<PAGE>

================================================================================

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

                                AMENDMENT NO. 1 TO
                                   FORM 10-KSB
                                  ____________

                        FOR ANNUAL AND TRANSITION REPORT
                     PURSUANT TO SECTIONS 13 OF 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
                                       OR
[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
         FOR THE TRANSITION PERIOD FROM _______________  TO _______________

                        COMMISSION FILE NUMBER: 000-51443
                                  ____________

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

                  COLORADO                                 84-1573852
     (STATE OR OTHER JURISDICTION OF                    (I.R.S. EMPLOYER
      INCORPORATION OR ORGANIZATION)                   IDENTIFICATION NO.)

      1241 E. DYER ROAD, SUITE 150                           92705
              SANTA ANA, CA
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                  (ZIP CODE)

                    ISSUER'S TELEPHONE NUMBER: (949) 623-9300
                                  ____________

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         COMMON STOCK, $0.001 PAR VALUE
                                (TITLE OF CLASS)
                                  ____________

         Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. [ ]

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during
the preceding 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 [ ] No [X]

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended.
Yes [ ] No [X]

         Issuer's revenues for its most recent fiscal year were $849,285.





<PAGE>

         The aggregate market value of the voting stock held by non-affiliates
computed by reference to the closing sale price of $0.87 per share as of August
17, 2007 was $52,833,736. For the purpose of this calculation, shares owned by
officers, directors and 10% stockholders known to the registrant have been
deemed to be owned by affiliates. This determination of affiliate status is not
a determination for other purposes.

         State the number of shares outstanding of each of the issuer's classes
of common equity outstanding as of the latest practicable date: 64,128,432
shares of Common Stock, $0.001 par value, as of August 9, 2007.

         Documents Incorporated by Reference:  None.

         Transitional Small Business Disclosure Format: Yes [ ] No [X]





<PAGE>

                                EXPLANATORY NOTE
                                ----------------

         Raptor Networks Technology, Inc. (the "Company") is filing this
Amendment No. 1 to Form 10-KSB for the year ended December 31, 2006 to reflect
the restatement of its consolidated financial statements for the year ended
December 31, 2006. The purpose for and effects of the restatement are
described in Note 12 to the consolidated financial statements contained herein.

         The information in this Amendment No. 1 to Form 10-KSB has not been
updated from the original filing of the Form 10-KSB except as required to
reflect the effects of the restatement. The restatement includes changes to
Part I Items 1 and 2. Items included in the original Form 10-KSB that are not
included herein are not amended and remain in effect as of the date of the
original filing. Additionally, this Amendment No. 1 to Form 10-KSB does not
purport to provide an update or a discussion of any other developments at the
Company subsequent to the original filing.





<PAGE>

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
                                     PART II

Item 6.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations..............................  22
Item 7.  Financial Statements...............................................  37

                                    PART III

Item 13. Exhibits...........................................................  48
Signatures..................................................................  52
Index to Financial Statements............................................... F-1
Index to Exhibits


                                       -i-



<PAGE>

                                     PART II

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

EFFECTS OF RESTATEMENT

      This Management's Discussion and Analysis or Plan of Operation
discussion has been revised to reflect the effects of the restatement described
in Note 12 to the accompanying consolidated financial statements.

CAUTIONARY STATEMENT

         The following discussion and analysis provides information that our
management believes is relevant to an assessment and understanding of our
results of operations and financial condition for the fiscal years ended
December 31, 2005 and 2006. This discussion should be read in conjunction with
our consolidated financial statements and related notes thereto beginning on
page F-1 of this Report. This Report contains trend analysis and other
forward-looking statements that involve risks and uncertainties, such as
statements concerning future operating results; developments in markets and
strategic focus; and future economic, business and regulatory conditions. Such
forward-looking statements are generally accompanied by words such as "plan,"
"estimate," "expect," "believe," "should," "would," "could," "anticipate,"
"may," "forecast," "project," "pro forma," "goal," "continues," "intend," "seek"
and other words that convey uncertainty of future events or outcomes. The
cautionary statements included in the "Risk Factor" section under Item 1 above
or elsewhere in this Report should be read as being applicable to all
forward-looking statements wherever they may appear. Our actual future results
could differ materially from those discussed herein. We disclaim any obligations
subsequently to revise any forward-looking statements to reflect events or
circumstances after the date of such statement or to reflect the occurrence of
anticipated or unanticipated events.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

         Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States (GAAP). The
preparation of our financial statements requires our management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures. We base our estimates on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The significant accounting
policies that are believed to be the most critical to aid in fully understanding
and evaluating the reported financial results include inventory valuations,
license fees and the recovery of deferred income tax assets.

         We determine our inventory value at the lower of average cost or
market. When required, a provision is made to reduce excess and obsolete
inventory to estimated net realizable value.

         We have paid $260,000 to a supplier for a software platform related to
our ER-1010 product. This license fee will be amortized and charged to cost of
sales over the sale of 1,000 ER-1010 systems, which approximates the number of
systems expected to be sold using the platform. We amortized $520 for the sale
of two ER-1010 systems,, $4,160 for the sale of 16 ER-1010 systems and $7,800
for the sale of 30 ER-1010 systems in 2004 , 2005, and 2006 respectively.

         We review our long-lived assets and certain related intangibles for
impairment periodically and whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable. When
necessary, impaired assets are written down to their estimated fair value based
on the best information available. Estimated fair value is generally based on
either appraised value or measured by discounting estimated future cash flows.
We are required to exercise a considerable amount of judgment when estimating
discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates. No assets were considered impaired for either
of the years ended December 31, 2005 or 2006.


                                      -22-




<PAGE>

         As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves us estimating the
actual current tax liabilities together with assessing temporary differences
resulting from different treatment of items for tax and accounting purposes. We
recognize deferred tax assets and liabilities based on differences between the
financial reporting and tax bases of assets and liabilities using the enacted
federal, state, and local income tax rates and laws that are expected to be in
effect when the differences reverse.

SELECTED FINANCIAL DATA

         The following table sets forth selected financial data regarding our
financial position and operating results. This data should be read in
conjunction with our consolidated financial statements and related notes thereto
beginning on page F-1 of this Report.

       RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005,
         COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2006 (IN THOUSANDS)


                                          December 31, 2005    December 31, 2006
                                          -----------------    -----------------

Net Sales                                  $           289      $           849
Cost of Sales                                          120                  320
                                           ---------------      ---------------

Gross Profit                                           169                  529

Operating expenses
   Consulting Fees                                      --                  105
   Finder's Fees                                     1,064                  465
   Cost of warrants granted                          3,433                   --
   Stock for services (non cash)                        --                   --
   Salary expense                                    2,630                2,891
   Marketing expense                                   349                  229
   Research and Development Costs                      403                  546
   Selling, general and administrative               2,767                2,405
                                           ---------------      ---------------
Total operating expenses                            10,646                6,641

  Net Other Income (loss)                           (2,913)             (12,967)

Loss before Income tax provision                   (13,390)             (19,079)
  Income tax provision                                  --                   --
                                           ---------------      ---------------
Net loss                                   $       (13,390)     $       (19,079)
                                           ===============      ===============

NET SALES

         For the fiscal years ended December 31, 2005 and December 31, 2006, we
realized revenues of $289,236 and $849,285, respectively. The $560,049 increase
in revenues between 2005 and 2006 resulted primarily from the start up of sales
of our products into the entertainment industry. Another important cause of the
increase in sales in 2006 was the purchase of equipment by systems integrators
who during 2006 signed Value Added Reseller's (VAR) agreements with us.

         In 2006, we sold 30 ER-1010 core switch units and 23 OR-1048 edge
switch units versus the sale of 16 ER-1010 units in 2005. In 2006, we sold our
products to 18 customers; whereas in 2005, we sold our products to 7 customers.

         A majority of our 2006 revenues were earned in the fourth quarter of
2006. During that quarter, we realized $272,906 in revenues, a substantial
increase over revenues for each of the first three quarters of 2006 which were
$182,295, $204,969 and $189,115, for the first, second and third quarters,
respectively. Fourth quarter revenues in 2006 of $272,906 also substantially
exceeded fourth quarter revenues in 2005 of $155,800. During the fourth quarter
2006, we sold seven ER-1010 units and five OR-1048 units to five customers,
mainly in the entertainment and education industries.

                                      -23-


<PAGE>

         Sales trends in 2006 indicate that our flagship product, the ER-1010
network core switch, is an attractive network product for the entertainment
industry. We believe, the performance of the ER-1010 with respect to video
streaming is superior to competitive legacy products. We believe that the
superior performance of the ER-1010 in video streaming is one of several reasons
for the ramp up we have seen for our product in the entertainment vertical in
2006. Taking into account the ramp up in 2006 and current discussions with
several prospects in the entertainment vertical, we believe that this vertical
represents a substantial growth opportunity for us in 2007.

         Another important trend we observed in 2006 was that our product has
attractive features for government networks. Such features are price, security,
resiliency and speed. Agreements were signed in 2006 with large system
integrators who provide products and services to the government sector. These
integrators purchased six ER-1010 units and two OR-1048 units from us in 2006
for demonstration purposes, contributing to our revenues in 2006. In the fourth
quarter of 2006 we started testing our products at a government-owned test
organization. We expect that, with the agreements which were put in place in
2006 and upon successful conclusion of the government testing program, sales to
federal and local government will substantially contribute to our revenue growth
beginning in 2007.

         Although to a lesser degree than was the case for entertainment, sales
of our product into enterprise production networks also grew in 2006 over 2005.
Selling cycles for our product in this vertical area are very long due to what
we perceive as reluctance to adapt new technology in this type of market. We
believe that the price and performance advantages of our product offering and
the increased availability of favorable reference sites will reduce the
enterprise production networks selling cycles in 2007 and beyond, while
contributing towards growth in this vertical part of the market.

         We are continuing discussions with various third parties regarding the
possibility of incorporating our technology/products into their product and
service offerings. This could result in license fee income and/or additional
product sales in 2007. However, at this point, we are engaged only in
preliminary, non-binding discussions and there can be no guarantee that we will
be able to secure any relationship with these third parties.

GROSS MARGIN

         Our gross margin was $168,936 and $529,212 in 2005 and 2006,
respectively, representing an increase of $360,276 or 213%. The cause of this
increase in gross margin was our increase in revenues and an improvement in
gross margin percentage from 58% in 2005 to 62% in 2006. This gross margin
improvement was due to a change in our proportionate number of sales in various
markets, with the lower-margin education sector representing a smaller
percentage of our overall sales in 2006 as compared to 2005.

OPERATING EXPENSES

         Total operating expenses, excluding cost of warrants, were
approximately $7,213,000 and $6,641,000 in 2005 and 2006, respectively,
representing a decrease of $572,000 or 8%. The primary cause of this decrease
was the reduced finder's fees incurred in connection with private placements of
our securities. Such finder's fees were reduced by $599,405 in 2006.

         Increases in Salary and Research & Development (R&D) expenses were
offset by decreases in Marketing expenses and Selling, general and
administrative expenses.

         The following descriptions detail our total operating expenses by
expense category.


                                      -24-




<PAGE>

FINDERS' FEES

         Expenses for finders' fees were $1,064,405 and $465,000 in 2005 and
2006, respectively. In 2005, expenses of $1,064,405 consisted entirely of
placement agent fees paid in connection with private placements of our
securities. In 2006, our finder's fees consisted of a payment of $300,000 for
placement agent fees paid in connection with the July 31, 2006 closing of our
Senior Convertible Note Financing. In addition, in 2006, we paid $165,000 as a
success fee for a bridge note financing. The variations in placement agent
related expenses between these two years resulted from differences in both the
gross proceeds raised through private placements of our securities during each
year and the percentage of such proceeds that were paid as placement agent fees.
We raised gross proceeds of $9,088,000 and $5,000,000 through such private
placements in 2005 and 2006, respectively. In addition we obtained a bridge loan
in the amount of $689,000 in 2006.

COST OF WARRANTS

         In 2005, we issued warrants to purchase shares of our common stock to
investors and placement agents in connection with our private placements. The
total charge for these warrants calculated as required by accounting rule EITF
00-19 was $3,432,994. The warrants issued in 2006 are associated with a
convertible debt and therefore the charges for these warrants have been
accounted for under "OTHER INCOME/ (LOSS") as described below.

SALARY EXPENSE

         Salary expense decreased from $3,072,206 in 2005 to $2,890,942 in 2006,
a decrease of $181,264 or 6%. Major reasons for the decrease in salary expense
in 2006 is a six person decrease of average headcount compared to 2005. This
decrease was partially offset by an increase of salaries due to the introduction
in 2006 of FAS 123R requiring the expensing of stock options resulting in a
total charge of $168,214 and bonus payments and salary increases to certain
employees. These bonuses and salary increases were necessary to maintain a
reasonably competitive compensation structure because, as reported in previous
filings, salaries had been previously adjusted downward to reduce expense run
rates. Management believes that the 2006 salary expense, even following this
latest set of increases may still not be indicative of our future salary
expense, since once we achieve certain revenue goals, we intend to continue
increasing annual salary levels for management level employees to what we
believe to be more competitive levels.

