<PAGE>

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

                                   FORM 10-QSB
 (Mark One)

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

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2005

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

                         Commission file number: 0-28560

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

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


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

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

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

Check whether the 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 [ ]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The number of shares outstanding of the registrant's only class of common stock,
$.01 par value, was 19,117,154 on February 17, 2006.


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




<PAGE>

                                     PART I
                              FINANCIAL INFORMATION

                                                                            PAGE
Item 1. Financial Statements

        Condensed Consolidated Statements of Operations for the Three and
        Nine Months Ended December 31, 2005 and 2004 (unaudited)............. 3

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

        Condensed Consolidated Statements of Cash Flows for the
        Nine Months Ended December 31, 2005 and 2004 (unaudited)............. 5

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

Item 2. Management's Discussion and Analysis or Plan of Operation........... 20

Item 3. Controls and Procedures ............................................ 33



                                     PART II
                                OTHER INFORMATION

Item 1. Legal Proceedings................................................... 34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......... 34

Item 3. Defaults Upon Senior Securities..................................... 34

Item 4. Submission of Matters to a Vote of Security Holders................. 35

Item 5. Other Information................................................... 35

Item 6. Exhibits ........................................................... 36


Signatures.................................................................. 37

Exhibits Filed with this Report on Form 10-QSB.............................. 38




<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 DECEMBER 31,     NINE MONTHS ENDED DECEMBER 31,
                                                      ------------------------------      ------------------------------
                                                          2005               2004             2005              2004
                                                      ------------      ------------      ------------      ------------
<S>                                                   <C>               <C>               <C>               <C>
Net revenues:
    Collaborative software products and
      services                                        $        245      $        193      $        624      $        461
    IT services                                                636               903             2,153             3,012
                                                      ------------      ------------      ------------      ------------
           Total net revenues                                  881             1,096             2,777             3,473
                                                      ------------      ------------      ------------      ------------

Cost of revenues:
    Collaborative software products and
      services                                                  38                 1                40                72
    IT services                                                485               636             1,659             2,024
                                                      ------------      ------------      ------------      ------------
           Total cost of revenues                              523               637             1,699             2,096

                                                      ------------      ------------      ------------      ------------
           Gross profit                                        358               459             1,078             1,377
                                                      ------------      ------------      ------------      ------------

Operating expenses:
    Selling, general and administrative                        897               828             2,242             2,224
    Research and development                                   106               135               397               408
    Bad debt expense                                            32                --               253               156
    Depreciation                                                83                95               232               234
    Impairment charge (Note 11)                              2,924                --             2,924                --

                                                      ------------      ------------      ------------      ------------
           Total operating expenses                          4,042             1,058             6,048             3,022
                                                      ------------      ------------      ------------      ------------

           Operating loss                                   (3,684)             (599)           (4,970)           (1,645)
                                                      ------------      ------------      ------------      ------------

Other expense (income):
    Interest, net                                              343               123               593               339
    Other                                                      (38)               (9)              (44)              (67)

                                                      ------------      ------------      ------------      ------------
           Total other expense                                 305               114               549               272
                                                      ------------      ------------      ------------      ------------

Loss from continuing operations before income
    taxes                                                   (3,989)             (713)           (5,519)           (1,917)
Income tax expense                                               3                --                10                 8
                                                      ------------      ------------      ------------      ------------
       Loss from continuing operations                      (3,992)             (713)           (5,529)           (1,925)
                                                      ------------      ------------      ------------      ------------

Discontinued operations:
(Loss) income from discontinued operations
(Note 14)                                                     (327)              478              (118)              883
Gain on sale of business, net of taxes (Note 14)            22,168                --            22,168               117

                                                      ------------      ------------      ------------      ------------
       Income from discontinued operations                  21,841               478            22,050             1,000
                                                      ------------      ------------      ------------      ------------

           Net income (loss)                          $     17,849      $       (235)     $     16,521      $       (925)
                                                      ============      ============      ============      ============

Basic and diluted income (loss) per common share:
     Loss per common share from continuing
     operations                                       $      (0.21)     $      (0.04)     $      (0.29)     $      (0.10)
     Income from discontinued operations                      1.14              0.03              1.15              0.05
                                                      ------------      ------------      ------------      ------------
     Basic income (loss) per common share             $       0.93      $      (0.01)     $       0.86      $      (0.05)
                                                      ============      ============      ============      ============

Common equivalent shares used in computing
    basic and diluted net loss per common
    share:                                              19,117,154        18,865,523        19,117,154        18,775,554

                          See accompanying notes to condensed consolidated financial statements.


                                                            3



<PAGE>

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


                                                                                 DECEMBER 31,
                                                                                    2005             MARCH 31,
                                                                                 (UNAUDITED)           2005
                                                                                 ------------      ------------

                                                     ASSETS
Current assets:
    Cash and cash equivalents                                                    $     20,540      $      3,681
    Restricted cash                                                                     1,070                --
    Accounts receivable (net of allowance for doubtful accounts of $180 and
      $199, as of December 31, 2005 and March 31, 2005, respectively)                     853             1,568
    Income tax receivable                                                                   8                11
    Notes and related party loans receivable                                                2                12
    Deposits                                                                               85                96
    Prepaid expenses and other current assets                                             736               923
    Current assets held for sale (Note 14)                                                164             4,062
                                                                                 ------------      ------------
           Total current assets                                                        23,458            10,353

Property, plant and equipment, net                                                      1,046             1,065
Goodwill                                                                                   --             2,931
Other assets                                                                              128               144
                                                                                 ------------      ------------
                                                                                 $     24,632      $     14,493
                                                                                 ============      ============

                                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Current portion of long-term debt, net of discount of $15 and $222 as        $         66      $      1,297
      of December 31, 2005 and March 31, 2005, respectively
    Related party loans payable                                                            --               100
    Current portion of capital lease obligations                                          138               133
    Accounts payable                                                                      248               173
    Accrued expenses                                                                      563               542
    Income taxes payable                                                                  660                29
    Cash distribution payable (Note 15)                                                16,250                --
    Deferred revenues                                                                     174               409
    Other liabilities                                                                      39                63
      Liabilities held for sale (Note 14)                                                 220             3,334
                                                                                 ------------      ------------
           Total current liabilities                                                   18,358             6,080

Long-term debt, net of current portion and net of discount of $7 and $200,                 28             2,108
    as of December 31, 2005 and March 31, 2005, respectively
Capital lease obligations, net of current portion                                         221               342
Deferred gain on sale-leaseback (Note 14)                                                 625               678
                                                                                 ------------      ------------
           Total liabilities                                                           19,232             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 December 31, 2005 and March 31, 2005)                      191               191
    Additional paid-in capital                                                         20,619            36,869
    Accumulated deficit                                                               (14,711)          (31,232)
    Accumulated other comprehensive loss:
       Cumulative foreign currency translation adjustments                               (699)             (543)
                                                                                 ------------      ------------
           Total stockholders' equity                                                   5,400             5,285
                                                                                 ------------      ------------
                                                                                 $     24,632      $     14,493
                                                                                 ============      ============


                     See accompanying notes to condensed consolidated financial statements.


                                                       4



<PAGE>

                                     NETGURU, INC. AND SUBSIDIARIES
                            CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                              (Unaudited)
                                             (In thousands)
                                                                        NINE MONTHS       NINE MONTHS
                                                                           ENDED             ENDED
                                                                        DECEMBER 31,      DECEMBER 31,
                                                                            2005              2004
                                                                        ------------      ------------
Cash flows from operating activities:
    Net income (loss)                                                   $     16,521      $       (925)
       Less: (Loss) income from discontinued operations                         (118)              883
       Less: Gain on sale                                                     22,168               117
                                                                        ------------      ------------
    Loss from continuing operations                                           (5,529)           (1,925)
    Adjustments to reconcile net loss to net cash used in operating
      activities:
        Depreciation and amortization                                            232               311
        Tax expense allocation to discontinued operations                       (650)               --
        Bad debt expense                                                         246               153
        Impairment charge-goodwill                                             2,924                --
        Amortization of discount on loan                                         399               159
        Expense recognized on issuance of warrants and common stock               --                68
        Loss on disposal of property                                              --                19
        Changes in operating assets and liabilities:
          Accounts receivable                                                    445               (85)
          Notes and related party loans receivable                                10                 6
          Prepaid expenses and other current assets                              177               (35)
          Deposits                                                                 8               (29)
          Other assets                                                            15              (125)
          Accounts payable                                                        77              (146)
          Accrued expenses                                                        30              (217)
          Income taxes payable                                                   636               (33)
          Other current liabilities                                              (19)               50
          Deferred revenues                                                     (234)               15
          Deferred gain on sale-leaseback                                        (52)              (52)
                                                                        ------------      ------------
            Net cash used in operating activities                             (1,285)           (1,866)
                                                                        ------------      ------------

