<PAGE>

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

                                   FORM 10-QSB

 (Mark One)

[X]      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

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

                         Commission file number: 0-28560

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

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

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

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

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

Check 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 18,837,154 on November 11, 2004.

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


<PAGE>

                                     PART I
                              FINANCIAL INFORMATION

                                                                            PAGE
Item 1.  Financial Statements

         Condensed Consolidated Statements of Operations for the Three and
         Six Months Ended September 30, 2004 and 2003 (unaudited)..............3

         Condensed Consolidated Balance Sheets as of
         September 30, 2004 (unaudited) and March 31, 2004.....................4

         Condensed Consolidated Statements of Cash Flows for the
         Six Months Ended September 30, 2004 and 2003 (unaudited)..............5

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

Item 2.  Management's Discussion and Analysis or Plan of Operation............16

Item 3.  Controls and Procedures .............................................29

                                     PART II
                                OTHER INFORMATION

Item 1.  Legal Proceedings....................................................30

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
              Securities .....................................................30

Item 3.  Defaults Upon Senior Securities......................................30

Item 4.  Submission of Matters to a Vote of Security Holders..................30

Item 5.  Other Information....................................................30

Item 6.  Exhibits and Reports on Form 8-K.....................................31

Signatures....................................................................32

Exhibits Filed with this Report on Form 10-QSB................................33

                                       2

<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)

                                                   THREE MONTHS      THREE MONTHS       SIX MONTHS       SIX MONTHS
                                                      ENDED             ENDED             ENDED             ENDED
                                                   SEPTEMBER 30,     SEPTEMBER 30,     SEPTEMBER 30,     SEPTEMBER 30,
                                                       2004              2003              2004             2003
                                                   -------------     -------------     -------------     -------------
<S>                                                <C>               <C>               <C>               <C>
Net revenues:
    Engineering and collaborative software
      products and services                        $      2,832      $      2,674      $      5,276      $      5,396
    IT services                                           1,067             1,290             2,147             2,503
                                                   -------------     -------------     -------------     -------------
           Total net revenues                      $      3,899      $      3,964      $      7,423      $      7,899

Cost of revenues:
    Engineering and collaborative software
      products and services                                 187               223               432               464
    IT services                                             685             1,045             1,444             1,965
                                                   -------------     -------------     -------------     -------------
           Total cost of revenues                           872             1,268             1,876             2,429

                                                   -------------     -------------     -------------     -------------
           Gross profit                                   3,027             2,696             5,547             5,470
                                                   -------------     -------------     -------------     -------------

Operating expenses:
    Selling, general and administrative                   2,384             2,592             4,619             4,844
    Research and development                                411               517               826             1,056
    Bad debt expense                                         --                23               164                34
    Depreciation                                            236               234               477               484
                                                   -------------     -------------     -------------     -------------
           Total operating expenses                       3,031             3,366             6,086             6,418
                                                   -------------     -------------     -------------     -------------

           Operating loss                                    (4)             (670)             (539)             (948)
                                                   -------------     -------------     -------------     -------------

Other expense (income):
    Interest, net                                           104               138               229               283
    Other                                                   (24)              (83)              (57)              (83)
    Loss on substantial modification of debt                 --                --               133                --
                                                   -------------     -------------     -------------     -------------
           Total other expense                               80                55               305               200
                                                   -------------     -------------     -------------     -------------

Loss from continuing operations before                      (84)             (725)             (844)           (1,148)
    income taxes
Income tax expense                                           15                75                22               112
                                                   -------------     -------------     -------------     -------------
Loss from continuing operations                             (99)             (800)             (866)           (1,260)
Gain from discontinued operations (Note 14)                  38                33                67                90
                                                   -------------     -------------     -------------     -------------
           Net loss                                $        (61)     $       (767)     $       (799)     $     (1,170)
                                                   =============     =============     =============     =============

Basic and diluted loss per common share:
     Loss per common share from continuing
    operations                                     $         --      $      (0.05)     $      (0.05)     $      (0.07)
     Gain from discontinued operations                       --              0.01              0.01                --
                                                   -------------     -------------     -------------     -------------
     Basic and diluted loss per common share       $         --      $      (0.04)     $      (0.04)     $      (0.07)
                                                   =============     =============     =============     =============

Common shares used in computing basic and
    diluted net loss per common share:               18,833,350        17,341,152        18,730,323        17,333,195
                                                   =============     =============     =============     =============

                        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)

                                                                 SEPTEMBER 30,
                                                                     2004              MARCH 31,
                                                                 (UNAUDITED)             2004
                                                               ----------------     ----------------

                                                ASSETS
<S>                                                            <C>                  <C>
Current assets:
    Cash and cash equivalents                                  $         1,540      $         1,646
    Short-term investment                                                                       100
    Accounts receivable (net of allowance for
      doubtful accounts of $708 and
      $615, as of September 30, 2004 and
      March 31, 2004, respectively)                                      3,547                3,340
    Income tax receivable                                                    2                   16
    Notes and related party loans receivable                                32                   35
    Deposits                                                                92                   67
    Prepaid expenses and other current assets                            1,275                1,174
    Assets of subsidiary held for sale                                      --                  327
                                                               ----------------     ----------------
           Total current assets                                          6,488                6,705

Property, plant and equipment, net                                       1,977                2,215
Goodwill                                                                 3,089                2,892
Other assets                                                               135                  218
                                                               ----------------     ----------------
                                                               $        11,689      $        12,030
                                                               ================     ================

                                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Current portion of long-term debt,
      net of discount of $151                                  $         1,121      $           975
    Current portion of capital lease obligations                           136                  109
    Accounts payable                                                       479                  600
    Accrued expenses                                                       990                1,160
    Income taxes payable                                                    53                   55
    Deferred revenues                                                    1,610                1,834
    Other liabilities                                                      166                  208
    Liabilities of subsidiary held for sale                                 --                  186
                                                               ----------------     ----------------
           Total current liabilities                                     4,555                5,127

Long-term debt, net of current portion
  and net of discount of $150                                            1,335                1,382
Capital lease obligations, net of current portion                          411                  368
Deferred gain on sale-leaseback                                            712                  747
                                                               ----------------     ----------------
           Total liabilities                                             7,013                7,624
                                                               ----------------     ----------------

Stockholders' equity:
    Preferred stock, par value $.01
      (Authorized 5,000,000 shares; no shares
      issued and outstanding)                                               --                   --
    Common stock, par value $.01; (Authorized
      150,000,000 shares; 18,837,154
      and 18,087,154 shares issued and outstanding
      as of September 30, 2004
      and March 31, 2004, respectively)                                    188                  181
    Additional paid-in capital                                          36,404               35,352
    Accumulated deficit                                                (31,243)             (30,444)
    Accumulated other comprehensive loss:
       Cumulative foreign currency translation adjustments                (673)                (683)
                                                               ----------------     ----------------
           Total stockholders' equity                                    4,676                4,406
                                                               ----------------     ----------------
                                                               $        11,689      $        12,030
                                                               ================     ================

               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)

