<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 JUNE 30, 2005
                                       OR

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
         For the transition period from __________ to __________

                        Commission file number: 000-28560

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

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

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

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

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

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

The number of shares outstanding of the registrant's only class of common stock,
$.01 par value, was 19,117,154 on August 10, 2005.

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
           months ended June 30, 2005 and 2004 (unaudited)...................  3

         Condensed Consolidated Balance Sheets as of
           June 30, 2005 (unaudited) and March 31, 2005......................  4

         Condensed Consolidated Statements of Cash Flows for the three
           months ended June 30, 2005 and 2004
           (unaudited).......................................................  5

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

Item 2.  Management's Discussion and Analysis or Plan of Operation........... 19

Item 3.  Controls and Procedures............................................. 31


                                     PART II
                                OTHER INFORMATION

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

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds......... 33

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

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

Item 5.  Other Information................................................... 33

Item 6.  Exhibits ........................................................... 34

Signatures................................................................... 35

Exhibits Filed with this Report on Form 10-QSB............................... 36


                                       2



<PAGE>
<TABLE>

                                   PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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


                                                                          THREE MONTHS ENDED
                                                                                JUNE 30,
                                                                     ------------------------------
                                                                         2005              2004
                                                                     ------------      ------------
<S>                                                                  <C>               <C>
Net revenues:
    Engineering and collaborative software products and services     $      3,014      $      2,444
    IT services                                                               834             1,080

                                                                     ------------      ------------
           Total net revenues                                               3,848             3,524
                                                                     ------------      ------------

Cost of revenues:
    Engineering and collaborative software products and services              125               245
    IT services                                                               633               758

                                                                     ------------      ------------
           Total cost of revenues                                             758             1,003

                                                                     ------------      ------------
           Gross profit                                                     3,090             2,521
                                                                     ------------      ------------

Operating expenses:
    Selling, general and administrative                                     2,454             2,235
    Research and development                                                  382               415
    Bad debt expense                                                          208               165
    Depreciation                                                              217               241

                                                                     ------------      ------------
           Total operating expenses                                         3,261             3,056
                                                                     ------------      ------------

           Operating loss                                                    (171)             (535)
                                                                     ------------      ------------

Other expense (income):
    Interest, net                                                             138               138
    Other income                                                               10               (33)

                                                                     ------------      ------------
           Total other expense                                                148               105
                                                                     ------------      ------------

Loss from continuing operations before income taxes                          (319)             (640)
Income tax expense                                                             15                 6
                                                                     ------------      ------------
Net loss from continuing operations                                          (334)             (646)
Income from discontinued operations (Note 14)                                  --                29
                                                                     ------------      ------------
           Net loss                                                  $       (334)     $       (617)
                                                                     ============      ============

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

Common shares used in computing net loss per common share              19,117,154        18,626,165
                                                                     ============      ============

               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)


                                                                                   JUNE 30,
                                                                                    2005            MARCH 31,
                                                                                 (UNAUDITED)          2005
                                                                                 ------------      ------------
                                                     ASSETS
<S>                                                                              <C>                      <C>
Current assets:
    Cash and cash equivalents                                                    $      3,791             3,619
    Restricted cash                                                                        60                62
                                                                                 ------------      ------------
         Total cash and cash equivalents                                                3,851             3,681

    Accounts receivable (net of allowance for doubtful accounts of $777 and
      $705, as of June 30, 2005 and March 31, 2005, respectively)                       3,302             4,334
    Income tax receivable                                                                  12                15
    Notes and related party loans receivable                                               11                12
    Deposits                                                                              100                96
    Prepaid expenses and other current assets                                           1,150             1,343
                                                                                 ------------      ------------
         Total current assets                                                           8,426             9,481

Property, plant and equipment, net                                                      1,593             1,682
Goodwill                                                                                3,088             3,088
Other assets                                                                              306               242
                                                                                 ------------      ------------
                                                                                 $     13,413            14,493
                                                                                 ============      ============

                                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Current portion of long-term debt, net of discount of $221 and $222, as
      of June 30, 2005 and March 31, 2005, respectively                          $      1,509             1,297
    Related party loans payable                                                           100               100
    Current portion of capital lease obligations                                          155               144
    Accounts payable                                                                      505               464
    Accrued expenses                                                                      857             1,136
    Income taxes payable                                                                   28                29
    Deferred revenues                                                                   2,297             2,697
    Other liabilities                                                                     158               212
                                                                                 ------------      ------------
         Total current liabilities                                                      5,609             6,079

Long-term debt, net of current portion, net of discount of $144 and $200, as
    of June 30, 2005 and March 31, 2005, respectively                                   1,884             2,108
Capital lease obligations, net of current portion                                         325               343
Deferred gain on sale-leaseback and other long-term liabilities                           683               678
                                                                                 ------------      ------------

         Total liabilities                                                              8,501             9,208
                                                                                 ------------      ------------

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; 19,117,154
      shares outstanding as of June 30, 2005 and March 31, 2005                           191               191
    Additional paid-in capital                                                         36,869            36,869
    Accumulated deficit                                                               (31,566)          (31,232)
    Accumulated other comprehensive loss:
       Cumulative foreign currency translation adjustments                               (582)             (543)
                                                                                 ------------      ------------

         Total stockholders' equity                                                     4,912             5,285
                                                                                 ------------      ------------
                                                                                 $     13,413            14,493
                                                                                 ============      ============

                     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)


                                                                              THREE MONTHS       THREE MONTHS
                                                                                 ENDED             ENDED
                                                                             JUNE 30, 2005      JUNE 30, 2004
                                                                             -------------      -------------
<S>                                                                          <C>                <C>
Cash flows from operating activities:
    Net loss                                                                 $        (334)     $        (617)
    Income from discontinued operations                                                 --                 29
                                                                             -------------      -------------
    Loss from continuing operations                                                   (334)              (646)
    Adjustments to reconcile loss from continuing operations to net cash
      provided by (used in) operating activities:
        Depreciation and amortization                                                  217                310
        Bad debt expense                                                               208                165
        Amortization of debt discount                                                   56                 63
        Consulting expense recognized on issuance of warrants and stock                 --                 35
        Gain on disposal of property                                                    (1)                --
        Changes in operating assets and liabilities:
          Accounts receivable                                                          775                 41
          Notes and related party loans receivable                                       1                  2
          Income tax receivable                                                          4
          Prepaid expenses and other current assets                                    188                (74)
          Deposits                                                                      (4)               (39)
          Other assets                                                                 (64)                (5)
          Accounts payable                                                              43                (81)
          Accrued expenses                                                            (269)              (176)
          Income taxes payable                                                          --                  9
          Other current liabilities                                                    (41)               (41)
          Deferred revenues                                                           (369)                84
          Deferred gain on sale-leaseback                                                5                (18)
                                                                             -------------      -------------

