respectively, as compared to the same periods in the prior fiscal year due
to (1) decreases of $210,000 and $1,688,000 in call termination services net
revenues during the three and nine months ended December 31, 2003, respectively,
and (2) decreases of $81,000 and $238,000, in retail phone card net revenues
during the three and nine months ended December 31, 2003, respectively. Due to
the recent turmoil in the telecommunications industry, which has increased the
uncertainty of the viability of smaller services providers, some of whom are our
customers, and due to the higher operating costs and lower gross margins for the
call termination services business, we have severely curtailed our sales efforts
in this line of business, resulting in lower revenues. The decrease in the
retail phone card net revenues was the result of a decline in business and
reduction in the prices we charge our customers due to price competition. We do
not expect our Web-based telecommunications services net revenues to improve
significantly from current levels for the foreseeable future due to the
uncertainty in the telecommunications service industry.

                                       30





<PAGE>

         As part of our efforts to focus on our core software products and IT
services businesses, during the three months ended December 31, 2003, we
committed to a plan to sell our travel services subsidiary. We have begun to
actively market the subsidiary to potential buyers and expect to complete the
sale within the next twelve months. Pursuant to SFAS No.144, "Accounting for the
Impairment or Disposal of Long Lived Assets," the results of operations of the
travel services subsidiary are shown in our condensed consolidated statements of
operations under "discontinued operations," and are no longer included with our
Web-based telecommunications services.

GROSS PROFIT

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

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED     NINE MONTHS ENDED
                                               DECEMBER 31,           DECEMBER 31,
                                          --------------------    --------------------
                                            2003       2002         2003       2002
                                          -------     -------     -------     -------
<S>                                       <C>         <C>         <C>         <C>
GROSS PROFIT
    Engineering and collaborative
      software products and services      $2,331      $2,160      $6,987      $5,886
    IT services                              248         372         779       1,055
    Web-based telecommunications
      services                                65          88         296         209

                                          -------     -------     -------     -------
         Consolidated                     $2,644      $2,620      $8,062      $7,150
                                          =======     =======     =======     =======
GROSS PROFIT PERCENTAGE
    Engineering and collaborative
      software products and services      87.5 %      88.6 %      86.7 %      87.9 %
    IT services                           20.4 %      25.9 %      21.0 %      25.0 %
    Web-based telecommunications
      services                            25.2 %      14.7 %      32.5 %       7.4 %
</TABLE>

         Gross profit percentage in the engineering and collaborative software
products and services segment decreased by 1.1 and 1.2 percentage points during
the three and nine months ended December 31, 2003, respectively, compared to the
same periods in the prior fiscal year. The decrease in gross profit percentage
is due to lower levels of revenue from digital media and animation services
during the three and nine months ended December 31, 2003 with no corresponding
decrease in the cost of providing such services. In addition, amortization
expense charged to cost of sales for the nine months ended December 31, 2003
increased by $34,000 as compared to the same period in the prior fiscal year.
Our engineering and collaborative software products and services segment
generally produces higher gross margin than our other segments due to the low
costs associated with each sale. The cost of revenues for the software sales and
support segment includes printing services, direct supplies such as hardware
locks, which are security devices that are attached to the central processing
unit to prevent unauthorized access to licensed software, salaries for the
technical support employees, freight out, and software amortization expense.

                                       31





<PAGE>

         Gross profit percentage in the IT services segment decreased by 5.5 and
4.0 percentage points during the three and nine months ended December 31, 2003,
respectively, as compared to the same periods in the prior fiscal year. As a
result of the market slowdown for the IT industry, net revenues from this
segment have been decreasing significantly over the past several quarters.
Although we cut our costs of providing IT services in response to this
continuing decline, the net revenues from this segment were not adequate to
maintain consistent gross profit percentages. In addition, due to higher
competition, we have lowered our billing rates as compared to the same period in
the prior year. Historically, gross profit percentage from the IT services
segment has been lower than gross profit percentage from the engineering and
collaborative software products and services segment due to the higher cost of
labor associated with IT services. The cost of revenues for IT services includes
the salaries, bonuses, and benefits for the consulting employees. Our IT
services consultants generally receive higher salaries than our technical
support employees.

