<PAGE>

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

                                   FORM 10-QSB
 (Mark One)

[X]      QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002

[ ]      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)                (Zip Code)

                    Issuer's telephone number: (714) 974-2500

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

The number of shares outstanding of the registrant's only class of common stock,
$.01 par value, was 17,325,150 on February 14, 2003.

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



<PAGE>

<TABLE>
                                                PART I
                                        FINANCIAL INFORMATION
<CAPTION>

                                                                                                 PAGE
<S>               <C>                                                                             <C>
Item 1.           Financial Statements

                  Condensed Consolidated Statements of Operations for the three- and
                  nine-month periods ended December 31, 2002 and 2001(unaudited).............      3

                  Condensed Consolidated Balance Sheets as of
                  December 31, 2002 (unaudited) and March 31, 2002...........................      4

                  Condensed Consolidated Statements of Cash Flows for the
                  nine month periods ended December 31, 2002 and 2001 (unaudited)............      5

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

Item 2.           Management's Discussion and Analysis of Financial Condition and
                  Results of Operations......................................................     17

Item 3.           Controls and Procedures....................................................     32

                                               PART II
                                          OTHER INFORMATION

Item 1.           Legal Proceedings..........................................................     33

Item 2.           Changes in Securities......................................................     33

Item 3.           Defaults Upon Senior Securities............................................     33

Item 4.           Submission of Matters to a Vote of Security Holders........................     33

Item 5.           Other Information..........................................................     34

Item 6.           Exhibits and Reports on Form 8-K...........................................     34

Signatures...................................................................................     36

Certifications of Principal Executive Officer and Principal Financial Officer................     37

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

                                                  2
</TABLE>



<PAGE>

                         PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

<TABLE>
                                          NETGURU, INC. AND SUBSIDIARIES
                                  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                                    (UNAUDITED)
                                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>

                                                THREE MONTHS      THREE MONTHS      NINE MONTHS       NINE MONTHS
                                                   ENDED             ENDED             ENDED             ENDED
                                                DECEMBER 31,      DECEMBER 31,      DECEMBER 31,      DECEMBER 31,
                                                   2002              2001              2002              2001
                                               -------------     -------------     -------------     -------------
<S>                                            <C>               <C>               <C>               <C>
Net revenues:
    Engineering and collaborative software     $      2,439      $      2,522      $      6,700      $      7,023
      solutions
    IT services                                       1,436             1,876             4,219             7,948
    Web-based telecommunication and travel
      services                                        1,225               982             4,341             3,494
                                               -------------     -------------     -------------     -------------

           Total net revenues                         5,100             5,380            15,260            18,465

Cost of revenues:
    Engineering and collaborative software              279               297               814               843
      solutions
    IT services                                       1,064             1,596             3,164             5,960
    Web-based telecommunication and travel            1,027             1,057             3,874             3,289
      services
                                               -------------     -------------     -------------     -------------

           Total cost of revenues                     2,370             2,950             7,852            10,092

                                               -------------     -------------     -------------     -------------
           Gross profit                               2,730             2,430             7,408             8,373
                                               -------------     -------------     -------------     -------------

Operating expenses:
    Selling, general and administrative               2,628             2,878             8,086             8,993
    Research and development                            481               493             1,492             1,460
    Amortization of goodwill                             --               287                --               903
    Depreciation and other amortization                 274               257               816               836
      Impairment charge                                  --                --                67                --
      Restructuring                                      90                --               194                --

                                               -------------     -------------     -------------     -------------
           Total operating expenses                   3,473             3,915            10,655            12,192
                                               -------------     -------------     -------------     -------------

           Operating loss                              (743)           (1,485)           (3,247)           (3,819)
                                               -------------     -------------     -------------     -------------

Other expense (income):
    Interest, net                                        66                35               182               107
    Other                                                 5                 7                (1)               (1)
                                               -------------     -------------     -------------     -------------
           Total other expense                           71                42               181               106
                                               -------------     -------------     -------------     -------------

Loss before income taxes                               (814)           (1,527)           (3,428)           (3,925)
Income tax (benefit) expense                             46                36              (256)              173
                                               -------------     -------------     -------------     -------------

           Net loss                            $       (860)     $     (1,563)     $     (3,172)     $     (4,098)
                                               =============     =============     =============     =============

Net loss per common share:
         Basic                                 $      (0.05)     $      (0.09)     $      (0.18)     $      (0.24)
                                               =============     =============     =============     =============
         Diluted                               $      (0.05)     $      (0.09)     $      (0.18)     $      (0.24)
                                               =============     =============     =============     =============

Common shares used in computing net
  loss per common share:
         Basic                                   17,325,150        16,920,850        17,304,649        17,007,428
                                               =============     =============     =============     =============
         Diluted                                 17,325,150        16,920,850        17,304,649        17,007,428
                                               =============     =============     =============     =============

                      See accompanying notes to condensed consolidated financial statements.

                                                        3
</TABLE>



<PAGE>

<TABLE>
                                         NETGURU, INC. AND SUBSIDIARIES
                                     CONDENSED CONSOLIDATED BALANCE SHEETS
                               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>

                                                                                  DECEMBER 31,       MARCH 31,
                                                                                      2002             2002
                                                                                  ------------     ------------
                                                                                   (Unaudited)
<S>                                                                               <C>              <C>
                                                     ASSETS
Current assets:
    Cash and cash equivalents                                                     $     2,656      $     3,466
    Accounts receivable (net of allowance for doubtful accounts of $651
      and $981, as of December 31, 2002 and March 31, 2002, respectively)               3,321            3,325
    Income tax receivable                                                                   5              305
    Notes and related party loans receivable                                              105              269
    Prepaid expenses and other current assets                                           1,783            1,543
                                                                                  ------------     ------------

           Total current assets                                                         7,870            8,908

Property, plant and equipment, net                                                      3,566            4,169
Goodwill, net                                                                           9,105            9,105
Other assets                                                                              676              884
                                                                                  ------------     ------------
                                                                                  $    21,217      $    23,066
                                                                                  ============     ============

                                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Current portion of long-term debt                                             $     1,241      $       259
    Current portion of capital lease obligations                                          427              417
    Accounts payable                                                                      697            1,012
    Accrued expenses                                                                      804            1,082
    Income taxes payable                                                                   45              196
    Deferred revenues                                                                   1,950            1,760
    Deferred income taxes                                                                  --               60
    Other liabilities                                                                     219              199
    Accrued restructuring costs                                                           216              157
                                                                                  ------------     ------------

           Total current liabilities                                                    5,599            5,142

Long-term debt, net of current portion                                                  1,373              567
Capital lease obligations, net of current portion                                         720            1,027
Deferred income taxes, non-current                                                         --              112
Deferred gain on sale-leaseback                                                           841              887
                                                                                  ------------     ------------

           Total liabilities                                                            8,533            7,735
                                                                                  ------------     ------------

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 17,325,150 and 17,265,850 shares (net of 10,965 treasury
      shares) as of December 31, 2002 and March 31, 2002, respectively                    173              173
    Additional paid-in capital                                                         33,322           33,057
    Accumulated deficit                                                               (19,977)         (16,805)
    Accumulated other comprehensive loss:
       Cumulative foreign currency translation adjustments                               (834)          (1,094)
                                                                                  ------------     ------------

           Total stockholders' equity                                                  12,684           15,331
                                                                                  ------------     ------------
                                                                                  $    21,217      $    23,066
                                                                                  ============     ============

                     See accompanying notes to condensed consolidated financial statements.

                                                       4
</TABLE>



<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,
                                                                              2002             2001
                                                                          ------------     ------------
<S>                                                                       <C>              <C>
Cash flows from operating activities:
    Net loss                                                              $    (3,172)     $    (4,098)
    Adjustments to reconcile net loss to net cash used in operating
      activities:
        Depreciation and amortization                                           1,067            1,892
        Bad debt expense                                                           83               --
        Deferred income taxes                                                    (173)              (7)
        Expense recognized on issuance of stock and stock options                  52               65
        Restructuring                                                             194               --
        Impairment charge                                                          67               --
        Loss on disposal of property                                                3               --
        Changes in operating assets and liabilities (net of
          acquisitions):
          Accounts receivable                                                      47            1,608
          Notes and related party loans receivable                                165                5
          Income tax receivable                                                   300               --
          Prepaid expenses and other current assets                               (45)            (498)
          Other assets                                                            (31)            (191)
          Accounts payable                                                       (334)             229
          Accrued expenses                                                       (285)            (579)
          Income taxes payable                                                   (154)              75
          Accrued restructuring costs                                            (135)              --
          Other current liabilities                                               (19)              32
          Deferred revenues                                                       138             (396)
          Deferred gain on sale-leaseback                                         (52)             (52)
                                                                          ------------     ------------

                  Net cash used in operating activities                        (2,284)          (1,915)
                                                                          ------------     ------------

Cash flows from investing activities:
    Purchase of property, plant and equipment                                    (206)            (713)
    Payments to acquire companies, net of cash acquired                            --              (68)
                                                                          ------------     ------------

                  Net cash used in investing activities                          (206)            (781)
                                                                          ------------     ------------

Cash flows from financing activities:
    Proceeds from issuance of debt                                              2,221               40
    Financing fees                                                               (214)              --
    Repayment of debt                                                            (196)            (388)
    Repayment of capital lease obligations                                       (314)            (102)
    Issuance of common stock                                                       55               27
    Repurchase common stock                                                        --             (140)
                                                                          ------------     ------------

                  Net cash provided by (used in) financing activities           1,552             (563)
                                                                          ------------     ------------

    Effect of exchange rate changes on cash and cash equivalents                  128             (102)
                                                                          ------------     ------------

                  Decrease in cash and cash equivalents                          (810)          (3,361)

Cash and cash equivalents, beginning of period                                  3,466            7,958
                                                                          ------------     ------------

Cash and cash equivalents, end of period                                  $     2,656      $     4,597
                                                                          ============     ============

                                              (Continued)

                                                   5
</TABLE>



<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,
                                                                                2002                 2001
                                                                           ----------------     --------------
<S>                                                                         <C>                <C>
Supplemental disclosure of cash flow information: Amounts paid for:
         Interest                                                           $          192     $          180
                                                                            ===============    ===============
         Income taxes                                                       $           31     $           96
                                                                            ===============    ===============

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

                    See accompanying notes to condensed consolidated financial statements.