                  Net cash provided by (used in) operating activities                  415               (371)
                                                                             -------------      -------------
Cash flows from investing activities:
    Purchase of property, plant and equipment                                         (121)               (98)
    Proceeds from sale of property, plant and equipment                                  2                  1
    Payments to acquire companies, net of cash acquired                                (19)               (24)
    Proceeds from sale of subsidiary                                                    --                155
                                                                             -------------      -------------

                  Net cash (used in) provided by investing activities                 (138)                34
                                                                             -------------      -------------
Cash flows from financing activities:
    Proceeds from issuance of long-term debt                                            48              1,703
    Repayment of long-term debt                                                       (100)              (781)
    Repayment of capital lease obligations                                             (36)               (32)
    Issuance of common stock                                                            --                 25
                                                                             -------------      -------------

                  Net cash (used in) provided by financing activities                  (88)               915
                                                                             -------------      -------------

    Effect of exchange rate changes on cash and cash equivalents                       (19)                90
                                                                             -------------      -------------
                  Net cash provided by continuing operations                           170                668
                  Net cash provided by discontinued operations                          --                 27

                                                                             -------------      -------------
Cash and cash equivalents, beginning of period                                       3,681              1,646
                                                                             -------------      -------------
Cash and cash equivalents, end of period                                     $       3,851      $       2,341
                                                                             =============      =============


                                        (continued on the following page)

                                                       5
</TABLE>



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


                                                                              THREE MONTHS       THREE MONTHS
                                                                                 ENDED             ENDED
                                                                             JUNE 30, 2005      JUNE 30, 2004
                                                                             -------------      -------------
<S>                                                                          <C>                <C>
Supplemental disclosure of cash flow information:
    Cash paid for:
      Interest                                                               $          91      $          80
                                                                             =============      =============
      Income taxes                                                           $           8      $           4
                                                                             =============      =============

Supplemental disclosure of non-cash investing and financing activities:
    Acquisition of equipment under capital leases                            $          29      $          78
    Repayment of convertible debt with common stock                          $          --      $         910
    Acquisition of a company:
      Net assets acquired                                                    $          --      $          54
      Net liabilities assumed                                                $          --      $          29
      Promissory note issued toward consideration, net of discount           $          --      $         150
      Common stock issued toward consideration                               $          --      $          48


                     See accompanying notes to condensed consolidated financial statements.


                                                       6
</TABLE>



<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2005
                                   (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 normal and recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position at June 30, 2005 and the results of operations and the cash flows for
the three months ended June 30, 2005 and 2004, pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for annual consolidated
financial statements. Results of operations for the three months ended June 30,
2005 are not necessarily indicative of the results to be expected for the full
year ending March 31, 2006 or any other period. It is suggested that the
accompanying condensed consolidated financial statements be read in conjunction
with the Company's audited consolidated financial statements included in the
Company's annual report on Form10-KSB for the year ended March 31, 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.

2. FAIR VALUE OF FINANCIAL INSTRUMENTS

         Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures About Fair Value Of Financial Instruments," requires management to
disclose the estimated fair value of certain assets and liabilities defined by
SFAS No. 107 as financial instruments. At June 30, 2005, the Company's
management believed the carrying amounts of cash and cash equivalents,
receivable and payable amounts, and accrued expenses approximated fair value
because of the short maturity of these financial instruments. The Company's
management also believed that the carrying amounts of its capital lease
obligations approximated their fair values, as the interest rates approximated a
rate that the Company could have obtained under similar terms at the balance
sheet date. In addition, the Company's management also believed that the
carrying amounts of its long-term debt obligations approximated their fair
values, as the borrowing rates is consistent with other lending sources. The
estimated fair value of the Company's long-term debt at June 30,2005, was
approximately $3.9 million.

3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         EXCHANGES OF NONMONETARY ASSETS

         In December 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 153, "Exchanges of Nonmonetary Assets," an Amendment of
Accounting Principles Board ("APB") Opinion No. 29, "Accounting for Nonmonetary
Transactions." SFAS No. 153 requires companies to measure exchanges of
nonmonetary assets, including similar productive assets that have commercial
substance, based on the fair value of the assets exchanged, recognizing a gain
or loss. SFAS No. 153 is effective for interim periods beginning after June 15,


                                       7



<PAGE>

2005 and, thus, will be effective for the Company beginning with the second
quarter of fiscal 2006. Early adoption is encouraged but not required. The
Company's management believes that adoption of SFAS No. 153 will not have a
material effect on the Company's consolidated financial condition or results of
operations.

         SHARE-BASED PAYMENT

         In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". SFAS No. 123(R) requires companies to measure and recognize
compensation expense for all stock-based payments at fair value. For small
businesses, SFAS No. 123(R) is effective for the first quarter of the first
fiscal year beginning after December 15, 2005 and, thus, will be effective for
the interim periods beginning with first quarter of fiscal 2007. Early adoption
is encouraged and retroactive application of the provisions of SFAS No. 123(R)
to the beginning of the fiscal year that includes the effective date is
permitted, but not required. The Company is currently evaluating the effect of
adopting SFAS No. 123(R) and the Company's management believes the adoption of
SFAS No. 123(R) will have a material effect on the Company's consolidated
results of operations, similar to the pro forma results described in
"Stock-Based Compensation" in note 1 of notes to the Company's consolidated
financial statements included in the Company's annual report on Form 10-KSB for
fiscal 2005, but have not yet determined the amount of the effect.

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 is established and ends when the
product is available for general release to customers. As of June 30, 2005,
capitalized software costs of approximately $144,000 were included in other
assets, all of which represents software developed in-house. Additions to
capitalized software were $42,287 and $0 during the three months ended June 30,
2005 and 2004 respectively.

         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 $0 and $69,000 for the quarters ended June 30, 2005
and 2004, respectively. Accumulated amortization on capitalized software was
$1,003,000 and $982,000 as of June 30, 2005 and 2004, respectively.

5. REVENUE RECOGNITION

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

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


                                       8



<PAGE>

purchase) on the purchase of a product during which time the customer may return
the product subject to a $50 restocking fee per item returned. Since the
Company's product returns have historically not been material, the Company does
not make any provisions for such returns. Customers may choose to purchase
maintenance contracts that include telephone, e-mail and other methods of
support, and the right to receive upgrades. Revenue from these maintenance
contracts is deferred and recognized ratably over the life of the contract,
usually twelve months.

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

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

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

         Revenues from providing IT services are recognized primarily on a time
and materials basis, with time at a marked-up rate and materials and other
reasonable expenses at cost, once the services are completed and no significant
obligations remain. Certain IT services contracts are fixed price contracts
where progress toward completion is measured by mutually agreed upon
pre-determined milestones for which the Company recognizes revenue upon
achieving such milestones. Fixed price IT contracts are typically for a short
duration of one to six months. The Company did not have any fixed price
contracts at June 30, 2005.