Cash flows from investing activities:
    Purchase of property, plant and equipment                                   (224)              (42)
    Proceeds from sale of equipment                                               --                37
    Sale of short-term investments                                                --               100
    Payments to acquire companies, net of cash acquired                           --               (58)
    Increase in restricted cash                                               (1,070)               --
    Proceeds from sale of discontinued operations                             23,500               115
                                                                        ------------      ------------
            Net cash provided by investing activities                         22,206               152
                                                                        ------------      ------------

Cash flows from financing activities:
    Proceeds from issuance of long-term debt                                      --             3,627
    Financing fee                                                                 --               (21)
    Repayment of long-term debt                                               (3,775)           (1,730)
    Repayment of capital lease obligations                                      (140)              (98)
    Issuance of common stock                                                      --               100
                                                                        ------------      ------------
            Net cash (used in) provided by financing activities               (3,915)            1,878
                                                                        ------------      ------------

    Effect of exchange rate changes on cash and cash equivalents                 (49)              227
                                                                        ------------      ------------

            Net cash provided by continuing operations                        16,957               391
                                                                        ------------      ------------
Cash flows from discontinued operations (Revised- See Note 16)
     Cash provided by operating activities                                        59             1,152
     Cash used in investing activities                                          (147)             (230)
     Cash used in financing activities                                           (10)              (17)
                                                                        ------------      ------------
            Net cash (used in) provided by discontinued operations               (98)              905
                                                                        ------------      ------------

Cash and cash equivalents, beginning of period                                 3,681             1,646
                                                                        ------------      ------------

Cash and cash equivalents, end of period                                $     20,540      $      2,942
                                                                        ============      ============


                                   (continued on the following page)


                                                   5



<PAGE>

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


                                                                        NINE MONTHS       NINE MONTHS
                                                                           ENDED              ENDED
                                                                        DECEMBER 31,      DECEMBER 31,
                                                                            2005              2004
                                                                        ------------      ------------

Supplemental disclosure of cash flow information: Cash paid for:
      Interest                                                          $        266      $        267
                                                                        ============      ============
      Income taxes                                                      $         25      $         75
                                                                        ============      ============

Supplemental disclosure of non-cash investing and financing activities:
    Acquisition of equipment under capital leases                        $        27      $        119
    Repayment of convertible debt with common stock                      $         -      $      1,209
     Issuance of warrants                                                $                $        103
     Acquisition of a company:
      Net assets acquired                                                $         -      $         54
      Net liabilities assumed                                            $         -      $         29
      Promissory note issued toward consideration, net of discount       $         -      $        135
      Common stock issued toward consideration                           $         -      $         41


                 See accompanying notes to condensed consolidated financial statements.


                                                   6
</TABLE>



<PAGE>

                         NETGURU, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
                                   (UNAUDITED)


1.  BASIS OF PRESENTATION

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

         The condensed consolidated financial statements have been prepared by
the Company and include all normal and recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position at December 31, 2005 and the results of operations and the cash flows
for the three and nine months ended December 31, 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, ("GAAP") for
annual consolidated financial statements. Results of operations for the three
and nine months ended December 31, 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 GAAP
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.

         On November 18, 2005, the Company completed its sale of the assets of
its Research Engineers International ("REI") business and STAAD product lines to
privately held Bentley Systems, Incorporated ("Bentley") for $23.50 million and
recorded a net gain of $22.17 million. As such, unless otherwise noted, all
amounts presented, including all note disclosures, contain only information
related to the Company's continuing operations. In accordance with GAAP, the
balance sheet at March 31, 2005 has been adjusted to reflect the assets and
liabilities of the REI business and STAAD product lines as held for sale. At
December 31, 2005, all of the assets and liabilities in our France subsidiary,
which we plan to sell during the fourth quarter of fiscal 2006, remained
classified as held for sale. Additionally, the statements of operations and cash
flows have been adjusted to reflect the results of the REI business and STAAD
product lines as discontinued for the periods presented. See note14 for
additional discontinued operations disclosures.

         Certain reclassifications have been made to the fiscal 2005 condensed
consolidated financial statements to conform to the fiscal 2006 presentation.
The primary reclassifications relate to the separate reporting for the
discontinued operations of the REI business and STAAD product lines (note 14).

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 December 31, 2005, the Company's
management believed the carrying amounts of cash and cash equivalents,


                                       7



<PAGE>

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 are consistent with those of other lending
sources. The estimated fair value of the Company's long-term debt at December
31, 2005, was approximately $94,000.

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,
2005 and, thus, became effective for the Company beginning with the second
quarter of fiscal 2006. The adoption of SFAS No. 153 has not had 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 Company 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 to the Company's consolidated financial
statements included in the Company's annual report on Form 10-KSB for fiscal
2005 and note 8 of this quarterly report. However, management has not yet
determined the actual effect of the accounting for stock option and related
income tax components.

4.  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 reasonably assured. The Company's revenues
arise from the following segments: collaborative software products and services
and IT services.

         Revenue from software sales is recognized upon shipment if no
significant post-contract support obligations remain outstanding and collection
of the resulting receivable is reasonably assured. Customers may choose to
purchase maintenance contracts that include telephone, e-mail and other methods
of support, and the right to unspecified upgrades on a when-and-if available
basis. Revenue from these maintenance contracts is deferred and recognized
ratably over the life of the contract, usually twelve months.


                                       8



<PAGE>

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

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

         The Company sells its collaborative software along with a maintenance
package. This constitutes a multi-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 multi-element arrangements
are recognized over the terms of the maintenance contracts. The 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 reasonably assured 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 nine months. The Company did not have any fixed price
contracts at December 31, 2005.

5.  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.

6. LONG-TERM DEBT

         In connection with the Company's entry into the Asset Purchase
Agreement with Bentley described in note 14, the Company and Laurus Master Fund,
Ltd., ("Laurus"), then a secured creditor and beneficial owner of more than 5%
of the Company's outstanding common stock, entered into a Stand Still Agreement
as of August 19, 2005. Under the Stand Still Agreement, Laurus consented to the
Company's entry into and consummation of the transactions contemplated by the
Asset Purchase Agreement and agreed to release its security interest in the


                                       9



<PAGE>

assets being sold, subject to Laurus being paid in full at the closing all of
the Company's obligations under the convertible promissory notes described below
held by Laurus. The Stand Still Agreement did not, however, limit the right of
Laurus to transfer or vote shares of the Company's common stock.

         As described below, on November 18, 2005, the Company used part of the
sale proceeds to pay the remaining total outstanding debt and accrued interest
owed to Laurus in the amount of approximately $2.25 million. This amount also
included 4% prepayment penalty charges aggregating approximately $86,000. Upon
receiving payment in full for all of the Company's obligations under the
convertible promissory notes held, Laurus released all UCC filings against
assets of the Company. In addition, the revolving credit facility described
below was terminated.

         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 was reduced by the
balance outstanding on the Amended and Restated 2003 Note (defined below).

         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"). In connection with
the Facility, the Company issued to Laurus a warrant to purchase up to 180,000
shares of the Company's common stock at any time or from time to time on or
before July 2008 at an exercise price ranging from $1.50 to $1.89 per share. The
Company recorded a debt discount as a result of the issuance of this warrant of
approximately $201,000. The total debt discount was being charged to interest
expense, ratably, over the term of the Facility

         On November 18, 2005, this Facility was terminated after the entire
outstanding debt balance for the Amended and Restated 2003 Note and 2004 Note
were paid off. As of that date the Company had no borrowings under the Facility.
On the day the note was terminated, the Company expensed the remaining
unamortized discount to interest expense in the amount of approximately $38,000.
The early termination fee that was due if the Facility were to be terminated
prior to August 1, 2006 was waived since all of the outstanding borrowings from
Laurus were repaid.

         2003 NOTE

         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 2003 Note"). The net proceeds from the additional
principal under the Amended and Restated 2003 Note were used for working
capital.

         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, was 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.


                                       10



<PAGE>

         As of November 18, 2005, there was an outstanding principal balance of
$1,310,000 and accrued interest of approximately $5,000 for the 2003 Note. On
November 18, 2005, the Company paid the entire amount of outstanding debt and
accrued interest for the 2003 Note. In addition, the Company was charged a 4%
pre-payment penalty fee in the amount of approximately $52,000. The total amount
that was paid for the 2003 Note was approximately $1,367,000. On the day the
note was paid off, the Company expensed the remaining unamortized discount to
interest expense in the amount of approximately $85,000.