MARKETING EXPENSES

         Marketing expenses decreased from $349,310 in 2005 to $229,381 in 2006,
a decrease of $119,929 or 34%. The primary causes of this decrease were that we
reduced advertising and promotional materials expenses. Advertising expenses
were reduced by $90,000 in 2006. Based upon our 2005 advertising efforts, we
concluded that we did not attain sufficient returns from monies spent on
advertising.

RESEARCH AND DEVELOPMENT

         We spent $403,057 and $545,522 on research and development (R&D) in
2005 and 2006, respectively, an increase of $142,465 or 35%. The primary cause
of this increase was the rent paid for additional design tools for both our
hardware and software design teams, which increased by $240,000 in 2006 compared
to 2005. This increase of rental expenses was partially offset by an approximate
$94,000 decrease in expenses in 2006 incurred with respect to the establishment
of our service activity as compared to 2005.

SELLING, GENERAL AND ADMINISTRATIVE

         Selling, general and administrative (SG&A) expenses increased from
$2,324,939 in 2005 to $2,404,743 in 2006, a 1% increase. Main decreases were: A
$39,000 reduction in expenses for IT support; a $210,000 reduction in expenses
for inventory stored with third parties; and an $88,000 reduction in expenses
for the cost of attending conferences. These decreases were offset by increased
legal expenses of $120,000, caused by an increase of securities laws related
legal support and increased rates charged by our law firm, and an increase of
sales support expenses of $69,000 spent in connection with starting up new sales
channels.


                                      -25-




<PAGE>

OTHER INCOME/ (LOSS)

         Other losses increased substantially from $2,912,965 in 2005 to
$12,966,694 in 2006. The primary reason for the $10,053,729 increase in other
losses is non-cash charges in the aggregate amount of $12,622,254 that we
recorded with respect to our July 31, 2006 financing transaction as prescribed
by FAS 133 and EITF 00-19. We are required to account for the warrants and the
embedded conversion feature associated with this transaction as liabilities at
their respective estimated fair values. We are also required to adjust the
estimated fair values of these liabilities at each period-end with the resultant
gain or loss recorded against earnings and such amounts aggregated $9,080,794
during the year ended December 31, 2006. The warrants and conversion feature are
valued using the Black-Scholes option pricing model. We believe that the closing
price of our common stock, the estimated life of the financial instrument and
the applicable volatility rates are the key assumptions used in the valuation
calculation. The fair value of the conversion features and warrants in excess of
the face value of the debt host instrument is expensed at the time of closing of
the financing. This excess fair value amounted to $2,499,794. We also recorded
net debt discount costs of $5,000,000 and we amortized $1,041,667 of such debt
discount into expenses during the year ended December 31, 2006.

         The 2005 other losses were primarily attributable to a $2,652,000
non-cash charge in connection with the conversion on notes which converted to
equity in 2005 and which charge was booked as prescribed under paragraph 13 of
EITF 98-5.

         Interest expense increased from $263,744 in 2005 to $346,049 in 2006,
an increase of $82,305. The main reason for this increase is the higher interest
expense of $64,000 incurred in connection with our 2006 financings compared to
the interest incurred in connection with similar financing activities incurred
in 2005.

LIQUIDITY AND CAPITAL RESOURCES

         Our independent auditors have qualified their opinion with respect to
our financial statements to include an explanatory paragraph related to our
ability to continue as a going concern in their report for each of our fiscal
years ended December 31, 2006, 2005, 2004 and 2003. Reports of independent
auditors questioning a company's ability to continue as a going concern
generally are viewed very unfavorably by analysts and investors. There are a
number of risks and challenges associated with such a qualified report
including, but not limited to, a significant impediment to our ability to raise
additional capital or seek financing from entities that will not conduct such
transactions in the face of such increased level of risk of insolvency and loss,
increased difficulty in attracting talent, and the diversion of the attention of
executive officers and other key employees to raising capital or financing
rather than devoting time to the day-to-day operations of our business. We urge
potential investors to review the report of our independent certified public
accountants and our consolidated financial statements and related notes
beginning on page F-1 of this Report, the cautionary statements included in the
"Risk Factor" section under Item 1 of this Report, and to seek independent
advice concerning the substantial risks related thereto before making a decision
to invest in us.

         For the years ended December 31, 2005 and 2006, we sustained net losses
of $13,390,940 and $19,078,578, respectively. Since our inception, including the
period ended December 31, 2006, we have realized negligible revenues and have
financed our operations almost exclusively from cash raised through a series of
equity and debt financings and not with cash generated from operations. As of
December 31, 2006, we had a deficit in working capital of $16,799,965. Our
management has attempted and continues to attempt to address these financial
conditions by seeking additional debt and equity financing to fund our
continuing operations, as more fully described below. We anticipate that the
proceeds from our Senior Convertible Note Financing (described under the caption
"Senior Convertible Note Financing" below) will be sufficient to support our
operations through August 30, 2007. However, if we do not experience a
significant increase in revenues by June 30, 2007, we expect that additional
capital will need to be raised to fund our continuing operations and there can
be no assurance that we will be able to obtain requisite financing on acceptable
terms, if at all.


                                      -26-




<PAGE>

December 2003 - April 2004 Convertible Loans
--------------------------------------------

         During the period between December 2003 through April 2004, we obtained
convertible loans totaling $1,214,290. Interest on these loans accrues at an
annual rate of 8%. The loans are convertible into shares of our common stock at
any time during the three year period following initial funding of the loans.
The conversion rate is $3.50 per share. If not previously voluntarily converted,
the total amount of principal and accrued but unpaid interest thereunder shall
automatically convert into shares of our common stock at a conversion rate of
$3.50 per share on April 15, 2007.

April 2004 Financing
--------------------

         In April 2004, we closed an equity based financing for gross proceeds
of $5,600,000. The financing involved the purchase of 3,200,000 shares of our
common stock, 3,200,000 Series A Warrants and 3,200,000 Series B Warrants. The
Series A Warrants expired on September 30, 2004 and no such warrants were
exercised prior to their expiration. The Series B Warrants expire on April 1,
2009 and had an original exercise price of $3.50 per share. However, pursuant to
the anti-dilution provisions of the Series B Warrants, our subsequent issuances
of securities have resulted in a reduced exercise price of $1.19 per share as of
March 12, 2007.