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

         2002 NOTE

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

         In April 2004, Laurus converted $650,000 of principal balance on the
2002 Note into 500,000 shares of the Company's common stock. In December 2004,
Laurus converted the remaining balance of $80,000 into 61,358 shares of the
Company's common stock. At June 30, 2005, the Company had no principal balance
outstanding under the 2002 note.

         REVOLVING CREDIT FACILITY

         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, if any, 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 7.25% in June 2005
as a result of increases in the prime rate. 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. 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 ranging from $1.50 to $1.89 per share. 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 June 30, 2005, 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 June 30, 2005,
the Company had no borrowings under the Facility.

         2003 NOTE

         The interest rate on the 2003 Note was equal to the greater of 5% or
the prime rate plus 1%. The fixed conversion price, upon which potential
issuances of the Company's common stock to satisfy the obligations of the 2003
Note were based, was $1.30. On April 27, 2004, the Company amended and restated
the 2003 Note to reflect an additional $1,000,000 that it borrowed on April 27,
2004, so that the principal amount of the 2003 Note was increased to $2,400,000
from $1,400,000 (the "Amended and Restated December 2003 Note"). The net
proceeds from the additional principal under the Amended and Restated December
2003 Note were used for working capital.

          The Amended and Restated 2003 Note requires monthly principal payments
of $50,000 plus accrued interest (payable in arrears) on the first business day
of each month, commencing August 1, 2004, with the entire remaining principal
balance becoming due on December 3, 2006. Monthly payments under the original
2003 Note had been scheduled to begin in April 2004. The amount of monthly
principal payment was increased from $30,000 to $50,000. The Company is required
to pay any remaining balance of principal, including any accrued and unpaid
interest, on the maturity date. The final payment due at maturity was increased
from $440,000 to $710,000. The Company recorded approximately $173,000 as
additional discount to the Amended and Restated 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 feature of the debt related to
the additional borrowings. This additional discount, along with approximately
$133,000 in unamortized discount remaining at the time of the amendment for a
total discount of $306,000, is being amortized to interest expense over the
remainder of the term of the Amended and Restated 2003 Note. In April 2004 and
December 2004, Laurus converted $260,000 and $219,000 of the principal balance
under the Amended and Restated 2003 Note into 200,000 and 168,462 shares of the
Company's common stock, respectively. At June 30, 2005, the Company had an
outstanding balance of $1,560,000, excluding unamortized fees and unamortized
beneficial conversion adjustments, under the Amended and Restated 2003 Note.

         The Amended and Restated 2003 Note is 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 Amended and Restated 2003 Note for
general corporate purposes only. The Company is also required not to permit for
any fiscal quarter commencing April 1, 2003, the net operating cash flow deficit
to be greater than $500,000, excluding extraordinary items, as determined by
Laurus. At June 30, 2005, the Company was in compliance with this covenant.

         2004 NOTE

         On December 23, 2004 ("Closing Date"), the Company entered into a
Securities Purchase Agreement ("2004 Agreement") with Laurus. Pursuant to the
2004 Agreement, the Company sold to Laurus a secured convertible note in the
original principal amount of $1,000,000 ("2004 Note") that is scheduled to
mature on December 23, 2007 ("Maturity Date"). The Company paid Laurus Capital
Management, LLC, an affiliate of Laurus, a $5,000 fee, and reimbursed Laurus for
$5,000 of expenses in connection with the offering. The net proceeds from the
sale of the 2004 Note were used for working capital. In connection with the 2004
Note, we issued to Laurus a warrant to purchase up to 130,000 shares of the


                                       11



<PAGE>

Company's common stock at any time or from time to time on or before December
23, 2009 at an exercise price of $1.56 per share ("2004 Warrant"). On June 30,
2005, the outstanding principal balance of the 2004 Note was $1,000,000.

         The 2004 Note bears an annual interest rate equal to the greater of 5%
or prime rate plus 1% based on a 360-day year, and requires monthly interest
payments in arrears on the first business day of each month beginning February
1, 2005 through the Maturity Date. The interest rate may be adjusted downward
(but not below 0%) following effective registration of the shares underlying the
2004 Note with the Securities and Exchange Commission, (the "SEC") if certain
increases occur in the closing price of the Company's common stock. The 2004
Note requires monthly principal repayments of $30,000 along with any related
accrued but unpaid interest (together the "Monthly Payment") beginning July 1,
2005 and through the Maturity Date. The remaining balance of principal,
including any accrued and unpaid interest, is due on the Maturity Date. The
Monthly Payment must be paid through conversion into shares of the Company's
common stock at the initial fixed conversion price of $1.29 per share (subject
to anti-dilution adjustments in connection with mergers, acquisitions, stock
splits, dividends and the like, and in connection with future issuances of the
Company's common stock at prices per share below the then-applicable conversion
price) if the following conversion criteria are met:

         (1)      the shares are registered with the SEC for public resale;
         (2)      the average closing price of the Company's common stock for
                  the 5 trading days preceding a repayment date is at least 110%
                  of the fixed conversion price; and
         (3)      the amount of such conversion does not exceed 25% of the
                  aggregate dollar trading volume of the Company's common stock
                  for the 30-day trading period immediately preceding the
                  applicable repayment date.

                  Any amount of Monthly Payment that cannot be converted into
common stock due to failure to meet the conversion criteria must be paid in cash
at a rate of 102% of the monthly principal amount. Laurus may convert at the
fixed conversion price amounts due under the 2004 Note if the underlying shares
are registered for resale or an exemption from registration is available and no
event of default under the 2004 Note remains uncured or remains unwaived by
Laurus.

         The Company may also prepay the amount of the 2004 Note in cash by
paying 104% of the principal balance together with any accrued but unpaid
interest.

         In the event of a default and continuation of a default, Laurus may
accelerate the payment of the principal balance requiring the Company to pay
115% of the entire principal balance of the 2004 Note outstanding on that date.
In the event of a default and continuation of default, the interest rate will
increase by 5% per annum on the unpaid principal balance until the default is
cured or waived. Events of default that would give rise to automatic
acceleration of payment of the principal balance and an increase in annual
interest rate on unpaid principal balance include:

         o        A failure to pay principal, interest or fees;
         o        Breach of covenant, representations and warranties;
         o        A receiver or trustee for the Company is appointed;
         o        Any judgment against the Company or any of its assets in
                  excess of $250,000 remains unvacated, unbonded or unstayed for
                  ninety days;
         o        Bankruptcy, insolvency, liquidation or reorganization
                  proceedings against the Company are not resolved within 30
                  days;


                                       12



<PAGE>

         o        Trading stop in the Company's common stock is in effect for
                  more than five days;
         o        Failure to deliver the Company's common stock or replacement
                  note;
         o        Occurrence of default or continuation of default in related or
                  other agreements with Laurus; and
         o        Change in control of ownership of the Company.