     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, the Company issued to Laurus a
warrant to purchase up to 130,000 shares of the 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"). 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 was being charged to interest expense, ratably,
over the term of the 2004 Note.

         As of November 18, 2005, there was an outstanding principal balance of
$850,000 and accrued interest of approximately $3,000 for the 2004 Note. On
November 18, 2005, the Company paid the entire amount of outstanding debt and
accrued interest for the 2004 Note. In addition, the Company was charged a 4%
pre-payment penalty fee in the amount of $34,000. The total amount that was paid
for the 2004 Note was approximately $887,000. On the day the note was paid off,
the Company expensed the remaining unamortized discount to interest expense in
the amount of approximately $124,000.

7. 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.


                                       11



<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):


<TABLE>
                                                    THREE MONTHS ENDED       NINE MONTHS ENDED DECEMBER
                                                       DECEMBER 31,                        31,
                                                 ----------------------      --------------------------
                                                   2005          2004           2005              2004
                                                 --------      --------      ----------       ---------
<S>                                              <C>           <C>           <C>              <C>
          Net income (loss) - as reported        $ 17,849      $   (235)     $   16,521       $    (925)
          Deduct: Stock-based compensation
          expense determined under the fair
          value based method for all awards,
          net of tax                                  (36)          (68)           (108)           (204)
                                                 --------      --------      ----------       ---------
              Net income (loss) - pro forma      $ 17,813      $   (303)     $   16,413       $  (1,129)
                                                 ========      ========      ==========       =========

         Basic and diluted net income (loss)
         per share -
              As reported                        $   0.93      $  (0.01)     $        0.86    $   (0.05)
              Pro forma                          $   0.93      $  (0.02)     $        0.86    $   (0.06)

         Weighted average fair value of
              options granted                    $     --      $     --      $        1.02         1.45
</TABLE>

                                                              NINE MONTHS ENDED
                                                                DECEMBER 31,
                                                          ----------------------
                                                             2005        2004
                                                          ----------  ----------
        Black-Scholes option pricing model
              Assumptions:
                  Dividend yield                                -           -
                  Expected volatility                        81.0 %      83.9 %
                  Risk-free interest rate                    4.26        3.81
                  Expected option lives (in years)           7.01        6.85

8. FOREIGN CURRENCY TRANSLATION

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

9. 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 $17,748,000 and $59,000 for the three months ended December 31, 2005
and 2004, respectively, and was $16,365,000 and $738,000 for the nine months
ended December 31, 2005 and 2004, respectively.


                                       12



<PAGE>

10. 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         NINE MONTHS ENDED
                                                                DECEMBER 31,               DECEMBER 31,
                                                           ---------------------      ---------------------
                                                             2005         2004          2005         2004
                                                           --------     --------      --------     --------
<S>                                                        <C>          <C>           <C>          <C>
         Numerator:
         Net income (loss) and numerator for
         basic and diluted income (loss) per share         $ 17,849     $   (235)     $ 16,521     $   (925)
                                                           ========     ========      ========     ========
         Denominator:
         Denominator for basic net loss per share
           - average number of common shares                 19,117       18,866        19,117       18,776
           outstanding during the period
         Incremental common shares attributable to
           exercise of outstanding options,
           warrants and other common stock equivalents           --           --            --           --
                                                           --------     --------      --------     --------
         Denominator for diluted net loss per
         share                                             $ 19,117     $ 18,866        19,117       18,776
                                                           ========     ========      ========     ========

         Basic and diluted net income (loss) per
         share                                             $   0.93     $  (0.01)     $   0.86     $  (0.05)
                                                           ========     ========      ========     ========

</TABLE>

         There were no options, warrant and other common stock equivalents that
amounted to potential common shares for the three and nine-month periods ended
December 31, 2005. Options, warrants and other common stock equivalents
amounting to 1,377,000 and 1,360,000 potential common shares for the three and
nine month periods ended December 31, 2004 were excluded from the computation of
diluted EPS for the periods presented because the Company reported net losses
and, therefore, the effect would be antidilutive.

11.  IMPAIRMENT CHARGE

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

         The Company considers the following operating segments- collaborative
software products and services and IT services - to be our reporting units for
purposes of testing for impairment.

         The Company uses 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 the Company does not need
to proceed to the second step. If the carrying value of a reporting unit exceeds
its fair value, then the Company has 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 the Company has to record an impairment loss in the amount of the
excess.


                                       13



<PAGE>

         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.

         In accordance with SFAS No. 142, the Company assessed the fair value of
its two reporting units by considering their projected cash flows, using
risk-adjusted discount rates and other valuation techniques. Given consideration
of relevant factors, such as the decline in revenue of these reporting units and
the projected cash flows being negatively affected due to the Company's total
operating costs now being charged against the remaining operations after the REI
sale, the Company conducted a test and concluded that as of December 31, 2005,
an impairment write-down of its IT services division and collaborative service
division were required. In accordance with the provisions of SFAS No. 142, the
Company recorded an impairment charge of $2,924,000 during the three months
ended December 31, 2005 for the write-down of goodwill related to the purchases
of netGuru Systems, Inc., R-Cube Technologies, Inc., Apex Technology, and
Allegria, Inc. The amount of the write-down represented the excess of the
carrying amount of goodwill over its fair value. As of December 31, 2005, the
Company had no remaining goodwill balance.

12. SEGMENT AND GEOGRAPHIC DATA

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

         o        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.


                                       14



<PAGE>

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

<TABLE>
                                                  THREE MONTHS ENDED        NINE MONTHS ENDED
                                                     DECEMBER 31,              DECEMBER 31,
                                                 --------------------      --------------------
                                                   2005        2004          2005        2004
                                                 -------      -------      -------      -------
<S>                                              <C>          <C>          <C>          <C>
                      NET REVENUE
             Collaborative software products
               and services                      $   245      $   193      $   624      $   461
             IT services                             636          903        2,153        3,012

                                                 -------      -------      -------      -------
                  Consolidated                   $   881      $ 1,096      $ 2,777      $ 3,473
                                                 =======      =======      =======      =======

                      GROSS PROFIT
             Collaborative software products
               and services                      $   207      $   192      $   584      $   389
             IT services                             151          267          494          988

                                                 -------      -------      -------      -------
                  Consolidated                   $   358      $   459      $ 1,078      $ 1,377
                                                 =======      =======      =======      =======

                   OPERATING (LOSS)
             Collaborative software products
               and services                      $(1,786)     $   (27)     $(1,742)     $  (331)
             IT services                          (1,321)         (97)      (1,761)         (19)
              Center                                (577)        (475)      (1,467)      (1,295)

                                                 -------      -------      -------      -------
                  Consolidated                   $(3,684)     $  (599)     $(4,970)     $(1,645)
                                                 =======      =======      =======      =======

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

                                                  THREE MONTHS ENDED        NINE MONTHS ENDED
                                                     DECEMBER 31,              DECEMBER 31,
                                                 --------------------      --------------------
                                                  2005         2004          2005        2004
                                                 -------      -------      -------      -------
                      NET REVENUE
         United States                           $   618      $   727      $ 2,017      $ 2,418
         Europe                                       87           52          190          294
         Asia-Pacific                                176          317          570          761
                                                 -------      -------      -------      -------

                  Consolidated                   $   881      $ 1,096      $ 2,777      $ 3,473
                                                 =======      =======      =======      =======

                      EXPORT SALES
         United States                           $    24      $   136      $   134      $   445
                                                 =======      =======      =======      =======

</TABLE>

                                                DECEMBER 31,      MARCH 31,
                                                    2005            2005
                                                ------------    -----------
                                                      (IN THOUSANDS)
                LONG-LIVED ASSETS
                United States                   $        324    $    3,050
                Europe                                    30           101
                Asia-Pacific                             820           989
                                                ------------    -----------

                         Consolidated           $      1,174    $    4,140
                                                ============    ===========


                                       15



<PAGE>

13. CONTINGENCIES

          The Company is a named defendant in a civil action commenced against
it by plaintiffs Ash Brahma, Sujit Kumar , and Venture International
(collectively, "Plaintiffs") on August 18, 2005, in the Commonwealth of
Massachusetts, Essex County, Superior Court Department of the Trial Court, Civil
Action No. 05-1446 B, entitled, ASH BRAHMA, ET AL. V. NETGURU, INC. (the
"Action").