June 2004 Financing
-------------------

         In June 2004, we closed an equity based financing for gross proceeds of
$1,750,000. The financing involved the purchase of 972,223 shares of our common
stock, 972,223 Series C Warrants to purchase common stock and 972,223 Series D
Warrants to purchase common stock. The Series C Warrants were issued with an
original exercise price of $3.00 per share. In August 2004, we amended the terms
of the Series C Warrants to reduce the exercise price to $1.25 per share. The
Series C Warrants subsequently expired on August 15, 2006 and no such warrants
were exercised prior to their expiration. The Series D Warrants expire on June
1, 2009 and had an original exercise price of $3.50 per share. In December 2005,
we amended the terms of the Series D Warrants to reduce the exercise price to
$0.50 per share.

10% Convertible Bridge Notes
----------------------------

         During the period between November 2004 and February 2005, we issued
convertible notes (the "10% Notes") to forty-one accredited investors in the
aggregate principal amount of $2,360,000 in exchange for $2,360,000 in cash. Our
net proceeds were $2,124,000, after the payment of a 10% placement agent fee to
Burnham Hill Partners, a division of Pali Capital, Inc. (a NASD-registered
broker-dealer) ("Burnham Hill"), who acted as placement agent for the financing.
The 10% Notes bore interest at a rate of 10% per annum. Pursuant to the terms of
the 10% Notes, the outstanding principal amount of these notes, together with
all accrued but unpaid interest thereunder, would automatically convert into
shares issued in an equity based financing with gross proceeds of at least
$4,000,000, if any, of the sale of our common stock or other equity-based
equivalent, and at a price per share not to exceed $0.50 per share (a "10% Note
Qualified Financing"). However, for the purpose of determining the number of
shares and warrants to be received by the holders upon such conversion following
a 10% Note Qualified Financing, the holders would be deemed to have tendered
120% of the outstanding balance of the 10% Notes.

         As of the August 25, 2005 closing of our 2005 Private Placement of
"units" (described below under the caption "2005 Private Placement of Common
Stock and Warrants") we had raised total gross proceeds of $3,558,500 through
the 2005 Private Placement. In addition, between February 2005 and April 2005
(and as described below under the heading "8% Convertible Bridge Notes"), we
secured additional private debt financing in the original aggregate principal
amount of $600,000 through the issuance of 8% Convertible Bridge Notes. After
adding this $600,000 in convertible debt financing to the gross proceeds of the
2005 Private Placement, our aggregate gross proceeds were $4,158,500. As a
result, we achieved a 10% Note Qualified Financing and, accordingly, the
$4,000,000 automatic conversion event of the 10% Notes was triggered upon the
August 25, 2005 closing of the 2005 Private Placement.


                                      -27-




<PAGE>

         As of August 25, 2005, the total principal and accrued interest under
the 10% Notes was $2,509,971. After taking into account the provision of the 10%
Notes which provided that the holders would be deemed to have tendered 120% of
the outstanding balance of the 10% Notes, the holders of the 10% Notes were
deemed to have tendered $3,011,965 for the purpose of determining the number of
shares and warrants to be received by the holders upon such conversion. Based on
the offering terms of our 2005 Private Placement, the holders were entitled to
an aggregate of 6,023,932 shares of our common stock (based on a $0.50 price per
share of common stock included within the units offered to investors in the 2005
Private Placement) and 1,505,989 Series G-BH Warrants to purchase our common
stock. The Series G-BH Warrants have an exercise price of $2.50 per share of
common stock, expire August 25, 2010, and, so long as certain other conditions
set forth in the Series G-BH Warrants are met, are callable by us the first day
after the 30-trading-day average price of our common stock exceeds $3.50 per
share.

         In addition, the 10% Note holders were issued 1,416,000 Series E
Warrants. These Series E Warrants had an original exercise price of $0.60 per
share of common stock and expire five years from the respective noteholder's 10%
Note issuance date. However, pursuant to the anti-dilution provisions of the
Series E Warrants, our subsequent issuances of securities have resulted in a
reduced exercise price of $0.52 per share as of March 12, 2007. In the event the
closing bid price of our common stock exceeds $2.50 per share and certain other
conditions set forth in the Series E Warrants are met, 50% of the Series E
Warrants are callable by us during the first two years after their respective
date of issuance, and 100% of the Series E Warrants are callable by us
thereafter.

         We also issued 602,393 Series J placement agent warrants to designees
of Burnham Hill for placement agent services provided in conjunction with the
10% Note financing. The Series J Warrants had an original exercise price of
$0.50 per shares of common stock and expire August 25, 2010. However, pursuant
to the anti-dilution provisions of the Series J Warrants, our subsequent
issuances of securities have resulted in a reduced exercise price of $0.47 per
share as of March 12, 2007.

8% Convertible Bridge Notes
---------------------------

         During the period between February 2005 and April 2005, we secured
private debt financing from ten accredited investors in the original aggregate
principal amount of $600,000. Our net proceeds were $528,000 after the payment
of a 12% placement agent fee to Brookstreet Securities Corporation (a
NASD-registered broker-dealer), who acted as placement agent for the financing.
The debt was evidenced by thirteen Convertible Bridge Notes (the "8% Notes"),
which bore interest at a rate of 8% per annum. The 8% Notes contained a
conversion provision whereby the entire principal and accrued interest of the 8%
Notes would automatically convert into shares of our common stock if we raised
at least $3,000,000 in a private equity financing after the issuance of the 8%
Notes (an "8% Note Qualified Financing"). For purposes of such conversion, the
conversion price would reflect a 20% discount from the per share purchase price
in the 8% Note Qualified Financing. In addition, the $600,000 in 8% Notes was to
be added to the proceeds from the 8% Note Qualified Financing for purposes of
calculating the $3,000,000 amount, which triggered the automatic conversion.

         As of the July 15, 2005 closing of our 2005 Private Placement, we had
raised total gross proceeds of $2,416,000 through the 2005 Private Placement.
After adding the $600,000 in 8% Notes to these gross proceeds as required by the
conversion provisions of the 8% Notes, the aggregate gross proceeds from the
2005 Private Placement and 8% Notes was $3,016,000. As a result, we achieved an
8% Note Qualified Financing and, accordingly, the $3,000,000 automatic
conversion event of the 8% Notes was triggered upon the July 15, 2005 closing of
the 2005 Private Placement.