         Gross profit percentage in the Web-based telecommunications services
segment increased by 10.5 and 25.1 percentage points during the three and nine
months ended December 31, 2003, respectively, compared to the same periods in
the prior fiscal year. The cost of revenues for Web-based telecommunications
services includes the cost of buying minutes from another carrier. Gross profit
percentage from Web-based telecommunications services during the three and nine
months ended December 31, 2003, increased due to our near elimination of call
termination services, which historically had an average gross profit percentage
of 7%, and due to our focus on phone card services, which have an average gross
profit percentage of 35%. In addition, the gross profit percentage increased due
the lower cost of purchased minutes for our phone card services. Although gross
profit from Web-based telecommunications services increased during the three and
nine months ended December 31, 2003, compared to the same periods of the prior
fiscal year, we believe this is not a trend. Pricing pressures in the
telecommunications industry may negatively impact the gross profit from our
Web-based telecommunications services for the foreseeable future.

OPERATING EXPENSES

         The following table presents our operating expenses and the percentage
of total net revenue (dollars in thousands):

<TABLE>
<CAPTION>
                                  THREE MONTHS ENDED        NINE MONTHS ENDED
                                     DECEMBER 31,              DECEMBER 31,
                              ------------------------    ----------------------
                                2003           2002         2003         2002
                              ---------     ----------    ---------   ----------
<S>                            <C>           <C>          <C>          <C>
OPERATING EXPENSES
Selling, general and
  administrative expenses      $ 3,154       $ 2,541      $ 8,010      $ 7,859
% of total revenue              76.2 %        56.8 %       63.2 %       57.1 %

Research and development       $   529       $   481      $ 1,517      $ 1,492
% of total revenue              12.8 %        10.8 %       12.0 %       10.8 %

Depreciation                   $   234       $   271      $   724      $   811
 % of total revenue              5.7 %         6.0 %        5.7 %        5.9 %

Impairment charge              $    --       $    --      $    --      $    67
 % of total revenue                 --            --           --        0.5 %

Restructuring                  $    --       $    90      $    --      $   194
 % of total revenue                 --         2.0 %           --        1.4 %

Total operating expenses       $ 3,917       $ 3,383      $10,251      $10,423
% of total revenue              94.7 %        75.6 %       80.9 %       75.7 %
</TABLE>

                                       32





<PAGE>

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative ("SG&A") expenses increased by
$613,000 (24.1%) and $151,000 (1.9%) during the three and nine months ended
December 31, 2003, respectively, compared to the same periods in the prior
fiscal year. The increase in SG&A expenses for the three months ended December
31, 2003 was due primarily to a $230,000 increase for severance payments and
expenses relating to options given as part of a severance package, $42,000
increase for outside consulting fees and commissions, a $73,000 increase in
other professional fees, a $39,000 increase in sales commissions for the
engineering segment due to higher sales, and a $421,000 increase in strategic
consulting and investor relations services. The increase in strategic consulting
and investor relations services was a non-cash expense related to the issuance
of warrants as consideration for services. These increases were offset by a
$131,000 reduction in salaries and related expenses due to employee terminations
and reassignment of certain employees to R&D due to the nature of work they
perform, an $119,000 reduction in legal fees, and a $49,000 reduction in rent.
The increase in SG&A expenses for the nine months ended December 31, 2003 was
due primarily to a $230,000 increase in severance payments and expenses related
to options given as part of a severance package, a $103,000 increase in sales
commissions due to increased sales in the engineering and collaborative software
segment, a $58,000 increase in amortization of deferred fees, a $68,000 increase
in legal fees, a $137,000 increase in other professional fees, and a $465,000 in
strategic consulting and investor relations services expense. Approximately
$410,000 of the $465,000 increase in strategic and investor relations services
expense was a non-cash expense related to the issuance of warrants as
consideration for services. These increases were offset by a $464,000 reduction
in salaries and related benefits due to employee terminations and reassignment
of certain employees to R&D due to the nature of work they perform, a $177,000
reduction in rent, a $63,000 reduction in marketing consulting expenses due to
continuing cost control measures, a $76,000 reduction in dealer commission
expenses due a decrease in dealer sales, and a $75,000 reduction in user
conference expenses related to our annual user conference meeting. We continue
to monitor our SG&A expenses but do not make any assurances that we will be able
to maintain or further cut SG&A expenses from levels attained in the first nine
months of fiscal 2004. 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. During the three and nine months ended December 31, 2003, R&D
expenses increased by $48,000 (10.0%) and $25,000 (1.7%), respectively, compared
to the same periods in the prior fiscal year. The increase in R&D is primarily
related to the expenses of certain employees who were reassigned to the R&D
department in the current period from SG&A due to the nature of the work they
currently perform. We believe our R&D expenses will remain at current levels for
the foreseeable future.