                  As security for payment of the 2004 Note, the Company granted
to Laurus a continuing general security interest in the Company's assets.

         On June 28, 2005, the Company and Laurus entered into a waiver and
extension, pursuant to which they agreed to amend the definition of
"Effectiveness Date" contained in a Registration Rights Agreement (the
"Agreement") dated December 23, 2004 that they entered into simultaneously with
the issuance of the 2004 Note and the 2004 Warrant. Pursuant to the Agreement,
the Company was required to file by a January 22, 2005 initial filing date a
resale registration statement with the SEC covering the shares of common stock
issuable upon conversion of the 2004 Note and upon exercise of the 2004 Warrant.
The Company was also required to obtain effectiveness of the registration
statement by a May 22, 2005 initial Effectiveness Date.

                  The Agreement provides that:

         o        if a registration statement is not filed on or prior to the
                  initial filing date, or

         o        if the registration statement is not declared effective by the
                  SEC by the Effectiveness Date, or

         o        if after the registration statement is filed with and declared
                  effective by the SEC, the registration statement ceases to be
                  effective as to all registrable securities to which it is
                  required to relate at any time prior to the time that all of
                  the registrable securities have been sold or may be sold
                  without volume restrictions under Rule 144(k) of the
                  Securities Act of 1933, as amended, or

         o        if trading of our common stock is suspended for more than
                  three trading days,

         then subject to certain grace periods, until the event described above
is cured, the Company must pay to Laurus cash liquidated damages equal to 1.0%
for each 30-day period (prorated for partial periods) of the original principal
amount of the 2004 Note.

         The Company was unable to meet either the initial filing deadline or
the initial Effectiveness Date. Accordingly, the Company and Laurus entered into
the June 28, 2005 waiver and extension. The waiver and extension provides that
the January 22, 2005 initial filing deadline is waived. The waiver and extension
also provides that the amended Effectiveness Date for the initial registration
statement filed under the Agreement is September 1, 2005, and with respect to
each additional registration statement that may be required to be filed in the
future, a date no later than 30 days following the applicable filing date. The
Company paid $10,000 in liquidated damages for the delay in the registration
statement being declared effective by the Commission. The $10,000 liquidated
damage payment was recorded as a penalty expense under other expense in July
2005. The registration statement was declared effective by the Commission
on August 12, 2005.


                                       13



<PAGE>

         With the exception of previously disclosed issuances of stock and the
exception of stock options granted to employees and directors, the Company is
prohibited from issuing any securities with a continuously variable/floating
conversion feature that could become free-trading prior to the full repayment or
conversion of the 2004 Note together with all related accrued and unpaid
interest and fees.

         The five-year 2004 Warrant permits Laurus to purchase up to 130,000
shares of common stock, at any time or from time to time, at the exercise price
of $1.56 per share.The exercise price and the number of shares underlying the
2004 Warrant are fixed but are subject to anti-dilution adjustments in
connection with mergers, acquisitions, stock splits, dividends and the like.

         Laurus has contractually agreed to two separate beneficial ownership
limitations that restrict conversion of the 2004 Note and the exercise of the
2004 Warrant. Laurus has agreed that the 2004 Note shall not be converted and
the 2004 Warrant shall not be exercised to the extent such conversion would
result in Laurus, together with its affiliates, beneficially owning in excess of
4.99% of the number of shares of the Company's common stock outstanding at that
time. Laurus may cause this 4.99% limitation to expire by providing the Company
with 75 days' advance notice of its intention to do so. This 4.99% limitation
does not preclude conversion of the 2004 Note or exercise of the 2004 Warrant
over time, so long as Laurus' beneficial ownership of the Company's common
stock, together with its affiliates, does not exceed the limitation amount. This
4.99% limitation automatically becomes void upon an event of default under the
2004 Note.

          The Company recorded a debt discount as a result of the issuance of
the 2004 Warrant of approximately $103,000 and a debt discount as a result of
$10,000 in fees paid to Laurus and its affiliate. The total debt discount of
$113,000 is being charged to interest expense, ratably, over the term of the
2004 Note.

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.


                                       14



<PAGE>

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

                                                     THREE MONTHS ENDED JUNE 30,
                                                       2005              2004
                                                     --------           -------
         Net loss - as reported                      $   (334)          $  (617)
         Deduct: Stock-based compensation expense
             determined under the fair value based
             method for all awards, net of tax
                                                           36                34
                                                     --------           -------
         Net loss - pro forma                        $   (370)          $  (651)
                                                     ========           =======
         Basic and diluted net loss per share -
             as reported                             $  (0.02)          $ (0.03)
                                                     ========           =======
             pro forma                               $  (0.02)          $ (0.04)
                                                     ========           =======
         Weighted average fair value of options
             granted                                 $     --           $    --
                                                     ========           =======


                                                       2005               2004
                                                     --------           -------
              Black-Scholes option pricing model
                assumptions:
                  Dividend yield                           --               --
                  Expected volatility                    81.0%            60.2%
                  Risk-free interest rate                4.26              3.9%
                  Expected option lives (in years)       7.01              6.4

9. FOREIGN CURRENCY TRANSLATION

         The financial condition and results of operations of the Company's
foreign subsidiaries are accounted for using the local currency as the
functional currency. Assets and liabilities of the subsidiaries are translated
into United States dollars (the reporting currency) at the exchange rate in
effect at the end of the interim period. Statements of operations accounts are
translated at the average rate of exchange prevailing during the respective
interim periods. Translation adjustments arising from the use of differing
exchange rates from period to period are included in accumulated other
comprehensive income (loss) in the consolidated balance sheet. Gains and losses
resulting from foreign currency transactions are included in operations and were
not material to the first quarters of fiscal 2006 and 2005.

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 $373,000 and $621,000 for the quarters ended June 30, 2005 and 2004,
respectively.


                                       15



<PAGE>

11. NET LOSS PER SHARE

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

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

<TABLE>
                                                                            THREE MONTHS ENDED
                                                                                 JUNE 30,
                                                                            2005           2004
<S>                                                                       <C>           <C>
         Numerator:
         Net loss and numerator for basic and diluted loss per share      $   (334)     $   (617)
                                                                          ========      ========

         Denominator:
         Denominator for basic net loss per share - average
            number of common shares outstanding during the period           19,117        18,626
         Incremental common shares attributable to exercise of
            outstanding options, warrants and other common stock
            equivalents                                                         --            --
                                                                          --------      --------
         Denominator for diluted net loss per share                         19,117        18,626
                                                                          ========      ========

         Basic and diluted net loss per share                             $  (0.02)     $  (0.03)
                                                                          ========      ========

</TABLE>

         Options, warrants and other common stock equivalents amounting to
1,977,000 and 1,847,000 potential common shares were excluded from the
computations of diluted EPS for the quarters ended June 30, 2005 and 2004,
respectively, because the Company reported net losses and, therefore, the effect
would have been anti-dilutive. Potential common shares amounting to 1,975,000
from the possible conversion of the convertible notes issued to Laurus were
excluded from the computation of diluted loss per share for the quarter ended
June 30, 2005, as their effect would have been anti-dilutive.

