U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: March 31, 2006 Commission File Number: 0-22991 ONSPAN NETWORKING, INC. ----------------------- (Exact name of small business issuer as specified in its charter) NEVADA 87-0460247 ------ ---------- (State of Incorporation) (IRS Employer ID No) 21218 ST ANDREWS BLVD #610, BOCA RATON, FL 33433 ------------------------------------------------ (Address of principal executive office) (561) 306-5700 -------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. The number of shares outstanding of registrant's common stock, par value $.012 per share, as of March 31, 2006 was 1,089,219. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]. ONSPAN NETWORKING, INC. INDEX Page No. ------ Part I. Unaudited Financial Information Item 1. Condensed Consolidated: Balance Sheet - As of March 31, 2006 ........................... 3 Condensed Consolidated Statements of Operations - For the Three and Six Months Ended March 31, 2006 and 2005 .... 4 Condensed Consolidated Statements of Cash Flows - For the Six Months Ended March 31, 2006 and 2005 ............... 5 Condensed Consolidated Notes to Financial Statements ........... 6-15 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations ...................................... 16-23 Part II. Other Information Item 1. Legal Proceedings .............................................. 23 Item 3. Controls and Procedures ........................................ 24 Item 5. Other Information .............................................. 25 Item 6. Exhibits and Reports Form 8-K .................................. 25 2 ONSPAN NETWORKING, INC. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF MARCH 31, 2006 ASSETS CURRENT ASSETS Cash and cash equivalents ................................... $ 57,457 Marketable Securities ....................................... 73,200 ----------- Total current assets .......................................... 130,657 Property and equipment, net ................................... 1,528 ----------- Total assets .................................................. $ 132,185 =========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable and accrued expenses ....................... $ 65,551 Notes payable - Shareholder ................................. 210,748 Accrued wages ............................................... 360,600 Deferred tax liability ...................................... 15,090 ----------- Total current liabilities ..................................... 651,989 Dividend payable ............................................ 30,946 ----------- Total Liabilities ............................................. 682,935 ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT Preferred stock; $.001 par value; authorized 12,500 shares; issued and outstanding 2,713 shares; liquidation preference $271,300 ........................... 2 Common stock, $.012 par value. Authorized 8,333,333 shares; issued and outstanding 1,089,219 shares ............ 13,071 Paid-in capital ............................................. 7,908,845 Accumulated other comprehensive income, net of tax .......... 25,010 Accumulated deficit ......................................... (8,497,678) ----------- Total stockholders' deficit ................................... (550,750) ----------- Total liabilities and stockholders' deficit ................... $ 132,185 =========== See accompanying notes to unaudited condensed consolidated financial statements. 3 ONSPAN NETWORKING, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2006 AND 2005 THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, ------------------------- ----------------------- 2006 2005 2006 2005 ----------- ----------- ---------- ---------- Revenues ........................... $ - $ - $ - $ - COSTS AND EXPENSES: Salaries and wages ............... 39,000 21,000 79,000 61,000 Other selling, general and administrative expenses ......... 78,447 92,113 144,713 156,769 ----------- ----------- ---------- ---------- 117,447 113,113 223,713 217,769 ----------- ----------- ---------- ---------- Loss from operations ............... (117,447) (113,113) (223,713) (217,769) OTHER INCOME (EXPENSE): Other income ..................... 17,250 - 17,250 - Interest income .................. 1 277 2 746 ----------- ----------- ---------- ---------- Total other income (expense) ... 17,251 277 17,252 746 ----------- ----------- ---------- ---------- LOSS BEFORE INCOME TAXES ........... (100,196) (112,836) (206,461) (217,023) INCOME TAXES ....................... - - - - ----------- ----------- ---------- ---------- NET LOSS ........................... $ (100,196) $ (112,836) (206,461) (217,023) =========== =========== ========== ========== BASIC AND DILUTED NET LOSS PER SHARE $ (0.09) $ (0.10) $ (0.19) $ (0.20) =========== =========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING BASIC AND DILUTED ................ 1,089,219 1,090,677 1,089,219 1,090,677 =========== =========== ========== ========== See accompanying notes to unaudited condensed consolidated financial statements. 4 ONSPAN NETWORKING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2006 AND 2005 2006 2005 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ........................................... $(206,461) $(217,023) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation ..................................... 366 678 Common stock received in exchange for leasehold improvements .......................... - (6,100) Change in assets and liabilities Prepaid expenses ............................... 2,372 (2,372) Accounts payable ............................... (2,924) 14,205 Accrued interest ............................... 5,539 - Accrued wages payable .......................... 77,500 61,000 --------- --------- Net cash used in operating activities .............. (123,608) (149,612) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase marketable securities ................... - (27,000) --------- --------- Net cash used in investing activities .............. - (27,000) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuances of Notes Payable - Shareholder ......... 165,000 - --------- --------- Net cash provided by financing activities ......... 165,000 - --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 41,392 (176,612) CASH AND CASH EQUIVALENTS, beginning of period ..... 