         DEPRECIATION

         Depreciation expenses (excluding amounts charged to cost of revenues)
decreased by $37,000 (13.7%) and $87,000 (10.7%) during the three and nine
months ended December 31, 2003, respectively, compared to the same periods in
the prior fiscal year due to fully depreciated assets not being replaced at the
same rate. In addition, the sale of one of our telecommunications switches

                                       33

<PAGE>

contributed a reduction in depreciation expense of approximately $24,000 per
quarter. As a result of our continuing efforts to control cost, additions to
capital equipment have been minimal. We anticipate that depreciation and
amortization expenses will remain at this lower level through the end of fiscal
2004.

         RESTRUCTURING

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

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

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

         In March 2001, we closed our Boston technical support office as part of
consolidating our technical support activities. Technical support activities
previously offered from that office have been consolidated into the California
facility. The closing of this office resulted in the termination of two
employees. The restructuring charge related to the consolidation of technical
support facilities was $166,000, of which $49,000 related to accrued severance
payments for the two terminated employees and $117,000 related to contractual
lease obligations for the vacated space. We made cash payments totaling $58,000
in fiscal 2002 toward settlement of obligations related to this activity. By
consolidating the technical support functions, beginning in April 2001, we
reduced employee costs by approximately $221,000 per year and reduced facility
costs by approximately $51,000 per year. During fiscal 2003, we made cash
payments of $55,000 for severance expenses relating to the termination of one
employee and $47,000 for lease payments for the vacated office space. During the
first six months of fiscal 2004, we paid the remaining $19,000 for lease
payments for the vacated office space. As of December 31, 2003, we had no
remaining unpaid obligations related to this activity.

         The elimination of the in-house legal department primarily consisted of
the termination of one employee whose position was not refilled. Due to the size
of our operations, a full-fledged internal legal department was unnecessary. We
are able to obtain cost-effective legal services, as and when needed, from our
continuing external legal counsel. By eliminating the in-house legal department,
we reduced employee costs by approximately $127,000 per year beginning in April
2001. In fiscal 2001, we estimated the restructuring charge related to the
elimination of the in-house legal department to be $42,000. Additional charges
of $41,000 and $199,000 were recorded in fiscal 2002 and in fiscal 2003,
respectively, since the original estimate of severance expenses was
insufficient. During fiscal 2002 and fiscal 2003, we paid $52,000 and $50,000,
respectively, toward settlement of obligations due to the terminated employee.
During the first quarter of fiscal 2004, we paid the remaining settlement
obligation of $180,000. As of December 31, 2003, we had no remaining unpaid
obligations related to this activity.

                                       34

<PAGE>

         IMPAIRMENT CHARGE

         No impairment charges were recorded during the nine months ended
December 31, 2003. During the nine months ended December 31, 2002, we recorded
an impairment charge of $67,000 as a result of the write-down of a capitalized
software asset to its net realizable value.