         In the Action, Plaintiffs allege breach of contract and fraud on the
part of the Company, and they seek alleged damages of $4,885,000. On October 5,
2005, the Company timely filed a Notice of Removal of the Action to the United
States District Court, District of Massachusetts, where the Action is currently
pending.

         On October 13, 2005, the Company filed its answer and counterclaim
in the Action. The Company has denied any breach of contract or other wrongdoing
on its part, and has denied that Plaintiffs are entitled to equitable relief or
damages. The Company's counterclaim seeks recession of contract and/or breach of
contract, restitution and/or damages for consulting fees paid to Plaintiffs,
damages for time and money spent pursuant to the contracts alleged objectives
(plus interest, costs and attorneys' fees).

         Both parties have engaged in early discussions exploring potential
resolution of the disputes to avoid protracted litigation. During the course of
the discussions, Plaintiffs have been made aware of material facts, which serve
to obviate the bulk of their alleged damages claim. Accordingly, with respect to
the complaint, the Company believes that the alleged damages approximate $60,000
as opposed to the original claim.

         The assigned judge has issued an inquiry asking if the parties will
stipulate to assignment of the Action to a magistrate judge for all purposes.
The parties have until February 17, 2006, to respond to the inquiry.

         The Company's wholly-owned subsidiary, R-Cube Technologies, Inc.
("R-Cube") is a named defendant in a civil action commenced against it by
plaintiff EOP-Central Park Plaza, LLC ("EOP") on December 27, 2005, in Orange
County Superior Court, Case No. 05NL25236, entitled, EOP-CENTRAL PARK PLAZA. LLC
V. R-CUBE TECHNOLOGIES, INC. (the "R-Cube Action").

         In the R-Cube Action, EOP alleges causes of action for (1) breach of
contract; (2) open book account; and (3) account stated on the part of R-Cube,
and seeks alleged damages of $21,3000. R-cube denies any breach of contract or
other wrongdoing and/or contends that its performance under the agreement was
excused. R-Cube further denies that EOP is entitled to the claimed damages

         Management believes the resolution of these matters will not materially
affect the Company's consolidated results of operations or financial condition.

14. DISCONTINUED OPERATIONS

         On November 18, 2005, the Company completed the sale of assets of its
REI business and STAAD product lines to Bentley for $23.50 million in cash and
recorded a net gain of approximately $22.17 million, net of approximately
$650,000 in net tax expense. Net operating losses from prior years are being
utilized to significantly reduce the Company's taxable income. The primary
difference in the Company's federal statutory rate compared to the effective tax
rate resulted from a change of approximately $7.3 million in the Company's
valuation allowance. The change decreased the expected tax from approximately
$8.0 million to approximately $650,000. The Company continues to record a full


                                       16



<PAGE>

valuation allowance against the remaining net deferred tax assets, which
includes state net operating losses, research and development tax credits,
reserves, and other accruals. In November 2005 the company set aside a cash
reserve of $1.07 million in accordance with the purchase agreement with Bentley.
In addition to the $23.50 million, the Company also received $250,000 for
reimbursement of expenses relating to legal and financial services in connection
with the asset sale.

         The asset sale included the worldwide operations associated with REI,
including the STAAD structural analysis and design product line, software and
product development, customer support and relationships, and offices associated
with the worldwide business. The Yorba Linda office sale-leaseback was assigned
to Bentley on November 17, 2005. Effective as of that date, the Company assigned
to Bentley all of its right, title, and interest in and to the lease. Bentley
assumed all of the Company's obligations under the lease, and agreed to make all
payments and to perform all covenants and agreements of tenant under the lease,
however the assignment did not alter the primary responsibility of the Company
for the payment of rent if Bentley defaults or breaches the lease assignment. As
such, the deferred gain on the sale-leaseback that was recorded in November 1999
remains on the balance sheet as a liability and is being recognized over the
remaining period of the original lease.

         On January 5, 2006, the Company entered into a separate agreement with
Mr. Badreddine Ziane to sell the Company's France subsidiary for $100,000. Mr.
Ziane has agreed to purchase all the outstanding shares of the subsidiary and he
intends to sell the REI products and offer related consulting services as an
independent contractor to Bentley. The Company expects this sale to be finalized
by the end of the fourth quarter of fiscal 2006. At December 31, 2005 the assets
and liabilities associated with the France subsidiary remained classified as
held for sale.

         The Company's condensed consolidated financial statements have been
reclassified for all periods presented to reflect the REI business as
discontinued operations. The Company first reflected these operations as
discontinued in the second quarter of fiscal 2006 when the Company decided to
sell the operations. In accordance with GAAP, the revenues, costs, and expenses
directly associated with the REI business have been reclassified as discontinued
operations on the condensed consolidated statements of operations for all
periods presented. Corporate expenses such as general corporate overhead and
interest have not been allocated to discontinued operations. Additionally,
assets and liabilities of the REI business segment have been reclassified as
held for sale on the Company's condensed consolidated balance sheets for all
periods presented, and the Company's condensed consolidated statements of cash
flows have been reclassified to reflect the operations of the REI business
segment as discontinued operations for all periods presented.

         Separately, in September 2004, the Company sold its Web-based
telecommunications services division in its continuing efforts to focus on its
core software products and IT services businesses. 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 and nine months ended December 31, 2004. 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 prior to March 31, 2005.


                                       17



<PAGE>

         The carrying value of the assets and liabilities held for sale of the
discontinued REI business included in the consolidated balance sheets are as
follows:


                                                      DECEMBER 31,    MARCH 31,
                                                         2005           2005
                                                      ------------    ---------
ASSETS HELD FOR SALE
    Accounts receivable, net                          $        133    $   2,766
    Income taxes receivable                                     --            4
    Prepaid expenses and other current assets                   23          420
                                                      ------------    ---------
           Total current assets                                156        3,190

Property, plant and equipment, net                               8          617
Goodwill                                                        --          157
Other assets                                                    --           98
                                                      ------------    ---------
                                                      $        164    $   4,062
                                                      ============    =========

LIABILITIES HELD FOR SALE
    Current portion of capital lease obligations      $         --    $      11
    Accounts payable                                            10          291
    Accrued expenses                                            26          595
    Income taxes payable                                        12           --
    Deferred revenues                                           27        2,288
    Other liabilities                                          145          148
                                                      ------------    ---------
           Total current liabilities                           220        3,333

Capital lease obligations, net of current portion               --            1
                                                      ------------    ---------
           Total liabilities                          $        220    $   3,334
                                                      ============    =========


                                       18



<PAGE>

         The net revenues, net income (loss), gain on sale, and income tax
expense of the Company's discontinued operations, were as follows:

<TABLE>
                                               THREE MONTHS ENDED          NINE MONTHS ENDED
                                                  DECEMBER 31,                DECEMBER 31,
                                             ----------------------      ----------------------
                                               2005          2004           2005         2004
                                             --------      --------      --------      --------
<S>                                          <C>           <C>           <C>           <C>
Net revenues:

   Web-based telecommunications services     $     --      $     --      $     --      $    327
      business
    REI business                                1,707         2,624         7,527         7,671
                                             --------      --------      --------      --------
                                             $  1,707      $  2,624      $  7,527      $  7,998

Net (loss) income from operations of:
   Web-based telecommunications services
      business                               $     --      $     --      $     --      $    (50)

    REI business                                 (327)          478          (118)          933
                                             --------      --------      --------      --------
                                             $   (327)     $    478      $   (118)     $    883

Gain on sale before income taxes from:
   Web-based telecommunications services
      business                               $     --      $     --      $     --      $    117
    REI business                               22,818            --        22,818            --
                                             --------      --------      --------      --------
                                             $ 22,818      $     --      $ 22,818      $    117
Income tax expense:
    REI business                             $    650      $     --      $    650      $     --


</TABLE>

15.  SUBSEQUENT EVENTS

         On December 29, 2005, the Company announced that its board of directors
approved a cash distribution in the amount of $0.85 per share payable on January
27, 2006 to stockholders of record as of January 17, 2006. The total amount that
was distributed on January 27, 2006 was approximately $16,250,000, which has
been recorded as a cash distribution payable on the December 31, 2005 balance
sheet. The distribution follows the Company's sale of the assets of its REI
business and STAAD product lines on November 18, 2005 and the board of
directors' subsequent decision to distribute substantially all of the net
proceeds of the sale after repaying debt and setting aside reserves for taxes,
continuing operations, and other contingencies. In connection with the
distribution, options issued under the Company's stock option plans ceased
further vesting and then terminated if not exercised prior to the
ex-distribution date of January 30, 2006. Non-plan options and warrants that
remained outstanding on the ex-distribution date had an $0.85 per share
reduction in their exercise prices of those options and warrants on the
ex-distribution date.