16,065 241,961 --------- --------- CASH AND CASH EQUIVALENTS, end of period ........... $ 57,457 $ 65,349 ========= ========= See accompanying notes to unaudited condensed consolidated financial statements. 5 ONSPAN NETWORKING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. ORGANIZATION HISTORY OF BUSINESS Originally incorporated in 1985, as Network Information Services, Inc., Network Systems International, Inc. ("NESI"), a Nevada corporation, was the surviving corporation of a reverse merger completed in April 1996. The Company became a publicly traded entity in connection with the re-organization. On July 10, 1998, the Company's stock was officially approved for listing on the NASDAQ Small Cap market and the Company's common stock began trading on NASDAQ Small Cap under the symbol NESI. As of April 2, 2002, the securities were de-listed from the NASDAQ Small Cap market and now trade on the Over-The-Counter Bulletin Board under the symbol ONSP. Effective February 10, 2001, the Company changed its name from Network Systems International, Inc., to Onspan Networking, Inc. (the "Company" or "Onspan"). On October 9, 2001, the Company affected a 1 for 12 reverse stock split of its issued and outstanding common stock. Prior to August 5, 2002, the Company, a Nevada corporation, was a holding company, that through its wholly owned subsidiary, InterLAN Communications, Inc. ("InterLAN"), developed data communications and networking infrastructure solutions for business, government and education. On August 5, 2002, the Company completed the sale of its operating division InterLAN and announced a change in its strategy of business as discussed under Discontinued Operations below. April 22, 2003 the Company created a new subsidiary, Coventry 1 Inc. that is a Nevada Corporation. The Company's other subsidiary, Onspan SmartHouse, Inc., is a Florida Corporation. Currently the Company has 3 full time employees. On May 27, 2004, the Company entered into a stock purchase agreement with Herbert Tabin, its President and Chief Executive Officer, and Gary Schultheis, an employee of the Company, pursuant to which the Company sold its wholly-owned subsidiary, Coventry 1, Inc., to Messrs. Tabin and Schultheis. Messrs. Tabin and Schultheis also agreed to pay the Company 0.75% of the gross sales amount of the property upon any subsequent sale provided the gross sales price exceeds $2,000,001. On March 1, 2006 Messrs. Tabin and Schultheis sold the above property for $2,300,000 and paid to the Company $17,250. The Company sold the real estate project in order to service mounting legal expenses associated with litigation. 6 ONSPAN NETWORKING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation. These financial statements have not been audited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. However, these financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report for the year ended September 30, 2005, which is included in the Company's Form 10-KSB for the year ended September 30, 2005. The financial data for the interim periods presented may not necessarily reflect the results to be anticipated for the complete year. B. ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements for the period ended March 31, 2006 include the accounts of Onspan Networking, Inc. and its subsidiary, Onspan Smarthouse Inc. All significant intercompany accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, accounts payable and accrued wages approximate fair value as of March 31, 2006, because of the short maturity of these instruments. REVENUE RECOGNITION The Company will recognize revenue when earned and realizable MARKETABLE SECURITIES The Company's marketable securities are classified as available-for-sale and are stated at fair value determined by the last recorded trading price of each security at the balance sheet date. Unrealized gains and losses are included in Accumulated Other Comprehensive Income, net of applicable income taxes. 7 ONSPAN NETWORKING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Related gains or losses and declines in value, if any, judged to be other than temporary on available-for-sale securities are reported in non operating expenses. For purposes of determining realized gains and losses the loss of securities sold is based on specific identification. PREFERRED STOCK At March 31, 2006, the Company had 2,713 shares outstanding of its Series A Convertible Preferred Stock ("Series A"). Series A has a stated liquidation preference value of $100 per share redeemable at the Company's option, has no voting rights, and each preferred share is convertible to 4 shares of the Company's common stock as adjusted for the 1 for 12 reverse stock split. Dividends on the Series A were to be paid monthly in cash at a rate of 12% of the original issue. The Company's Board of Directors, elected to suspend the payment of Series A dividends. This decision was made in light of the general economic conditions. In particular, the Board took such actions as necessary to preserve the Company's working capital in order to ensure the continued viability of the Company. The Board of Directors is unable at this time to predict if and when the Company will resume the payment of cash dividends on its Series A 12% Cumulative Convertible Preferred Stock. As of March 31, 2006 the amount of accumulated unpaid dividends on the preferred stock is approximately $150,000. STOCK OPTION PLAN Effective January 1, 2006, the Company adopted SFAS 123R using the modified prospective approach and accordingly, prior periods have not been restated to reflect the impact of SFAS 132R. Prior to the Company's adoption of SFAS No. 123R "Accounting for Stock Based Compensation" ("SFAS 123R"), the Company applied the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its stock option plan. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123 requires the Company to disclose pro forma information regarding option grants made to its employees. SFAS 123 specifies certain valuation techniques that produce estimated compensation charges that are included in the pro forma results below. 