         As of July 15, 2005, the total principal and accrued interest under the
8% Notes was $616,097. Pursuant to the 20% discount in conversion price
discussed above, the conversion price of the 8% Notes was $0.40 per share of our
common stock (based on a $0.50 price per share of common stock included within
the units offered to investors in the 2005 Private Placement). Based on this
$0.40 per share conversion price, the holders of the 8% Notes were entitled to
an aggregate of 1,540,244 shares of our common stock.

         We also issued 231,036 Series F placement agent warrants to Brookstreet
Securities Corporation and its designees for placement agent services provided
in conjunction with the 8% Note financing. The Series F Warrants have an
exercise price of $0.40 per share of common stock and expire on the earlier of
April 23, 2010 or upon a merger, acquisition, consolidation, sale of voting
control or sale of substantially all of our assets in which our shareholders do
not own a majority of the outstanding shares of the surviving corporation.


                                      -28-




<PAGE>

2005 Private Placement of Common Stock and Warrants
---------------------------------------------------

         During the period between April 2005 and November 2005, we sold a
combination of common stock and warrants in a private placement transaction to
189 accredited investors (the "2005 Private Placement"). The common stock and
warrants were sold as "units," with each unit consisting of four shares of
common stock and one Series G Warrant to purchase common stock. The price per
unit was $2.00. We raised aggregate gross proceeds of $7,128,375 under this
private placement transaction and issued 14,256,750 shares of common stock and
Series G Warrants to purchase an aggregate of 3,564,188 shares of common stock.
The Series G Warrants have an exercise price of $2.50 per share of common stock,
expire five years from their respective date of issuance, and, so long as
certain other conditions set forth in the Series G Warrants are met, are
callable by us the first day after the 30-trading-day average price of our
common stock exceeds $3.50 per share. Our net proceeds were $6,272,970 after the
payment of $855,405 in placement agent fees to Brookstreet Securities
Corporation, who acted as placement agent for the transaction.

         In addition, we issued Series H placement agent warrants to acquire up
to 2,138,513 shares of common stock to Brookstreet Securities Corporation and
its designees for placement agent services rendered in conjunction with the 2005
Private Placement. The Series H Warrants had an original exercise price of $0.50
per share of common stock and expire on the earlier of November 23, 2007 or upon
a merger, acquisition, consolidation, sale of voting control or sale of
substantially all of our assets in which our shareholders do not own a majority
of the outstanding shares of the surviving corporation. However, pursuant to the
anti-dilution provisions of the Series H Warrants, our subsequent issuances of
securities have resulted in a reduced exercise price of $0.47 per share as of
March 12, 2007.

April 2006 Loan Agreement
-------------------------

         On April 28, 2006, we, along with our wholly-owned subsidiary Raptor
Networks Technology, Inc., a California corporation, entered into a senior loan
agreement whereby we could borrow, upon the satisfaction of certain conditions,
up to $1,100,000. The loan was structured as a non-amortizing revolving loan.
The outstanding daily balance of the loan bore interest at a floating rate per
annum equal to the greater of (i) prime rate plus 4% or (ii) 11.75%. The loan
was secured by a first priority security interest in collateral consisting of
substantially all of our and our subsidiary's assets, including accounts
receivable, inventory, equipment, intellectual property, contract rights, cash
and deposits. On July 31, 2006, we paid the entire outstanding balance of
principal and accrued but unpaid interest in the amount of $705,316 and fees in
the amount of $165,000, at which time our obligations under this loan agreement
were satisfied in full.

Senior Convertible Note Financing
---------------------------------

         On July 30, 2006, we entered into a Securities Purchase Agreement with
three institutional accredited investors in connection with a private placement
transaction providing for, among other things, our issuance of senior
convertible notes in the aggregate principal amount of $5 million, Series L
Warrants to purchase up to an aggregate of 17,065,623 shares of our common stock
and Series M Warrants to purchase up to an aggregate of 7,395,103 shares of our
common stock. We received aggregate gross proceeds of $5 million from the
investors for our issuance of these notes and warrants. We also entered into a
registration rights agreement with the investors that required us to register up
to 130% of the shares underlying the notes, Series L Warrants and Series M
Warrants with the SEC.

         We subsequently entered into Amendment and Exchange Agreements, dated
January 18, 2007 and amended and restated on January 22, 2007, with the
investors from the July 30, 2006 private placement providing for certain
amendments to the senior convertible notes, Series L Warrants, Series M Warrants
and registration rights agreement. These amendments include, but are not limited
to, an increase in the principal amount of the notes from an aggregate of $5
million to an aggregate of approximately $7.2 million, an increase in the
aggregate number of shares of common stock issuable upon exercise of the Series
L Warrants by 5,688,540 (from an aggregate of 17,065,623 shares to an aggregate
of 22,754,163 shares), and a reduction in the exercise price of the Series L


                                      -29-




<PAGE>

Warrants and the Series M Warrants from $0.5054 per share to $0.43948 per share.
We did not receive any additional cash consideration for these amendments. The
amendments provided for by the Amendment and Exchange Agreements were reflected
by our issuance of amended and restated notes, Series L-1 Warrants and Series
M-1 Warrants and by entering into an amended and restated registration rights
agreement with the investors.

         In addition, the Amendment and Exchange Agreements provided for an
additional private placement transaction with one of the investors resulting in
our issuance of an additional senior convertible note in the principal amount of
$1.6 million, Series L-2 Warrants to purchase an aggregate of 7,281,332 shares
of our common stock and Series M-2 Warrants to purchase an aggregate of
2,366,433 shares of our common stock. We received aggregate gross proceeds of
$1.6 million from the investor for our issuance of these additional note and
warrants.

         The following is a brief summary of the July 30, 2006 private
placement, as amended by the Amendment and Exchange Agreements (the "Senior
Convertible Note Financing").

         Amended Purchase Agreement
         --------------------------

         As described above, the Securities Purchase Agreement, as amended by
the Amendment and Exchange Agreements (the "Amended Purchase Agreement"),
provided for the issuance to the investors of senior convertible notes in the
aggregate principal amount of approximately $8.8 million and Series L-1 Warrants
to purchase an aggregate of 22,754,163 shares of our common stock, Series M-1
Warrants to purchase an aggregate of 7,395,103 shares of our common stock,
Series L-2 Warrants to purchase an aggregate of 7,281,332 shares of our common
stock and Series M-2 Warrants to purchase an aggregate of 2,366,433 shares of
our common stock (the Series L-1 Warrants, Series M-1 Warrants, Series L-2
Warrants and Series M-2 Warrants collectively referred to as the "Senior Note
Warrants"). We received aggregate gross proceeds of $6.6 million from the
investors for our issuance of these notes and warrants.