         On January 5, 2006, the Company entered into a separate agreement with
Mr. Badreddine Ziane to sell the Company's France subsidiary for $100,000. Mr.
Ziane has agreed to purchase all the outstanding shares of the subsidiary and he
intends to sell the REI products and offer related consulting services as an
independent contractor to Bentley. The Company expects this sale to be finalized
by the end of the fourth quarter of fiscal 2006. At December 31, 2005 the assets
and liabilities associated with the France subsidiary remained classified as
held for sale.

16.  CASH FLOWS FROM DISCONTINUED OPERATIONS

         At December 31, 2005, the Company has separately disclosed the
operating, investing and financing portions of the cash flows attributable to
its discontinued operations, which in prior periods were reported on a combined
basis as a single amount.


                                       19



<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 successfully implement our business plans,
                  including the possible divestiture of some or all remaining
                  operations, the possibility of a corporate merger or strategic
                  acquisition, and/or the possible expansion of 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        Collaborative software products and services for businesses
                  worldwide; and
         o        Embedded information technology, or IT, services (including
                  engineering business process outsourcing, or EBPO).

         Our net revenues from continuing operations during the nine months
ended December 31, 2005 were $2,777,000, a decrease of $696,000 (20.0%) over the
corresponding prior year period, of which IT services net revenues decreased
$859,000 (28.5%), and collaborative software products and services net revenues
increased $163,000 (35.4%).


                                       20



<PAGE>

         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.

         On November 18, 2005, we completed the asset sale of our Research
Engineers International, Inc. ("REI") business and STAAD product lines to
Bentley Systems, Incorporated ("Bentley") for $23.5 million in cash. The asset
sale included the worldwide operations associated with REI, including the STAAD
structural analysis and design product line, software and product development,
customer support and relationships, and offices associated with the worldwide
business. As of that date, we met the criteria required to account for the REI
business as a discontinued operation. As such, the Management Discussion and
Analysis results of operations discussion is broken up into analysis of
continuing operations and discontinued operations.

         Part of the proceeds from the asset sale was used to pay off the
remaining outstanding indebtedness under our convertible notes in the amount of
approximately $2,255,000 million on November 18, 2005, as described in note 6.
In addition, sale proceeds were used to pay off $1,058,000 of debt at our India
subsidiary in November 2005. On January 27, 2006, $16,250,000 was distributed to
stockholders of record as of January 17, 2006. See "Liquidity and Capital
Resources" below for further discussion on the cash distribution.

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        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 reasonably assured.

         We recognize revenues from software that 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


                                       21



<PAGE>

the product to the customer, provided no significant obligations remain and
collection of the resulting receivable is probable. Customers may choose to
purchase ongoing maintenance contracts that include telephone, e-mail and other
methods of support, and unspecified upgrades on a when-and-if available basis.
Revenue from the maintenance contracts is deferred and recognized ratably over
the life of the contract, usually twelve months.

         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 nine months. We did not have any uncompleted fixed
price IT contracts at December 31, 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, 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.


                                       22



<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 -
collaborative software products and services as well as 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. 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,
our results of operations could be materially affected by the write-down of the
carrying amount of goodwill to its estimated fair value.

         We assessed the fair value of our two reporting units by considering
their projected cash flows, using risk-adjusted discount rates and other
valuation techniques. Given consideration of relevant factors, such as the
decline in revenue of these reporting units as well as the negative impact on
projected cash flows due to total operating costs now being charged to the
remaining operations after the REI sale, we conducted a test and concluded that
as of December 31, 2005, an impairment write-down of our IT services division
and our collaborative service division were required. In accordance with the
provisions of SFAS No. 142, we recorded an impairment charge of $2,924,000
during the three months ended December 31, 2005. The amount of the write down
represented the excess of the carrying amount of goodwill over its fair value.
As of December 31, 2005, we had no remaining goodwill balance.


                                       23



<PAGE>

CONSOLIDATED RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED DECEMBER 31,
2005 VERSUS THREE AND NINE MONTHS ENDED DECEMBER 31, 2004

         CONTINUING OPERATIONS

NET REVENUES

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


                                      THREE MONTHS ENDED     NINE MONTHS ENDED
                                         DECEMBER 31,          DECEMBER 31,
                                      ------------------     ------------------
                                       2005        2004       2005        2004
                                      ------      ------     ------      ------
NET REVENUES
Collaborative
   software products and services     $  245      $  193     $  624      $  461
% of total net revenues                 27.8%       17.6%      22.5%       13.3%

IT services                              636         903      2,153       3,012
% of total net revenues                 72.2%       82.4%      77.5%       86.7%
                                      ------      ------     ------      ------
Total net revenues                    $  881      $1,096     $2,777      $3,473
                                      ======      ======     ======      ======


         Total net revenues for the three and nine months ended December 31,
2005 decreased by $215,000 (19.6%) and $696,000 (20.0%), respectively, compared
to the three and nine months ended December 31, 2004.

 COLLABORATIVE SOFTWARE PRODUCTS AND SERVICES

         Net revenues from collaborative software products and services for the
three months ended December 31, 2005 increased by $52,000 (26.9%) compared to
the three months ended December 31, 2004. Net revenues from collaborative
software products and services for the nine months ended December 31, 2005
increased by $163,000 (35.4%) compared to the nine months ended December 31,
2004 due to the completion and recognition of one large project in the amount of
$220,000 during the nine months ended December 31, 2005, compared to the
completion of a $75,000 project for the same period in the prior year. The
timing of completion and recognition of revenue from our large projects creates
variability in our collaborative software net revenues between quarters.

IT SERVICES

         The trend of decreasing IT services net revenues continued during the
three and nine months ended December 31, 2005, compared to the three and nine
months ended December 31, 2004. IT services net revenues decreased $267,000
(29.6%) and $859,000 (28.5%) for the three and nine months ended December 31,
2005, compared to the three and nine months ended December 31, 2004. Net
revenues from IT services have decreased due to the scaling back of one of our
domestic IT services offices, due to a reduction in IT services revenues in
Europe where the focus has shifted from lower to higher gross margin areas such
as software sales, and a reduction of our prices to remain competitive and
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


                                       24



<PAGE>

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. 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 revenues, or gross margin (dollars
in thousands):

                                     THREE MONTHS ENDED      NINE MONTHS ENDED
                                        DECEMBER 31,            DECEMBER 31,
                                     ------------------    --------------------
                                      2005        2004       2005        2004
                                     ------      ------    --------    --------
GROSS PROFIT
Collaborative
   software products and services   $   207     $   192    $    584    $    389
IT services                             151         267         494         988

                                     ------      ------    --------    --------
  Consolidated                      $   358     $   459    $  1,078    $  1,377
                                     ======      ======    ========    ========
GROSS MARGIN
Collaborative
   software products and services      84.6%       99.5%       93.6%       84.4%
IT services                            23.7%       29.5%       22.9%       32.8%

                                     ------      ------    --------    --------
  Consolidated                         40.6%       41.9%       38.8%       39.6%
                                     ======      ======    ========    ========

         Consolidated gross margin decreased to 40.6% and 38.8% for the three
and nine months ended December 31, 2005 from 41.9% and 39.6% for the three and
nine months ended December 31, 2004 due to the decreasing gross margin for IT
services.

COLLABORATIVE SOFTWARE PRODUCTS AND SERVICES

         Our collaborative software products and services segment generally
produces a higher gross margin than our IT services segment due to the
relatively lower costs associated with each sale. The cost of net revenues for
the collaborative software products and services segment includes royalty fees
and software amortization expense.

         Gross margin in the collaborative software products and services
segment decreased by 14.9 percentage points to 84.6% for the three months ended
December 31, 2005 from 99.5% for the three months ended December 31, 2004. Gross
margin for the nine months ended December 31, 2005 increased by 9.2 percentage
points to 93.6% compared to 84.4% for the nine months ended December 31, 2004.
The decrease in gross margin for the three months ended December 31, 2005 was
due to one project that had specific service hours associated with the sale,
which increased the cost of sale. This kind of project was not present in the
prior year. The increase in gross margin for the nine months was primarily due
to a $69,000 decrease in software amortization costs as a result of the
completion of amortization during June 2004.