         OTHER EXPENSES (INCOME)

         The following table presents our other expense (income) and its
percentage of total net revenue (dollars in thousands):

                                 THREE MONTHS ENDED         NINE MONTHS ENDED
                                   DECEMBER 31,                DECEMBER 31,
                              -----------------------    -----------------------
                               2003           2002        2003          2002
                              -------      ----------    -------      ----------
OTHER EXPENSE (INCOME)

Interest, net                  $ 256         $  66       $ 494         $ 182
% of total revenue             6.2 %         1.5 %       3.9 %         1.3 %

Other (income) expense         $ (26)        $   5       $(108)        $   3
 % of total revenue             (0.6)%       0.1 %        (0.9)%          --

Total other expense            $ 230         $  71       $ 386         $ 185
 % of total revenue            5.6 %         1.6 %       3.0 %         1.3 %

         INTEREST EXPENSE

         Net interest for the three and nine months ended December 31, 2003
increased by $190,000 and $312,000, respectively, compared to the same periods
in the prior fiscal year. The increase in net interest expense during the three
months ended December 31, 2003 was due to a $198,000 increase in interest due to
increase in our debt obligations, offset by a decrease of $8,000 in interest
expense related to our capital leases. During the nine months ended December 31,
2003, interest expenses increased due to a $340,000 increase in interest expense
related to increase in our debt obligations, offset by a decrease of $28,000 in
interest expense related to our capital leases. Interest expense in the upcoming
months may decrease due to conversion of a portion of debt outstanding under the
2002 Note into equity but will be offset by increase in interest on borrowings
under the 2003 Note. If the conversion of borrowings under the 2002 Note are not
made, we anticipate our interest expense to increase in the future.

         OTHER (INCOME) EXPENSE

         Other income for the three and nine months ended December 31, 2003
increased by $29,000 and $111,000, respectively, compared to the same periods in
the prior fiscal year due to selling ISP equipment that was previously written
off in the prior fiscal year.

          INCOME TAXES

          We recorded an income tax expense of $164,000 during the nine months
ended December 31, 2003 compared to an income tax benefit of $255,000 during the
same period in the prior fiscal year. Due to our net operating loss position, we
reversed tax liabilities recorded in prior periods that were no longer required,
which resulted in a tax benefit in the prior fiscal year. Tax expense in the
three and nine months ended December 31, 2003 resulted from provisions for
foreign taxes.

                                       35

<PAGE>

         CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE

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

         DISCONTINUED OPERATIONS

         As a result of our efforts to focus on our core software products and
IT services businesses, during the three months ended December 31, 2003, we
committed to a plan to sell our travel services subsidiary. We have begun to
actively market the subsidiary to potential buyers and expect to complete the
sale within the next twelve months. We have presented the results of operations
of the travel services subsidiary in our condensed consolidated statement of
operations under "discontinued operations," and the assets and liabilities of
this subsidiary separately in our condensed consolidated balance sheets. In
addition, we have reclassified prior periods presentations to be comparable to
the current period presentation. We wrote down the net assets of our travel
subsidiary to their fair value less cost to sell. As a result, we recorded a
loss on discontinued operations of $462,000, including an impairment loss of
$316,000.

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 December 31, 2003 consisted of
$1,667,000 of cash and cash equivalents and a revolving credit facility
described below. Cash and cash equivalents decreased by $1,105,000 (39.9%)
during the nine months ended December 31, 2003. The primary reason for this
decrease was usage of cash in operations. During the nine months ended December
31, 2003, our consolidated average monthly net cash outflow from operations was
approximately $166,000, compared to approximately $261,000 per month during the
same period in the prior fiscal year.

         Net cash used in operations was $1,490,000 during nine months ended
December 31, 2003 compared to $2,345,000 during the same period in the prior
fiscal year, a decrease of $855,000. Net loss was the primary reason for cash
used in operations in both periods. The decrease in cash used in operations was
primarily due to increases in accounts receivable, prepaid expenses, a decrease
in deferred revenues and a decrease in income tax receivable. These factors were
partially offset by increases in stock based compensation and deposits. Working
capital decreased to $1,295,000 at December 31, 2003 from $1,461,000 at December
31, 2002. Current ratio increased to 1.3 at December 31, 2003 from1.2 at
December 31, 2002 primarily due to increases in accounts receivable and prepaid
expenses and other current assets as well as due to decreases in current portion
of long-term debt, current portion of capital lease obligations and accrued
restructuring costs.