8 ONSPAN NETWORKING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) These amounts have not been reflected in the Company's Condensed Consolidated Statement of Operations, because Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees," specifies that no compensation charge arises when the price of the employees' stock options equal the market value of the underlying stock at the grant date, as in the case of options granted to the Company's employees. The pro forma amount was as follows for the period ended March 31, 2005: 2005 ---- Actual net loss ............... $(217,023) ========= Pro forma net loss ............ $(217,023) ========= Pro forma basic and diluted net loss per share .............. $ (.20) ========= LOSS PER SHARE The financial statements are presented in accordance with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share". Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted loss per share do not reflect the potential dilution from the exercise or conversion of securities into common stock as such effect was antidilutive. USE OF ESTIMATES The preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Expenditures for significant renewals and improvements are capitalized. Repairs and maintenance are charged to expense as incurred. Depreciation is computed on a straight-line method based upon the useful lives of the assets. WEBSITE In 2004, the Company purchased the Internet Domain www.VOIS.com, and capitalized its related acquisition costs in the amount of $20,000. During the fourth quarter of 2005, the Company decided to utilize this Domain as part of its portal development activities. As a result, the Company expenses its previously capitalized costs as in-progress research and development pursuant to SFAS 2, "Accounting for Research and Development Costs". 9 ONSPAN NETWORKING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) C. PROPERTY AND EQUIPMENT Property and equipment, which are reflected at cost, consist of the following at March 31, 2006: 2006 ---- Computer equipment ........... $ 6,612 ------- Total property and equipment . $ 6,612 Less: accumulated depreciation (5,084) ------- Property and equipment, net .. $ 1,528 ======= Depreciation expense for the six month period ended March 31, 2006 and 2005 is $366 and $678, respectively. D. MARKETABLE SECURITIES On October 15, 2004, the Company purchased 150,000 shares for $.18 per share for an aggregate purchase price of $27,000 (1,200,000 Evolve One, Inc. common shares post split). Evolve One, Inc. also is a related party where certain officers and directors of the Company are also is a 30% shareholders of Evolve One Inc. The Company terminated its sub-lease agreement with Evolve One Inc., as of January 20, 2005. Evolve One, Inc. agreed to compensate the Company 20,000 shares of Evolve One, Inc. restricted common stock for the capital improvements abandoned by the Company. The carrying value of equity securities as shown in the accompanying balance sheet and their estimated market value at March 31, 2006 is as follows: 2006 ---- Available-for-sale securities: Cost ................ 33,100 Unrealized gain ..... 40,100 ------ 73,200 ====== Subsequent to March 31, 2006 the Company entered into a stock purchase agreement with Progress Partners, Inc., a Florida corporation, and certain individuals to sell 1,191,172 of its 1,200,000 shares of Evolve One, Inc currently owned by the Company for $10,653. 10 ONSPAN NETWORKING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) E. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. At March 31, 2006 and 2005, the Company had no amounts in excess of FDIC insured limit. F. OTHER COMPREHENSIVE INCOME (LOSS) The following represents a reconciliation of other comprehensive income for the six months ended March 31, 2006: Accumulated other comprehensive income at September 30, 2005: $ 74,470 Unrealized (loss) from marketable equity securities .......... (79,300) Deferred tax benefit ......................................... 29,840 -------- Net accumulated other comprehensive income ................... $ 25,010 ======== G. NOTE PAYABLE - SHAREHOLDER The Company has issued the following Secured Promissory Notes payable to its President, Herbert Tabin: DATE AMOUNT INTEREST RATE MATURITY DATE ---- ------ ------------- ------------- July 13, 2005 ............. 15,000 5.25% December 15, 2005 September 20, 2005 ........ 25,000 5.25% December 15, 2005 October 15, 2005 .......... 20,000 5.25% December 15, 2005 December 7, 2005 .......... 45,000 5.25% March 7, 2006 December 14, 2005 ......... 35,000 5.25% March 15, 2006 February 3, 2006 .......... 10,000 5.25% May 15, 2006 March 5, 2006 ............. 25,000 5.25% July 15, 2006 March 27, 2006 ............ 30,000 5.25% July 15, 2006 Accrued Interest .......... 5,748 ------- Balance, March 31, 2006 ... 210,748 ======= At March 31,2006, secured promissory notes in the amount of $140,000 were in default. As a result, the interest rate on these notes increase an additional 12% per annum to 17.25%. H. INCOME TAXES The provision for income taxes for the six months ended March 31, 2006 consists of the following components: 11 ONSPAN NETWORKING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Continuing operations Federal: Current .................... $ - Deferred ................... - ---- $ - ==== Reconciliation of the Federal Statutory Income Tax rate to the Company's effective income tax rate is as follows: Computed at the Statutary rates (34%) .............. $ (70,197) Non deductible expenses ............................ - State income taxes (net of federal tax benefit) .... (7,494) Unrealized loss on marketable securities ........... 29,840 Change in valuation allowance ...................... (47,851) --------- Tax provision (benefit) ............................ $ - ========= The significant temporary differences that give rise to a deferred tax asset as of March 31, 2006 as follows: Deferred tax asset: Accrued compensation ............................... $ 134,679 Capital loss Carryforward .......................... 41,798 NOL Carryforward ................................... 785,675 --------- Total deferred tax asset ...................... 962,152 Deferred tax liability: Unrealized gain on marketable securities ......... (15,090) --------- Total ......................................... $ 947,062 --------- Less valuation allowance ..................... (962,152) --------- Net deferred tax liability .................... $ (15,090) ========= The net change in the total valuation allowance for the six month period ended March 31, 2006 was an increase of $47,851. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. I. RELATED PARTY TRANSACTIONS For the period ended March 31, 2006 the Company accrued $35,500 in salaries for its President Herbert Tabin. As of March 31, 2006 the Company had a total of $173,200 accrued salaries to Mr. Tabin. 12 ONSPAN NETWORKING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On October 15, 2004 The Company purchased 150,000 shares for $.18 per share for an aggregate purchase price of $27,000. (1,200,000 shares post split ) of Evolve One, Inc, a related party where certain officers and directors of the Company were also officers and directors of Evolve One Inc. until January 2005, in a private transaction exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of the Securities Act. Subsequent to March 31, 2006 the Company entered into a stock purchase agreement with Progress Partners, Inc., a Florida corporation, and certain individuals to sell 1,191,172 of its 1,200,000 shares of Evolve One, Inc, a related party where certain officers and directors of the Company were also officers and directors of Evolve One Inc. currently owned by the Company for $10,653. On May 27, 2004, the Company entered into a stock purchase agreement with Herbert Tabin, its President and Chief Executive Officer, and Gary Schultheis, an employee of the Company, pursuant to which the Company sold its wholly-owned subsidiary, Coventry 1, Inc., to Messrs. Tabin and Schultheis. Messrs. Tabin and Schultheis also agreed to pay the Company 0.75% of the gross sales amount of the property upon any subsequent sale provided the gross sales price exceeds $2,000,001. On March 1, 2006 Messrs. Tabin and Schultheis sold the above property for $2,300,000 and paid to the Company $17,250. The Company has agreed to indemnify the Directors against losses from litigation, and has provided for any expected losses resulting from various legal proceedings. (See Note K). J. LOSS PER SHARE Basic loss per share is computed by dividing loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if options to issue 377,677 shares of dilutive potential common stock had been converted to common stock. 2006 2005 ---- ---- Net loss ......................................... $ (206,461) $ (217,023) =========== =========== Denominator for basic loss per share - Weighted average shares .......................... 1,089,219 1,090,677 Effect of dilutive securities - stock options .... - - ----------- ----------- Denominator for diluted loss per share - Weighted average shares adjusted for dilutive securities ...................................... 1,089,219 1,090,677 =========== =========== Basic and diluted loss per common share .......... $ (.19) $ (.20) =========== =========== 13 ONSPAN NETWORKING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) K. LEGAL PROCEEDINGS 1. Securities Actions: RICHARD T. CLARK AND JOEL C. HOLT V. HERBERT TABIN AND GARY SCHULTHEIS, United States District Court Northern District of Oklahoma, Case No. 03-CV-289K(J). On March 28, 2003, Plaintiffs Richard Clark and Joel Holt ("Plaintiffs") filed a petition in the Tulsa County District Court alleging claims against the Company and its President, CEO and Director, Herbert Tabin ("Tabin"), for, among other things, fraud, breach of fiduciary duty, and breach of contract. On May 1, 2003, the Company, along with Tabin, removed this action to the United States District Court for the Northern District of Oklahoma and filed a Motion to Dismiss all claims. On October 15, 2003, Plaintiffs withdrew their claims and filed an Amended Complaint asserting claims against Tabin, both individually and derivatively, on behalf of the Company. Plaintiffs also asserted claims against the Company. Plaintiffs sought damages in the amount of $300,000 each, as well as punitive damages. The Company retained independent counsel to conduct an investigation into the allegations by Plaintiffs made derivatively on behalf of the Company and, based on that investigation, determined that no action on behalf of the Company was warranted. Defendants also filed a Motion to dismiss all of the allegations in the Amended Complaint. On October 19, 2004, Plaintiffs filed a Second Amended Complaint in which they dropped the Company as a defendant and dropped the derivative shareholder claims. Plaintiffs added Gary Schultheis as an individual defendant. The Second Amended Complaint alleges claims against Tabin and Schultheis individually. Defendants filed Motions to Dismiss the Second Amended Complaint which was denied by the Court. On December 2, 2005, Plaintiffs filed a Third Amended Complaint alleging claims against Tabin and Schultheis individually for breach of contract, breach of fiduciary duty, civil conspiracy, and violations of Oklahoma securities laws. Plaintiffs seek damages in the amount of $300,000 each, plus the amount of lost opportunity to gain on their investments, less the value of their investments at the time of trial, along with interest costs, attorneys' fees and punitive damages. Plaintiffs also seek rescission of their investments in Onspan. On April 28, 2006 defendants filed a motion for summary judgment. The Company has agreed to indemnify the directors against losses from litigation and has provided for any expected losses resulting from various legal proceedings. 2. Potential Tax Liability: In 2003, the North Carolina Department of Revenue contacted the Company with regard to state income taxes for the tax year ended September 30, 1999. Upon investigation, the Company has determined that former management did not file a state income tax return in North Carolina for that year, although a return was filed in Florida for that year and returns were filed in North Carolina for two then subsidiaries of the company. The Company is in the process of investigating the situation and of evaluating what action should be taken as a result of the inquiry by the North Carolina Department of Revenue. 