IT SERVICES

         Gross margin in the IT services segment decreased by 5.8 and 9.9
percentage points for the three and nine months ended December 31, 2005,
respectively compared to the three and nine months ended December 31, 2004. IT
services segment gross margin decreased due to the increase in the number of
employees for the new estimated EBPO projects we will undertake, but have not


                                       25



<PAGE>

begun yet or have been delayed. Historically, gross margin from the IT services
segment has been lower than gross margin from the engineering and collaborative
software products and services segment due to the higher cost of labor
associated with IT services. The cost of net 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.

OPERATING EXPENSES

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


<TABLE>
                                       THREE MONTHS ENDED            NINE MONTHS ENDED
                                          DECEMBER 31,                  DECEMBER 31,
                                   --------------------------     ------------------------
                                      2005             2004          2005           2004
                                   ----------       ---------     ---------      ---------
<S>                                <C>              <C>           <C>            <C>
OPERATING EXPENSES
    Selling, general and
       administrative expenses     $     897        $    828      $   2,242      $  2,224
    % of total net revenues            101.9%           75.5%          80.7%         64.1%

    Research and development
      expenses                     $     106        $    135      $     397      $    408
    % of total net revenues             12.0%           12.3%          14.3%         11.7%

    Bad debt expense               $      32        $      -      $     253      $    156
    % of total net revenues              3.7%              -            9.1%          4.5%

    Depreciation                   $      83        $     95      $     232      $    234
     % of total net revenues             9.4%            8.7%           8.4%          6.7%

    Impairment charge              $   2,924        $      -      $   2,924      $      -
    % of total net revenues            331.9%              -          105.3%            -

    Total operating expenses       $   4,042        $  1,058      $   6,048      $  3,022
    % of total net revenues            458.9%           96.5%         217.8%         87.0%

</TABLE>

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative ("SG&A") expenses increased by
$69,000 (8.4%) and by $18,000 (1%) for the three and nine months ended December
31, 2005, respectively, compared to the three and nine months ended December 31,
2004. As a percentage of revenues, SG&A expenses increased 26.4 percentage
points and 16.6 percentage points for the three and nine months ended December
31, 2005, compared to the three and nine months ended December 31, 2004. SG&A
expenses increased as a percentage of total net revenues due to the fact that
the corporate overhead costs are remaining relatively constant yet the total
amount of net revenues from the IT segment are decreasing. The increase in the
SG&A expenses for the three months ended December 31, 2005 was primarily due to
the following:


                                       26



<PAGE>

         o        A $42,000 increase in traveling expenses due to increased
                  travel by our sales departments and upper management to
                  promote sales growth;
         o        A $28,000 increase in temporary help expenses due to contract
                  accounting services provided to us;
         o        A $19,000 increase in investment banking expense due to
                  strategic opportunities advisory services provided to us;
         o        An $11,000 increase in professional fees due to additional
                  accounting and legal fees;
         o        A $6,000 increase in board compensation expense due to monthly
                  pay increases; and
         o        A $5,000 increase in consulting expenses due to the India
                  operation's design and detailing sales administration program.

The above increases were partially offset by the following decrease in SG&A
expense:

         o        A $57,000 decrease in insurance expenses and other benefits
                  due to a decrease in the number of our U.S. employees and due
                  to proper allocation to cost of sales of IT consultants'
                  insurance expenses.

         We continue to monitor our SG&A expenses but do not make any assurances
that we will be able to reduce SG&A expenses from levels attained in the first
nine months of fiscal 2006. In addition, obtaining profitability may be
difficult due to the future decrease in sales resulting from the sale of our REI
business and due to the decreasing trend in IT services sales.

         RESEARCH AND DEVELOPMENT EXPENSES

         Research and development ("R&D") expenses consist primarily of software
developers' wages. R&D expenses decreased by $29,000 (21.5%) and $11,000 (2.7%)
to $106,000 and $397,000 for the three and nine months ended December 31, 2005,
from $135,000 and $408,000 for the three and nine months ended December 31,
2004. The decrease in R&D expense was due to many of our R&D developers working
on actual service projects for our customers, and, as a result, their costs were
re-classified to cost of sales.

         BAD DEBT EXPENSE

         Bad debt expense increased by $32,000 and $97,000 to $32,000 and
$253,000 for the three and nine months ended December 31, 2005, respectively,
from $0 and $156,000 for the three and nine months ended December 31, 2004,
respectively. Bad debt expense increased by $32,000 during the three months
ended December 31, 2005 due to an increase in the reserve balance for domestic
operations. It increased for the nine months ended December 31, 2005 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 $12,000 (12.6%) and $2,000 (1.0%) for the three and nine months ended
December 31, 2005, respectively, compared to the three and nine months ended
December 31, 2004. We anticipate that depreciation expenses will remain at this
lower level through the end of fiscal 2006.




                                       27



<PAGE>

IMPAIRMENT CHARGE

         During the three and nine months ended December 31, 2005, we recorded
an impairment charge of $2,924,000 for the write-down of goodwill related to the
purchases of netGuru Systems, Inc., R-Cube Technologies, Inc, and Allegria, Inc
in accordance with SFAS No. 142. In accordance with SFAS No. 142, we assessed
the fair value of our two reporting units by considering their projected cash
flows, using risk-adjusted discount rates, and other valuation techniques. Given
consideration of relevant factors such as the sale of the REI business, we
concluded that an impairment write down of our IT Services division in the
amount of $1,137,000 was required, as well as an impairment write-down of our
collaborative software division in the amount of $1,787,000. As of December 31,
2005, we had no remaining goodwill balance.

SEGMENT PROFITABILITY AND OPERATING (LOSS)

         During the three and nine months ended December 31, 2005, consolidated
operating losses were $3,684,000 and $4,970,000, respectively, compared to
consolidated operating losses of $599,000 and $1,645,000 during the three and
nine months ended December 31, 2004, respectively. Consolidated operating losses
during the three and nine months ended December 31, 2005 consisted of operating
losses from the collaborative software products and services segment, the IT
services segment, and from the corporate center. Operating losses in the
engineering and collaborative software products and services segment were
$1,786,000 and $1,742,000 during the three and nine months ended December 31,
2005 compared to operating losses of $27,000 and $331,000 during the three and
nine months ended December 31, 2004, respectively. Operating loss for the
engineering and collaborative software segment decreased $1,759,000 and
$1,411,000 during the three months and nine months ended December 31, 2005
primarily due to an impairment charge to goodwill in the amount of $1,787,000.
This decrease was offset by the following increases during the nine months ended
December 31, 2005:

         o        A $163,000 increase in revenue due to larger value projects
                  being completed;
         o        A $141,000 decrease in bad debt expense due to no additional
                  reserves needed; and
         o        A $69,000 decrease in amortization of capitalized software due
                  to the completion of amortization in June 2004.

         In the IT services segment, the operating loss during the three and
nine months ended December 31, 2005 was $1,321,000 and $1,761,000, respectively,
compared to operating losses of $97,000 and $19,000 during the three and nine
months ended December 31, 2004, respectively. The decrease in operating income
for both periods was due primarily to a $1,137,000 impairment charge to
goodwill. In addition, the decrease was due to an increased bad debt expense,
increased staff for the anticipated EBPO projects that have not started or have
been delayed, and a decrease in the number of customers, causing a reduction in
sales.


                                       28



<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):

<TABLE>
                                      THREE MONTHS ENDED              NINE MONTHS ENDED
                                         DECEMBER 31,                     DECEMBER 31,
                                 ----------------------------       ----------------------
                                    2005              2004             2005          2004
                                 ----------        ----------       ---------    ---------
<S>                              <C>               <C>              <C>          <C>
OTHER EXPENSE (INCOME)
    Interest expense, net        $     343         $     123        $    593     $    339
    % of total net revenues           38.9%             11.2%           21.3%         9.8%

    Other income                 $     (38)        $      (9)       $    (44)    $    (67)
    % of total net revenues           (4.3)%            (0.8)%          (1.6)%       (1.9)%

    Total other expense          $     305         $     114        $    549     $    272
    % of total net revenues           34.6%             10.4%           19.8%         7.8%

</TABLE>

         INTEREST EXPENSE, NET

         Interest expense, net increased by $220,000 (178.9%) and $254,000
(74.9%) for the three and nine months ended December 31, 2005 compared to the
three and nine months ended December 31, 2004. This increase was due primarily
to an increase in interest expense from our Laurus debt. On November 18, 2005,
we paid the entire outstanding debt obligation to Laurus and expensed the
remaining unamortized discount for the 2003 and 2004 note and the revolving
credit facility in the amount of $247,000. In addition, the remaining prepaid
loan fees of $35,000 associated with the Laurus debt were expensed to loan
origination fees, which is part of interest expense. Due to the Laurus debt
payoff and the payoff of the debt of our India subsidiary, we anticipate our
interest expense in the future will decrease.