                                                      6
</TABLE>



<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2002
                                   (UNAUDITED)

     BASIS OF PRESENTATION

         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.

         The 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, 2002
and the results of operations and the cash flows for the three and nine months
ended December 31, 2002 and 2001, 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, 2002 are
not necessarily indicative of the results to be expected for the full year
ending March 31, 2003.

     USE OF ESTIMATES

         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.

     FAIR VALUE OF FINANCIAL INSTRUMENTS

         Statement of Financial Accounting Standards ("SFAS") No. 107,
DISCLOSURES ABOUT FAIR VALUE OF Financial INSTRUMENTS, requires management to
disclose the estimated fair value of certain assets and liabilities defined by
SFAS No. 107 as financial instruments. Financial instruments are generally
defined by SFAS No. 107 as cash or contractual obligations that convey to one
entity a right to receive cash or other financial instruments from another
entity, and impose on the other entity the obligation to deliver cash or other
financial instruments to the first entity. At December 31, 2002, management
believes the carrying amounts of cash and cash equivalents, receivable and
payable amounts, and accrued expenses approximate fair value because of the
short maturity of these financial instruments. The Company also believes that
the carrying amounts of its long-term debt and capital lease obligations
approximate their fair value as the interest rates on those debts and
obligations approximate a rate that the Company could obtain under similar terms
at the balance sheet date.

     GOODWILL

         In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS, SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001 and eliminated the
pooling-of-interests method. SFAS No. 141 specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported separately from goodwill. SFAS No. 142 also requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values. In addition, SFAS No. 142 includes
provisions, upon adoption, for the reclassification of certain existing
recognized intangibles as goodwill, reclassification of certain intangibles out
of previously reported goodwill, reassessment of the useful lives of recognized
intangibles and testing for impairment of those intangibles.

                                       7



<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

         The Company adopted the provisions of SFAS No. 141 as of July 1, 2001,
and SFAS No. 142 became effective for the Company on April 1, 2002. Intangible
assets identified as having indefinite useful lives were required to be tested
for impairment in accordance with the provisions of SFAS No. 142. Impairment is
measured as the excess of carrying value over the fair value of an intangible
asset with an indefinite life. The Company did not record an impairment loss as
of the date of adoption because it determined that it did not have any
identifiable intangible assets other than goodwill.

         In connection with the SFAS No. 142 transitional goodwill impairment
evaluation, the statement requires the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company identified its reporting units and
determined the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill, to those reporting units as of
April 1, 2002. Pursuant to paragraphs 30-31 of SFAS No. 142, the Company
identified three "reporting units" as defined in paragraph 17 of SFAS No. 131:

         1)       Engineering and collaborative software solutions;
         2)       IT Services; and
         3)       Web-based telecommunication and travel services.

         Each of these reporting units was identical to its related operating
segment and met the specified criteria as distinct operating units: the
component constitutes a business; discrete financial data is available for the
component; and segment management routinely reviews the component's operating
results. The aggregation criteria for each of the components met the test of:

         (a)      similar economic characteristics over the long term;
         (b)      similar products or services;
         (c)      similar production processes; and
         (d)      similar types or classes of customers.

         As of March 31, 2002, goodwill balances for each of the reporting units
were as follows:

                Engineering and collaborative software solutions     $1,859,000
                IT services                                          $6,765,000
                Web based telecommunication and travel services      $  481,000

         In connection with adopting SFAS No.142, during the second quarter of
fiscal year 2003, the Company completed step one of the test for impairment,
which indicated that the carrying value of its IT services segment exceeded its
estimated fair value, as determined utilizing various valuation techniques
including discounted cash flow and comparative market analysis. For the fiscal
year ended March 31, 2002, net revenue for the IT services reporting unit
declined $8,150,000, from $18,019,000 for the year ended March 31, 2001 to
$9,869,000 for the year ended March 31, 2002. This decline in net revenues for
IT services is not anticipated to substantially improve and may further decline
in the next 12 months because the Company does not expect the demand for IT
services to improve during this period. In accordance with SFAS No. 142, the
Company is currently determining the extent of the impairment in the IT services
segment and will report the level of impairment for each reporting unit by
fiscal year end.

         The Company is required to complete the second step of the test for
impairment as soon as possible, but no later than March 31, 2003, the end of the
year of adoption. In the second step, the Company must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the reporting
unit goodwill, both of which would be measured as of the date of adoption. 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. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. Any
transitional impairment loss will be recognized as a cumulative effect of a
change in accounting principle in the Company's consolidated statement of
operations.

                                       8



<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

         As of December 31, 2002, the Company had unamortized goodwill in the
amount of $9,105,000, all of which will be subject to the transition provisions
of SFAS No. 142. Approximately $6,765,000 of this amount represents unamortized
goodwill related to the IT services segment. No amortization expense was
recorded during the three and nine-month periods ended December 31, 2002. The
Company will continue to assess for impairment at each reporting date or at any
time it becomes aware of factors or circumstances that would warrant the
assessment for impairment, including whether it will be required to recognize
any transitional impairment losses as a cumulative effect of a change in
accounting principle.

         The following table reconciles previously reported net income (loss) as
if the provisions of SFAS No. 142 were in effect in fiscal year 2002 and at
fiscal year end 2002 and 2001 (in thousands except per share amounts):

<TABLE>
<CAPTION>
                                  THREE MONTHS ENDED             NINE MONTHS ENDED                YEAR ENDED
                                      DECEMBER 31,                  DECEMBER 31,                   MARCH 31,
                                   2002          2001           2002           2001           2002           2001
                               -----------   ------------   ------------    -----------    -----------    -----------
<S>                            <C>           <C>            <C>             <C>                <C>            <C>
         Reported net loss     $     (860)   $    (1,563)   $    (3,172)    $   (4,098)        (8,944)        (6,637)
         Add back:  Goodwill
            amortization, net
            of taxes                   --            279             --            851          1,052          1,282
                               -----------   ------------   ------------    -----------    -----------    -----------

         Adjusted net loss     $     (860)   $    (1,284)   $    (3,172)    $   (3,247)        (7,892)        (5,355)

         Reported basic and
            diluted loss per
            common share       $    (0.05)   $     (0.09)   $     (0.18)    $    (0.24)    $    (0.53)    $    (0.45)
         Add back: Goodwill
            amortization, net
            of taxes                   --           0.01             --           0.05           0.06           0.09
                               -----------   ------------   ------------    -----------    -----------    -----------
         Adjusted basic and
            diluted loss per
            common share       $    (0.05)   $     (0.08)   $     (0.18)    $    (0.19)    $    (0.47)    $    (0.36)
                               -----------   ------------   ------------    -----------    -----------    -----------
</TABLE>

     SOFTWARE DEVELOPMENT COSTS AND PURCHASED TECHNOLOGY

         The Company capitalizes costs related to the development of certain
software products. 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, 2002, capitalized costs of approximately
$460,000, net of accumulated amortization, were included in other assets.
Approximately $253,000 of this amount represents software developed in-house and
$207,000 represents the cost of software developed on the Company's behalf by
third parties. Additions to capitalized software were $28,000 and $385,000
during the nine months ended December 31, 2002 and 2001, respectively.

         The Company amortizes capitalized software development costs and
purchased technology using the straight-line method over three to five years, or
the ratio of actual sales to anticipated sales, whichever is greater. During the
nine months ended December 31, 2002, the Company recognized a capitalized
software impairment loss of approximately $67,000 in the engineering and
collaborative software solutions segment, since revenues-to-date and forecasted
revenues from these assets did not support the carrying value of the recorded
amounts. Amortization of software development costs and purchased technology
charged to cost of revenues was approximately $61,000 and $49,000 for the three
months ended December 31, 2002 and 2001, respectively, and $173,000 and $153,000
for the nine months ended December 31, 2002 and 2001, respectively. Accumulated
amortization on capitalized software was $508,000 and $566,000 as of December
31, 2002 and 2001, respectively.

                                       9



<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     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 and
determinable; and 4. Collectibility is reasonably assured. The Company's
revenues arise from the following segments: engineering and collaborative
software solutions (including digital media products and animation services); IT
services; and Web-based telecommunication and travel services.

         Revenue from software sales is recognized upon shipment provided no
significant post-contract support obligations remain outstanding and collection
of the resulting receivable is reasonably assured. Beginning in the second
quarter of fiscal 2003, the Company provides a 15-day right of return (from the
date of purchase) on the purchase of the product during which time the customer
may return the product subject to a $50 restocking fee per item returned. Since
the Company's product returns have historically not been material, less than
$16,000 during a nine-month period, the Company does not make any provisions
for such returns. Customers may choose to purchase maintenance contracts that
include telephone, e-mail and other methods of support, and the right to receive
upgrades. Revenue from these maintenance contracts is deferred and recognized
ratably over the life of the contract, usually twelve months. Revenues from
digital media and animation services are recognized upon achievement of certain
pre-determined milestones.

         In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 97-2, SOFTWARE REVENUE RECOGNITION. The Company adopted SOP
97-2 in the first quarter of fiscal 1999. SOP 97-2 distinguishes between
significant and insignificant vendor obligations as a basis for recording
revenue with a requirement that each element of a software licensing arrangement
be separately identified and accounted for based on relative fair values of each
element. The Company determines the fair value of each element in multi-element
transactions based on vendor-specific objective evidence ("VSOE"). VSOE for each
element is based on the price charged when the same element is sold separately.
In 1998, the AICPA issued SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE
RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS, which modifies SOP 97-2 to
allow for use of the residual method of revenue recognition provided that
certain criteria have been met. The Company adopted SOP 98-9 in the first
quarter of fiscal 2000. 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.

         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, as services are performed. Certain IT services
contracts are fixed price contracts where progress toward completion is measured
by mutually agreed upon pre-determined milestones for which we recognize revenue
upon achieving such milestones. The Company's fixed price IT contracts are
typically for a short duration of one to three months.

         With regard to the Web-based telecommunication services, 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 cards are deferred and recognized on the basis of usage,
whereas revenues from resale of third-party phone cards are recognized net of
returns since no obligations remain once product is delivered. Certain travel
services, based on their nature, are recognized at the gross sales value with
purchase costs stated as a separate cost of revenues in accordance with Emerging
Issues Task Force Issue No. 99-19, RECORDING REVENUE GROSS AS A PRINCIPAL VERSUS
NET AS AN AGENT. Other products and services sold via Internet portals,
including certain travel services, where the Company is a travel discounter or
an agent, are recognized net of purchase costs when the products and services
are delivered and collectibility is reasonably assured.