12. SEGMENT AND GEOGRAPHIC DATA

         The Company is an integrated Internet and IT technology and services
company. The Company's operating segments are:

         o        Engineering and collaborative software products and services;
                  and
         o        IT services

         The Company applies the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires
segments to be determined and reported based on how management measures
performance and makes decisions about allocating resources. The Company's
management monitors unallocable expenses related to the Company's corporate
activities in a separate "Center," which is reflected in the tables below.


                                       16



<PAGE>

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

                                                              THREE MONTHS
                                                             ENDED JUNE 30,
                                                        ------------------------
                                                          2005            2004
                                                        -------         -------
                                                            (IN THOUSANDS)
         NET REVENUE
             Engineering and collaborative software     $ 3,014         $ 2,444
               products and services
             IT services                                    834           1,080
                                                        -------         -------
                  Consolidated                          $ 3,848         $ 3,524
                                                        =======         =======

         GROSS PROFIT
             Engineering and collaborative software     $ 2,889         $ 2,199
               products and services
             IT services                                    201             322
                                                        -------         -------
                  Consolidated                          $ 3,090         $ 2,521
                                                        =======         =======

         OPERATING (LOSS) INCOME
             Engineering and collaborative software     $   337         $  (113)
               products and services
             IT services                                    (96)             28
             Center                                        (412)           (450)
                                                        -------         -------
                  Consolidated                          $  (171)        $  (535)
                                                        =======         =======


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


                                                           THREE MONTHS ENDED
                                                               JUNE 30,
                                                        ------------------------
                                                         2005            2004
                                                        ------          ------
                                                            (IN THOUSANDS)
         NET REVENUE
         United States                                  $1,782          $1,584
         The Americas (other than U.S.)                    203             165
         Europe                                            860             770
         Asia-Pacific                                    1,003           1,005
                                                        ------          ------

                  Consolidated                          $3,848          $3,524
                                                        ======          ======
         EXPORT SALES
         United States                                  $  421          $  405
                                                        ======          ======


                                       17



<PAGE>

                                                              AS OF
                                                   ---------------------------
                                                     JUNE 30,        MARCH 31,
                                                      2005             2005
                                                   ----------       ----------
                                                         (IN THOUSANDS)

         LONG-LIVED ASSETS
         United States                             $    3,627       $    3,466
         Europe                                           187              201
         Asia-Pacific                                   1,173            1,345
                                                   ----------       ----------

                  Consolidated                     $    4,987       $    5,012
                                                   ==========       ==========

13. CONTINGENCIES

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

14. DISCONTINUED OPERATIONS

         In its continuing efforts to focus on its core software products and IT
services businesses, the Company sold its Web-based telecommunications services
division in September 2004. Accordingly, the results of the operations of the
Web-based telecommunications services division is excluded from continuing
operations and reported as "Discontinued Operations" for the three months ended
June 30, 2004. Gain from the discontinued operations for the three months ended
June 30, 2004 was $29,000.

         The total sales price was $130,000 for the sale of the Web-based
telecommunications services division in September 2004. The Company received the
entire proceeds from the sale of the Web-based telecommunications services
division as of March 31, 2005.

         The following table summarizes financial information for the
discontinued operations:

                                                             THREE MONTHS ENDED
                                                                 JUNE 30,
                                                              2005       2004
                                                             ------     ------
          Web-based telecommunications services revenues     $   --     $  217
                                                             ------     ------
                                                                 --        217
                                                             ------     ------

          Income from operations of
            Web-based telecommunications services                --         29

                                                             ------     ------
         Income from discontinued operations                 $   --     $   29
                                                             ======     ======


                                       18



<PAGE>

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

         FORWARD-LOOKING STATEMENTS

         This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. 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 to re-pay our debt and service our interest cost;
         o        our ability to successfully implement our business plans,
                  including our engineering business process outsourcing
                  initiatives;
         o        our ability to attract and retain strategic partners and
                  alliances;
         o        our ability to hire and retain qualified personnel;
         o        the risks of uncertainty of protection of our intellectual
                  property;
         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 the following two business segments:

         o        Structural and civil engineering and collaborative software
                  products and services for businesses worldwide; and
         o        Embedded information technology, or IT, services (including
                  engineering business process outsourcing, or EBPO).


                                       19



<PAGE>

         Our net revenues during the three months ended June 30, 2005 were
$3,848,000, an increase of $324,000 (9.2%) over the corresponding prior year
period, of which engineering and collaborative software products and services
net revenues increased $570,000 (23.3%), and IT services net revenues declined
$246,000 (22.8%).

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

         Currently, our EBPO services address the production of structural steel
detailing drawings. Although we believe our EBPO 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.

         As of June 30, 2005, our indebtedness under our convertible notes
totaled approximately $2,560,000, out of a total availability of $4,000,000.

     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 doubtful 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.

         At the time of sale of our pre-packaged engineering software products,
we provide a 15-day right of return on the purchase of the products during which
time the customers may return the products 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.


                                       20



<PAGE>

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

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

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

         We recognize revenues from our IT services primarily on a time and
materials basis, with time at a marked-up rate and materials and other
reasonable expenses at cost, as we perform IT services. Certain IT services
contracts are fixed price contracts where we measure progress toward completion
by mutually agreed upon pre-determined milestones and recognize revenue upon
reaching those milestones. Our fixed price IT contracts typically are for a
short duration of one to six months. We did not have any uncompleted fixed price
IT contracts at June 30, 2005.

         ALLOWANCE FOR DOUBTFUL 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. We review
our accounts receivable balances and the collectibility of these balances on a
periodic basis. Based on our analysis of the length of time that the balances
have been outstanding, the pattern of customer payments, our understanding of
the general business conditions of our customers and our communications with our
customers, we estimate the recoverability of these balances. When recoverability
is uncertain and the unrecoverable amounts can be reasonably estimated, we
record bad debt expense and increase the allowance for accounts receivable by an
amount equal to the amount estimated to be unrecoverable. If the historical data
we use to calculate the allowance provided for doubtful accounts does not
reflect our future ability to collect outstanding receivables, additional
provisions for doubtful accounts may be needed and our future results of
operations could be materially affected.

         IMPAIRMENT OF LONG-LIVED ASSETS, INCLUDING GOODWILL

         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.