14 ONSPAN NETWORKING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company has been unable to estimate with any reasonable certainty what liability it may have to the State of North Carolina. L. GOING CONCERN The accompanying financial statements were prepared assuming that the Company will continue as a going concern. The Company and certain of the officers and directors have been a party to several legal proceedings; the Company has provided indemnifications to its officers and directors against losses sustained in these proceedings. Although the Company continues to vigorously defend these actions, the Company is unable to estimate with any reasonable certainty what liability it may have to these litigants. There are no assurances that the Company will be successful in defending these legal proceedings, or if successful the cost of defending these legal proceedings may significantly deplete the capital of the Company, impairing the Company's ability to continue as a going concern. Certain employees have agreed to defer receipt of their compensation, and the Company continues to depend on funding provided by its president, Herbert Tabin, to pay its operating expenses. Accordingly, there are no assurances that the Company will be successful in achieving the above plans, or that such plans, if consummated, will enable the Company to obtain profitable operations or continue as a going concern. M. SUBSEQUENT EVENTS On April 28, 2006 the Company entered into a stock purchase agreement with Progress Partners, Inc., a Florida corporation, and certain individuals to sell 1,191,172 of its 1,200,000 shares of Evolve One, Inc currently owned by the Company for $10,653. (See Note D) 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS From time to time, the Company may publish forward-looking statements relative to such matters as anticipated financial performance, business prospects, technological developments and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. All statements other than statements of historical fact included in this section or elsewhere in this report are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include: 1. General economic factors including, but not limited to, changes in interest rates and trends in disposable income; 2. Information and technological advances; 3. Cost of products sold; 4. Competition; and 5. Success of marketing, advertising and promotional campaigns. CRITICAL ACCOUNTING ESTIMATES AND POLICIES The Company has identified the policies outlined below as critical to its business operations and an understanding of its results of operations. The listing is not intended to be a comprehensive list of all of the Company's accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management's judgment in their application. The impact and any associated risks related to these policies on the Company's business operations is discussed throughout Management's Discussion and Analysis or plan of operations where such policies affect the Company's reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Notes to Consolidated Financial Statements. The Company's preparation of the financial statements requires it to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Company's financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. PLAN OF OPERATION AND GOING CONCERN Prior to August 5, 2002, the Company, a Nevada corporation, was a holding Company, that through its wholly owned subsidiary, InterLAN Communications, Inc. ("InterLAN"), developed data communications and networking infrastructure solutions for business, government and education. Following August 5, 2002, the Company announced a change in its strategy and subsequently sold its operating division InterLAN. In April of 2003, the Company changed its focus to investing in and revitalizing single family homes in established residential neighborhoods in suburban areas. The Company had acquired its first property on June 19, 2003. 16 The Company, which had received engineering plans for the real estate project, had intended to renovate and expand the existing single-family home on this site. However on May 27, 2004 the Company completed the sale of Coventry 1, Inc. and utilized the cash received for legal expenses. The Company and certain of the officers and directors have been a party to several legal proceedings; the Company has provided indemnifications to its officers and directors against losses sustained in these proceedings. Although the Company continues to vigorously defend these actions, the Company is unable to estimate with any reasonable certainty what liability it may have to these litigants. There are no assurances that the Company will be successful in defending these legal proceedings, or if successful the cost of defending these legal proceedings may significantly deplete the capital of the Company, impairing the Company's ability to continue as a going concern. Certain employees have agreed to defer receipt of their compensation, and the Company continues to depend on funding provided by its president, Herbert Tabin, to pay its operating expenses. Accordingly, there are no assurances that the Company will be successful in achieving the above plans, or that such plans, if consummated, will enable the Company to obtain profitable operations or continue as a going concern. MARKETABLE SECURITIES The Company's marketable securities are classified as available-for-sale and are stated at fair value determined by the last recorded trading price of each security at the balance sheet date. Unrealized gains and losses are included in accumulated other comprehensive income, net of applicable income taxes. Related gains or losses and declines in value, if any, judged to be other than temporary on available-for-sale securities are reported in non operating expenses. For purposes of determining realized gains and losses the loss of securities sold is based on specific identification. COMMITMENTS AND CONTINGENCIES The Company and certain of its officers and directors have been named as defendants in multiple lawsuits. See Note J to the condensed consolidated Financial Statements. The Company has indemnified these officers and directors against any losses sustained as a result of these actions. RISK FACTORS SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL CAPITAL. The Company's capital requirements have been and will continue to be significant. The Company had been dependent primarily on existing capital and Notes provided by related parties. Future capital needs may