                                       36





<PAGE>

         Net cash used in investing activities during the nine months ended
December 31, 2003 consisted solely of capital expenditures of $78,000 compared
to $195,000 of capital expenditures during the nine months ended December 31,
2002. During the nine months ended December 31, 2003, we received $150,000 as
proceeds from the sale of one of our telecommunications switches. We expect our
capital expenditures to stay at the current level for the next twelve months.

         Cash provided by financing activities during the nine months ended
December 31, 2003 primarily resulted from long-term borrowings of $2,101,000
(including $1,150000 related to convertible debt we issued to Laurus on December
4, 2003, as described below) offset by $1,371,000 in long-term debt repayments.
In addition, repayments of capital lease obligations amounted to $528,000.
Proceeds from long-term borrowings, primarily from Laurus, during the same
period in the prior fiscal year were $2,221,000. Additionally, we paid $214,000
in financing fees related to the issuance of long-term debt, $196,000 to repay
long-term debt and $314,000 to repay capital lease obligations during the same
period in the prior fiscal year.

         We incurred net losses from continuing operations of $2,739,000 and
$3,203,000 and used cash in operations of $1,490,000 and $2,345,000 during the
nine months ended December 31, 2003 and 2002, respectively. Our future capital
requirements will depend upon many factors, including sales and marketing
efforts, the development of new products and services, possible future strategic
acquisitions, the progress of research and development efforts, and the status
of competitive products and services.

         The following table summarizes our contractual obligations and
commercial commitments at December 31, 2003 (in thousands of dollars):

<TABLE>
<CAPTION>
                                         --------------------------------------------------------------------------------
                                                                     PAYMENTS DUE BY PERIOD
                                         --------------------------------------------------------------------------------

                                                               LESS THAN
CONTRACTUAL OBLIGATIONS                        TOTAL             1 YEAR      1-3 YEARS      4-5 YEARS       AFTER 5 YEARS
-----------------------                        -----             ------      ---------      ---------       -------------
<S>                                             <C>                <C>          <C>              <C>               <C>
Long-Term Debt                             $    2,541              795          1,598            100                 48
Capital Lease Obligations                         511              148            290             73                  -
Operating Leases                                3,550              488            823            652              1,587

                                         ---------------------------------------------------------------------------------
Total Contractual Cash Obligations         $    6,602            1,431          2,711           825               1,635
                                         =================================================================================

                                             TOTAL AMOUNTS      LESS THAN
OTHER COMMERCIAL COMMITMENTS                   COMMITTED          1 YEAR   1-3 YEARS      4-5 YEARS        OVER 5 YEARS
----------------------------                   ---------          ------   ---------      ---------        ------------

Letter of Credit                             $     100              100         -              -                -
                                         ----------------------------------------------------------------------------------
Total Commercial Commitments                 $     100              100         -              -                -
                                         ==================================================================================
</TABLE>

         As indicated above, we historically have relied upon cash from
financing activities to fund most of the cash requirements of our operating and
investing activities. We have not been able to generate sufficient cash from our
operating activities in the past, and there is no assurance we will be able to
do so in the future. However, we believe that current and future available
capital resources, including amounts available under the revolving credit
facility from Laurus, will be adequate to fund our operations for the next

                                       37

<PAGE>

twelve months, because we are continuing to implement cost containment measures
in an effort to reduce net cash outflow both domestically and abroad and are
working to increase sales of our software products. The results of these
combined efforts have reduced our consolidated monthly net cash outflow from
operations to approximately $166,000 per month.