         The Amended Purchase Agreement contains representations and warranties
made by us and the investors which are typical for transactions of this type.
The representations and warranties made by us in the Amended Purchase Agreement
are qualified by reference to certain exceptions contained in disclosure
schedules delivered to the investors. Accordingly, the representations and
warranties contained in the Amended Purchase Agreement should not be relied upon
by others who have not reviewed those disclosure schedules and the documentation
surrounding the transaction as a whole.

         The Amended Purchase Agreement contains commitments by us that we will
not engage in certain activities which are typical for transactions of this
type, as well as the following covenants:

         o        We will use the estimated $6.2 million in net proceeds
                  approximately as follows:

                     Pay down of debt                        $ 1,200,000

                     Funding of operations                   $ 3,500,000

                     Capital expenditures                      $ 500,000

                     Working capital                         $ 1,000,000

         o        We will not, while the senior convertible notes are
                  outstanding, directly or indirectly redeem or pay any cash
                  dividend or distribution on our common stock, without the
                  consent of the holders of the senior convertible notes.

         o        We will not issue any additional senior convertible notes or
                  any form of convertible, exchangeable or exercisable
                  securities with a price that varies or may vary with the
                  market price of our common stock, and we will not conduct any
                  securities offerings until:


                                      -30-




<PAGE>

                  o        our stockholders approve an increase in our
                           authorized level of common stock from 110,000,000
                           shares to at least 200,000,000 shares; and

                  o        the Initial Registration Statement (as defined below)
                           and all Additional Registration Statements (as
                           defined below) are declared effective by the SEC.

         o        We will not file any registration statements, other than the
                  Initial Registration Statement and the Additional Registration
                  Statements, with the SEC within 120 business days following
                  the date the Initial Registration Statement or any Additional
                  Registration Statement is declared effective by the SEC.

         o        We will not conduct any other securities offerings or be party
                  to any solicitations, negotiations or discussion regarding any
                  other securities offering within 120 business days following
                  the date the Initial Registration Statement or any Additional
                  Registration Statement is declared effective by the SEC.

         o        We will offer to the investors, until the later to occur of
                  (i) July 31, 2008 or (ii) the date on which none of the senior
                  convertible notes are outstanding, the opportunity to
                  participate in any of our subsequent securities offerings.

         o        We will seek stockholder approval to increase our authorized
                  level of common stock from 110,000,000 shares to at least
                  200,000,000 shares and if, despite our best efforts,
                  stockholder approval is not obtained on or before April 30,
                  2007, we will continue to seek stockholder approval every six
                  months thereafter until such stockholder approval is obtained;
                  provided that if our Board of Directors does not recommend
                  that our stockholders approve the increase in authorized
                  common stock and stockholder approval is not obtained, then we
                  shall continue to seek stockholder approval every three months
                  until the senior convertible notes are no longer outstanding
                  or until stockholder approval is obtained.

         o        If our common stock is listed on a market other than the OTC
                  Bulletin Board and the issuance of the shares underlying the
                  senior convertible notes and Senior Note Warrants would exceed
                  the number of shares of common stock we may issue under the
                  rules and regulation of such other market, then we will seek
                  stockholder approval as required by such other market to
                  permit the listing of all of the shares underlying the senior
                  convertible notes and Senior Note Warrants within 75 days of
                  our common stock being listed on the exchange or market and
                  if, despite our best efforts, stockholder approval is not
                  obtained, continue to seek stockholder approval every six
                  months thereafter until such stockholder approval is obtained
                  or the senior convertible notes are no longer outstanding.

         The Amended Purchase Agreement also obligates us to indemnify the
investors, subsequent holders of the senior convertible notes and Senior Note
Warrants and various related parties for certain losses including those
resulting from (1) any misrepresentation or breach of any representation or
warranty made by us, (2) any breach of any of our obligations, and (3) certain
claims by others.

         Senior Convertible Notes
         ------------------------

         The senior convertible notes have an aggregate principal amount of
approximately $8.8 million and are convertible into shares of our common stock
at an initial conversion price of $0.43948 per share, subject to adjustment as
described below (the "Conversion Price"). The senior convertible notes mature on
July 31, 2008 (the "Maturity Date"), subject to the right of the investors to
extend the date for the payment of any installment of principal (as described
below). The senior convertible notes bear interest at the rate of 9.25% per
annum, which rate may be adjusted to 7.0% per annum at the beginning of each
calendar quarter if certain conditions are satisfied. The interest rate is
increased to 15% upon the occurrence of an event of default (as described
below).


                                      -31-




<PAGE>

         REPAYMENT OF PRINCIPAL

         The principal amount of the senior convertible notes is to be repaid
beginning on the earlier of (i) the first day of the month following the month
the Initial Registration Statement is declared effective by the SEC and (ii) May
1, 2007, and, thereafter, the first day of each calendar month. The amount of
each payment shall be equal to the quotient of (a) the aggregate outstanding
principal of the senior convertible notes divided by (b) the number of months
until the Maturity Date. Such principal payments shall be paid in shares of our
common stock (subject to the satisfaction of the conditions listed below) or, at
our option, in cash or a combination of cash and shares of common stock.

         In order for principal payments to be paid in shares of our common
stock, all of the following conditions must be satisfied at the time of such
payment:

         o        Either:

                  o        The shares of common stock used to make the principal
                           payment are covered by a registration statement that
                           has been effective for a certain continuous period of
                           time (up to six months), subject to certain grace
                           periods; or

                  o        All shares of common stock issuable upon conversion
                           in full of the senior convertible notes and exercise
                           in full of the Senior Note Warrants shall be eligible
                           for sale without restriction and without the need for
                           registration under any applicable federal or state
                           securities laws;

         o        During the entire six-month period immediately preceding the
                  principal payment date, our common stock shall have been
                  designated for quotation on the OTC Bulletin Board, or any
                  other eligible exchange or market permitted by the senior
                  convertible notes, and shall not have been suspended from
                  trading on such exchange or market (other than suspensions of
                  not more than two days due to business announcements by us)
                  nor shall delisting or suspension by such exchange or market
                  been threatened or pending either in writing by such exchange
                  or market or due to our falling below the minimum listing
                  maintenance requirements of such exchange or market;

         o        During the entire one-year period immediately preceding the
                  principal payment date, we shall have delivered shares of
                  common stock upon conversion of the senior convertible notes
                  and upon exercise of the Senior Note Warrants on a timely
                  basis;