                                       10



<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     RECLASSIFICATIONS

         Certain reclassifications have been made to the fiscal 2002 condensed
consolidated financial statements to conform to the fiscal 2003 presentation.

     PROVISION FOR RESTRUCTURING OF 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 towards the communication and connectivity services
targeted at the corporate market. The Company's original focus related to ISP
services was that the Company planned to offer ISP services to both consumers
and businesses in India. With the acquisition of a 30% ownership in Vital
Communications, Ltd., an IT communications technology company, the Company had
planned to start providing ISP services for the 10,000 customers of Vital
Communications as a first step to becoming an ISP in India. The total amount
charged for the refocus of ISP operations in fiscal 2001 was $1,998,000. This
total charge consisted of $171,000 in contractual obligations and $1,827,000 in
asset write-offs related to ISP operations in India. These charges did not
include any employee costs. However, they included the write-off of amounts paid
to acquire 30% ownership in Vital Communications, the write-off of capitalized
connectivity charges for the ISP business and the write-off of ISP
infrastructure equipment. The ISP infrastructure equipment related to the Voice
Over Internet Protocol ("VOIP") technology. The equipment was determined to have
no resale value, because VOIP technology was not permitted in India and because
it was not cost-effective to sell the equipment in countries where VOIP was
allowed since the technology had changed. The restructuring related to the ISP
operations resulted in elimination of depreciation and amortization expenses
that would have resulted from the ISP related assets.

         With regard to the Internet portal business, the Company redirected its
primary focus towards the telephony and travel services offered through the
portal. The initial restructuring charge related to the refocus of the portal
business was $194,000, of which $168,000 was related to asset write-offs, and
$26,000 was related to contractual obligations. The entire $194,000 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, 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 restructure charge related to the
consolidation of technical support facilities was $166,000, of which $49,000
related to accrued severance payments for the two terminated employees and
$117,000 related to contractual lease obligations for the vacated space. The
Company made cash payments totaling $58,000 in fiscal 2002 towards settlement of
obligations related to this activity. During fiscal 2003, the Company made cash
payments of $49,000 for severance expenses relating to the termination of one of
the employees and $36,000 for lease payments for the vacated office space. The
Company expects that employee costs, and the facility costs (once the lease
obligations are satisfied) will decrease as a result of this restructuring.

         The elimination of the in-house legal department primarily consisted of
the termination of one employee whose position was not filled. Legal services
are being obtained from the Company's continuing external legal counsel. In
fiscal 2001, the Company estimated that the restructure charge related to the
elimination of the in-house legal department to be $42,000. In fiscal 2002, the
Company paid $52,000 toward this restructure charge. 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 the nine months ended December 31, 2002, the Company paid
$50,000 toward settlement of obligations due to the terminated employee.

                                       11



<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

         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           TOTAL
                               OPERATIONS       OPERATIONS         SUPPORT       DEPARTMENT
                              ------------     ------------     ------------     ------------     ------------
<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             67A             (16)B             41B              25
                              ------------     ------------     ------------     ------------     ------------

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

     Cash payments                     --               --              (85)             (50)            (135)

     Adjustments                      (34)C             --               29C             199              194C
                              ------------     ------------     ------------     ------------     ------------

     December 31, 2002        $        --      $        --      $        36      $       180      $       216
                              ============     ============     ============     ============     ============
</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.

         The balance at December 31, 2002 includes $30,000 of lease payments for
vacated office space scheduled for payment through September 2003. The remaining
personnel costs and contractual obligations are expected to be paid by the end
of fiscal 2003.

     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
("Allegria"). The recipients of these shares were given the right to demand the
Company to repurchase these shares at a price of $28.60 per share at the end of
one year. In April 2001, each of the three former owners exercised this right.
The total repurchase price was $715,000. Agreements were reached with the former
owners to extend the cash payment for this repurchase over a period of twelve
months.

         The repurchase of 12,000 shares from two of the former owners was
settled for a total of $272,000, and the entire amount was paid as of December
31, 2002.

         The owner of the remaining 13,000 shares is holding the stock
certificates until full payment is received for these shares. The total cash to
be paid for this repurchase was $372,000, of which $128,000 has been paid as of
December 31, 2002. Due to a dispute as a result of an apparent breach of the

                                       12



<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

purchase agreement by the former owner, the Company believes that it is probable
that the balance of $244,000 will not be paid and therefore has not accrued this
amount as a liability.

         On December 13, 2002, the Company obtained a secured convertible debt
financing from a private equity fund. In connection with this financing, the
Company issued warrants to purchase 200,000 shares of the Company's common stock
at exercise prices ranging from $1.76 to $2.40 per share. These warrants expire
December 12, 2007. The following table summarizes the fair value of these
warrants and the assumptions used in determining fair value.

<TABLE>
<CAPTION>
                        Number of     Exercise price   Estimated life                Risk-free   Fair value
                        ---------     --------------   --------------                ---------   ----------
      Grant date         warrants       per share        (in years)     Volatility     rate      of warrants
      ----------         --------       ---------        ----------     ----------     ----      -----------
                                                                                                   $ (a)
                                                                                                   -----
<S>                      <C>           <C>                  <C>           <C>           <C>       <C>
     December 2002       200,000       $1.76-$2.40          5             99.65%        3%        199,638
</TABLE>

         (a) Fair value was determined using the Black-Scholes option-pricing
         model.

     FOREIGN CURRENCY TRANSLATION

         The financial position 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 U.S. dollars (the reporting currency) at the exchange rate in effect at the
period-end. Statements of operations accounts are translated at the average rate
of exchange prevailing during the respective periods. Translation adjustments
arising from the use of differing exchange rates from period to period are
included in accumulated other comprehensive loss in the consolidated balance
sheets. Gains and losses resulting from foreign currency transactions are
included in operations and are not material to the three- and nine-month periods
ended December 31, 2002 and 2001.

     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 $723,000 and $1,636,000 for the three months ended December 31, 2002
and 2001, respectively, and was $2,912,000 and $4,276,000 for the nine months
ended December 31, 2002 and 2001, respectively.

     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.

                                       13



<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

         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           2001            2002           2001
                                                  -------------------------------------------------------------
<S>                                                    <C>            <C>            <C>             <C>
        Numerator:
        Net loss                                       $   (860)      $  (1,563)     $  (3,172)      $ (4,098)
                                                  -------------------------------------------------------------
        Numerator for basic and diluted loss per
           share                                       $   (860)      $  (1,563)     $  (3,172)      $ (4,098)
                                                  =============================================================

        Denominator:
        Denominator for basic net loss per share
           - average number of common shares              17,325          16,921         17,305         17,007
           outstanding during the period
        Incremental common shares attributable to
           exercise of outstanding options,
           warrants and other common stock
           equivalents                                         -               -              -              -
                                                  -------------------------------------------------------------
        Denominator for diluted net loss per
        share                                             17,325          16,921         17,305         17,007
                                                  =============================================================

        Basic net loss per share                       $   (0.05)     $    (0.09)    $    (0.18)     $   (0.24)
                                                  =============================================================
        Diluted net loss per share                     $   (0.05)     $    (0.09)    $    (0.18)     $   (0.24)
                                                  =============================================================
</TABLE>

         Options, warrants and other common stock equivalents amounting to
426,000 and 621,000 potential common shares for the three and nine months ended
December 31, 2002, respectively, and 271,000 and 462,000 potential common shares
for the three and nine months ended December 31, 2001, respectively, were
excluded from the computation of diluted EPS for the periods presented because
the Company reported net losses and, therefore, the effect would be
antidilutive.

     SEGMENT AND GEOGRAPHIC DATA

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

         The Company applies the provisions of SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 requires
segments to be determined and reported based on how management measures
performance and makes decisions about allocating resources.

                                       14



<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

         The significant components of worldwide operations by reportable
operating segment (in thousands of dollars) are:

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED          NINE MONTHS ENDED
                                               DECEMBER 31,                DECEMBER 31,
                                         -----------------------     ----------*------------
                                            2002          2001          2002          2001
                                         ---------     ---------     ---------     ---------
<S>                                      <C>           <C>           <C>           <C>
             NET REVENUE
     Engineering and collaborative
       software solutions                $  2,439      $  2,522      $  6,700      $  7,023

     IT services                            1,436         1,876         4,219         7,948
     Web-based telecommunication and
       travel services                      1,225           982         4,341         3,494
                                         ---------     ---------     ---------     ---------
          Consolidated                   $  5,100      $  5,380      $ 15,260      $ 18,465
                                         =========     =========     =========     =========

          GROSS PROFIT (LOSS)
     Engineering and collaborative
       software solutions                $  2,160      $  2,225      $  5,886      $  6,180
     IT services                              372           280         1,055         1,988
     Web-based telecommunication and
       travel services                        198           (75)          467           205
                                         ---------     ---------     ---------     ---------
          Consolidated                   $  2,730      $  2,430      $  7,408      $  8,373
                                         =========     =========     =========     =========

        OPERATING (LOSS)/INCOME
     Engineering and collaborative
       software solutions                $   (386)     $   (500)     $ (2,271)     $ (2,408)
     IT services                               65          (533)          (95)         (375)
     Web-based telecommunication and
       travel services                       (422)         (452)         (881)       (1,036)
                                         ---------     ---------     ---------     ---------
          Consolidated                   $   (743)     $ (1,485)     $ (3,247)     $ (3,819)
                                         =========     =========     =========     =========
</TABLE>

                                             15



<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

                                    THREE MONTHS ENDED      NINE MONTHS ENDED
                                        DECEMBER 31,           DECEMBER 31,
                                   --------------------    --------------------
                                     2002        2001        2002        2001
                                   --------    --------    --------    --------
             NET REVENUE
United States                      $ 2,902     $ 3,887     $10,175     $14,709
The Americas (other than U.S.)         278         210         609         412
Europe                               1,041         662       2,150       1,700
Asia-Pacific                           879         621       2,326       1,644
                                   --------    --------    --------    --------

         Consolidated              $ 5,100     $ 5,380     $15,260     $18,465
                                   ========    ========    ========    ========

             EXPORT SALES
United States                      $   693     $   216     $ 1,368     $   436
                                   ========    ========    ========    ========

                                          DECEMBER 31,       MARCH 31,
                                              2002             2002
                                          ------------      ------------
                                                 (IN THOUSANDS)
                LONG-LIVED ASSETS
         United States                    $    11,749       $    12,434
         Europe                                   343               284
         Asia-Pacific                           1,255             1,440
                                          ------------      ------------

                  Consolidated            $    13,347       $    14,158
                                          ============      ============

     CONTINGENCIES

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

                                       16



<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

FORWARD-LOOKING STATEMENTS

         This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. We intend that those forward-looking statements be subject to the
safe harbors created by those sections. These forward-looking statements
generally include the plans and objectives of management for future operations,
including plans and objectives relating to our future economic performance, and
can generally be identified by the use of the words "believe," "intend," "plan,"
"expect," "forecast," "project," "may," "should," "could," "seek," "pro forma,"
"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 return to profitability and obtain additional
                  working capital, if required;
         o        our ability to successfully implement our future business
                  plans;
         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 most recent annual report on Form 10-KSB, as amended, could cause our
financial results, including our net income (loss) or growth in net income
(loss) to differ materially from prior results, which in turn could, among other
things, cause the price of our common stock to fluctuate substantially.