         Our former bank line of credit expired in August 2001, and our $500,000
line of credit from a major stockholder expired March 31, 2003. On December 13,
2002, we issued a $2,000,000, 6% convertible note to Laurus ("2002 Note"). 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
our common stock to satisfy the obligations of the convertible note are based,
was reduced from $1.60 to $1.30. We accounted for this transaction as a
modification of debt under EITF 96-19, "Debtor's Accounting for a Modification
or Exchange of Debt Instruments." As a result of the reduction in the conversion
price from $1.60 to $1.30, we recorded a beneficial conversion amount of
$302,000, estimated using the Black-Scholes option pricing model, as discount to
the convertible debt, which is being amortized over the life of the note using
the effective interest rate method.

         On July 31, 2003, we also obtained a three-year, renewable, $4,000,000
revolving accounts receivable credit facility from Laurus. Borrowings against
this credit facility accrued interest, initially, at an annual rate equal to the
greater of 5% or prime rate plus 1% per annum, payable monthly in arrears. Since
November 2003, interest rate per annum on the borrowings has been adjustable
every month based on certain conditions and on the volume weighted average price
of our common stock. Obligations owed under this revolving credit facility may
be repaid at our option in cash or through the issuance of shares of our common
stock at the fixed conversion price of $1.30 per share, subject to volume
limitations, provided the shares are registered with the Securities and Exchange
Commission for public resale and the then current market price is greater than
110% of the fixed conversion price. The fixed conversion price may be adjusted
upward under certain circumstances. Also, the fixed conversion price is subject
to standard anti-dilution provisions for stock-splits, stock dividends,
reclassifications, and the like, and is subject to downward adjustment for
certain issuances at prices below the then fixed conversion price. The accounts
receivable credit facility has a three-year term, which automatically renews
every three years unless cancelled in writing by us or by Laurus under certain
conditions. An early termination fee of up to $120,000 will be payable if the
facility is terminated prior to August 1, 2006. The facility also provides us
the flexibility to access additional amounts above what is available based upon
eligible accounts receivable. Any such additional amounts would accrue interest
at a rate of 0.6% per month, payable monthly.

         In connection with this financing, we paid a $140,000 fee to an
affiliate of Laurus and issued to Laurus a five-year warrant to purchase 180,000
shares of our common stock, exercisable at various exercise prices as follows:
115% of the then effective fixed conversion price per share for the purchase of
up to 60,000 shares; 125% of the then effective fixed conversion price per share
for the purchase of an additional 60,000 shares; and 145% of the then effective
fixed conversion price per share for the purchase of an additional 60,000
shares. Based on the initial fixed conversion price of $1.30, the exercise
prices would be $1.495 per share for the purchase of up to 60,000 shares; $1.625
per share for the purchase of an additional 60,000 shares; and $1.885 per share
for the purchase of an additional 60,000 shares. The fair market value of these
warrants estimated using the Black-Scholes option pricing model was $201,000,

                                       38

<PAGE>

which was recorded as a discount. Laurus may also receive additional five-year
warrants to purchase up to 400,000 shares of our common stock at an exercise
price equal to 125% of the fixed conversion price based upon how much of the
outstanding obligation under the credit facility is converted to equity. As of
December 31, 2003, none of the additional five-year warrants have been issued.
The credit facility is secured by a general security interest in the assets of
netGuru and its subsidiaries.

         During the three months ended September 30, 2003, we borrowed $600,000
under this credit facility and recognized approximately $77,000 of debt discount
as a result of the beneficial conversion rate of the debt. During the three
months ended December 31, 2003, we borrowed an additional $300,000 under this
facility and recognized approximately an additional $63,000 of debt discount as
a result of the beneficial conversion rate of the debt. On December 4, 2003, the
outstanding balance of $900,000 was canceled under the revolving credit facility
and was refinanced with the same lender along with $500,000 of additional
borrowings and we issued a three-year, 5% secured convertible note that we
issued to Laurus Master Fund for $1,400,000 ("2003 Note"). Interest rate on the
2003 Note is equal to the greater of the prime rate plus one percent (1.0%) or
five percent (5%) and is payable in arrears commencing January 1, 2004 and on
the first business day of each consecutive calendar month thereafter. Beginning
in April 1, 2004, if not previously paid with shares, we are required to make
monthly payments of $30,000 plus accrued but unpaid interest to that date. The
2003 Note terminates on December 3, 2006. The fixed conversion price, upon which
potential issuances of our common stock to satisfy the obligations of the 2003
Note are based is $1.30. At December 31, 2003, we had no borrowings under the
revolving credit facility and a balance of $1,244,000, net of fees and
beneficial conversion adjustments, under the 2003 Note. In connection with this
note, we paid Laurus $15,500 in fees.