         o        The common stock used to make the principal payment may be
                  issued without violating the ownership limitations described
                  in more detail below prohibiting an investor from owning in
                  excess of 4.99% of our outstanding shares of common stock
                  (which limit may be raised or lowered to an amount not to
                  exceed 9.99% at the option of the holder upon 61-days prior
                  notice to us) and without violating the regulations of the OTC
                  Bulletin Board or other eligible exchange or market on which
                  our common stock may then trade;

         o        We have not failed to timely make any payments due under the
                  Amended Purchase Agreement, the senior convertible notes, the
                  Senior Note Warrants or the amended and restated registration
                  rights agreement, within ten business days of when such
                  payment is due;

         o        During the entire six-month period immediately preceding the
                  principal payment date, we shall not have publicly announced
                  that certain types of transactions involving a change of
                  control are pending, proposed or intended that have not been
                  abandoned, terminated or consummated;

         o        During the entire six-month period immediately preceding the
                  principal payment date, no event shall have occurred that
                  constitutes, or with the passage of time or giving of notice
                  would constitute, an event of default under the senior
                  convertible notes;


                                      -32-




<PAGE>

         o        We shall have no knowledge of any fact that would cause:

                  o        The registration statement covering the shares of
                           common stock used to make the principal payment not
                           to be effective and available for the resale of such
                           shares of common stock, or

                  o        Any shares of common stock issuable upon conversion
                           of the senior convertible notes or upon exercise of
                           the Senior Note Warrants not to be eligible for sale
                           without restriction pursuant to Rule 144(k) of the
                           Securities Act and any applicable state securities
                           laws;

         o        If the principal payment to be made in shares of common stock
                  occurs after April 30, 2007, we must have obtained stockholder
                  approval to increase our authorized level of common stock from
                  110,000,000 shares to at least 200,000,000 shares;

         o        If our common stock is listed on an exchange or market other
                  than the OTC Bulletin Board and the issuance of the shares of
                  common stock underlying the senior convertible notes and the
                  Senior Note Warrants would exceed the number of shares of
                  common stock we may issue under the rules and regulations of
                  such exchange or market, then we must have obtained
                  stockholder approval, within 75 days of our common stock being
                  listed on the exchange or market, to permit the listing of all
                  of the shares of common stock underlying the senior
                  convertible notes and the Senior Note Warrants; and

         o        We must be in compliance with, and must not have breached any
                  provision, covenant, representation or warranty of, the
                  Amended Purchase Agreement, the senior convertible notes, the
                  Senior Note Warrants or the amended and restated registration
                  rights agreement.

         When we use common stock to make a principal payment, we shall deliver
shares to the investors the day after the principal payment due date in an
amount equal to the principal payment amount divided by the lower of the
Conversion Price or a 10.0% discount to the volume weighted average price of our
common stock for the five days preceding the payment date; provided that the
discount will be reduced to 7.5% if the volume weighted average price for the 20
previous trading days is above $1.00 per share ("First Calculation"). After 20
trading days have elapsed from the principal due date, the amount of principal
paid in common stock will then again be divided by the lower of the Conversion
Price or a 10.0% discount to the volume weighted average price of our common
stock for the 20 days after the principal payment date; provided that the
discount will be reduced to 7.5% if the volume weighted average price for the 20
previous trading days is above $1.00 per share ("Second Calculation"). If the
Second Calculation results in a larger number than the First Calculation, the
investors shall be issued additional shares of common stock to cover the
difference between the Second Calculation and the First Calculation. If the
Second Calculation is less than the First Calculation, the outstanding principal
amount of the senior convertible note will be reduced.

         Subject to our right to require the investors to convert all or a
portion of the senior convertible notes, which is discussed below, the investor
may, upon notice to us, elect to defer payments for a period of up to two years
from the date such installment was originally due.

         PAYMENT OF INTEREST

         Interest on the senior convertible notes is payable quarterly beginning
on April 1, 2007. The portion of each interest payment that relates to principal
amounts paid by us in shares of common stock may, at our option if certain
conditions are satisfied, be paid by the issuance of common stock. The other
portion of each interest payment must be paid in cash. Any shares of common
stock used to pay interest will be valued at 90.0% of the arithmetic average of
the weighted average price of the common stock for the five trading days
preceding the interest payment date; provided that the shares of common stock
used to pay interest will be valued at 92.5% if the volume weighted average
price for the 20 previous trading days is above $1.00 per share.


                                      -33-




<PAGE>

         CONVERSION

         The senior convertible notes are convertible at the option of the
holders into shares of our common stock at an initial Conversion Price of
$0.43948 per share, subject to adjustment for stock splits, combinations or
similar events. The Conversion Price is also subject to a "full ratchet"
anti-dilution adjustment which, in the event that we issue or are deemed to have
issued certain securities at a price lower than the then applicable Conversion
Price, immediately reduces the Conversion Price to equal the price at which we
issue or are deemed to have issued our common stock.

         Subject to certain conditions, we may require the investors to convert
up to 50%, subject to certain limitations, or 100%, of the senior convertible
notes after the SEC has declared effective the Initial Registration Statement at
any time when the shares of our common stock are trading at or above 150% of the
initial Conversion Price in the case of a conversion of up to 50% of the senior
convertible notes or at or above 175% of the initial Conversion Price in the
case of a conversion of up to 100% of the senior convertible notes (a "Mandatory
Conversion"). The senior convertible notes contain certain limitations on
optional and mandatory conversion. For example, they provide that no conversion
may be made if, after giving effect to the conversion, the investor, together
with its affiliates, would own in excess of 4.99% of our outstanding shares of
common stock. This percentage may, however, be raised or lowered to an amount
not to exceed 9.99% at the option of the investor upon 61-days prior notice to
us.

         The senior convertible notes impose penalties on us for any failure to
deliver any shares of our common stock issuable upon conversion.

         EVENTS OF DEFAULT

         The senior convertible notes contain a variety of events of default
which are typical for transactions of this type, as well as the following
events:

         o        The failure of any registration statement required by the
                  amended and restated registration rights agreement to be
                  declared effective by the SEC within 60 days after the date
                  required by the amended and restated registration rights
                  agreement or the lapse or unavailability of such registration
                  statement for more than 10 consecutive days or more than an
                  aggregate of 30 days in any 365-day period (other than certain
                  allowable grace periods).

         o        The suspension from trading or failure of our common stock to
                  be listed for trading on the OTC Bulletin Board or another
                  eligible market for more than 5 consecutive trading days or
                  more than an aggregate of 10 trading days in any 365-day
                  period.

         o        Our failure to issue shares upon conversion of a senior
                  convertible note for more than 10 business days after the
                  relevant conversion date or a notice of our intention not to
                  comply with a request for conversion.

         o        The failure for 10 consecutive business days to have reserved
                  for issuance the full number of shares issuable upon
                  conversion in accordance to the terms of the senior
                  convertible notes.

         o        The failure to obtain stockholder approval to increase our
                  authorized level of common stock from 110,000,000 shares to at
                  least 200,000,000 shares on or before April 30, 2007.