be satisfied by either the private placement of equity securities, loans and/or other debt financings. The Company based on its cash requirements and exposure to liability from shareholder lawsuits is unsure if current loans will be sufficient for the 17 next twelve months. The Company is currently contemplating the pursuit of potential funding opportunities which could be debt or equity. However, there can be no assurance that any of such opportunities will result in actual funding or that additional financing will be available to the Company when needed, on commercially reasonable terms, or at all. If the Company is unable to obtain additional financing it will likely cease its operations. Any additional financings may involve substantial dilution to the Company's then-existing shareholders. MANAGEMENT OF GROWTH AND ATTRACTION AND RETENTION OF KEY PERSONNEL. Management of the Company's growth may place a considerable strain on the Company's management, operations and systems. The Company's ability to execute any future business strategy will depend in part upon its ability to manage the demands of a growing business. Any failure of the Company's management team to effectively manage growth could have a material adverse affect on the Company's business, financial condition or results of operations. The Company's future success depends in large part on the continued service of its key management personnel. The Company believes that its future success also depends on its ability to attract and retain skilled technical, managerial and marketing personnel. Competition for qualified personnel is intense. The Company has from time to time experienced difficulties in recruiting qualified personnel. Failure by the Company to attract and retain the personnel it requires could have a material adverse affect on the financial condition and results of operations of the Company. VOLATILITY OF MARKET PRICE; ISSUANCE OF SUBSTANTIAL NUMBER OF SHARES; AUTHORIZED SHARES; PROXY RULES. The Company's Common Stock has been traded since 1994. The Company believes that factors such as (but not limited to) the sale of common stock issued on conversion of the Company's debentures, announcements of developments related to the Company's business, fluctuations in the Company's quarterly or annual operating results, failure to meet expectations, general economic conditions, interest rate changes or money supply fluctuations and developments in the Company's relationships with clients and suppliers will cause the price of the Company's Common Stock to fluctuate substantially. In recent years the stock market has experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. Such fluctuations could adversely affect the market price of the Company's Common Stock. PENNY STOCK REGULATIONS AND REQUIREMENTS FOR LOW PRICED STOCK. The Commission adopted regulations which generally define a "penny stock" to be any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Based upon the price of the Company's Common Stock as currently traded on the OTC Bulletin Board, the Company's stock is subject to Rule 15g-9 under the Exchange Act which imposes additional sales practice requirements on broker-dealers which sell securities to persons other 18 than established customers and "accredited investors." For transactions covered by this Rule, a broker-dealer must make a special suitability determination for the purchaser and have received a purchasers' written consent to the transaction prior to sale. Consequently, the Rule may have a negative effect on the ability of shareholders to sell common shares of the Company in the secondary market. MANAGEMENT CONTROLS THE COMPANY'S FUNDS. Management has broad discretion over how to spend the funds held by the Company. Although management will endeavor to act in the best interests of the shareholders, there can be no assurance that the decision to utilize proceeds will prove profitable to the Company. THE COMPANY RELIES ON ITS MANAGEMENT. The Company is dependent upon the members of management set forth herein. If the current management is no longer able to provide services to the Company, its business will be negatively affected. ADDITIONAL DEBT, OR EQUITY FINANCING MAY AFFECT INVESTOR'S ABILITY TO SELL COMMON STOCK. The Company's common stock currently trades on the OTC Bulletin Board under the symbol ONSP. Stocks trading on the OTC Bulletin Board generally attract a smaller number of market makers and a less active public market and may be subject to significant volatility. If the Company raises additional money from the sale of its Common Stock, the market price could drop and investor's ability to sell stock could be diminished. Further, even if the Company is able to increase its authorized shares, there can be no assurance that it will be able to obtain sufficient shareholder votes in the future for any such increase, which votes are required by Nevada law. THE COMPANY'S STRATEGY INCLUDES PURSUING STRATEGIC ACQUISITIONS THAT MAY NOT BE SUCCESSFUL The Company will consider acquiring businesses that are intended to add products and or services. Acquisitions involve a number of operational risks that the acquired business may not be successfully integrated, may distract management attention, may involve unforeseen costs and liabilities, and possible regulatory costs, some or all of which could have a materially adverse effect on the Company's financial condition or results of operations. Additionally, the Company may make acquisitions with cash or with stock, or a combination thereof. If the Company does make any such acquisitions, various associated risks may be encountered, including potential dilution to the Company's then current shareholders, as a result of additional shares of common stock being issued in connection with the acquisitions. 