         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 December 31, 2003.

         The balances outstanding on the 2002 Note and 2003 Note will reduce the
amount available under the revolving credit facility. At December 31, 2003, we
had no borrowings under the credit facility and principal balances of $975,000
and $1,400,000 under the 2002 Note and 2003 Note, respectively. At December 31,
2003, we had $1,625,000 available under the revolving credit facility.

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

                                       39


<PAGE>

         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, 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.

         As of October 1, 2003, we discontinued the operations of our travel
services subsidiary. We do not believe that discontinuing the operations of our
travel subsidiary will materially affect our liquidity.

ITEM 3.  CONTROLS AND PROCEDURES.

         Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of December 31, 2003, that the design and operation
of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective
to ensure that information required to be disclosed by us in the reports filed
or submitted by us under the Exchange Act is accumulated, recorded, processed,
summarized and reported to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
whether or not disclosure is required.

         During the quarter ended December 31, 2003, there were no changes in
our "internal controls over financial reporting" (as defined in Rule 13a-15(f)
under the Exchange Act) that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.

                                       40


<PAGE>

                          PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         None

ITEM 2.  CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
         SECURITIES

         On July 31, 2003, we obtained a three-year, renewable, $4,000,000
revolving accounts receivable credit facility from Laurus.The amount available
under this revolving credit facility will be reduced by any balance outstanding
on the convertible note that we issued to Laurus in December 2002, as amended
("2002 Note"). As of December 3, 2003, we had borrowed $900,000 under this
credit facility. In December 2003, we issued a three-year 5% secured convertible
note ("2003 Note") to Laurus for $1,400,000. The obligation then outstanding
under the credit facility was refinanced into the 2003 Note. The total proceeds,
net of fees and expenses, from the 2003 Note were $1,384,500, which includes the
$900,000 that was outstanding under the revolving credit facility. The 2003
Note, which will be amortized over a 36-month period, may be repaid, at our
option, in cash or through the issuance of shares of our common stock. We will
have the option to pay the monthly amortized amount of the note in shares at the
fixed price of $1.30 per share if the shares are registered with the Securities
and Exchange Commission for public resale and the then current market price of
our common stock is at least $1.43. The note includes a right of conversion in
favor of Laurus. If Laurus exercises its conversion right at any time or from
time to time at or prior to the maturity of the note, then the note will be
convertible into shares of our common stock at a fixed conversion price of
$1.30, subject to adjustments for stock splits, combinations and dividends and
for shares of common stock issued for less than the fixed conversion price
(unless exempted pursuant to the note purchase agreement). 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 in accordance with accounting principles
generally accepted in the United States. At December 31, 2003, we were in
compliance with this covenant.

         During the quarter ended December 31, 2003, we converted $715,000 of
outstanding indebtedness and accrued interest under the 2002 Note into common
stock. We issued to Laurus 550,000 shares at the fixed conversion price of $1.30
per share.

         On December 31, 2003, we issued three five-year warrants to purchase an
aggregate of 485,000 shares of our common stock at exercise prices ranging from
$1.00 to $1.40 for past and future strategic consulting and investor relations
services. The warrants were valued at $504,000 using the Black-Scholes
option-pricing model. We recorded $410,000 in expense related to these issuances
related to past services and capitalized $94,000 as they represent payment for
future services.