OVERVIEW

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

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

         We have provided computer-aided engineering software solutions to our
customers for over 20 years. For the past 18 years, we have supported our
engineering software business with our India-based software programming and IT
resources. In 1999, we acquired two IT services companies in the U.S., which
further expanded our IT resources and capabilities. Our Internet portal services
were started in 1999 and were refocused in fiscal 2001 toward Web-based
telecommunication and travel services. A more expansive discussion of our
business and services is contained in the "Business" section of our most recent
annual report on Form 10-KSB, as amended.

                                       17



<PAGE>

CRITICAL ACCOUNTING POLICIES

         Securities and Exchange Commission, or SEC, Financial Reporting Release
No. 60, requires all companies to include a discussion of critical accounting
policies or methods used in the preparation of financial statements. In this
discussion, the SEC requires all companies to address the implications of
uncertainties for the methods, assumptions and estimates used for recurring and
pervasive accounting measurements, so that investors are made aware of the
susceptibility of reported amounts to change, including rapid change.

         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 capitalization of software development and
                  purchased technology;
         o        allowance for accounts receivable:
         o        impairment of long-lived assets including goodwill; and
         o        deferred income taxes.

     REVENUE RECOGNITION
     -------------------

         We derive revenues from:

         o        engineering and collaborative software products and services
                  (including digital media products and animation services);
         o        IT services;
         o        and Web-based telecommunication and travel services.

         We recognize revenues when the following criteria are met:

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

         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 reasonably assured. Beginning in the second quarter of fiscal 2003, we
provide a 15-day right of return (from the date of purchase) 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. Since our product returns have
historically not been material, approximately less than $16,000 during
a nine-month period, we do not make any provisions for such returns. 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 there is a
reasonable assurance of collectibility of the resulting receivable. We recognize
revenues from digital media and animation services upon completion and delivery
provided no significant obligations remain.

         In 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants, or AICPA, issued Statement of
Position or SOP 97-2, SOFTWARE REVENUE RECOGNITION. SOP 97-2 distinguishes
between significant and insignificant vendor obligations as a basis for

                                       18



<PAGE>

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, or 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.

         With regard to our Web-based telecommunication services, 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 our own phone cards on the basis of usage. We recognize revenues from our
resale of third-party phone cards net of returns because no obligations remain
once the phone cards are delivered. We recognize revenues from certain travel
services, where we are a ticket consolidator, at the gross sales value, with
purchase costs stated as a separate cost of revenues in accordance with Emerging
Issues Task Force Issue No. 99-19, RECORDING REVENUE GROSS AS A PRINCIPAL VERSUS
NET AS AN AGENT. We recognize revenues from other products and services sold via
Internet portals, including travel services, where we are a travel discounter or
an agent, net of purchase costs when the products and services are delivered and
collectibility is reasonably assured.

     ACCOUNTING FOR SOFTWARE DEVELOPMENT COST 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 has been 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 three 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. 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

                                       19



<PAGE>

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 SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. This statement required that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. We measured recoverability of an asset to be held and used by
comparing the carrying amount of the asset to future net undiscounted cash flows
expected to be generated by the asset. If we considered the asset to be
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 supersedes SFAS No. 121, and the
accounting and reporting provisions of Accounting Principles Bulletin, or APB,
No. 30, REPORTING THE RESULTS OF OPERATIONS FOR A DISPOSAL OF A SEGMENT OF A
BUSINESS. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. We have adopted SFAS No. 144 beginning April 1, 2002. Our adoption of
SFAS No. 144 did not materially impact our consolidated financial position or
results of operations. We apply the provisions of SFAS No. 86 ACCOUNTING FOR THE
COST OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED to evaluate
unamortized capitalized software development costs. At each balance sheet date,
we compare the unamortized software development cost of each product to the net
realizable value of the product. We write off the amount by which the
unamortized software development cost exceeds the net realizable value of the
product as cost of sales of the product.

         In 2001, the FASB issued 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 for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values.

         Intangible assets identified as having indefinite useful lives were
required to be tested for impairment in accordance with the provisions of SFAS
No. 142. Impairment is measured as the excess of carrying value over the fair
value of an intangible asset with an indefinite life. We did not record an
impairment loss as of the date of adoption because we determined that we did not
have any identifiable intangible assets other than goodwill.

         In connection with the SFAS No. 142 transitional goodwill impairment
evaluation, we identified our reporting units and determined the carrying value
of each reporting unit by assigning the assets and liabilities, including the
existing goodwill, to those reporting units as of April 1, 2002. Pursuant to
paragraphs 30-31 of SFAS No. 142, we identified three "reporting units" as
defined in paragraph 17 of SFAS No. 131:

         1)       Engineering and collaborative software solutions;
         2)       IT Services; and
         3)       Web-based telecommunication and travel services.

         Annually, or more frequently if evidence of impairment to goodwill
exists, we compare 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

                                       20



<PAGE>

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

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

         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 may be incorrect. In addition, future results of operations could be
materially impacted by the write-down of the carrying amount of goodwill to its
potential recoverable value.

     DEFERRED INCOME TAXES
     ---------------------

         We account for income taxes using the asset and liability method. We
recognize deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. We measure
deferred tax assets and liabilities using enacted tax rates that we expect to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled.

         In assessing the realizability of the net deferred tax assets, we
consider whether it is more likely than not that we will not realize some or all
of the deferred tax assets. The ultimate realization of deferred tax assets
depends either upon the generation of future taxable income during the periods
in which those temporary differences become deductible or upon the carryback of
losses to recover income taxes previously paid during the carryback period. If
we determine we will not be able to realize all or part of our net deferred tax
assets in a future period, we will charge to income in that period an adjustment
to the deferred tax asset through the use of a valuation allowance. Conversely,
if we determine we will be able to realize our deferred tax assets in a future
period in excess of the net amount recorded, we will increase our income in that
period by adjusting the deferred tax asset through the use of a valuation
allowance.

                                       21



<PAGE>

     RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED            NINE MONTHS ENDED
                                                                DECEMBER 31,                 DECEMBER 31,
                                                         ------------------------      ------------------------
                                                            2002           2001           2002           2001
                                                         ---------      ---------      ---------      ---------
<S>                                                        <C>            <C>            <C>            <C>
     Net revenues                                          100.0%         100.0%         100.0%         100.0%
     Cost of revenues                                       46.5           54.8           51.5           54.7
                                                         ---------      ---------      ---------      ---------

     Gross profit                                           53.5           45.2           48.5           45.3
                                                         ---------      ---------      ---------      ---------

     Selling, general and administrative expenses           51.5           53.5           53.0           48.7
     Research and development expenses                       9.4            9.2            9.8            7.9
     Amortization of goodwill                                 --            5.3             --            4.9
     Depreciation and software amortization                  5.4            4.8            5.3            4.5
     Impairment charge                                        --             --            0.4             --
     Restructuring                                           1.8             --            1.3             --
                                                         ---------      ---------      ---------      ---------
            Total operating expenses                        68.1           72.8           69.8           66.0

     Operating loss                                        (14.6)         (27.6)         (21.3)         (20.7)

     Interest (income) expense, net                          1.3            0.7            1.2            0.6
     Other (income) expense, net                             0.1            0.1             --             --
                                                         ---------      ---------      ---------      ---------

     Loss before income taxes                              (16.0)         (28.4)         (22.5)         (21.3)
     Income tax expense (benefit)                            0.9            0.7           (1.7)           1.1
                                                         ---------      ---------      ---------      ---------

     Net loss                                              (16.9)%        (29.1)%        (20.8)%        (22.2)%
                                                         =========      =========      =========      =========
</TABLE>

         NET REVENUES. Net revenues declined by $280,000 (5.2%) to $5,100,000
for the three months ended December 31, 2002 from $5,380,000 for the three
months ended December 31, 2001. Net revenues declined by $3,205,000 (17.4%) to
$15,260,000 for the nine months ended December 31, 2002 from $18,465,000 for the
nine months ended December 31, 2001. Our net revenues consisted primarily of
revenues from (1) engineering and collaborative software solutions (including
digital media products and animation services), (2) IT services, and (3)
Web-based telecommunication and travel services. The overall declines in our net
revenues for the three and nine months ended December 31, 2002 primarily
resulted from the decline in net revenues of our IT services segment, which was
partially offset by increases in net revenues for our Web-based
telecommunication and travel service segments during the three and nine months
ended December 31, 2002.