19 THE COMPANY'S STOCK PRICE WILL FLUCTUATE AND MAY FALL BELOW EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH COULD SUBJECT THE COMPANY TO LITIGATION The market price of the Company's common stock may fluctuate significantly in response to a number of factors, some of which are beyond its control. These factors include: - quarterly variations in operating results; - changes in accounting treatments or principles; - existing litigation; - announcements by the Company or its competitors of new products and services offerings, significant contracts, acquisitions or strategic relationships; - additions or departures of key personnel; - any future sales of the Company's common stock or other securities; - stock market price and volume fluctuations of publicly-traded companies in general; and - general political, economic and market conditions. It is likely that in some future quarter the Company's operating results may fall below the expectations of securities analysts and investors, which could result in a decrease in the trading price of the Company's common stock. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. The Company may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources, which could seriously harm the Company's business and operating results. THERE IS A LIMITED PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK AND THERE ARE NO ASSURANCES OF A CONTINUED TRADING MARKET FOR THE COMPANY'S COMMON STOCK The Company's common stock is currently quoted on the OTC Bulletin Board (R) Market (OTCBB) under the symbol "ONSP". The Company's common stock is thinly traded. There are no assurances the Company will maintain its OTC Bulletin Board (R) listing. If the Company's common stock should be delisted from the OTC 20 Bulletin Board(R) Market, it is likely that the stock would then be quoted on the Pink Sheets Market, which could materially and / or adversely effect any future liquidity in the Company's common stock. INABILITY TO SECURE AN INDEPENDENT AUDIT COMMITTEE MEMBER Due to the potential exposure to litigation and small compensation, it may be difficult to secure and Independent Audit Committee Member. If the Company is unable to secure an Independent Audit Committee Member, it may be in violation of current standards and may be subject to possible de-listing of which could have a materially adverse affect on the Company's financial condition or results of operations. HISTORY OF BUSINESS Originally incorporated in 1985, as Network Information Services, Inc., Network Systems International, Inc. ("NESI"), a Nevada corporation, was the surviving corporation of a reverse merger completed in April 1996. The Company became a publicly traded entity in connection with the re-organization. On July 10, 1998, the Company's stock was officially approved for listing on the NASDAQ Small Cap market and the Company's common stock began trading on NASDAQ Small Cap under the symbol NESI. As of April 2, 2002, the securities were de-listed from the NASDAQ Small Cap market and now trade on the Over-The-Counter Bulletin Board under the symbol ONSP. Effective February 10, 2001, the Company changed its name from Network Systems International, Inc., to Onspan Networking, Inc. (the "Company" or "Onspan"). On October 9, 2001, the Company effected a 1 for 12 reverse stock split of its issued and outstanding common stock. Prior to August 5, 2002, the Company, a Nevada corporation, was a holding company, that through its wholly owned subsidiary, InterLAN Communications, Inc. ("InterLAN"), developed data communications and networking infrastructure solutions for business, government and education. On August 5, 2002, the Company completed the sale of its operating division InterLAN and announced a change in its strategy of business as discussed under Discontinued Operations below. April 22, 2003 the Company created a new subsidiary, Coventry 1 Inc. that is a Nevada Corporation. The Company's other subsidiary, Onspan SmartHouse, Inc., is a Florida Corporation. Currently the Company has 3 full time employees. On May 27, 2004, the Company entered into a stock purchase agreement with Herbert Tabin, its President and Chief Executive Officer, and Gary Schultheis, an employee of the Company, pursuant to which the Company sold its wholly-owned subsidiary, Coventry 1, Inc., to Messrs. Tabin and Schultheis. Messrs. Tabin and Schultheis also agreed to pay the Company 0.75% of the gross sales amount of the property upon any subsequent sale provided the gross sales price exceeds $2,000,001. On March 1, 2006 Messrs. Tabin and Schultheis sold the above property for $2,300,000 and paid to the Company $17,250. The Company sold the real estate project in order to service mounting legal expenses associated with litigation. 21 A. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY AND CAPITAL RESOURCES During the six months ended March 31, 2006, working capital deficiency increased $255,555 to ($521,332) from ($265,777). The primary reasons for the increase is an increase in accrued wages of $77,500, an increase in notes payable of $170,539, an increase of cash of $16,065, an increase in marketable securities of $79,300, and an increase in accounts payable of $2,924. During this same period, stockholders' deficit increased $255,921 to ($550,750) from ($294,829). The increase in stockholders' deficit is primarily due to the net loss for the period of ($206,461), and decreases in other comprehensive income of ($49,460) primary due to the net unrealized gain on available for sale securities. The Company has not budgeted any significant capital expenditures for the current fiscal year. There are no assurances that the Company will be successful in achieving the above plans, or that such plans, if consummated, will enable the Company to obtain profitable operations or continue as a going concern. B. RESULTS OF OPERATIONS SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The Company's selling, general and administrative expenses, including salaries and wages amounted to $223,713 during the six months ended March 31, 2006, as compared to $217,769 for the six months ended March 31, 2005. The increase of $5,944 is primarily due to increase in wages of $18,000 offset by a decrease of legal and professional fees of $18,230. INCOME TAXES The Company recorded $47,851 in deferred income tax benefit for the six-month period ended March 31, 2006, a 100% valuation allowance was taken against this amount as of March 31, 2006. The North Carolina Department of Revenue has contacted the Company with regard to state income taxes for the tax year ended September 30, 1999. Upon investigation, the Company has determined that former management did not file a state income tax return in North Carolina for that year, although a return was filed in Florida for that year and returns were filed in North Carolina for two then subsidiaries of the company. The Company is in the process of investigating the situation and of evaluating what action should be taken as a result of the inquiry by the North Carolina Department of Revenue. The Company has been unable to estimate with any reasonable certainty what liability it may have to the State of North Carolina. 