                                                                            SIX MONTHS ENDED     SIX MONTHS ENDED
                                                                              SEPTEMBER 30,        SEPTEMBER 30,
                                                                                 2004                 2003
                                                                            ----------------     ----------------
<S>                                                                         <C>                  <C>
Cash flows from operating activities:
    Net loss                                                                $          (799)     $        (1,170)
    Gain from discontinued operations                                                    67                   90
                                                                            ----------------     ----------------
    Loss from continuing operations                                                    (866)              (1,260)
    Adjustments to reconcile net loss to net cash used in operating
      activities:
        Depreciation and amortization                                                   543                  626
        Loss on substantial modification of debt                                        133                   --
        Bad debt expense                                                                164                   34
        Amortization of discount on loan                                                 86                   --
        Expense recognized on issuance of warrants and common stock                      48                   37
        Changes in operating assets and liabilities:
          Accounts receivable                                                          (447)                 298
          Notes and related party loans receivable                                        4                   48
          Income tax receivable                                                          14                   --
          Prepaid expenses and other current assets                                    (168)                (136)
          Deposits                                                                      (29)                 577
          Other assets                                                                   14                   (2)
          Accounts payable                                                             (102)                 (18)
          Accrued expenses                                                             (177)                (223)
          Income taxes payable                                                           (2)                  85
          Change in assets and liabilities held for sale                                173                 (102)
          Other current liabilities                                                     (42)                 (58)
          Deferred revenues                                                            (215)                (532)
          Deferred gain on sale-leaseback                                               (35)                 (35)
                                                                            ----------------     ----------------
             Net cash used in operating activities                                     (904)                (860)
                                                                            ----------------     ----------------

Cash flows from investing activities:
    Purchase of property, plant and equipment                                          (188)                 (40)
    Sale of short term investments                                                      100                   --
    Payments to acquire companies, net of cash acquired                                 (36)                  --
    Proceeds from sale of division                                                       36                   --
                                                                            ----------------     ----------------
             Net cash used in investing activities                                      (88)                 (40)
                                                                            ----------------     ----------------

Cash flows from financing activities:
    Proceeds from issuance of long-term debt                                          2,032                  627
    Repayment of long-term debt                                                      (1,237)                (527)
    Repayment of capital lease obligations                                              (63)                (127)
    Issuance of common stock                                                             50                   --
                                                                            ----------------     ----------------
             Net cash provided by (used in) financing activities                        782                  (27)
                                                                            ----------------     ----------------
    Effect of exchange rate changes on cash and cash equivalents                        104                   23
                                                                            ----------------     ----------------

                  Decrease in cash and cash equivalents                                (106)                (904)

Cash and cash equivalents, beginning of period                                        1,646                2,861
                                                                            ----------------     ----------------

Cash and cash equivalents, end of period                                    $         1,540      $         1,957
                                                                            ================     ================

                                                    (Continued)

                                                        5
</TABLE>

<PAGE>

<TABLE>
                                          NETGURU, INC. AND SUBSIDIARIES

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

                                                                            SIX MONTHS ENDED     SIX MONTHS ENDED
                                                                              SEPTEMBER 30,        SEPTEMBER 30,
                                                                                 2004                 2003
                                                                            ----------------     ----------------

<S>                                                                         <C>                  <C>
Supplemental disclosure of cash flow information: Cash paid for:
         Interest                                                           $           202      $           187
                                                                            ================     ================
         Income taxes                                                       $             4      $            24
                                                                            ================     ================

Supplemental disclosure of non-cash investing and financing activities:
         Acquisition of equipment under capital lease                       $           112      $            --
         Repayment of convertible debt with common stock                    $           910      $            --
         Acquisition of a company                                           $           142      $            --
         Issuance of warrants                                               $            --      $           201
                                                                            ================     ================

                      See accompanying notes to condensed consolidated financial statements.

                                                        6
</TABLE>

<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2004
                                   (UNAUDITED)

1. REPORT BY MANAGEMENT

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

         These condensed consolidated financial statements have been prepared by
the Company and include all adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position at September 30,
2004 and the results of operations and the cash flows for the three and six
months ended September 30, 2004 and 2003, pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States of America for annual consolidated financial
statements. Results of operations for the three and six months ended September
30, 2004 are not necessarily indicative of the results to be expected for the
full fiscal year ending March 31, 2005.

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

         Certain reclassifications have been made to the fiscal 2004
consolidated financial statements to conform to the fiscal 2005 presentation.

2. FAIR VALUE OF FINANCIAL INSTRUMENTS

         Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures About Fair Value Of Financial Instruments," requires management to
disclose the estimated fair value of certain assets and liabilities defined by
SFAS No. 107 as financial instruments. At September 30, 2004, management
believed the carrying amounts of cash and cash equivalents, receivable and
payable amounts, and accrued expenses approximated fair value because of the
short maturity of these financial instruments. The Company also believed that
the carrying amounts of its capital lease obligations approximated their fair
values, as the interest rates approximated a rate that the Company could have
obtained under similar terms at the balance sheet date. The estimated fair value
of the Company's long-term debt at September 30, 2004, excluding capital leases,
determined by using the effective rate of interest on this indebtedness, was
approximately $2,757,000.

3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         REVENUE RECOGNITION

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

                                       7

<PAGE>

         In July 2003, the EITF reached a consensus on EITF 03-5, "Applicability
of AICPA SOP 97-2 to Non-Software Deliverables." EITF 03-5 provides accounting
guidance on whether non-software deliverables (for example, non-software related
equipment or services) included in an arrangement that contains software are
within the scope of SOP 97-2. In general, any non-software deliverables are
within the scope of SOP 97-2 if the software deliverable is essential to the
functionality of the non-software deliverables. The Company adopted the
consensus in October 2003. The adoption of EITF 03-5 did not materially impact
the Company's consolidated financial condition or results of operations.

         FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND
EQUITY

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

4. SOFTWARE DEVELOPMENT COSTS AND PURCHASED TECHNOLOGY

         The Company capitalizes costs related to the development of certain
software products in accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed." Capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. As of September 30,
2004, there were no unamortized capitalized software costs.

         The Company amortizes capitalized software development costs and
purchased technology using the straight-line method over two to five years, or
the ratio of actual sales to anticipated sales, whichever is greater.
Amortization of software development costs and purchased technology charged to
operations was approximately $69,000 and $139,000 for the six months ended
September 30, 2004 and 2003, respectively. Accumulated amortization on
capitalized software was $983,000 and $777,000 as of September 30, 2004 and
2003, respectively.

5. REVENUE RECOGNITION

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

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

                                       8

<PAGE>

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

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

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

         Revenues from providing IT services are recognized primarily on a time
and materials basis, with time at a marked-up rate and materials and other
reasonable expenses at cost, once the services are completed and no significant
obligations remain. Certain IT services contracts are fixed price contracts
where progress toward completion is measured by mutually agreed upon
pre-determined milestones for which the Company recognizes revenue upon
achieving such milestones. Fixed price IT contracts are typically for a short
duration of one to six months. The Company did not have any fixed price
contracts at September 30, 2004.