         OTHER INCOME

         Other income increased by $29,000 for the three months ended December
31, 2005, compared to the three months ended December 31, 2004 primarily due to
rental income in India from subleasing our building to Bentley, and from the
write off of a previously recorded liability. For the nine months ended December
31, 2005, other income decreased by $23,000, compared to the nine months ended
December 31, 2004. During the nine months ended December 31, 2004, we had sold
certain assets that were previously written off, which contributed to a higher
year-to-date balance in fiscal 2005 compared to fiscal 2006.

INCOME TAXES

          We recorded income tax expenses of $3,000 and $10,000 for the three
and nine months ended December 31, 2005, respectively, compared to income tax
expenses of $0 and $8,000 during the three and nine months ended December 31,
2004, respectively. Tax expense for the three and nine months ended December 31,
2005 resulted from provisions for domestic and foreign income taxes applicable
to local jurisdictions.

DISCONTINUED OPERATIONS

         On November 18, 2005, the Company completed the sale of its REI
business and STAAD product lines to Bentley for $23,500,000 in cash. The asset
sale included the worldwide operations associated with REI, including the STAAD
structural analysis and design product line, software and product development,
customer support and relationships, and offices associated with the worldwide
business. In addition to the $23,500,000, we also received $250,000 for


                                       29



<PAGE>

reimbursement of expenses relating to legal and financial services in connection
with the asset sale. In accordance with the asset sale agreement, in November
2005 we set aside a cash reserve of $1.07 million. In accordance with accounting
principles generally accepted in the United States, the revenues, costs, and
expenses directly associated with the REI business have been reclassified as
discontinued operations on the condensed consolidated statements of operations
for all periods presented. Corporate expenses such as general corporate overhead
and interest have not been allocated to discontinued operations.

         We recorded income from discontinued operations of $21,841,000 during
the three months ended December 31, 2005 compared to income from discontinued
operations of $478,000 during the three months ended December 31, 2004. The
income recorded in the third quarter of 2006 includes a gain on the sale of the
REI business in the amount of $22,818,000, partially offset by a tax expense
from the gain on sale of $650,000, and by losses from the REI operations of
$327,000. The losses in the third quarter of 2006 reflect only one and one-half
months of full operations, as we completed the sale on November 18, 2005.

         Net loss from discontinued operations for the three months ended
December 31, 2005 was $327,000 compared to a net income of $478,000 for the same
period in the prior year, a decrease of $805,000. The decrease in the REI
business segment was primarily due to additional direct costs incurred related
to the sale of the REI business. In addition, the decrease was due to only one
and one-half months of revenue being recorded in the third quarter of 2006,where
the last month is usually the highest revenue month. Separately, in September
2004, we sold our Web-based telecommunications services division in our
continuing efforts to focus on our core software products and IT services
businesses. 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 and nine months ended December
31, 2004. 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 prior to March 31, 2005.

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. 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. Until the close the sale of our REI business during the quarter
ended December 31, 2005, we financed our operations (including capital
expenditures) primarily through existing cash and cash equivalent balances and
issuance of convertible notes. As a result of the sale, we have allocated a
portion of the $23,500,000 sale proceeds of to transaction costs, applicable
taxes and the retirement of approximately $3,312,000 of outstanding debt. On
December 29, 2005, we announced that our board of directors approved a cash
distribution in the amount of $0.85 per share payable on January 27, 2006 to
stockholders of record as of January 17, 2006. The total amount that was
distributed on January 27, 2006 was approximately $16,250,000, which was
recorded as a cash distribution payable on our December 31, 2005 balance sheet.

         Our principal sources of liquidity at December 31, 2005 consisted of
$20,540,000 of cash and cash equivalents. Cash and cash equivalents of our
continuing operations increased by $16,957,000 during the nine months ended
December 31, 2005. Total cash used in our discontinued operations was $98,000
for the nine months ended December 31, 2005, compared to total cash provided of


                                       30



<PAGE>

$905,000 for the nine months ended December 31, 2004. Total cash as of December
31, 2005 was reduced by $16,250,000 in January 2006 due to the cash distribution
to our stockholders, and we expect another reduction in cash in the short term
from the payment of approximately $650,000 for our income taxes.

         Net cash used in continuing operations was $1,285,000 during the nine
months ended December 31, 2005 compared to $1,866,000 for the nine months ended
December 31, 2004, a decrease of approximately $581,000. Net loss from
continuing operations of $5,529,000 offset by an impairment charge for goodwill
of $2,924,000, depreciation expense of $232,000, bad debt expense of $246,000
and amortization of loan discount of $399,000 were the primary reasons for cash
used in operations during the nine months ended December 31, 2005. Net loss from
continuing operations of $1, 925,000, offset by depreciation expense of $311,
000, bad debt expense of $153,000, and amortization of discount on loan of
$159,000 were the primary reasons for cash used in operations during the nine
months ended December 31, 2004.

         The following contributed to cash usage during the nine months ended
December 31, 2005:

         o        A $234,000 decrease in deferred revenues primarily due to a
                  lower level of new maintenance billings and the recognition of
                  revenues from one large collaborative software contract that
                  was deferred at fiscal year-end.

         The above cash usages were partially offset by the following
contributors to cash during the nine months ended December 31, 2005:

         o        A $445,000 decrease in accounts receivable due to a few large
                  payments received for large collaborative software contracts
                  and due to one of our larger IT customers paying on a net
                  15-day basis instead of net 60 days;
         o        A $177,000 decrease in prepaid expenses and other current
                  assets due to the write-off of the remaining capitalized film
                  costs, the write-off of tax deducted at source amounts that
                  are not recoverable, and a decrease in prepaid insurance fees;
                  and
         o        A $77,000 increase in accounts payable due to larger
                  professional fee invoices being held for payment along with
                  building fees for the new work being done on our India
                  building.

For the nine months ended December 31, 2004 the following contributed to cash
usage:

         o        A $217,000 decrease in accrued expenses primarily due to
                  payment of severance payments and professional fees;
         o        A $146,000 decrease in accounts payable due to payments; and
         o        A $125,000 increase in other current assets due primarily to a
                  receivable resulting from the sale of our Web-based
                  telecommunications services division.

         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 positive cash generation, if actual levels of expenses and revenues
from our EBPO services differ from anticipated levels due to unanticipated
increases in labor costs, decreased demand, competition, or other factors.


                                       31



<PAGE>

         Net cash provided by investing activities during the nine months ended
December 31, 2005 was $22,206,000. Net cash provided by investing activities
primarily consisted of proceeds of $23,500,000 from the sale of our REI
business. This was offset by an increase in restricted cash of $1,070,000 for
the cash reserve set aside per the Bentley purchase agreement and capital
expenditures of $224,000 for facility enhancements at our India operations. Net
cash provided by investing activities for nine months ended December 31, 2004
was $152,000. This primarily consisted of proceeds from the sale of short-term
investments of $100,000 and $115,000 of proceeds from the sale of e-Destinations
and our web-based telecommunications services division, offset by capital
expenditures of $42,000 and payments to acquire companies of $58,000.

         Cash used in financing activities during the nine months ended December
31, 2005 primarily resulted from $3,775,000 in long-term debt repayments and
$140,000 in capital lease obligations repayment. Cash provided by financing
activities during the nine months ended December 31, 2004 primarily resulted
from long-term borrowings of $3,627,000 and $100,000 of common stock issuance,
offset by $1,730,000 in long-term debt repayments and $98,000 in capital lease
repayments.

         Our board of directors has formed a special committee of three
independent board members. This special committee is evaluating the possible
divestiture of some or all of our remaining assets and operations, as well as
possible mergers and/or strategic acquisitions. Our future capital requirements
will depend upon many factors, including sales and marketing efforts, the
development of new products and services, possible future corporate mergers or
strategic acquisitions or divestitures, the progress of research and development
efforts, and the status of competitive products and services. We believe that
the proceeds that remain from our sale of our REI business, together with our
operating revenues and anticipated proceeds from the pending sale of our France
subsidiary, will be adequate to fund our operations for the next twelve months.
However, 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.