         Engineering and collaborative software solutions net revenues declined
by $83,000 (3.3%) to $2,439,000 for the three months ended December 31, 2002
from $2,522,000 for the three months ended December 31, 2001. Engineering and
collaborative software solutions net revenues declined by $323,000 (4.6%) to
$6,700,000 for the nine months ended December 31, 2002 from $7,023,000 for the
nine months ended December 31, 2001. The decline in engineering and
collaborative software solutions net revenues during the three and nine months
ended December 31, 2002, compared to the three and nine months ended December
31, 2001, was primarily due to a decline in collaborative software solutions net

                                       22



<PAGE>

revenues and was offset by an increase in engineering software revenues. The
majority of our collaborative software solutions net revenues are generated from
service-oriented projects, where the revenues are not recognized until an entire
project is completed. Collaborative software solutions net revenues declined
approximately $284,000 and $579,000 for the three and nine months ended December
31, 2002 as compared to the three and nine months ended December 31, 2001,
primarily due to projects amounting to approximately $232,000 and $532,000,
respectively, that were completed and recognized in the three and nine months
ended December 31, 2001. During the three and nine months ended December 31,
2002, since none of the collaborative software projects that were being worked
on were completed, we did not recognize any revenues from these projects. The
decline in collaborative software solutions net revenues was offset by $163,000
and $297,000 increases in engineering software solutions net revenues from Asia
during the three and nine months ended December 31, 2002, respectively. We
believe our sales in Asia increased due to improvements in the Asian economy. As
a percentage of total net revenues, engineering and collaborative software
solutions net revenues increased to 47.8% and 43.9% for the three and nine
months ended December 31, 2002 as compared to 46.9% and 38.0% for the three and
nine months ended December 31, 2001, respectively, primarily due to greater
declines in our IT services segment.

         We anticipate improvements in our engineering software sales as a
result of our efforts to refocus our sales initiatives and to re-engage our
international distributors as well as due to improvements in the Asian economy.
We also anticipate that collaborative software solutions net revenues will
improve during the remainder of the current fiscal year, but this is dependent,
in part on the completion by March 31, 2003 of some of the projects that were
ongoing during the nine months ended December 31, 2002.

         IT services net revenues declined by $440,000 (23.5%) to $1,436,000 for
the three months ended December 31, 2002 from $1,876,000 for the three months
ended December 31, 2001. IT services net revenues declined by $3,729,000 (46.9%)
to $4,219,000 for the nine months ended December 31, 2002 from $7,948,000 for
the nine months ended December 31, 2001. IT services net revenues represented
28.2% and 27.6% of total net revenues for the three and nine months ended
December 31, 2002, respectively, compared to 34.9% and 43.0% for the three and
nine months ended December 31, 2001, respectively. During the past year, the IT
services industry has been adversely affected by a slow economy, and many of our
customers reduced spending on technology consulting and systems integration
services. Due to the slower economy, many of our customers were faced with
financial constraints and as such canceled or postponed many contracted jobs. In
addition, the demand for some of our services decreased during the three and
nine months ended December 31, 2002. We reduced our billing rates in order to
offer a more attractive pricing to our cost conscious customers. As a result,
our IT services revenues declined during the three and nine months ended
December 31, 2002 compared to the three and nine months ended December 31, 2001.
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 revenue for the indefinite future.

         Web-based telecommunication and travel services net revenues increased
by $243,000 (24.7%) to $1,225,000 for the three months ended December 31, 2002
from $982,000 for the three months ended December 31, 2001. Web-based
telecommunication and travel services net revenues increased by $847,000
(24.2%), to $4,341,000 for the nine months ended December 31, 2002 from
$3,494,000 for the nine months ended December 31, 2001. Web-based
telecommunication and travel services net revenues represented 24.0% and 28.4%
of total net revenues, respectively, for the three and nine months ended
December 31, 2002, compared to 18.3% and 18.9%, respectively, for the three and
nine months ended December 31, 2001, primarily due to declines in our IT
services segment. The increase in Web-based telecommunication and travel
services net revenues during the three months ended December 31, 2002 was due to
a $203,000 increase in call termination services and a $183,000 increase in
travel services net revenues, offset by a $110,000 decline in phone card
revenues. The increase in telecommunication and travel services net revenues
during the nine months ended December 31, 2002 was due to a $1,388,000 increase
in call termination services, which was offset by a $129,000 decline in travel
services and a $386,000 decline in phone card revenues. Call termination
services increased during the three and nine months ended December 31, 2002
compared to the three and nine months ended December 31, 2001, because the
ramp-up of the call termination services did not start until the beginning of
the current fiscal year. Phone card net revenues declined because our sales
efforts were focused more on call termination services than on phone card
services. Although telecommunication services net revenues increased during the
nine months ended December 31, 2002 compared to the three and nine months ended
December 31, 2001, the recent turmoil in the telecommunications industry has
increased the uncertainty of the viability of smaller service providers, some of
who are our customers. As a result, we anticipate that telecommunication
services net revenues will not improve from current levels for the indefinite
future.

                                       23



<PAGE>

         Travel services net revenues increased during the three months ended
December 31, 2002 compared to the three months ended December 31, 2001, but
declined during the nine months ended December 31, 2002, as compared to the nine
months ended December 31, 2001, due to competition from other online travel
services and reductions in travel agency commissions. Although travel services
net revenues increased during the three months ended December 31, 2002 compared
to the three months ended December 31, 2001, we believe that this apparent
increase is due to comparison to a three-month period immediately following the
events of September 11, 2001, when travel services revenues had declined
greatly. We anticipate that travel services net revenues will not improve from
current levels for the indefinite future.

         GROSS PROFIT. Gross profit increased by $300,000 (12.3%) to $2,730,000
for the three months ended December 31, 2002 from $2,430,000 for the three
months ended December 31, 2001. The increase was primarily due to an increase in
gross profit for the telecommunication and travel services segment. Gross profit
declined by $965,000 (11.5%) to $7,408,000 for the nine months ended December
31, 2002 from $8,373,000 for the nine months ended December 31, 2001. The
decline was mainly due to the decline in gross profit from our IT services
business. Gross profit represented 53.5% and 48.5% of total net revenues for the
three and nine months ended December 31, 2002, as compared to 45.2% and 45.3%
for the comparable periods in the prior fiscal year. The increase in gross
profit as a percentage of net revenues is primarily due to the decline in IT
services net revenues, which is generally a lower margin business than our other
businesses.

         Engineering and collaborative software solutions gross profit declined
by $65,000 (2.9%) to 2,160,000 during the three months ended December 31, 2002
from $2,225,000 for the three months ended December 31, 2001, as a result of the
decline in net revenues, but the gross profit percentage remained relatively
flat (88.6% for the three months ended December 31, 2002 compared to 88.2% for
the three months ended December 31, 2001). Similarly, engineering and
collaborative software solutions gross profit declined by $294,000 (4.8%) to
$5,886,000 for the nine months ended December 31, 2002 from $6,180,000 for the
nine months ended December 31, 2001, as a result of the decline in net revenues,
but the gross profit percentage remained relatively flat at 87.9% for the nine
months ended December 31, 2002 compared to 88.0% for the nine months ended
December 31, 2001. Our engineering and collaborative software solutions segment
generally produces higher gross margins than our other segments due to the
relatively lower costs associated with each sale. The cost of revenues for the
engineering and collaborative software solutions 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 amortization of capitalized software.

         IT services gross profit increased by $92,000 (32.9%) to $372,000 for
the three months ended December 31, 2002 from $280,000 for the three months
ended December 31, 2001, and the gross profit percentage increased to 25.9% for
the three months ended December 31, 2002 from 14.9% for the three months ended
December 31, 2001. IT services gross profit declined by $933,000 (46.9%) to
$1,055,000 for the nine months ended December 31, 2002 from $1,988,000 for the
nine months ended December 31, 2001, as a result of the decline in net revenues,
but the gross profit percentage remained flat at 25.0%. In anticipation of
improvement in our IT services revenues toward the latter part of the prior
fiscal year, which improvement did not materialize, we continued to employ
consultants and thus continued to incur costs with no resulting increase in our
revenues. At the beginning of the current fiscal year, we responded to these
business conditions by eliminating excess capacity through workforce reductions
and aggressively reducing discretionary costs to lower the cost of operating
this segment of our business.

         During the three and nine months ended December 31, 2002, the decrease
in consulting employees' salaries and benefits due to reductions in the number
of consulting employees amounted to $455,000 and $1,636,000, respectively. In
addition, the decrease in subcontractors' expenses due to a reduction in the
number of outside subcontractors during the three and nine months ended December
31, 2002, as compared to the three and nine months ended December 31, 2001,
amounted to $176,000 and $1,375,000, respectively. We believe these actions have
helped curb further erosion of the gross profit of the IT services division.
However, gross profit from our IT services division could nevertheless decline
in the upcoming quarters, since the business environment for IT services is not
expected to improve in the immediate future. Historically, the IT services gross
profit percentage has been lower than the engineering and collaborative software
solutions gross profit percentage due to the higher cost of labor associated
with service revenue, including salaries, bonuses, and benefits for the
consulting employees. Our IT services consulting employees generally receive
higher salaries than our technical support employees, and we have employed more
consultants than technical support staff, both of which factors contributed to
the lower gross profit percentage for our IT services segment in comparison to
the gross profit percentage for our engineering and collaborative software
solutions segment.

                                       24



<PAGE>

         Web-based telecommunication and travel services gross profit increased
by $273,000 (364%) to 198,000 for the three months ended December 31, 2002 from
a gross loss of $75,000 for the three months ended December 31, 2001 as a result
of better pricing on phone minutes purchases, and gross profit percentage
increased correspondingly to 16.2% for the three months ended December 31, 2002,
compared to a gross loss of 7.6% for the three months ended December 31, 2001.
Web-based telecommunication and travel services gross profit increased by
$262,000 (128%) to $467,000 for the nine months ended December 31, 2002 from
$205,000 for the nine months ended December 31, 2001 as a result of better
pricing on phone minutes purchases, and gross profit percentage increased
correspondingly to 10.8% for the nine months ended December 31, 2002, from 5.9%
for the nine months ended December 31, 2001. The cost of revenues for our
Web-based telecommunication and travel services segment includes the cost of
buying minutes from another carrier and the cost of purchasing certain airline
tickets as a ticket consolidator. The events of September 11, 2001 negatively
impacted our travel services. Although the travel business has improved after
this initial downturn, continuing threats in the worldwide political climate
have hampered the recovery. Competition from other online travel services, many
of which have greater resources than we have, as well as reductions in travel
agency commissions due to pricing pressures experienced by the airline industry,
may also impact the gross profit from our travel business in the near future.