         During September 2004, the Company sold its Web-based
telecommunications services division and therefore, the results of the
operations of this division are excluded from continuing operations and are
reported under "Discontinued Operations." Of the total sale price of $130,000,
the Company received $36,000 in cash with the balance to be received in
consecutive monthly installments through April 15, 2005 (Note 14).

6. DEFERRED REVENUES

         The Company defers revenues for its maintenance contracts and for its
collaborative software sales that are not considered earned. The Company defers
its maintenance revenues when the maintenance contracts are sold, and then
recognizes the maintenance revenues over the term of the maintenance contracts.
The Company defers its collaborative software sales revenues if it invoices or
receives payment prior to the completion of a project, and then recognizes these
revenues upon completion of the project when no significant obligations remain.

                                       9

<PAGE>

7. LONG-TERM DEBT

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

         On August 4, 2003, the terms of the 2002 Note were amended as follows:
(1) the interest rate was amended from 6% to the greater of 5% or the prime rate
plus 1%, payable in arrears; (2) the amortization period was extended from 20
months ending on November 13, 2004 to 24 months ending on July 31, 2005; (3) the
penalty for repayments of the outstanding balance in cash was removed; and (4)
the fixed conversion price, upon which potential issuances of the Company's
common stock to satisfy the obligations of the convertible note are based, was
reduced from $1.60 to $1.30.

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

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

         Borrowings under the Facility accrued interest, initially, at an annual
rate equal to the greater of 5% or the prime rate plus 1%. Since November 1,
2003, the interest rate may be adjusted every month based on certain
registration requirements and on the volume weighted average price of the
Company's common stock. The interest rate was adjusted up to 5.75% during the
quarter ended September 30, 2004, as a result of three increases of 25 basis
points each in the prime rate from 4% to 4.75%. Obligations owed under this
Facility may be repaid at the Company's option in cash or through the issuance
of shares of the Company's common stock at the fixed conversion price of $1.30
per share, subject to volume limitations, as described in the Facility. The
Facility has a three-year term. An early termination fee of up to $120,000 will
be payable if the Facility is terminated prior to August 1, 2006. The Facility
also provides the Company, under certain conditions, the flexibility to borrow
additional amounts up to $1,000,000 above what is available based upon eligible
accounts receivable. Any such additional borrowings will accrue interest at a
rate of 0.6% per month, payable monthly.

         In connection with this Facility, the Company issued to Laurus a
five-year warrant to purchase 180,000 shares of the Company's common stock,
exercisable at various prices. Laurus may also receive additional five-year
warrants to purchase up to 400,000 shares of the Company's common stock at an
exercise price equal to 125% of the fixed conversion price based upon how much
of the outstanding obligation under the Facility is converted to equity. As of
September 30, 2004, none of the additional five-year warrants had been issued.
The Facility is secured by a general security interest in the assets of the
Company and its subsidiaries and prohibits the Company from paying any dividends
on its common stock without Laurus' permission.

                                       10

<PAGE>

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

         The interest rate on the 2003 Note was equal to the greater of 5% or
the prime rate plus 1%. The 2003 Note was to mature on December 3, 2006. The
fixed conversion price, upon which potential issuances of the Company's common
stock to satisfy the obligations of the 2003 Note were based, was $1.30. In
April 2004, the 2003 Note was amended ("Amended 2003 Note") to include
$1,000,000 in additional borrowings. The Amended 2003 Note requires monthly
principal payments of $50,000 plus accrued interest (payable in arrears)
commencing August 1, 2004, with the entire remaining principal balance becoming
due on December 3, 2006. The Company recorded this amendment as a substantial
modification of debt and wrote off approximately $133,000 in unamortized
discount on the original 2003 Note as a loss on substantial modification of debt
pursuant to EITF 96-19. The Company recorded approximately $173,000 as a
discount to the Amended 2003 Note, which included the $11,000 in fees it paid to
an affiliate of Laurus and the $162,000 it recorded in April 2004 due to the
beneficial conversion rate of the debt related to the additional borrowings. The
discount is being amortized to interest expense over the remainder of the term
of the Amended 2003 Note. In April 2004, Laurus also converted $260,000 of the
principal balance into 200,000 shares of the Company's common stock. At
September 30, 2004, the Company had an outstanding balance of $1,960,000,
excluding unamortized fees and unamortized beneficial conversion adjustments,
under the Amended 2003 Note.

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

8. STOCKHOLDERS' EQUITY

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

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

<TABLE>
                                           THREE MONTHS ENDED            SIX MONTHS ENDED
                                              SEPTEMBER 30,                SEPTEMBER 30,
                                       -------------------------     -------------------------
                                          2004           2003           2004           2003
                                       ----------     ----------     ----------     ----------
<S>                                    <C>            <C>            <C>            <C>
Net loss - as reported                 $     (61)     $    (767)     $    (799)     $  (1,170)
Deduct:  Stock-based compensation
expense determined under the fair
value based method for all awards,
net of tax                                  (145)           (78)          (290)          (157)

                                       ==========     ==========     ==========     ==========
    Net loss - pro forma               $    (206)     $    (845)     $  (1,089)     $  (1,327)
                                       ==========     ==========     ==========     ==========

                                       11
</TABLE>

<PAGE>

                                       THREE MONTHS ENDED      SIX MONTHS ENDED
                                          SEPTEMBER 30,         SEPTEMBER 30,
                                      --------------------  --------------------
                                         2004       2003       2004       2003
                                      ---------  ---------  ---------  ---------
Basic and diluted net
   loss per share -
     As reported                      $  (0.00)  $  (0.04)  $  (0.04)  $  (0.07)
     Pro forma                        $  (0.01)  $  (0.05)  $  (0.06)  $  (0.08)
Weighted average fair value of
     options granted                  $   1.45         --   $   1.45      --

                                                            SIX MONTHS ENDED
                                                              SEPTEMBER 30,
                                                      --------------------------
                                                          2004           2003
                                                      -----------    -----------
Black-Scholes option pricing model
      Assumptions:
          Dividend yield                                   --              --
          Expected volatility                            80.7%          120.2%
          Risk-free interest rate                        3.56%           3.13%
          Expected option lives (in years)               6.93            6.92

9. FOREIGN CURRENCY TRANSLATION

         The financial condition and results of operations of the Company's
foreign subsidiaries are accounted for using the local currency as the
functional currency. Assets and liabilities of the subsidiaries are translated
into United States dollars (the reporting currency) at the exchange rate in
effect at the end of the interim period. Statements of operations accounts are
translated at the average rate of exchange prevailing during the respective
interim periods. Translation adjustments arising from the use of differing
exchange rates from period to period are included in accumulated other
comprehensive income (loss) in the consolidated statements of stockholders'
equity. Gains and losses resulting from foreign currency transactions are
included in operations and were not material to the first half of fiscal 2005
and 2004.