22 OTHER COMPREHENSIVE INCOME (LOSS) During the six months ended March 31, 2006, the Company recorded a decrease in its net unrealized gain from available-for-sale securities in the amount of $79,300 net of tax , due to a decrease in market value. Available-for-sale securities consists exclusively of Evolve One, Inc. (EVLO). There can be no assurance that the Company will realize the value assigned, under Statement of Accounting Standards No.115 "Accounting for Certain Investments in Debt and Equity Securities", to these securities. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 1. Securities Actions: RICHARD T. CLARK AND JOEL C. HOLT V. HERBERT TABIN AND GARY SCHULTHEIS, United States District Court Northern District of Oklahoma, Case No. 03-CV-289K(J). On March 28, 2003, Plaintiffs Richard Clark and Joel Holt ("Plaintiffs") filed a petition in the Tulsa County District Court alleging claims against the Company and its President, CEO and Director, Herbert Tabin ("Tabin"), for, among other things, fraud, breach of fiduciary duty, and breach of contract. On May 1, 2003, the Company, along with Tabin, removed this action to the United States District Court for the Northern District of Oklahoma and filed a Motion to Dismiss all claims. On October 15, 2003, Plaintiffs withdrew their claims and filed an Amended Complaint asserting claims against Tabin, both individually and derivatively, on behalf of the Company. Plaintiffs also asserted claims against the Company. Plaintiffs sought damages in the amount of $300,000 each, as well as punitive damages. The Company retained independent counsel to conduct an investigation into the allegations by Plaintiffs made derivatively on behalf of the Company and, based on that investigation, determined that no action on behalf of the Company was warranted. Defendants also filed a Motion to Dismiss all of the allegations in the Amended Complaint. On October 19, 2004, Plaintiffs filed a Second Amended Complaint in which they dropped the Company as a defendant and dropped the derivative shareholder claims. Plaintiffs added Gary Schultheis as an individual defendant. The Second Amended Complaint alleges claims against Tabin and Schultheis individually. Defendants filed Motions to Dismiss the Second Amended Complaint which was denied by the Court. On December 2, 2005, Plaintiffs filed a Third Amended Complaint alleging claims against Tabin and Schultheis individually for breach of contract, breach of fiduciary duty, civil conspiracy, and violations of Oklahoma securities laws. Plaintiffs seek damages in the amount of $300,000 each, plus the amount of lost opportunity to gain on their investments, less the value of their investments at the time of trial, along with interest costs, attorneys' fees and punative damages. Plaintiffs also seek rescission of their investments in Onspan. On April 28, 2006 defendants filed a motion for summary judgement. 23 The Company has agreed to indemnify the directors against losses from litigation and has provided for any expected losses resulting from various legal proceedings. 2. Potential Tax Liability: In 2003, the North Carolina Department of Revenue contacted the Company with regard to state income taxes for the tax year ended September 30, 1999. Upon investigation, the Company has determined that former management did not file a state income tax return in North Carolina for that year, although a return was filed in Florida for that year and returns were filed in North Carolina for two then subsidiaries of the company. The Company is in the process of investigating the situation and of evaluating what action should be taken as a result of the inquiry by the North Carolina Department of Revenue. The Company has been unable to estimate with any reasonable certainty what liability it may have to the State of North Carolina. ITEM 3. CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures as of March 31, 2006 (the "Evaluation Date") were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no significant changes in our internal controls or in other factors that could significantly affect these controls during the quarter ended March 31, 2006. Disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14(c) and 15d-14(c)) are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. The Certifying Officers have also indicated that there were no significant changes in our internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses. 24 Our management, including each of the Certifying Officers, does not expect that our disclosure controls or our internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and their can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. ITEM 5. OTHER INFORMATION There is no immediate family relationship between or among any of the Directors and Executive Officers, except Ms. Dermer who is the sister-in-law of Mr. Tabin. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated: (a) EXHIBITS 31.1 Certification dated May 15, 2006 pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) of the Principal Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Herbert Tabin, Chief Executive Officer 31.2 Certification dated May 15, 2006 pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) of the Principal financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Marissa Dermer, Chief Financial Officer 32.1 Certification dated May 15, 2006 pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, made by Herbert Tabin, Chief Executive Officer. 32.2 Certification dated May 15, 2006 pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, made by Marissa Dermer, Chief Financial Officer. 25 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ONSPAN NETWORKING, INC. Date: May 15, 2006 By: /s/ Herbert Tabin ----------------- Herbert Tabin, President Date: May 15, 2006 By: /s/ Marissa Dermer ------------------ Marissa Dermer, Chief Financial and Principal Accounting Officer 26