         In order to improve overall gross profit and gross profit percentage,
we are refocusing our sales efforts toward our division with the highest gross
profit, namely, our engineering and collaborative software solutions division,
by working to develop strategic relationships, to increase our volume of
telephone sales, and to re-engage with our international distributors. We have
cut and will continue to cut the costs of our IT services division in an effort
to prevent further deterioration of gross profit and will continue to closely
monitor our costs related to the telephony and travel businesses.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses declined by $250,000 (8.7%) to $2,628,000 for
the three months ended December 31, 2002 from $2,878,000 for the three months
ended December 31, 2001, due primarily to a $21,000 reduction in salaries and
benefits due to employee terminations, a $23,000 decrease in IT sales
commissions due to decreased IT services net revenues, a $73,000 decrease in bad
debt expenses due to improved collection of accounts receivable, and a $119,000
reduction in advertising expenses and a $70,000 reduction in marketing
consulting expenses due to continuing cost control measures. These decreases
were offset by an increase in dealer commissions of $58,000 due to an increase
in dealer sales of engineering software solutions. SG&A expenses as a percentage
of total net revenues declined to 51.5% for the three months ended December 31,
2002 from 53.5% for the comparable period in the prior fiscal year, primarily
due to our continuing efforts to control SG&A costs.

         SG&A expenses declined by $907,000 (10.1%) to $8,086,000 for the nine
months ended December 31, 2002 from $8,993,000 for the nine months ended
December 31, 2001, due primarily to a $363,000 reduction in salaries and
benefits due to employee terminations, a $91,000 decrease in IT sales
commissions due to decreased IT services net revenues, a $64,000 decrease in bad
debt expenses due to improved collection of accounts receivable, and a $405,000
reduction in advertising expenses and a $116,000 reduction in marketing expenses
due to continuing cost control measures. These reductions were offset by a
$147,000 increase in dealer commissions due to an increase in dealer sales of
engineering software solutions. Although SG&A expenses declined during the nine
months ended December 31, 2002 compared to the nine months ended December 31,
2001, they represented 53.0% of total net revenues for the nine months ended
December 31, 2002 compared to 48.7% for the nine months ended December 31, 2001,
because a portion of the SG&A expenses are fixed and therefore do not change in
proportion to change in net revenues. We do not presently anticipate that our
efforts to control SG&A expenses will adversely impact our current sales and
marketing initiatives because these initiatives are designed to derive
operational efficiencies while controlling costs.

         RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D")
expenses decreased slightly by $12,000 (2.4%) to $481,000 for the three months
ended December 31, 2002 from $493,000 for the three months ended December 31,
2001 but as a percentage of total net revenues R&D increased to 9.4% for the
three months ended December 31, 2002 from 9.2% for the nine months ended
December 31, 2001. R&D expenses increased by $32,000 (2.2%) to $1,492,000 for
the nine months ended December 31, 2002 from $1,460,000 for the nine months
ended December 31, 2001. The increase in R&D expenses for the nine months ended

                                       25


<PAGE>

December 31, 2002 related to enhancement of our software products that had
already been released, and therefore were expensed, whereas during the nine
months ended December 31, 2001, certain R&D expenses were capitalized because
they related to development of software products. R&D expenses consist primarily
of software developers' wages. R&D expenses represented 9.8% of total net
revenues for the nine months ended December 31, 2002 compared to 7.9% for the
comparable period in the prior fiscal year. R&D expenses as a percentage of
revenues increased due to our continuing efforts to invest in research and
development for collaborative software solutions to position us for future
growth.

         DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and other
amortization expenses (excluding goodwill amortization and amounts charged to
cost of revenues) increased by $17,000 (6.6%) to $274,000 for the three months
ended December 31, 2002 from $257,000 for the three months ended December 31,
2001. Depreciation and other amortization expenses declined by $20,000 (2.4%) to
$816,000 for the nine months ended December 31, 2002 from $836,000 for the nine
months ended December 31, 2001 due to a lower level of capital expenditures as
part of our continuing efforts to control costs and discretionary spending. We
anticipate that depreciation and amortization expenses will remain at this lower
level through the end of the current fiscal year.

         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. In the Internet portal business, we redirected our
primary focus toward Web-based telecommunication and travel services. In
March 2001, we closed our Boston technical support office. Technical support
activities previously offered from that office have been consolidated into our
California facility. 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, as needed, through our continuing external
legal counsel. During the three and nine months ended December 31, 2002, we
provided another $90,000 and $194,000, respectively, toward additional expenses
from the restructuring plans announced in March 2001 primarily due to additional
amounts needed for severance costs for the elimination of the legal department
and the consolidation of technical support. As of December 31, 2002,
approximately $216,000 remained to be paid, of which $30,000 represents lease
payments for vacated office space and $186,000 represents severance payments.

         IMPAIRMENT CHARGE. We recorded an impairment charge of $67,000 for the
nine months ended December 31, 2002 as a result of the write-down of a
capitalized software asset to its net realizable value.

         INTEREST EXPENSE. Net interest for the three months ended December 31,
2002 increased by $31,000 (88.6%) to $66,000 for the three months ended December
31, 2002 from $35,000 for the three months ended December 31, 2001, primarily
due to an increase of $32,000 in interest expense related to capital lease and
note payable obligations. Net interest for the nine months ended December 31,
2002 increased by $75,000 (70.1%) to $182,000, from $107,000 for the nine months
ended December 31, 2001, primarily due to a decline in investment interest
income of $36,000 and an increase of $40,000 in interest expense related to
capital lease and long-term debt obligations. Approximately $13,000 of the
increase in interest expense during the three months ended December 31, 2002 was
related to the interest expense on the convertible debt financing obtained in
December 2002.

         INCOME TAXES. During the three months ended December 31, 2002, we
recorded an income tax expense of $46,000, as compared to an income tax expense
of $36,000 for the three months ended December 31, 2001 due to an increase in
net income in the foreign subsidiaries. We recorded an income tax benefit of
$256,000 for the nine months ended December 31, 2002 as compared to net income
tax expense of $173,000 for the nine months ended December 31, 2001. As a result
of our analysis, we reversed certain tax liabilities, which resulted in a tax
benefit for the nine months ended December 31, 2002. Tax expense for the nine
months ended December 31, 2001 resulted from provisions for local and state
taxes.

                                       26



<PAGE>

     LIQUIDITY AND CAPITAL RESOURCES

         Currently, we finance our operations (including capital expenditures)
primarily through existing cash and cash equivalent balances and proceeds from
our recently completed debt offering. We have used debt and equity financing
when appropriate and practicable. Our principal sources of liquidity at December
31, 2002 consisted of $2,656,000 of cash and cash equivalents. Cash and cash
equivalents declined by $810,000 or 23.4% during the nine months ended December
31, 2002. As discussed below, the primary reasons for this decline were
$2,289,000 cash used in operations, $206,000 in capital expenditures, $196,000
in repayment of bank debt and $314,000 in payments toward capital lease
obligations, offset by $2,007,000 in net financing proceeds.

         Net cash used in operations was $2,289,000 during the nine months ended
December 31, 2002 compared to $1,915,000 during the nine months ended December
31, 2001. Net loss was the primary contributor to net cash used in both periods.
A $334,000 decrease in accounts payable, a $285,000 decrease in accrued
expenses, a $154,000 decrease in income tax payable and a $138,000 increase in
deferred revenues contributed to the usage of cash in the nine months ended
December 31, 2002, and were offset by cash provided by a $59,000 increase in
restructuring related liabilities, a $165,000 decrease in notes and related
party loans receivable, and a $300,000 decrease in income tax receivable. In the
comparable period of the prior fiscal year, the primary reason for net cash used
in operations was the net loss, which was offset largely by a $1,608,000
decrease in accounts receivable balance. Additionally, a $689,000 increase in
prepaid expenses and other assets, a $579,000 decrease in accrued expenses and a
$396,000 decrease in deferred revenues, which were offset by a $229,000 increase
in accounts payable, also contributed to cash used in operations during the nine
months ended December 31, 2001.

         On December 13, 2002, we issued a 6% secured convertible note ("Note")
to Laurus Master Fund, Ltd. ("Laurus"), a private equity fund. The proceeds, net
of fees and expenses, from this Note were $1,786,000. This Note, which will be
amortized over a 20 month period, may be repaid, at our option, in cash or
through the issuance of shares of our common stock at the fixed price of $1.60
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 $1.76. The Note includes a right of conversion in favor of
Laurus. If Laurus exercises it conversion right at any time or from time to time
at or prior to maturity, the Note will be convertible into shares of our common
stock at a fixed conversion price, 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). In connection with this Note, we issued to Laurus a five-year
warrant to purchase 200,000 shares of our common stock, exercisable in three
tranches at exercise prices ranging from $1.76 to $2.40 per share. The warrant
exercise price and the number of shares underlying the warrant are subject to
adjustments for stock splits, combinations and dividends. The Note is secured by
a general security interest in our assets and the assets of our domestic
subsidiaries. We are required to use the proceeds from this financing for
general corporate purposes. We are also required not to permit for any fiscal
quarter commencing April 1, 2003, our 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.

         Net cash used in investing activities during the nine months ended
December 31, 2002 consisted of capital expenditures of $206,000, as compared to
capital expenditures of $713,000 and an expenditure of $68,000 used to acquire
companies during the nine months ended December 31, 2001.

         Net cash provided by financing activities during the nine months ended
December 31, 2002 consisted of $2,007,000 of proceeds from issuance of debt (net
of fees and expenses) and $55,000 from issuance of common stock, which were
offset by $196,000 to repay bank debt and $314,000 to repay capital lease
obligations. During the nine months ended December 31, 2001, we used $388,000 to
repay bank debt, $102,000 to repay capital lease obligations and $140,000 to
repurchase common stock, which were offset by $40,000 in proceeds from issuance
of debt and $27,000 in proceeds from issuance of common stock.