10. COMPREHENSIVE INCOME (LOSS)

         The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which prescribes rules for the reporting and display of
comprehensive income (loss) and its components. SFAS No. 130 requires foreign
currency translation adjustments, which are reported separately in stockholders'
equity, to be included in other comprehensive income (loss). Total comprehensive
loss was $789,000 and $1,093,000 for the six months ended September 30, 2004 and
2003, respectively.

11. NET LOSS PER SHARE

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

                                       12

<PAGE>

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

<TABLE>
                                                 THREE MONTHS ENDED        SIX MONTHS ENDED
                                                   SEPTEMBER 30,             SEPTEMBER 30,
                                               ---------------------     ---------------------
                                                 2004         2003         2004         2003
                                               --------     --------     --------     --------
<S>                                            <C>          <C>          <C>          <C>
Numerator:
Net loss and numerator for basic and
  diluted loss per share                           (61)        (767)        (799)      (1,170)
                                               ========     ========     ========     ========
Denominator:
Denominator for basic net loss per share-
  average number of common shares
  outstanding during the period                 18,834       17,341       18,730       17,333
Incremental common shares attributable to
  exercise of outstanding options, warrants
  and other common stock equivalents                --           --           --           --
                                               --------     --------     --------     --------
Denominator for diluted net loss per share      18,834       17,341       18,730       17,333
                                               ========     ========     ========     ========

Basic and diluted net loss per share           $ (0.00)     $ (0.04)     $ (0.04)     $ (0.07)
                                               ========     ========     ========     ========
</TABLE>

         Options, warrants and other common stock equivalents amounting to
1,615,000 and 1,664,000 potential common shares for the three and six month
periods ended September 30, 2004, respectively (including potential common
shares from the possible conversion of the convertible notes issued to Laurus
amounting to 1,569,000 for each of the same periods), and 1,689,000 and
1,561,000 potential common shares for the three and six month periods ended
September 30, 2003, 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.

12. SEGMENT AND GEOGRAPHIC DATA

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

         During the quarters ended March 31, 2004, and June 30, 2004, the
Company reported the results of its telecommunications services division in a
separate segment called Web-based telecommunications services. During the
quarter ended September 30, 2004, the Company sold its telecommunications
services division (see "Discontinued Operations"). Therefore beginning with the
quarter ended September 30, 2004, the Company operates in two segments - (1)
engineering and collaborative software products and services and (2) IT
services.

         The Company's management reviews unallocable expenses related to the
Company's corporate activities in a separate "Center." Prior period presentation
has been revised to provide comparable information.

         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.

                                       13

<PAGE>

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

                                        THREE MONTHS ENDED      SIX MONTHS ENDED
                                           SEPTEMBER 30,         SEPTEMBER 30,
                                       -------------------   -------------------
                                         2004       2003       2004       2003
                                       --------   --------   --------   --------
         NET REVENUE
Engineering and collaborative
  software products and services       $ 2,832    $ 2,674    $ 5,276    $ 5,396
IT services                              1,067      1,290      2,147      2,503
Center                                      --         --         --         --
                                       --------   --------   --------   --------
     Consolidated                      $ 3,899    $ 3,964    $ 7,423    $ 7,899
                                       ========   ========   ========   ========
         GROSS PROFIT
Engineering and collaborative
  software products and services       $ 2,645    $ 2,451    $ 4,844    $ 4,932
IT services                                382        245        703        538
Center                                      --         --         --         --
                                       --------   --------   --------   --------
     Consolidated                      $ 3,027    $ 2,696    $ 5,547    $ 5,470
                                       ========   ========   ========   ========
   OPERATING (LOSS)/INCOME
Engineering and collaborative
  software products and services       $   356    $    64    $   243    $   456
IT services                                 80       (174)       108       (259)
Center                                    (440)      (560)      (890)    (1,145)
                                       --------   --------   --------   --------
     Consolidated                      $    (4)   $  (670)   $  (539)   $  (948)
                                       ========   ========   ========   ========

         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     SIX MONTHS ENDED
                                           SEPTEMBER 30,          SEPTEMBER 30,
                                        ------------------    ------------------
                                          2004       2003      2004        2003
                                        -------    -------    -------    -------
             NET REVENUE
United States                           $1,814     $1,961     $3,398     $3,972
The Americas (other than U.S.)             107        147        271        305
Europe                                     874        812      1,644      1,938
Asia-Pacific                             1,104      1,044      2,110      1,684
                                        -------    -------    -------    -------
         Consolidated                   $3,899     $3,964     $7,423     $7,899
                                        =======    =======    =======    =======
             EXPORT SALES
United States                           $  307     $  312     $  937     $  975
                                        =======    =======    =======    =======

                                       14

<PAGE>

                                              SEPTEMBER 30,        MARCH 31,
                                                 2004                2004
                                              ------------       ------------
                                                      (IN THOUSANDS)
     LONG-LIVED ASSETS
     United States                            $     3,720        $     4,036
     Europe                                           203                204
     Asia-Pacific                                   1,278              1,085
                                              ------------       ------------

              Consolidated                    $     5,201        $     5,325
                                              ============       ============

13. CONTINGENCIES

         The Company is party to various litigation matters arising in the
normal course of business. Management believes the resolution of these matters
will not materially impact the Company's consolidated results of operations or
financial condition.

14. DISCONTINUED OPERATIONS

         In its continuing efforts to focus on its core software products and IT
services businesses, the Company sold its travel services subsidiary,
"e-Destinations," in April 2004 and its Web-based telecommunications services
division in September 2004. Accordingly, the results of the operations of the
Web-based telecommunications services subsidiary are excluded from continuing
operations and reported as "Discontinued Operations."

         Loss from discontinued operations for the three and six months ended
September 30,2004 was $79,000 and $50,000, respectively, compared to a gain from
discontinued operations of $33,000 and $90,000, respectively, for the three and
six months ended September 30,2003. The Company recorded no gain or loss from
the sale of e-Destinations and a $117,000 gain from the sale of the Web-based
telecommunications division during the three and six months ended September 30,
2004.

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

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

                                         THREE MONTHS ENDED    SIX MONTHS ENDED
                                           SEPTEMBER 30,        SEPTEMBER 30,
                                         ------------------   -----------------
                                          2004       2003      2004        2003
                                         ------     ------    ------     ------
Gain (loss) from operations of
       e-Destinations, Inc.              $  --      $  13     $  --      $  13
       Telecommunications services         (79)        20       (50)        77
Gain on sale of tele-
         communications services           117         --       117         --
                                         ------     ------    ------     ------
         Total                           $  38      $  33     $  67      $  90
                                         ======     ======    ======     ======

                                       15

<PAGE>

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

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

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

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

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

OVERVIEW

         We operate in two business segments. They are:

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

         Our net revenues during the six months ended September 30, 2004 were
$7,423,000, a decrease of 6.0% over the corresponding prior year period, of
which engineering and collaborative software products and services net revenues
declined $120,000 (2.2%) and IT services net revenues declined $356,000 (14.2%).

                                       16

<PAGE>

         We anticipate growth in both domestic and international sales of
engineering and collaborative software in the quarter ending December 31, 2004,
and for fiscal 2005. However, this will depend upon, among other factors, our
customers' continued acceptance of our products and services as well as our
customers' economic conditions. Although historically our software sales and
revenues have increased during the second half of the fiscal year, we can offer
no assurance that increases in software sales and revenues will materialize.