                                       21



<PAGE>

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

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

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

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

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

         Our annual test for impairment is performed as of March 31 every year.
The evaluation of goodwill impairment involves assumptions about the fair values
of assets and liabilities of each reporting unit. If these assumptions are
materially different from actual outcomes, the carrying value of goodwill will
be incorrect. In addition, future results of operations could be materially
impacted by the write-down of the carrying amount of goodwill to its estimated
fair value. There was no goodwill impairment write-down during the three months
ended June 30, 2005. As of June 30, 2005, our goodwill balance was $3,088,000.


                                       22



<PAGE>

CONSOLIDATED RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2005 VERSUS
THREE MONTHS ENDED JUNE 30, 2004

CONTINUING OPERATIONS

NET REVENUES

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

                                                           THREE MONTHS ENDED
                                                                JUNE 30,
                                                         ----------------------
NET REVENUE                                               2005            2004
                                                         ------          ------
     Engineering and collaborative
       software products and services                    $3,014          $2,444
     % of total net revenues                               78.3%           69.4%

     IT services                                         $  834          $1,080
     % of total net revenues                               21.7%           30.6%

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

     Total net revenues                                  $3,848          $3,524
                                                         ======          ======


         Net revenues for the three months ended June 30, 2005 increased by
$324,000 (9.2%), compared to the three months ended June 30, 2004. Our revenues
consisted primarily of 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 June 30, 2005 increased by $570,000 (23.3%)
compared to the three months ended June 30, 2004 primarily due to an increase in
net revenues from engineering software products and services in the U.S. and
Europe and an increase in net revenues from collaborative software products and
services.

         Net revenues from engineering software products and services for the
three months ended June 30, 2005 increased by $446,000 (19.0%) compared to the
three months ended June 30, 2004 primarily due to a $303,000 increase in net
revenues from the U.S. and a $129,000 increase from Europe. Net revenues from
U.S. increased due to a $144,000 increase in dealer sales, an $88,000 increase
in maintenance and corporate license revenue recognized, and a $50,000 increase
relating to a software service project recognized during the three months ended
June 30, 2005. In the later part of fiscal 2005, we increased our efforts to
increase our maintenance billings, which are now being reflected in the net
revenues from maintenance sales recognized. Net revenues from Europe increased
due to an increased emphasis on engineering software products and services
rather than on IT services and due to an increase in maintenance revenue
recognized.

         Net revenues from collaborative software products and services for the
three months ended June 30, 2005 increased by $124,000 (149%) compared to the
three months ended June 30, 2004 primarily due to the completion and recognition
of one large project in the amount of $98,000 during the three months ended June
30, 2005, compared to the same period in the prior year when no new projects
were completed. The timing of completion and recognition of our large projects
creates greater variability in our collaborative software net revenues between
quarters.


                                       23



<PAGE>

         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 for the
three months ended June 30, 2005, compared to the same period in the prior
fiscal year. IT services net revenues decreased $246,000 (22.8%) for the three
months ended June 30, 2005, compared to the three months ended June 30, 2004.
Net revenues from IT services have decreased due to the scaling back of one of
our domestic IT services offices, to decreases in IT services revenues from
Europe, and due to lowering the prices we charge our customers in order to be
able to compete with our competitors and to retain our current customers. For
the past several years, the IT services industry has 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. In addition,
the decrease is also attributable to the fact that our EBPO services business
did not bring significant revenues to the IT services segment. The EBPO service
business decreased by $17,000 for the three months ended June 30, 2005 compared
to the three months ended June 30, 2004. Although we anticipate that our EBPO
services business will bring in additional revenues for the IT services segment,
we cannot assure you that we will be successful in this endeavor, due to
competition among providers of such services and relatively few barriers to
entry since EBPO services are not capital-intensive.

GROSS PROFIT AND GROSS MARGIN

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


                                                        THREE MONTHS ENDED
                                                              JUNE 30,
                                                    ---------------------------
                                                       2005              2004
                                                    ---------         ---------
GROSS PROFIT
    Engineering and collaborative
      software products and services                $   2,889         $   2,199
    IT services                                           201               322

                                                    ---------         ---------
         Consolidated                               $   3,090         $   2,521
                                                    =========         =========
GROSS MARGIN
    Engineering and collaborative
      software products and services                     95.9%             90.0%
    IT services                                          24.1%             29.8%

         Consolidated                                    80.3%             71.5%


         Consolidated gross margin increased to 80.3% for the three months ended
June 30, 2005 from 71.5% for the three months ended June 30, 2004 due to the
higher concentration of the higher gross margin from engineering and
collaborative software products and services compared to IT services.


                                       24



<PAGE>

         ENGINEERING AND COLLABORATIVE SOFTWARE PRODUCTS AND SERVICES

         Our engineering and collaborative software products and services
segment generally produces higher gross margin than our IT services segment due
to the relatively lower costs associated with each sale. Additionally, research
and development costs are typically written off when developing software, and
only certain amounts are capitalized and subsequently amortized. 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. The increase in the gross margin in the
engineering and collaborative software products and services segment is
primarily the result of the increase in net revenues for the three months ended
June 30, 2005 as compared to net revenues for the three months ended June 30,
2004. Some of the components of the cost of revenues, such as amortization of
capitalized software development and salaries, do not vary significantly with
changes in revenues.

         Gross margin in the engineering and collaborative software products and
services segment increased by 5.9 percentage points for the three months ended
June 30, 2005, compared to the three months ended June 30, 2004. The increase in
gross margin in the engineering and collaborative software products and services
segment was primarily due to a $69,000 decrease in software amortization costs
as a result of the completion of amortization during June 2004, a $23,000
decrease in salaries for the technical support employees due to the majority of
our technical support team being shifted to the India office, and a $23,000
decrease in printing and distribution.

         IT SERVICES

         Gross margin in the IT services segment decreased by 5.7 percentage
points for the three months ended June 30, 2005, compared to the three months
ended June 30, 2004. The IT service segment decreased due to the increase in the
number of employees for the new estimated EBPO projects we will undertake, but
have not begun yet or have been delayed. Historically, gross profit
percentage from the IT services segment has been lower than gross profit
percentage from the engineering and collaborative software products and services
segment due to the higher cost of labor associated with IT services. The cost of
revenues for IT services includes the salaries, bonuses, and benefits for the
consulting employees. Our IT services consultants generally receive higher
salaries than our technical support employees.

         In order to maintain a higher level of overall gross profit, we
continue to focus our sales efforts on our segment with the highest gross
profit, namely, our engineering and collaborative software products and services
segment, by working to develop strategic relationships, to increase our volume
of telephone sales, and to re-engage with our international distributors. In our
IT services business, we are focusing more on project-based services instead of
the IT staffing services.