                                       27



<PAGE>

         The following tables summarize our contractual obligations and
commercial commitments at December 31, 2002 (in thousands of dollars):

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

                                                           LESS
                                                           THAN 1     1-3        4-5         AFTER 5
     CONTRACTUAL OBLIGATIONS                    TOTAL      YEAR       YEARS      YEARS       YEARS
     -----------------------                    -----      ----       -----      -----       -----
<S>                                             <C>        <C>        <C>         <C>         <C>
     Long-Term Debt                             2,614      1,241      1,356        17             -
     Capital Lease Obligations                  1,147        427        547       173             -
     Operating Leases                           5,181        766      1,130       794         2,491
                                           --------------------------------------------------------------
     Total Contractual Cash Obligations         8,942      2,434      3,033       984         2,491
                                           ==============================================================
</TABLE>

<TABLE>
<CAPTION>
                                          TOTAL AMOUNTS      LESS THAN 1                                OVER
     OTHER COMMERCIAL COMMITMENTS           COMMITTED           YEAR        1-3 YEARS      4-5 YEARS   5 YEARS
     ----------------------------           ---------           ----        ---------      ---------   -------
<S>                                             <C>              <C>             <C>           <C>         <C>
Purchase commitment                             131             131              -             -           -

                                         ----------------------------------------------------------------------
Total Commercial Commitments                    131             131              -             -           -
                                         ======================================================================
</TABLE>

         Our purchase commitment listed above is a commitment to purchase
$600,000 in airline tickets that we purchase as a ticket consolidator for the
period of October 1, 2002 through March 31, 2003. If we do not purchase airline
tickets amounting to $600,000 during this commitment period, we will owe the
airlines the difference between $600,000 and the total value of airline tickets
purchased as a consolidator during this period. At December 31, 2002, the
balance remaining on this purchase commitment was $131,000, which represented
the value of tickets to be purchased before March 31, 2003.

         On August 12, 2002, one of our major stockholders executed a letter of
commitment to provide us with a revolving line of credit expiring March 31,
2003, in the amount of $500,000 at annual interest rates varying from 2.0% over
prime rate to 10.0% over prime rate depending on the outstanding balance. The
revolving line of credit has no loan covenant or ratio requirements. As of
December 31, 2002, we had no borrowings against this revolving line of credit.
We do not anticipate borrowing against this credit facility before its
expiration date or renewing this credit facility when it expires.

         We incurred net losses of $3,172,000 and $4,098,000 and used cash in
operations of $2,289,000 and $1,915,000 in the nine months ended December 31,
2002 and 2001, 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. Although we expect our existing cash and cash equivalent balances to
decline further during the next twelve months, we believe that our current cash
and cash equivalents balances will be sufficient to meet our working capital
needs at currently anticipated levels for the next twelve months. We have made,
and will continue to make, budget cuts to maintain adequate capital reserves.
However, our operational plan calls for the raising of additional funds to
finance growth 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 satisfactory to us. If we obtain additional equity
funding, our existing shareholders will experience dilution. If adequate funds
are not available, we may be required to delay, scale back, or eliminate our
research and development programs and our marketing efforts or to obtain funds
through arrangements with partners or others who may require us to relinquish
rights to certain of our technologies or potential products or assets.

                                       28



<PAGE>

     IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standard (SFAS) No. 141, BUSINESS
COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and eliminated the
pooling-of-interests method of accounting. SFAS No. 141 specifies criteria that
intangible assets acquired in a business combination must meet to be recognized
and reported separately from goodwill. SFAS No. 142 also requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values. In addition, SFAS No. 142 includes
provisions, upon adoption, for the reclassification of certain existing
recognized intangibles as goodwill, reclassification of certain intangibles out
of previously reported goodwill, reassessment of the useful lives of recognized
intangibles and testing for impairment of those intangibles.

         We adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS
No. 142 became effective for us on April 1, 2002. Intangible assets identified
as having indefinite useful lives were required to be tested for impairment in
accordance with the provisions of SFAS No. 142. Impairment is measured as the
excess of carrying value over the fair value of an intangible asset with an
indefinite life. We did not record an impairment loss as of the date of adoption
because we determined that we did not have any identifiable intangible assets
other than goodwill.

         In connection with the SFAS No. 142 transitional goodwill impairment
evaluation, the statement requires us to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this, we identified our reporting units and determined the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill, to those reporting units as of April 1, 2002. Pursuant to
paragraphs 30-31 of SFAS No.142, we identified three "reporting units" as
defined in paragraph 17 of SFAS No. 131:

         1)       Engineering and collaborative software solutions;
         2)       IT Services; and
         3)       Web-based telecommunication and travel services.

         Each of these reporting units was identical to its related operating
segment and met the specified criteria as distinct operating units: the
component constitutes a business; discrete financial data is available for the
component; and segment management routinely reviews the component's operating
results. The aggregation criteria for each of the components met the test of:

         (a)      similar economic characteristics over the long term;
         (b)      similar products or services;
         (c)      similar production processes; and
         (d)      similar types or classes of customers.

         As of March 31, 2002, goodwill balances for each of the reporting units
were as follows:

               Engineering and collaborative software solutions     $1,859,000
               IT services                                          $6,765,000
               Web based telecommunication and travel services      $  481,000

         In connection with adopting SFAS No. 142, during the second quarter of
fiscal year 2003, we completed step one of the test for impairment, which
indicated that the carrying value of our IT services segment exceeded its
estimated fair value, as determined utilizing various valuation techniques
including discounted cash flow and comparative market analysis. Net revenue for
the IT services reporting unit declined $8,150,000, from $18,019,000 for the
year ended March 31, 2001 to $9,869,000 for the year ended March 31, 2002. This
decline in net revenues for

                                       29



<PAGE>

IT services is not anticipated to substantially improve and may worsen in the
next 12 months because we do not expect the demand for IT services to improve
during this period. In accordance with SFAS No. 142, we are currently
determining the extent of the impairment in the IT services segment and will
report the level of impairment for each reporting unit by fiscal year end.

         We are required to complete the second step of the test for impairment
as soon as possible, but no later than March 31, 2003, the end of the year of
adoption. In the second step, we must compare the implied fair value of the
reporting unit goodwill with the carrying amount of the reporting unit goodwill,
both of which would be measured as of the date of adoption. 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. The residual fair value after this allocation is the implied
fair value of the reporting unit goodwill. Any transitional impairment loss will
be recognized as a cumulative effect of a change in accounting principle in our
statement of operations.

         As of December 31, 2002, we had unamortized goodwill in the amount of
$9,105,000, all of which will be subject to the transition provisions of SFAS
No. 142. Approximately $6,765,000 of this amount represents unamortized goodwill
related to the IT services segment. No amortization expense was recorded during
the three and nine months ended December 31, 2002. We will continue to assess
for impairment at each reporting date or at any time we become aware of factors
or circumstances that would warrant the assessment for impairment, including
whether we will be required to recognize any transitional impairment losses as a
cumulative effect of a change in accounting principle.

         The following table reconciles previously reported net income (loss) as
if the provisions of SFAS No. 142 were in effect in fiscal year 2002 and at
fiscal year end 2002 and 2001 (in thousands except per share amounts):

<TABLE>
<CAPTION>
                                  THREE MONTHS ENDED             NINE MONTHS ENDED                YEAR ENDED
                                      DECEMBER 31,                  DECEMBER 31,                   MARCH 31,
                                   2002          2001           2002           2001           2002           2001
                               -----------   ------------   ------------    -----------    -----------    -----------
<S>                            <C>           <C>            <C>             <C>                <C>            <C>
         Reported net loss     $     (860)   $    (1,563)   $    (3,172)    $   (4,098)        (8,944)        (6,637)
         Add back:  Goodwill
            amortization, net
            of taxes                   --            279             --            851          1,052          1,282
                               -----------   ------------   ------------    -----------    -----------    -----------

         Adjusted net loss     $     (860)   $    (1,284)   $    (3,172)    $   (3,247)        (7,892)        (5,355)

         Reported basic and
            diluted loss per
            common share       $    (0.05)   $     (0.09)   $     (0.18)    $    (0.24)    $    (0.53)    $    (0.45)
         Add back: Goodwill
            amortization, net
            of taxes                   --           0.01             --           0.05           0.06           0.09
                               -----------   ------------   ------------    -----------    -----------    -----------
         Adjusted basic and
            diluted loss per
            common share       $    (0.05)   $     (0.08)   $     (0.18)    $    (0.19)    $    (0.47)    $    (0.36)
                               -----------   ------------   ------------    -----------    -----------    -----------
</TABLE>

         In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development, or normal use of the
asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.
We do not expect the adoption of SFAS No. 143 to have a material impact on our
consolidated financial position or results of operations.

                                       30



<PAGE>

         In August 2001, the 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 supersedes
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 is effective for fiscal years beginning after December 15, 2001. We
adopted SFAS No. 144 beginning April 1, 2002. The adoption of SFAS No. 144 did
not have a material impact on our consolidated financial position or results of
operations.

         In April 2002, the FASB issued SFAS No. 145, RESCISSION OF THE FASB
STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS. SFAS No. 145 eliminates the requirement to classify gains and
losses from the extinguishments of indebtedness as extraordinary, requires
certain lease modifications to be treated the same as a sale-leaseback
transaction, and makes other non-substantive technical corrections to existing
pronouncements. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002, with earlier adoption encouraged. We do not expect the adoption of
SFAS No. 145 to have a material impact on our consolidated financial position 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.
SFAS No. 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. As the
provisions of SFAS No. 146 are required to be applied prospectively after the
adoption date, we cannot determine the potential effects that adoption of SFAS
No. 146 will have on our consolidated financial statements.

         The Emerging Issues Task Force, or EITF, recently reached a consensus
on its tentative conclusions for EITF 00-21, REVENUE ARRANGEMENTS WITH MULTIPLE
DELIVERABLES. EITF 00-21 provides accounting guidance for customer solutions
where delivery or performance of products and/or?? services may occur at
different points in time or over different periods of time. Companies are
required to adopt this consensus for fiscal periods beginning after June 15,
2003. We believe the adoption of EITF 00-21 will not have a material impact on
our financial position, results of operations or liquidity.

         In November 2002, FASB issued FASB Interpretation No. 45, or FIN 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN 45 also clarifies that a guarantor is required to recognize a liability for
the fair value, or market value, of the obligation undertaken in issuing a
guarantee at the inception of the guarantee. The provisions of FIN 45 relating
to liability recognition do not apply to certain obligations such as product
warranties and guarantees accounted for as derivatives. The initial recognition
and measurement provisions apply on a prospective basis to guarantees issued or
modified subsequent to December 31, 2002. The disclosure requirements of FIN 45
are effective for interim or annual financial statement periods ending after
December 15, 2002. We adopted the provisions of FIN 45 relating to guarantees
issued on January 1, 2003. In connection with the convertible debt financing
that we obtained on December 13, 2002, we executed an unconditional guarantee on
behalf of our subsidiaries guaranteeing that our present and future obligations
to Laurus will be paid strictly in accordance with the terms of any document,
instrument or agreement creating or evidencing the obligation. We do not expect
the adoption of the recognition and measurement provisions of FIN 45 to have a
significant impact on our consolidated financial position or results of
operations.