         The following table summarizes our contractual obligations and
commercial commitments at December 31, 2005 (in thousands of dollars):

<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*                        $     94     $     66     $     18     $      7     $      3
Capital Lease Obligations                   442          185          248            9           --
Operating Leases                             99           99           --           --           --

                                       --------     --------     --------     --------     --------
Total Contractual Cash Obligations     $    635     $    350     $    266     $     16     $      3
                                       ========     ========     ========     ========     ========
</TABLE>

* Excludes debt discount of $22.

         In November 2005, our convertible notes and our India subsidiary's debt
were paid off with the proceeds from the sale of our REI business.


                                       32



<PAGE>

ITEM 3.  CONTROLS AND PROCEDURES.

         We conducted an evaluation, with the participation of our Chief
Executive Officer and Chief Financial Officer (our principal executive officer
and principal financial officer, respectively), of 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"), as of December 31,
2005, 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 Securities and
Exchange Commission's ("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 principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that as of December 31, 2005, our
disclosure controls and procedures were not effective at the reasonable
assurance level due to the material weakness described below.

         A material weakness is a control deficiency (within the meaning of the
Public Company Accounting Oversight Board (United States) Auditing Standard No.
2) or combination of control deficiencies that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. Management has identified as a
material weakness our need for additional staff with expertise in preparing
accounting estimates and performing reconciliation procedures relating to
inclusion of financial information in our consolidated financial statements.

         Our need for such additional staff resulted from the major sale of
assets we completed during the quarter ended December 31, 2005, which sale
resulted in our loss of accounting staff in our India and United States
operations. We have worked to remediate this weakness by using our remaining
accounting staff, temporary help and outside consulting services to perform
additional manual controls, procedures and analysis and other pre- and
post-closing procedures designed to ensure that our consolidated financial
statements were prepared in accordance with generally accepted accounting
principles. Accordingly, we believe that the consolidated financial statements
included in this report fairly present, in all material respects, our financial
condition, results of operations and cash flows for the periods presented.
Management estimates that we have paid the temporary help and outside consulting
service providers approximately $12,000 in connection with their remediation
efforts. Management is unable, however, to estimate our capital or other
expenditures associated with allocation of time of certain company personnel to
assist us in performing the additional controls and procedures or other
expenditures relating to higher fees paid to our independent auditors in
connection with their review of this remediation.

         The changes noted above, specifically, the changes relating to our use
of temporary help and outside consulting services to assist us in preparing our
consolidated financial statements and relating to our performance of additional
controls and procedures, are the only changes during the quarter ended December
31, 2005 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.


                                       33



<PAGE>

                          PART II -- OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS

         We are named defendant in a civil action commenced against us by
plaintiffs Ash Brahma, Sujit Kumar, and Venture International (collectively,
"Plaintiffs") on August 18, 2005, in the Commonwealth of Massachusetts, Essex
County, Superior Court Department of the Trial Court, Civil Action No. 05-1446
B, entitled, ASH BRAHMA, ET AL. V. NETGURU, INC. (the "Action").

         In the Action, Plaintiffs allege breach of contract and fraud on our
part, and they seek alleged damages of $4,885,000. On October 5, 2005, we timely
filed a Notice of Removal of the Action to the United States District Court,
District of Massachusetts, where the Action is currently pending.

         On October 13, 2005, we filed our answer and counterclaim in the
Action. We have denied any breach of contract or other wrongdoing on our part,
and have denied that Plaintiffs are entitled to equitable relief or damages. Our
counterclaim seeks recession of contract and/or breach of contract, restitution
and/or damages for consulting fees paid to Plaintiffs, damages for time and
money spent pursuant to the contracts alleged objectives (plus interest, costs
and attorneys' fees).

         Both of us have engaged in early discussions exploring potential
resolution of the disputes to avoid protracted litigation. During the course of
the discussions, Plaintiffs have been made aware of material facts, which serve
to obviate the bulk of their alleged damages claim. Accordingly, with respect to
the complaint, we believe the alleged damages approximate $60,000 as opposed to
the amount of their original claim.

         The assigned judge has issued an inquiry asking if the parties will
stipulate to assignment of the Action to a magistrate judge for all purposes.
Both of us have until February 17, 2006, to respond to the inquiry.

         Our wholly-owned subsidiary, R-Cube Technologies, Inc. ("R-Cube") is a
named defendant in acivil action commenced against it by plaintiff EOP-Central
Park Plaza, LLC ("EOP") on December 27, 2005, in Orange County Superior Court,
Case No. 05NL25236, entitled, EOP-CENTRAL PARK PLAZA. LLC V. R-CUBE
TECHNOLOGIES, INC. (the "R-Cube Action").

         In the R-CubeAction, EOP alleges causes of action for (1) breach of
contract; (2) open book account; and (3) account stated on the part of R-Cube,
and seeks alleged damages of approximately $21,300. We deny any breach of
contract or other wrongdoing and/or contend that our performance under the
agreement was excused. We further deny that EOP is entitled to the claimed
damages.

         We believe the resolution of these matters will not materially affect
our consolidated results of operations or financial condition.

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

         None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES


                                       34



<PAGE>

         None.

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

         (a) Our annual meeting of stockholders was held on November 17, 2005.

         (b) The following is a brief description of the matters voted on at the
         meeting and a statement of the number of votes cast for and against and
         the number of abstentions:

         (c)(i) PROPOSAL ONE: Election of Amrit K. Das, Santanu K. Das, Benedict
         A. Eazzetta, D. Dean McCormick III, and Stanley W. Corbett as directors
         of the Company, all of whom were then serving as directors, by the
         holders of issued and outstanding shares of our common stock:

                                          FOR            ABSTAIN       WITHHELD
                                          ---            -------       --------
        Amrit K. Das                  18,738,222            0           64,066
        Santanu K. Das                18,704,499            0           97,789
        Benedict A. Eazzetta          18,704,199            0           98,089
        D. Dean McCormick III         18,738,849            0           63,439
        Stanley W. Corbett            18,738,849            0           62,439

             (c)(ii) PROPOSAL TWO: Approval of the sale of our Research
             Engineers International business and our STAAD product lines for a
             purchase price of $23.50 million under the terms of an asset
             purchase agreement dated August 19, 2005:

                  For:              13,461,197
                  Abstain:              22,677
                  Against:             193,360

             (c)(iv) PROPOSAL THREE: Ratification of certain issuances of equity
             securities for compensatory purposes:

                  For:              13,414,639
                  Abstain:              28,152
                  Against:             234,443

             (c)(iv) PROPOSAL FOUR: Ratification of the appointment of Haskell &
             White LLP as our independent registered public accounting firm for
             the fiscal year ended March 31, 2006:

                  For:              18,751,458
                  Abstain:              25,752
                  Against:              25,078

         As a result, all five directors were re-elected to the board of
directors, and each of the proposals two, three and four was approved by
stockholders.

ITEM 5.      OTHER INFORMATION

         On June 1, 2005, we entered into separate Change in Control and
Executive Retention Agreements ("Retention Agreement") with Santanu K. Das,
currently a director and then both a director and an executive officer, and
Clara Young, then an executive officer. On November 18, 2005, we completed the
sale of our REI business and STAAD product lines to Bentley. As part of the


                                       35



<PAGE>

sale, both employees accepted new employment with Bentley, and resigned from
their positions as executive officers with our Company effective November 18.
2005. Accordingly, their employment agreements with us terminated as of that
date. Subsequently, on November 23, 2005 and November 28, 2005, we entered in a
separate Waiver and Termination of Agreement ("Termination Agreement") with each
of Mr. Das and Ms. Young, respectively. The Termination Agreements terminate the
Retention Agreements and contain mutual waivers and release relating to rights
each party may have had under the Retention Agreements. Both Agreements are
attached as exhibits to this Form 10-QSB.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K


         EXHIBIT
         NUMBER     DESCRIPTION
         ------     -----------

         10.1     Waiver and Termination of Agreement dated as of November 28,
                  2005 by and between netGuru, Inc. and Santanu Das

         10.2     Waiver and Termination of Agreement dated as of November 23,
                  2005 by and between netGuru, Inc. and Clara Young

         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)


                                       36



<PAGE>

                                   SIGNATURES

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


Date:  February 21, 2006

                               NETGURU, INC.


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


                                       37



<PAGE>

            EXHIBITS FILED WITH THIS QUARTERLY REPORT ON FORM 10-QSB

         Exh. No. Description
         -------- -----------
         10.1     Waiver and Termination of Agreement dated as of November 28,
                  2005 by and between netGuru, Inc. and Santanu Das

         10.2     Waiver and Termination of Agreement dated as of November 23,
                  2005 by and between netGuru, Inc. and Clara Young

         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


                                       38