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

         We plan to continue to monitor our costs in the upcoming quarters. As
part of our cost control measures and to expedite development of our next
generation of engineering software, we expect to move most of our R&D functions
related to engineering software development to our lower cost location in India.
Although we expect to be profitable in our quarter ending March 31, 2005, this
will depend upon the anticipated growth in our revenues, neither of which is
certain.

         As of September 30, 2004, our indebtedness under our convertible notes
totaled approximately $2,040,000, out of a total availability of $4,000,000.
During the six months ended September 30, 2004, we converted a portion of the
outstanding convertible debt into equity. We anticipate that additional
convertible debt will be converted to equity in the coming months.

CRITICAL ACCOUNTING POLICIES

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

         o        revenue recognition;
         o        allowance for accounts receivable; and
         o        impairment of long-lived assets, including goodwill.

         REVENUE RECOGNITION

         We derive revenues from:

         o        engineering and collaborative software products and services;
                  and
         o        IT services.

         We recognize revenues when the following criteria are met:

         o        persuasive evidence of an arrangement, such as agreements,
                  purchase orders or written or online requests, exists;
         o        delivery has been completed and no significant obligations
                  remain;
         o        our price to the buyer is fixed or determinable; and
         o        collection is probable.

                                       17

<PAGE>

         At the time of sale, we provide a 15-day right of return on the
purchase of the product during which time the customer may return the product to
us subject to a $50 restocking fee on each returned item. Customers may choose
to purchase ongoing maintenance contracts that include telephone, e-mail and
other methods of support, and the right to receive upgrades. Revenue from the
maintenance contracts is deferred and recognized ratably over the life of the
contract, usually twelve months.

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

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

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

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

         ALLOWANCE FOR ACCOUNTS RECEIVABLE

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

                                       18

<PAGE>

         IMPAIRMENT OF LONG-LIVED ASSETS, INCLUDING GOODWILL

         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 the accounting and reporting provisions of
APB No. 30, "Reporting the Results of Operations for a Disposal of a Segment of
a Business." In September 2004, we sold our Web-based telecommunications
services division and recorded a $50,000 loss from the discontinued operations
for the six months ended September 30, 2004 and a $117,000 gain on sale of the
telecommunications services division. Pursuant to SFAS No. 144, these items are
excluded from continuing operations and reported under "Discontinued
operations." Prior period presentations have been conformed to the current
period presentations.

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

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

         We consider the following operating segments- engineering and
collaborative software products and services and IT services - to be our
reporting units for purposes of testing for impairment.

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

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

         We are required to perform reviews for impairment annually, or more
frequently when events occur or circumstances change that would more likely than
not reduce the fair value of the net carrying amount.

         Our annual test for impairment is performed as of March 31 every year.
The evaluation of goodwill impairment involves assumptions about the fair values
of assets and liabilities of each reporting unit. If these assumptions are
materially different from actual outcomes, the carrying value of goodwill will
be incorrect. In addition, future results of operations could be materially
impacted by the write-down of the carrying amount of goodwill to its estimated
fair value. There was no goodwill impairment write-down during the six months
ended September 30, 2004. As of September 30, 2004, our goodwill balance was
$3,089,000.

                                       19

<PAGE>

CONSOLIDATED RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED SEPTEMBER 30,
2004 VERSUS THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2003

     CONTINUING OPERATIONS

NET REVENUES

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

                                      THREE MONTHS ENDED      SIX MONTHS ENDED
                                         SEPTEMBER 30,          SEPTEMBER 30,
                                     -------------------     -------------------
                                       2004        2003        2004        2003
                                     -------     -------     -------     -------
NET REVENUES
Engineering and collaborative
   software products and services    $2,832      $2,674      $5,276      $5,396
% of total net revenues                72.6%       67.5%       71.1%       68.3%

IT services                          $1,067      $1,290      $2,147      $2,503
% of total net revenues                27.4%       32.5%       28.9%       31.7%
                                     -------     -------     -------     -------
Total net revenues                   $3,899      $3,964      $7,423      $7,899
                                     =======     =======     =======     =======

         Total net revenues for the three and six months ended September 30,

2004 decreased by $65,000 (1.6%) and $476,000 (6.0%), respectively, compared to
the three and six months ended September 30, 2003. Our total net revenues
consisted primarily of net revenues from (1) engineering and collaborative
software products and services and (2) IT services.

ENGINEERING AND COLLABORATIVE SOFTWARE PRODUCTS AND SERVICES

         Net revenues from engineering and collaborative software products and
services for the three months ended September 30, 2004 increased by $158,000
(5.9%) compared to the three months ended September 30, 2003, primarily due to
an increase in net revenues from engineering software products and services. Net
revenues from engineering and collaborative software products and services for
the six months ended September 30, 2004 decreased by $120,000 (2.2%) compared to
the six months ended September 30, 2003 primarily due to a decrease in
collaborative software net revenues.

         Net revenues from engineering software products and services for the
three months ended September 30, 2004 increased by $219,000 (9.0%) compared to
the three months ended September 30, 2003, primarily due to a $196,000 increase
in net revenues from Asia due to increased direct sales efforts, and increases
in purchases by government entities and engineering colleges. Engineering
software products and services net revenues increased by approximately $85,000
(1.7%) during the six months ended September 30, 2004 due to a $301,000 increase
in net revenues from Asia and a $93,000 increase in net revenues from Europe
offset by a $309,000 decrease in domestic net revenues. The decrease in domestic
net revenues in the U.S. was primarily due to $450,000 in engineering software
products and services revenues recognized during the six months ended September
30, 2003 in connection with a large domestic project that did not recur during
the six months ended September 30, 2004. This decrease was partially offset by a
$145,000 increase in domestic net revenues from enhanced corporate sales
efforts. Net revenues from Asia increased due to an increase in infrastructure
projects requiring our engineering software, effective anti-piracy initiatives,
and training programs.

                                       20

<PAGE>

         Net revenues from collaborative software products and services
decreased $61,000 ($24.8%) and $205,000 (43.4%) during the three and six months
ended September 30, 2004, compared to the three and six months ended September
30, 2003. The decrease in net revenues from collaborative software products and
services was due to the lower value of a new project completed during the three
and six months ended September 30, 2004, compared to the three months ended
September 30, 2003 when a larger project was completed.