                                       25



<PAGE>

OPERATING EXPENSES

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

                                                         THREE MONTHS ENDED
                                                              JUNE 30,
                                                       -------------------------
                                                         2005              2004
                                                       -------           -------
OPERATING EXPENSES
    Selling, general and
      administrative expenses                          $2,454            $2,235
    % of total net revenues                              63.8%             63.4%

    Research and development                           $  382            $  415
    % of total net revenues                               9.9%             11.8%

    Bad debt expense                                   $  208            $  165
    % of total net revenues                               5.4%              4.7%

    Depreciation                                       $  217            $  241
    % of total net revenues                               5.6%              6.8%

    Total operating expenses                           $3,261            $3,056
    % of total net revenues                              84.7%             86.7%

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative ("SG&A") expenses increased by
$219,000 (9.8%) for the three months ended June 30, 2005, compared to the three
months ended June 30, 2004 primarily due to the following:

         o        an increase of $47,000 for write-offs of old advance income
                  tax amounts deducted at source in the India office that will
                  not be recoverable;
         o        professional fees increased $43,000 due to additional
                  accounting and legal fees;
         o        tradeshow and advertising expenses increased $32,000 due to
                  increased road shows and advertising campaigns in order to
                  increase sales growth;
         o        traveling expense increased $32,000 due to increased traveling
                  by our sales departments and upper management in order to
                  increase sales growth;
         o        dealer and employee sales commission expense increased $32,000
                  due to increased corporate license and dealer sales; and
         o        telephone expense increased $27,000 due to the addition of our
                  international private leased circuit line.

         We continue to monitor our SG&A expenses but do not make any assurances
that we will be able to cut SG&A expenses from levels attained in the first
three months of fiscal 2006. 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.


                                       26



<PAGE>

         RESEARCH AND DEVELOPMENT EXPENSES

         Research and development ("R&D") expenses consist primarily of software
developers' wages. R&D expenses decreased by $33,000 (8.0%) for the three months
ended June 30, 2005, compared to the three months ended June 30, 2004. As a
percentage of engineering and collaborative software net revenues, to which they
mostly relate, R&D expenses decreased to 12.7% for the three months ended June
30, 2005 from 17.0% for the same period in the prior fiscal year. The decrease
in R&D expenses is primarily related to a $53,000 decrease in salaries and
related expenses due to terminations and reorganization and a $42,000 decrease
due to capitalization of software development expenses related to STAAD X. These
decreases were offset by an increase of $47,000 in outside consulting expenses.
We believe R&D expenses may not decrease further from our current levels.

         BAD DEBT EXPENSE

         Bad debt expense increased by $43,000 (26%) to $208,000 for the three
months ended June 30, 2005 from $165,000 for the three months ended June 30,
2004. The increase in bad debt expense was primarily due to an increase in the
reserve balance for receivables at our India subsidiary.

         DEPRECIATION

         Depreciation expenses (excluding amounts charged to cost of revenues)
decreased by $24,000 (10.0%) for the three months ended June 30, 2005, compared
to the three months ended June 30, 2004. We anticipate that depreciation
expenses will remain at this level through the end of fiscal 2006.

SEGMENT PROFITABILITY AND OPERATING INCOME (LOSS)

         During the three months ended June 30, 2005, consolidated operating
loss was $171,000 compared to a consolidated operating loss of $535,000 during
the three months ended June 30, 2004. Consolidated operating loss during the
three months ended June 30, 2005 consisted of operating income from the
engineering and collaborative software products and services segment, offset by
an operating loss for the IT services segment and for the corporate center.
Operating income in the engineering and collaborative software products and
services segment was $337,000 during the three months ended June 30, 2005
compared to an operating loss of $113,000 during the three months ended June 30,
2004. In the IT services segment, the operating loss during the three months
ended June 30, 2005 was $96,000 compared to an operating income of $28,000
during the three months ended June 30, 2004.


                                       27



<PAGE>

OTHER EXPENSE (INCOME)

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

                                                          THREE MONTHS ENDED
                                                              JUNE 30,
                                                      --------------------------
                                                        2005             2004
                                                      --------         ---------
OTHER EXPENSE (INCOME)
    Interest, net                                     $  138           $   138
    % of total net revenues                              3.6%              3.9%

    Other expense (income)                            $   10           $   (33)
    % of total net revenues                              0.2%             (0.9)%

    Total other expense                               $  148           $   105
    % of total net revenues                              3.8%              3.0%

         INTEREST EXPENSE

         Net interest remained constant at $138,000 for the three months ended
June 30, 2005 compared to the three months ended June 30, 2004. Interest expense
in the upcoming quarters may decrease if additional portions of debt outstanding
under the Amended 2003 Note and 2004 Note are converted into equity or may
increase if we borrow additional amounts.

         OTHER (INCOME) EXPENSE

         Other income decreased by $43,000 for the three months ended June 30,
2005, compared to the three months ended June 30, 2004. During the three months
ended June 30, 2004, we had sold certain assets that were previously written
off, and did not have any similar transactions during the three months ended
June 30, 2005.

         INCOME TAXES

          We recorded an income tax expense of $15,000 for the three months
ended June 30, 2005 compared to $6,000 during the same period in the prior
fiscal year. Tax expense for the three months ended June 30, 2005 resulted from
provisions for domestic income taxes.

DISCONTINUED OPERATIONS

         In our continuing efforts to focus on its core software products and IT
services businesses, we sold our Web-based telecommunications services division
in September 2004. Accordingly, the results of the operations of the Web-based
telecommunications services division are excluded from continuing operations and
reported as "Discontinued Operations" for the three months ended June 30, 2004.
Gain from the discontinued operations for the three months ended June 30, 2004
was $29,000.

         The total sales price was $130,000 for the sale of the Web-based
telecommunications services division in September 2004. We had received the
entire proceeds from the sale of the Web-based telecommunications services
division as of March 31, 2005.


                                       28



<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         Historically, we have relied upon cash from financing activities to
fund the majority 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
issuance of convertible notes. We have used debt and equity financing when
appropriate and practicable, such as by issuing to Laurus a $2,400,000
convertible note in December 2003 ("2003 Note"), as amended in April 2004, and a
$1,000,000 convertible Note in December 2004 ("2004 Note").

         Our principal sources of liquidity at June 30, 2005 consisted of
$3,851,000 of cash and cash equivalents. Cash and cash equivalents increased by
$170,000 (4.6%) during the three months ended June 30, 2005.

         Net cash provided by operations was $415,000 during the three months
ended June 30, 2005 compared to $371,000 of net cash used in operations during
the three months ended June 30, 2004, an increase of $786,000. The major
contributors to this improvement in operating cash flows were the following:

         o        A $775,000 decrease in accounts receivable due to increased
                  cash collections and higher prepaid sales to domestic
                  customers;
         o        A $188,000 decrease in prepaid expenses and other current
                  assets due to the write-off of tax deducted at source
                  amounts that are not recoverable, a decrease in prepaid
                  software fees, and a decrease in prepaid insurance fees; and
         o        A $43,000 increase in accounts payable due to differences in
                  the timing of payments.

