Small and medium-sized businesses continue to represent a major opportunity for technology solutions providers. In March 2004, International Data Corporation, or IDC, an independent market research firm, estimated that there were approximately 13.5 million revenue-generating home-based businesses in the United States and approximately 8.2 million additional businesses with fewer than 100 employees.

According to a March 2004 report by IDC, approximately 76% of U.S. small businesses then had Internet access, which is expected to grow to nearly 83% by 2008. The pervasiveness of the Internet has enabled companies to deliver important components of information technology infrastructure remotely as a service. Businesses can now outsource systems and software to ASPs, which allows the implementation, hosting, maintenance, and upgrading of systems and software to be done in a more cost-effective manner than a business may have been able to do internally. In a May 2004 report, IDC projected that the market for software delivered as a service through ASPs will grow from $1.6 billion in 2003 to over $3.5 billion in 2008 in the United States.

Use of the Internet by consumers is widespread and growing. Jupiter Research, an independent market research firm, in a report dated February 2004, projected that the percentage of U.S. households with Internet access will increase from 66% in 2003 to 79%, or 91.2 million households, in 2008. Consumers searching the Internet for local businesses and services typically use two types of services: Internet yellow pages Websites and geographically targeted searches. It is believed consumers will increasingly choose to use the Internet to find local merchants, retailers, and service providers, rather than using the print yellow pages.

According to a March 2004 IDC report, 46% of small businesses, excluding home-based businesses, were estimated to have websites in 2003, with the number projected to grow at a compound annual growth rate of 8.1% through 2008.

The Company’s primary subscription offering is eWorks! XL, a comprehensive website design and provisioning package targeted at getting small and medium-sized businesses online quickly, effectively, and affordably when they have no Internet presence, or a limited one. The package includes a five-page semi-custom website built on the Company’s proprietary self-editing tool, which allows for easy maintenance by the customer. This offering includes a broad set of configuration and customization options using a web browser. The Company builds the initial website for the customer using the content and design information the customer provides.

In addition to its eWorks! XL subscription-based web services, the Company offers a number of premium subscription-based services and functionalities for an additional fee. These premium subscription-based services are available to the Company’s eWorks! XL customers, to customers of its custom website design services and, in most cases, to customers for whom the Company has not built a website but who otherwise require these web services.

The Company offers complete custom website design services that provide sophisticated functionality and interactivity beyond those available under eWorks! XL. These sites are typically built for larger, more established customers that have had an Internet presence in the past, or that are designing the first website with unique specifications.

The Company offers NetObjects Fusion, a desktop web authoring software, for businesses that want to design websites either for themselves or for others. Combining easy-to-use wizards, drag-and-drop simplicity, and design tools, NetObjects Fusion offers the flexibility to be an intuitive website building software for novices, as well as an advanced tool for website development professionals.

Cost of professional services increased 64% from $132 thousand in the three months ended March 31, 2004 to $216 thousand in the three months ended March 31, 2005.

Sales and marketing expenses increased 39% from $1.4 million, or 30% of total revenue, during the three months ended March 31, 2004 to $2.0 million, or 27% of total revenue, during the three months ended March 31, 2005.

Research and development expenses increased 34% from $261 thousand, or 6% of total revenue, during the three months ended March 31, 2004 to $349 thousand, or 5% of total revenue, during the three months ended March 31, 2005.

Depreciation and amortization expense decreased 23% from $129 thousand, or 3% of total revenue, in the three months ended March 31, 2004 to $99 thousand, or 1% of total revenue, in the three months ended March 31, 2005.