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

IT SERVICES

         The trend of decreasing IT services net revenues continued during the
three and six months ended September 30, 2004, compared to the three and six
months ended September 30, 2003. IT services net revenues decreased $223,000
(17.3%) and $356,000 (14.2%) for the three and six months ended September 30,
2004, compared to the three and six months ended September 30, 2003. Although
net revenues from IT services during the three and six months ended September
30, 2004 decreased in domestic and European segments as compared to the three
and six months ended September 30, 2003, they increased in Asia during the six
months ended September 30, 2004 as compared to the six months ended September
30, 2003. Net revenues from IT services have decreased due to scaling back of
one of our domestic IT services offices and due to decreases in IT services
revenues from Europe. These decreases were offset by a $122,000 increase in IT
services net revenues from India, primarily due to our acquisition of a small IT
consulting company in April 2004. In the past several quarters, the IT services
industry had been adversely affected by a slow economy, and many of our
customers reduced, and continue to reduce, spending on technology consulting and
systems integration services. Although we do not anticipate significant recovery
in the IT services sector, we anticipate that our increased emphasis on the
development of higher margin IT services as well as the BPO efforts that began
during the later part of fiscal 2004 will contribute to a partial recovery in
our IT services net revenues during the later part of fiscal 2005. IT
services net revenues for the six months ended September 30, 2004 do not reflect
any revenues related to our BPO services.

GROSS PROFIT AND GROSS MARGIN

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

<TABLE>
                                         THREE MONTHS ENDED           SIX MONTHS ENDED
                                            SEPTEMBER 30,               SEPTEMBER 30,
                                       -----------------------     -----------------------
                                          2004          2003          2004          2003
                                       ---------     ---------     ---------     ---------
<S>                                    <C>           <C>         <C>            <C>
GROSS PROFIT
Engineering and collaborative
   software products and services      $  2,645      $  2,451    $    4,844     $   4,932
IT services                                 382           245           703           538
                                       ---------     ---------     ---------    ----------
  Consolidated                         $  3,027      $  2,696      $  5,547     $   5,470
                                       =========     =========     =========    ==========
GROSS MARGIN
Engineering and collaborative
   software products and services          93.4%         91.7%         91.8%         91.4%
IT services                                35.8%         19.0%         32.7%         21.5%
                                       ---------     ---------     ---------    ----------
  Consolidated                             77.6%         68.0%         74.7%         69.2%
                                       =========     =========     =========    ==========
</TABLE>

                                       21

<PAGE>

         Consolidated gross margin increased to 77.6% and 74.7% for the three
and six months ended September 30, 2004 from 68.0% and 69.2% for the three and
six months ended September 30, 2003 due to the growing proportion of revenues as
well as higher gross margin from engineering and collaborative software products
and services compared to IT services.

ENGINEERING AND COLLABORATIVE SOFTWARE PRODUCTS AND SERVICES

         Our engineering and collaborative software products and services
segment generally produces a higher gross margin than our IT services segment
due to the relatively lower costs associated with each sale. The cost of
revenues for the engineering and collaborative software products and services
segment includes printing services, direct supplies such as hardware locks that
are attached to the central processing unit to prevent unauthorized access to
licensed software, salaries for the technical support employees, freight out,
and software amortization expense.

         Gross margin in the engineering and collaborative software products and
services segment stayed relatively flat, increasing by 1.7 and 0.4 percentage
points for the three and six months ended September 30, 2004, compared to the
three and six months ended September 30, 2003. The increase in gross margin in
the engineering and collaborative software product and services segment was due
to a $69,000 decrease in software amortization costs for the three and six
months ended September 30, 2004 compared to the three and six months ended
September 30, 2003, as a result of the completion of amortization during June
2004. This decrease was offset by a $26,000 and a $22,000 increase in cost of
technical support due to an increase in the number of technical support
personnel and $38,000 and $36,000 increases in royalty fees during the three and
six months ended September 30, 2004, respectively, compared to the three and six
months ended September 30, 2003. Gross margin for the six months ended September
30, 2003 included gross margin from a large project with minimal related costs
whereas gross margin for the six months ended September 30, 2004 did not include
any gross margin from such large projects.

IT SERVICES

         Historically, gross margin from the IT services segment has been lower
than gross margin from the engineering and collaborative software products and
services segment due to the higher cost of labor associated with IT services.
The cost of revenues for IT services includes the salaries, bonuses and benefits
for the consulting employees. Our IT services consultants generally receive
higher salaries than our technical support employees.

         Gross margin in the IT services segment increased by 16.8 and 11.2
percentage points for the three and six months ended September 30, 2004,
compared to the three and six months ended September 30, 2003. This increase was
primarily the result of our acquisition of a higher margin IT services company
engaged in steel detailing services in India. An increase in the emphasis on
higher margin IT services in India during the six months ended September 30,
2004 compared to IT services that included a lower margin hardware component
during the six months ended September 30, 2003 contributed to the improvement in
gross margin for this segment. In addition, better utilization of consultants
and scaling back of one of the domestic offices also contributed to the increase
in gross margin for the six months ended September 30, 2004, compared to the six
months ended September 30, 2003.

                                       22

<PAGE>

OPERATING EXPENSES

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

<TABLE>
                                  THREE MONTHS ENDED            SIX MONTHS ENDED
                                     SEPTEMBER 30,               SEPTEMBER 30,
                                 ------------------------   ------------------------
                                    2004          2003         2004          2003
                                 ----------    ----------   ----------     ---------
<S>                              <C>           <C>         <C>            <C>
OPERATING EXPENSES
  Selling, general and
     administrative expenses     $  2,384      $  2,592     $   4,619      $  4,844
  % of total net revenues            61.1%         65.4%         62.2%         61.3%

  Research and development
    expenses                     $    411      $    517      $    826      $  1,056
  % of total net revenues            10.5%         13.0%         11.1%         13.4%

  Bad debt expense               $     --      $     23      $    164      $     34
  % of total net revenues              --           0.6%          2.2%          0.4%

  Depreciation                   $    236      $    234      $    477      $    484
   % of total net revenues            6.1%          5.9%          6.4%          6.2%

  Total operating expenses       $  3,031      $  3,366      $  6,086      $  6,418
  % of total net revenues            77.7%         84.9%         82.0%         81.3%

</TABLE>

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative ("SG&A") expenses decreased by
$208,000 (8.0%) and $225,000 (4.6%) for the three and six months ended September
30, 2004, compared to the three and six months ended September 30, 2003.

         The primary reasons for the decrease in SG&A expenses during the three
months ended September 30, 2004, compared to the three months ended September
30, 2003, are as follows: a $145,000 decrease in salaries and related expenses
due to terminations and a $156,000 decrease in professional fees partially
offset by a $69,000 increase in consulting fees and a $49,000 increase in user
conference expenses, resulting in an overall decrease in SG&A expenses.

         The primary reasons for the decrease in SG&A expenses during the six
months ended September 30, 2004, compared to the six months ended September 30,
2003, are as follows: a $207,000 decrease in salaries and related expenses due
to terminations and a $167,000 decrease in professional fees partially offset by
a $68,000 increase in consulting fees and a $45,000 increase in user conference
expenses, resulting in an overall decrease in SG&A expenses. We continue to
monitor our SG&A expenses but do not make any assurances that we will be able to
cut SG&A expenses from levels attained in the first six months of fiscal 2005.
In addition, obtaining profitability may be difficult even with reduced expenses
because some of the areas of expense cutting, such as sales and marketing and
research and development, involve activities that we ordinarily undertake with
the expectation that they will contribute to future revenues. Even if near-term
profitability can be achieved through cost-cutting, it will not be sustainable
if the effect of cost-cutting is to impede future revenue growth.