                                       31


<PAGE>

         In December 2002, FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION, TRANSITION AND DISCLOSURE. SFAS No. 148 amends the disclosure
requirements of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to
require prominent disclosures in both interim and annual 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 also amends SFAS No.
123 to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. We
will commence quarterly footnote disclosure of the fair value based method of
accounting for stock-based employee compensation beginning in the quarter ending
June 30, 2003. As we have decided not to voluntarily adopt the SFAS No. 123 fair
value method of accounting for stock-based employee compensation, the new
transition alternatives of SFAS No. 148 will not have a material impact on our
consolidated financial position or results of operations.

         On January 17, 2003, the FASB issued FASB Financial Interpretation No.
46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES, or FIN 46, which requires
extensive disclosures and requires companies to evaluate variable interest
entities created after January 31, 2003 and existing entities to determine
whether to apply the interpretation's consolidation approach to them. Companies
must apply the interpretation to entities with which they are involved if the
entity's equity has specified characteristics. If it is reasonably possible that
a company will have a significant variable interest in a variable interest
entity at the date the interpretation's consolidation requirements become
effective, the company must disclose the nature, purpose, size and activities of
the variable interest entity and the consolidated enterprise's maximum exposure
to loss resulting from its involvement with the variable interest entity in all
financial statements issued after January 31, 2003 regardless of when the
variable interest entity was created. Currently, we do not have any variable
interest entities. We do not expect the adoption of the recognition and
measurement provisions of FIN 46 to have a significant impact on our
consolidated financial position or results of operations.

     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 February 11, 2003 ("Evaluation Date"), that the
design and operation of our "disclosure controls and procedures" (as defined in
Rules 13a-14(c) and 15d-14(c) 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.

         There were no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
Evaluation Date, nor were there any significant deficiencies or material
weaknesses in our internal controls. As a result, no corrective actions were
required or undertaken.

                                       32



<PAGE>

                          PART II -- OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS

         As discussed in our current report on Form 8-K for December 5, 2002, on
August 7 2001, a complaint for wrongful termination was filed against us by
Wayne Blair and Eric Christensen, two of our former employees, in the Superior
Court, Orange County, California. Subsequently, we entered into a settlement
agreement, the terms of which were not then material to our operations. The
settlement agreement required us to pay a total of $100,000 cash and to issue a
total of 80,000 shares of our common stock to the plaintiffs in consideration
for past services rendered and to register the public resale of those shares by
December 4, 2002.

         As required under the settlement agreement, we filed with the
Securities and Exchange Commission, or the SEC, a registration statement on Form
S-3 covering the resale of the 80,000 shares. In connection with our filing on
Form S-3, the SEC's Division of Corporation Finance reviewed the Form S-3 as
well as our Form 10-KSB for the year ended March 31, 2002 and Form 10-QSBs for
the quarters ended June 30, 2002 and September 30, 2002, which were incorporated
by reference into the Form S-3. Upon receipt of the SEC's comments on those
documents, we immediately prepared and delivered to the SEC a response letter
and filed amendments to those documents. We are awaiting further reply from the
SEC and, therefore, have been unable to complete the registration of the 80,000
shares before the December 4, 2002 deadline. As a result, on December 5, 2002,
the court entered a judgment against us for approximately $400,000. We have
since obtained a bond against the judgment amount, and have filed a notice of
appeal. In the meantime, we have begun settlement discussions with the
plaintiffs. As a result of the judgment, the plaintiffs were not entitled to the
shares of our common stock. Therefore, we cancelled and retired the 80,000
shares that were included in the Form S-3.

ITEM 2.  CHANGES IN SECURITIES

         In August 2002, we issued 80,000 shares of common stock valued at
$180,000 to two former employees in consideration for services rendered. These
shares were cancelled and retired in February 2003 as described in ITEM 1. LEGAL
PROCEEDINGS, above.

         In December 2002, we issued a 6% secured convertible note to Laurus
Master Fund, Ltd., a private equity fund ("Laurus"). The proceeds, net of fees
and expenses, from this note were $1,786,000. This note, which will be amortized
over a 20-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 conversion price of
$1.60 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 $1.76. 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, 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). In connection with this note, we
issued to Laurus a five-year warrant to purchase 200,000 shares of our common
stock. The warrant exercise price is computed as follows: $1.76 per share for
the purchase of up to 125,000 shares; $2.08 per share for the purchase of an
additional 50,000 shares; and $2.40 per share for the purchase of an additional
25,000 shares. The warrant exercise price may be paid in cash, in shares of our
common stock (if the fair market value of a single share of our common stock
exceeds the value of the per share warrant exercise price), or by a combination
of both. The warrant exercise price and the number of shares underlying the
warrant are subject to adjustments for stock splits, combinations and dividends.
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, our 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.

         Exemption from the registration provisions of the Securities Act of
1933 for the issuance of securities to Laurus as described above is claimed
under Section 4(2) of the Securities Act of 1933, among others, on the basis
that the transaction did not involve any public offering and the purchaser was
accredited and had access to the kind of information registration would provide.
Appropriate investment representations were obtained and the securities were
issued with restricted 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 21,
                  2002.

         (b)      We solicited proxies for the re-election of Amrit K. Das,
                  Jyoti Chatterjee, Santanu Das, Stephen Owen, Garret Vreeland,
                  Dr. Laxmi Mall Singhvi, and Stanley Corbett as directors, all
                  of whom were then serving as directors.

                                       33



<PAGE>

         (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           14,970,836         0          46,740
                     Jyoti Chatterjee       14,970,826         0          49,750
                     Santanu Das            14,970,836         0          46,740
                     Stephen Owen           15,010,836         0           6,740
                     Garret W. Vreeland     15,010,836         0           6,740
                     Dr. Laxmi Mall Singhvi 15,017,576         0          46,740
                     Stanley Corbett        15,010,836         0           6,740

         (c)(ii)  PROPOSAL TWO: Ratification of the appointment of KPMG LLP as
                  our independent accountants for the fiscal year beginning
                  April 1, 2002:

                                    For:                      15,006,776
                                    Against:                      10,800
                                    Abstain:                           -
                                    Broker Non-Voting                  -

         (d)      Not applicable.

ITEM 5.  OTHER INFORMATION

         None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibit
                  Number             Description
                  ------             -----------

                  10.1     netGuru, Inc. Securities Purchase Agreement dated
                           December 13, 2002 by and between netGuru, Inc. and
                           Laurus Master Fund, Ltd. (1)

                  10.2     6% Convertible Note dated December 13, 2002 in the
                           principal amount of $2,000,000 made by netGuru, Inc.
                           in favor of Laurus Master Fund, Ltd. (1)

                  10.3     Common Stock Purchase Warrant dated December 13, 2002
                           issued by netGuru, Inc. in favor of Laurus Master
                           Fund, Ltd. (1)

                  10.4     Security Agreement dated December 13, 2002 by and
                           between netGuru, Inc. and Laurus Master Fund, Ltd.
                           (1)

                  10.5     Security Agreement dated December 13, 2002 by and
                           between U.S. subsidiaries of netGuru, Inc. and
                           Laurus Master Fund, Ltd. (1)

                  10.6     Guarantee Agreement dated December 13, 2002 by and
                           between U.S. subsidiaries of netGuru, Inc. and
                           Laurus Master Fund, Ltd. (1)

                  99.1     Certifications 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 with the Securities and Exchange Commission on December 20, 2002
        as an exhibit to our current report on Form 8-K for December 5, 2002
        and incorporated herein by reference.

                                       34



<PAGE>

         (b)      Reports on Form 8-K

                           On December 20, 2002, we filed a current report on
                           Form 8-K for December 5, 2002, announcing the
                           issuance of a 6% convertible note and a warrant to
                           purchase 200,000 shares of our common stock to Laurus
                           Master Fund, Ltd. ("Laurus"), in return for
                           $2,000,000 in secured financing. The Form 8-K
                           included Item 5-Other Events and Regulation FD
                           Disclosure and Item 7-Financial Statements and
                           Exhibits. The exhibits attached were: a Securities
                           Purchase Agreement dated December 13, 2002, a 6%
                           Convertible Note dated December 13, 2002, a Common
                           stock Purchase Warrant dated December 13, 2002, two
                           Security Agreements dated December 13, 2002 giving
                           Laurus a security interest in all of the assets of
                           netGuru and its domestic subsidiaries, a Guarantee
                           Agreement dated December 13, 2002, guaranteeing
                           payment of all obligations strictly in accordance
                           with the terms of the note, and a press release dated
                           December 20, 2002 relating to the transaction.

                                       35



<PAGE>

                                   SIGNATURES

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

Date:  February 19, 2003

                                   NETGURU, INC.

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

                                       36



<PAGE>

                                 CERTIFICATIONS

         I, Amrit K. Das, certify that:

         1. I have reviewed this quarterly report on Form 10-QSB of netGuru,
Inc. ("quarterly report");

         2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

         b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

         c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

         a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

         b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

         6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: February 19, 2003                    /s/ AMRIT K. DAS
                                           -------------------------------------
                                           Amrit K. Das, Chief Executive Officer
                                           (principal executive officer)

                                       37



<PAGE>

         I, Bruce Nelson, certify that:

         1. I have reviewed this quarterly report on Form 10-QSB of netGuru,
Inc. ("quarterly report");

         2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

         b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

         c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

         a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

         b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

         6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: February 19, 2003                    /s/ BRUCE K. NELSON
                                           -------------------------------------
                                           Bruce Nelson, Chief Financial Officer
                                           (principal financial officer)

                                       38



<PAGE>

                 EXHIBITS FILED WITH THIS REPORT ON FORM 10-QSB

Exhibit
Number            Description
------            -----------

99.1     Certifications of chief executive officer and chief financial officer
         pursuant to 18 U.S.C section 1350, as adopted pursuant to section 906
         of the Sarbanes-Oxley Act of 2002

                                       39