         The above were partially offset by a $369,000 decrease in deferred
revenues primarily due to a lower level of new maintenance billings and a higher
level of recognized revenues from deferred billings and due to the recognition
of one of our collaborative software projects that was previously deferred.

         The following contributed to cash usage during the three months ended
June 30, 2004:

         o        A $176,000 decrease in accrued expenses primarily due to
                  payment of severance payments and professional fees;

         o        An $81,000 decrease in accounts payable due to payments; and

         o        A $74,000 increase in prepaid expenses and other current
                  assets due to prepayment of rent and product packaging
                  materials.

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

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


                                       29



<PAGE>

         Net cash used in investing activities was $138,000 during the three
months ended June 30, 2005 compared to cash provided by investing activities of
$34,000 during the three months ended June 30, 2004. Cash used in investing
activities during the three months ended June 30, 2005 primarily consisted of
capital expenditures of $121,000 and payments to acquire a company of $19,000.
Cash provided by investing activities during the three months ended June 30,
2004 consisted of proceeds from the sale of a subsidiary, offset by capital
expenditures of $98,000 and payments to acquire a company of $24,000.

         Net cash used in financing activities during the three months ended
June 30, 2005 was $88,000 compared to net cash provided by financing activities
of $915,000 during the three months ended June 30, 2004. Cash used in financing
activities during the three months ended June 30, 2005 consisted of repayments
of long-term debt of $100,000 and repayment of capital lease obligations of
$36,000, offset by long-term borrowings of $48,000 from our overdraft credit
facility of our India subsidiary. During the three months ended June 30, 2005,
we repaid $81,000 to Laurus, and the international subsidiary repaid $19,000 in
bank debt.

         We incurred net losses from continuing operations of $334,000 and
$617,000 during the three months ended June 30, 2005 and 2004, respectively. We
recorded net cash provided by operations of $415,000 and used cash in operations
of $371,000 during the three months ended June 30, 2005 and 2004, 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.

         Historically we have relied upon cash from financing activities to fund
the majority 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 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.

         We believe we will be able to generate sufficient cash from operations
or through existing or additional sources of debt and equity financing. 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.


                                       30



<PAGE>

         The following table summarizes our contractual obligations and
commercial commitments at June 30, 2005 (in thousands):

<TABLE>
                                                                     PAYMENTS DUE BY PERIOD
                                       --------------------------------------------------------------------------------
                                                        LESS THAN 1                                           AFTER 5
         CONTRACTUAL OBLIGATIONS           TOTAL           YEAR            2-3 YEARS        4-5 YEARS          YEARS
                                       ------------     ------------     ------------     ------------     ------------
<S>                                    <C>              <C>              <C>              <C>              <C>
Long-Term Debt*                        $      3,858     $      1,830     $      1,852     $        172     $          4
Capital Lease Obligations**                     597              215              330               52               --
Operating Leases                              2,603              326              419              368            1,490

                                       ------------     ------------     ------------     ------------     ------------
Total Contractual Cash Obligations     $      7,058     $      2,371     $      2,601     $        592     $      1,494
                                       ============     ============     ============     ============     ============

</TABLE>

*  Excludes debt discount of $365
** Represents future minimum lease payments excluding deductions for imputed
   interest of $117

         On July 31, 2003, we obtained $4,000,000 revolving credit facility from
Laurus. The availability of funds under this credit facility is limited by the
amount of the unpaid balances on the 2003 Note and the 2004 Note (collectively,
the "Laurus Notes"). At June 30, 2005, we had no borrowings under the revolving
credit facility and we had a total availability of $1,440,000 under the
revolving credit facility.

         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, 2004, the net operating cash flow deficit to be
greater than $500,000, excluding extraordinary items, as determined by Laurus.
We were in compliance with such covenant as of June 30, 2005.

         To the extent we are in need of any additional financing, we cannot
assure you that any such additional financing will be available to us on
acceptable terms, or at all. 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 will 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 June 30, 2005, that the design and operation of
our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms,
including to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is accumulated and communicated
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.


                                       31



<PAGE>

         During the quarter ended June 30, 2005, 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.

         Under current SEC guidelines, the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 (the "Act") will be effective for our fiscal year
ending March 31, 2007. In order to comply with the Act, we are beginning a
comprehensive effort, which includes documentation and testing of the design and
operation of our internal controls using the guidelines established by Internal
Control -Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. During the course of these activities,
we may identify certain internal control matters that our management believes
should be improved. These improvements, if necessary, will likely include
further formalization of existing policies and procedures, improved segregation
of duties, additional information technology system controls and additional
monitoring controls. Although our management does not believe that any of these
matters will result in material weaknesses being identified in the our internal
controls as defined by the Public Company Accounting Oversight Board (United
States), no assurances can be given regarding the outcome of these efforts at
the present time.


                                       32



<PAGE>

                          PART II -- OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

             None.

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

         DIVIDENDS AND RESTRICTIONS

         The credit facility with Laurus prohibits us from paying any dividends
on our common stock without Laurus' permission. We were 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 June 30, 2005, 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 June 30, 2005, no matters were submitted to a
vote of our common stockholders.

ITEM 5.   OTHER INFORMATION

             None.


                                       33



<PAGE>

ITEM 6.   EXHIBITS

EXHIBIT
 NUMBER           DESCRIPTION
 ------           -----------
  10.1            Description of Salary and Bonus Programs for Executive
                  Officers for Fiscal Year 2006 (1)

  10.2            Description of Non-Employee Director Compensation (1)

  10.3            Form of Change in Control and Executive Retention Agreement
                  approved effective as of June 1, 2005 between netGuru, Inc.
                  and each of Amrit K. Das, Santanu Das, Clara Young and Bruce
                  K. Nelson (1)

  10.4            Form of Non-Qualified Stock Option Agreement dated June 7,
                  2005 between netGuru, Inc. and each non-employee director (1)

  10.5            Waiver of Section 2(a) and Extension of Section 2(b) of
                  Registration Rights Agreement dated June 28, 2005 between
                  Laurus Master Fund, Ltd. and netGuru, Inc. (2)

  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 (3)

  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 (3)

----------

  (1)             Filed on June 7, 2005 as an exhibit to our Form 8-K
                  for June 1, 2005 and incorporated herein by
                  reference.

  (2)             Filed on July 5, 2005 as an exhibit to our Form 8-K
                  for June 28, 2005 and incorporated herein by
                  reference

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


                                       34



<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:  August 15, 2005

                                          NETGURU, INC.


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


                                       35



<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


                                       36