         The requirements of section 404 of the Sarbanes-Oxley Act of 2002 (the
"Act") are effective for us beginning with the fiscal year ending March 31,
2006. We anticipate that the expenses related to the implementation of the
requirements of the Act will be significant to our results of operations and
cash flows for the fiscal years ending March 31, 2005 and March 31, 2006.
However, we are unable to quantify the extent of the impact of the Act on our
results of operations and cash flows.

                                       23

<PAGE>

         RESEARCH AND DEVELOPMENT EXPENSES

         Research and development ("R&D") expenses consist primarily of software
developers' wages. R&D expenses decreased by $106,000 (20.5%) and $230,000
(21.8%) to $411,000 and $826,000 for the three and six months ended September
30, 2004, from $517,000 and $1,056,000 for the three and six months ended
September 30, 2003. The decrease in R&D expenses is primarily related to
employee terminations and a reduction in consulting expenditures. We believe R&D
expenses may decrease further from current levels as a result of our plans to
move most of the R&D work to our lower cost location overseas.

         BAD DEBT EXPENSE

         Bad debt expense decreased by $23,000 (100.0%) to $0 for the three
months ended September 30, 2004, from $23,000 for the three months ended
September 30, 2003. Bad debt expense increased by $130,000 to $164,000 for the
six months ended September 30, 2004 from $34,000 for the six months ended
September 30, 2003. The increase in bad debt expense was primarily due to one
collaborative software customer.

         DEPRECIATION

         Depreciation expenses (excluding amounts charged to cost of revenues)
stayed relatively flat, increasing $2,000 (0.7%) and decreasing $7,000 (1.5%)
for the three and six months ended September 30, 2004, respectively, compared to
the three and six months ended September 30, 2003. As a result of our continuing
efforts to control costs, additions to capital equipment have been minimal. We
anticipate that depreciation expenses will remain at this lower level through
the end of fiscal 2005.

OTHER EXPENSE (INCOME)

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

<TABLE>
                                     THREE MONTHS ENDED                SIX MONTHS ENDED
                                        SEPTEMBER 30,                    SEPTEMBER 30,
                                ------------------------------    ------------------------
                                   2004               2003            2004         2003
                                -----------      -------------    ------------  ----------
<S>                              <C>             <C>              <C>           <C>
OTHER EXPENSE (INCOME)
    Interest expense, net        $   104         $     138        $     229     $    283
    % of total net revenues          2.7%              3.5%             3.1%         3.6%

    Other income                 $   (24)        $     (83)       $     (57)    $    (83)
    % of total net revenues         (0.6)%            (2.1)%           (0.8)%       (1.1)%

    Loss on substantial
      modification of debt       $     -         $       -        $     133     $      -
    % of total net revenues            -                 -              1.8%           -

    Total other expense          $    80         $      55        $     305     $    200
    % of total net revenues          2.1%              1.4%             4.1%         2.5%

                                       24
</TABLE>

<PAGE>

         INTEREST EXPENSE, NET

         Interest expense, net decreased by $34,000 (24.6%) and $54,000 (19.1%)
for the three and six months ended September 30, 2004 compared to the three and
six months ended September 30, 2003. The decrease in interest expense, net was
primarily due to a reduction in principal balance due to conversion of a portion
of our convertible debt into equity as well as a reduction in interest due to
refinancing a bank debt by one of our subsidiaries. Annual interest rate on the
convertible notes with Laurus is based on the greater of 5% or the prime rate
plus 1%. The Federal Reserve has increased interest rates three times since
August 2004, which increased the stated rate on our convertible notes issued to
Laurus from 5% to 5.75%. Interest expense in the upcoming quarters may increase
if the prime rate increases further or if we borrow additional amounts, but may
decrease if additional portions of debt outstanding under the 2002 Note and
Amended 2003 Note are converted into equity.

         OTHER INCOME

         Other income decreased by $59,000 and $26,000 for the three and six
months ended September 30, 2004, compared to the three and six months ended
September 30, 2003 primarily due to the sale of certain assets in the prior year
that were previously written off or fully depreciated.

         LOSS ON SUBSTANTIAL MODIFICATION OF DEBT

         In April 2004, we amended our 2003 Note and borrowed an additional
$1,000,000 under the Amended 2003 Note (see note 7 "Long-term Debt" to the
condensed consolidated financial statements). We recorded this transaction as a
substantial modification of debt. We wrote off approximately $133,000 in
unamortized discount on the original 2003 Note as a loss on substantial
modification of debt pursuant to EITF 96-19. There was no similar transaction
for the three months ended September 30, 2004 or for the three and six months
ended September 30, 2003.

         INCOME TAXES

          We recorded an income tax expense of $15,000 and $22,000 for the three
and six months ended September 30, 2004 compared to $75,000 and $112,000 during
the three and six months ended September 30, 2003. Tax expense for the three and
six months ended September 30, 2004 resulted from provisions for domestic and
foreign income taxes applicable to local jurisdictions.

     DISCONTINUED OPERATIONS

         In our continuing efforts to focus on our core software products and IT
services businesses, we sold our travel services subsidiary, "e-Destinations,"
in April 2004 for its approximate fair value of $155,000 and our Web-based
telecommunication services division in September 2004 for $130,000, which amount
was $117,000 greater than its book value. Accordingly, the results of the
operations of the travel services subsidiary and Web-based telecommunications
services division are excluded from continuing operations and reported as
"discontinued operations."

         Loss from the discontinued operations for the three and six months
ended September 30,2004 was $79,000 and $50,000, respectively, compared to a
gain from discontinued operations of $33,000 and $90,000 for the three and six
months ended September 30,2003, respectively. We recorded no gain or loss from
the sale of e-Destinations since it was written down to its potential
recoverable value at the end of March 31, 2004, and a $117,000 gain from the
sale of the Web-based telecommunications services division during the three and
six months ended September 30, 2004.

                                       25

<PAGE>

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

LIQUIDITY AND CAPITAL RESOURCES

         Historically, we have relied upon cash from financing activities to
fund most of the cash requirements of our operating and investing activities.
Currently, we finance our operations (including capital expenditures) primarily
through existing cash and cash equivalent balances and borrowings under our
credit facilities. We have used debt and equity financing when appropriate and
practicable.

         Our principal sources of liquidity at September 30, 2004 consisted of
$1,540,000 of cash and cash equivalents and a revolving credit facility
described below. Cash and cash equivalents decreased by $106,000 (6.4%) during
the six months ended September 30, 2004. The primary reason for this decrease
was cash used in operations, which was offset by additional borrowings.