         On December 31, 2003, we also issued an option to purchase 200,000
shares of our common stock to a former employee at an exercise price of $1.07
per share. Approximately 33,333 shares or one-sixth of the 200,000 shares vest
every month commencing January 1, 2004 through June 1, 2004. The options will
expire on June 30, 2009, if not exercised previously. We recorded an expense of
$175,000 in the three months ended December 31, 2003, equivalent to the value of
the options determined using the Black-Scholes option pricing model.

                                       41


<PAGE>

         Exemption from the registration provisions of the Securities Act of
1933 for the transactions described above is claimed under Section 4(2) of the
Securities Act of 1933, among others, on the basis that such transactions did
not involve any public offering and the purchasers were sophisticated with
access to the kind of information registration would provide. Appropriate
investment representations were obtained, and the securities were issued with
restricted stock legends.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None

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

         (a)      Our annual meeting of stockholders was held on November 13,
                  2003.

         (b)      We solicited proxies for the re-election of Amrit K. Das,
                  Jyoti Chatterjee, Benedict A. Eazzetta, D. Dean McCormick III,
                  and Stanley W. Corbett as directors, all of whom were then
                  serving as directors.

         (c)(i)   PROPOSAL ONE: Election of six directors by the holders of
                  issued and outstanding shares of our common stock:

                                               For         Abstain       Against

                  Amrit K. Das              15,036,966        0          17,200
                  Jyoti Chatterjee          15,036,966        0          17,200
                  Benedict A. Eazzetta      15,046,966        0           7,200
                  D. Dean McCormick III     15,046,966        0           7,200
                  Stanley W. Corbett        15,046,966        0           7,200

         Jyoti Chatterjee subsequently resigned from the board of directors, and
         Santanu K. Das was appointed to fill the vacancy.

         (c)(ii)  PROPOSAL TWO: Ratification and approval of 2003 Stock Option
                  Plan

                  For:                     4,920,857
                  Against:                   125,501
                  Abstain:                   148,455

         (c)(iii) PROPOSAL THREE: Ratification of the appointment of KPMG LLP as
                  our independent accountants for the fiscal year beginning
                  April 1, 2003:

                  For:                   15,032,622
                  Against:                   13,300
                  Abstain:                    8,244

ITEM 5.  OTHER INFORMATION

         None

                                       42





<PAGE>

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

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

                  10.1     Security Agreement dated December 4, 2003 by and
                           between netGuru, Inc. and Laurus Master Fund, Ltd.
                           (1)

                  10.2     Secured Convertible Note dated December 4, 2003 made
                           by netGuru, Inc. in favor of Laurus Master Fund, Ltd.
                           (1)

                  10.3     Registration Rights Agreement dated December 4, 2003
                           by and between netGuru, Inc. and Laurus Master Fund,
                           Ltd. (1)

                  10.4     netGuru, Inc. 2003 Stock Option Plan (2)

                  10.5     Separation and Release Agreement dated December 24,
                           2003 by and between netGuru, Inc, and Jyoti
                           Chatterjee (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

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

-----------
(1)      Filed as an exhibit to our Form S-3 f that was filed with the
         Securities and Exchange Commission on January 6, 2004 (File No.
         333-112181) and incorporated herein by reference.
(2)      Incorporated by reference from Registrant's Definitive Proxy statement,
         filed with the Securities and Exchange Commission on October 14, 2003
         (File No. 0-28560).

         (b)      Reports on Form 8-K

                     On October 15, 2003, we filed a Form 8-K for October 8,
                     2003 that contained Item 5-Other Events and Item
                     7-Financial Statements, Pro Forma Financial Information and
                     Exhibits. Both items related to the transfer of our common
                     stock listing to The Nasdaq SmallCap Market.

                     On November 14, 2003, we filed a Form 8-K for November 12,
                     2003 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 results of the stockholder vote from our 2003 annual
                     meeting of stockholders held on November 13, 2003.

                                       43





<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:  February 17, 2004

                                          NETGURU, INC.

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

                                       44





<PAGE>

            EXHIBITS FILED WITH THIS QUARTERLY REPORT ON FORM 10-QSB

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

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

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

                                       45