         Net cash used in operations was $904,000 during six months ended
September 30, 2004 compared to $860,000 during the six months ended September
30, 2003, a decrease of $44,000. Net loss from continuing operations of $866,000
during the six months ended September 30, 2004 and net loss from continuing
operations of $1,260,000 during the six months ended September 30, 2003 were the
primary reasons for cash used in operations in both periods. Even though net
loss from continuing operations was lower during the six months ended September
30, 2004, compared to the net loss from continuing operations during the six
months ended September 30, 2003, cash usage during the six months ended
September 30, 2004 was higher compared to the cash usage during the six months
ended September 30, 2003. This was primarily due to a $447,000 net increase in
accounts receivable balance as of September 30, 2004 as a result of a higher
portion of sales on credit toward the end of September 2004, compared to a
$298,000 net decrease in accounts receivable balance at September 30, 2003 due
to better collection of accounts receivable.

         The following contributed to cash usage
during the six months ended September 30, 2004:

         o        A $447,000 increase in accounts receivable primarily due to
                  a higher proportion of sales on credit toward the end of
                  September 2004;
         o        A $215,000 decrease in deferred revenues primarily due to a
                  lower level of new maintenance billings and a higher level of
                  recognized revenues from previously deferred billings;
         o        A $177,000 decrease in accrued expenses primarily due to
                  payment of severance payments and professional fees;
         o        A $102,000 decrease in accounts payable due to payments; and
         o        A $168,000 increase in prepaid expenses and other current
                  assets due to prepayment of rent and product packaging
                  materials as well as due to a receivable resulting from the
                  sale of our Web-based telecommunications services division.

The above were partially offset by $155,000 in proceeds from the sale of
e-Destinations in April 2004.

The following contributed to cash usage during the six months ended September
30, 2003:

         o        A $532,000 decrease in deferred revenues primarily due to a
                  lower level of new maintenance billings and a higher level of
                  recognized revenues from previously deferred billings;
         o        A $223,000 decrease in accrued expenses due to payment of a
                  legal settlement and professional fees;
         o        A $136,000 increase in prepaid expenses and other current
                  assets primarily due to prepaid digital media costs; and
         o        A $102,000 decrease related to changes in assets and
                  liabilities of divisions held for sale.

                                       26

<PAGE>

         The above were offset by a $577,000 decrease in deposits due to payment
of a legal settlement and a $298,000 decrease in accounts receivable due to
better collections of receivables.

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

         The requirements of section 404 of the Sarbanes-Oxley Act of 2002 ("the
Act") are effective for us beginning with the fiscal year ending March 31, 2006.
We anticipate the expenses related to the implementation of the requirements of
the Act will be significant to our results of operations and cash flows for the
fiscal years ending March 31, 2005 and March 31, 2006. However, we are unable
to quantify the extent of the impact of the Act on our results of operations
and cash flows.

         Net cash used in investing activities during the six months ended
September 30, 2004 consisted of capital expenditures of $188,000 and payment to
acquire companies of $36,000, offset by $100,000 from the sale of short-term
investments and $36,000 of proceeds from the sale of our Web-based
telecommunications services division. Capital expenditures during the six months
ended September 30, 2003 were $40,000. We expect our capital expenditures to
stay at or near the current level for the next twelve months.

         Cash provided by financing activities during the six months ended
September 30, 2004 primarily resulted from long-term borrowings of $2,032,000
(including $990,000 in additional borrowings, net of fees, under the Amended
2003 Note) and $50,000 of proceeds from warrant exercises, offset by $1,237,000
in long-term debt repayments. In addition, repayments of capital lease
obligations amounted to $63,000 for the six months ended September 30, 2004.
Proceeds from long-term borrowings during the six months ended September 30,
2003 were $627,000. Additionally, we repaid $527,000 of long-term debt and
$127,000 in capital lease obligations during the six months ended September 30,
2003.

         We incurred net losses from continuing operations of $866,000 and
$1,260,000 and used cash in operations of $904,000 and $860,000 during the six
months ended September 30, 2004 and 2003, respectively. Our future capital
requirements will depend upon many factors, including sales and marketing
efforts, the development of new products and services, possible future strategic
acquisitions, the progress of research and development efforts, and the status
of competitive products and services.

                                       27

<PAGE>

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

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

Long-Term Debt*               $2,757    $1,222     $1,525     $    7     $    3
Capital Lease Obligations        547       136        293        118         --
Operating Leases               3,761       519        882        716      1,644
                              -------   -------    -------    -------    -------
Total Contractual Cash
   Obligations                $7,065    $1,877     $2,700     $  841     $1,647
                              =======   =======    =======    =======    =======

*  Excludes debt discount of $301

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

         On July 31, 2003, we obtained a $4,000,000 revolving credit facility
from Laurus. The availability of funds under this credit facility is limited by
the amount of the unpaid balances on the 2002 Note and the Amended 2003 Note
(collectively, the "Laurus Notes"). At September 30, 2004, we had no borrowings
under the revolving credit facility, $2,040,000 in principal balance, excluding
$301,000 of fees and beneficial conversion adjustments, under the 2002 Note and
the Amended 2003 Note, and availability of $1,960,000.

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

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

                                       28

<PAGE>

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

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

ITEM 3.  CONTROLS AND PROCEDURES.

         Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of September 30, 2004, that the design and
operation of our "disclosure controls and procedures" (as defined in Rule
13a-15(e) under the Exchange Act) are effective to ensure that information
required to be disclosed by us in the reports filed or submitted by us under
the Exchange Act is accumulated, recorded, processed, summarized and reported
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding whether or not
disclosure is required.

         During the quarter ended September 30, 2004, there were no changes in
our "internal controls over financial reporting" (as defined in Rule 13a-15(f)
under the Exchange Act) that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.

                                       29

<PAGE>

                          PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         None.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

         UNREGISTERED SALES OF EQUITY SECURITIES

         In April 2004 and July 2004, we issued 25,000 shares each of our common
stock to one accredited investor upon exercise of a previously issued warrant,
for total proceeds of $50,000.

         Exemption from the registration provisions of the Securities Act of
1933 for the transactions described above is claimed under Section 4(2) of the
Securities Act of 1933, among others, on the basis that such transactions did
not involve any public offering and the 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
securities legends.

         DIVIDENDS AND RESTRICTIONS

         The credit facility with Laurus prohibits us from paying any dividends
on our common stock without Laurus' permission. We are required to use the net
proceeds from the Laurus financing for general corporate purposes only. We are
also required not to permit for any fiscal quarter commencing April 1, 2003, the
net operating cash flow deficit to be greater than $500,000, excluding
extraordinary items, as determined by Laurus. At September 30, 2004, we were in
compliance with this covenant.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

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

         During the quarter ended September 30, 2004, no matters were submitted
to a vote of our common stockholders.

ITEM 5.  OTHER INFORMATION

         None.

                                       30

<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         Exhibit
         No.               Description

         31       Certifications required by Rule 13a-14(a) of the Securities
                  Exchange Act of 1934, as amended, as adopted pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002 (1)

         32       Certification of Chief Executive Officer and Chief Financial
                  Officer pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
----------

(1) Attached as an exhibit to this Form 10-QSB.

                                       31

<PAGE>

                                   SIGNATURES

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

Date:  November 15, 2004

                                         NETGURU, INC.

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

                                       32

<PAGE>

            EXHIBITS FILED WITH THIS QUARTERLY REPORT ON FORM 10-QSB

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

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

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

                                       33