         If there is an event of default, then the investors have the right to
redeem all or any portion of the senior convertible notes, at the greater of (i)
up to 125% of the sum of the outstanding principal, interest and late fees,
depending on the nature of the default, and (ii) the product of (a) the greater
of (1) the closing sale price for our common stock on the date immediately
preceding the event of default, (2) the closing sale price for our common stock
on the date immediately after the event of default and (3) the closing sale
price for our common stock on the date an investor delivers its redemption
notice for such event of default, multiplied by (b) 130% of the number of shares
into which the senior convertible notes (including all principal, interest and
late fees) may be converted.


                                      -34-




<PAGE>

         FUNDAMENTAL TRANSACTIONS

         The senior convertible notes prohibit us from entering into certain
transactions involving a change of control, unless the successor entity is a
publicly traded corporation, whose common stock is quoted on or listed on one of
the exchanges specified in the senior convertible notes, and the successor
assumes in writing all of our obligations under the senior convertible notes and
the other transaction documents.

         In the event of such a transaction, the investors have the right to
force redemption of the senior convertible notes, at the greater of (i) 150% of
the sum of the principal and interest and late fees, and (ii) the product of (x)
130% of the sum of the amount of principal, interest and late fees to be
redeemed and (y) the quotient determined by dividing (A) the closing sale price
of our common stock after the announcement of a change of control by (B) the
conversion price; provided, however, that if the change in control consideration
exceeds 200% of the conversion price then in effect, then the 130% premium will
be reduced to 120%.

         CONVERSION AND REDEMPTION

         The investors may accelerate the partial payment of the senior
convertible notes by requiring that we convert, or at our option, redeem in
cash, up to an amount equal to 20% of the aggregate dollar trading volume of our
common stock over the prior 20 trading day period. If we use common stock to
make the acceleration payment, we shall deliver shares to the investors in an
amount equal to the principal amount divided by the lower of the Conversion
Price or a 10.0% discount to the volume weighted average price of our common
stock for the five days preceding the payment date; provided that the discount
will be reduced to 7.5% if the volume weighted average price for the 20 previous
trading days is above $1.00 per share.

         COVENANTS

         The senior convertible notes contain a variety of obligations on our
part not to engage in certain activities, which are typical for transactions of
this type, as well as the following:

         o        We will initially reserve out of our authorized and unissued
                  common stock an aggregate of 34,078,554 shares for the
                  conversion of the senior convertible notes and exercise of the
                  Senior Note Warrants; provided, however, that if and after our
                  stockholders approve an increase in our authorized level of
                  common stock from 110,000,000 shares to at least 200,000,000
                  shares, we will reserve a number of shares equal to 130% of
                  the number of shares of common stock issuable upon conversion
                  of the senior convertible notes and exercise of the Senior
                  Note Warrants.

         o        We will not incur other indebtedness, except for certain
                  permitted indebtedness.

         o        We will not incur any liens, except for certain permitted
                  liens.

         o        We will not, directly or indirectly, redeem or repay all or
                  any portion of any permitted indebtedness if at the time such
                  payment is due or is made or, after giving effect to such
                  payment, an event constituting, or that with the passage of
                  time and without being cured would constitute, an event of
                  default has occurred and is continuing.

         o        We will not redeem, repurchase or pay any dividend or
                  distribution on our capital stock without the consent of the
                  investors holding a majority of the aggregate outstanding
                  principal of the senior convertible notes.

         PARTICIPATION RIGHTS

         The holders of the senior convertible notes are entitled to receive any
dividends paid or distributions made to the holders of our common stock on an
"as if converted to common stock" basis.


                                      -35-




<PAGE>

         LIMITATIONS ON TRANSFER

         The senior convertible notes may be sold, assigned or transferred by
the investors without our consent but subject to certain customary limitations
on transfer which are typical for transactions of this type.

         PURCHASE RIGHTS

         If we issue options, convertible securities, warrants or similar
securities to holders of our common stock, the holders of the senior convertible
notes shall have the right to acquire the same as if it had converted its senior
convertible note into common stock.

         Series L Warrants and Series M Warrants
         ---------------------------------------

         The Series L-1 Warrants and Series L-2 Warrants are immediately
exercisable and, in the aggregate, entitle the holders thereof to purchase up to
30,035,495 shares of our common stock. The Series M-1 Warrants and Series M-2
Warrants become exercisable only upon a Mandatory Conversion, if any, and, in
the aggregate, entitle the holders thereof to purchase up to 9,761,536 shares of
our common stock. All of the Senior Note Warrants have an exercise price of
$0.43948 per share and expire 84 months after a registration statement covering
the shares underlying the respective Senior Note Warrant is declared effective
by the SEC.

         Similar to the senior convertible notes, the Senior Note Warrants
require payments to be made by us for failure to deliver the shares of common
stock issuable upon exercise. The Senior Note Warrants also contain similar
limitations on exercise, including the limitation that the investors may not own
in excess of 4.99% of our outstanding shares of common stock (subject to an
increase or decrease, upon at least 61-days notice by an investor to us, of up
to 9.99%).

         ANTI-DILUTION PROTECTION

         The exercise price of the Senior Note Warrants and the number of shares
issuable upon exercise of the Senior Note Warrants are subject to adjustments
for stock splits, combinations or similar events. In addition, the exercise
price of the Senior Note Warrants and the number of shares issuable upon
exercise of the Senior Note Warrants are subject to a "full ratchet"
anti-dilution adjustment which, in the event that we issue or are deemed to have
issued certain securities at a price lower than the then applicable exercise
price, immediately reduces the exercise price of the Senior Note Warrants to
equal the price at which we issue or are deemed to have issued our common stock
and increases the number of shares exercisable under the Senior Note Warrants by
a ratio equal to the old exercise price divided by the new reduced exercise
price.

         FUNDAMENTAL TRANSACTIONS

         We may not enter into a transaction involving a change of control
unless the successor entity assumes our obligations under the Senior Note
Warrants and the successor entity is a publicly traded corporation whose common
stock is quoted on or listed on one of the exchanges specified in the Senior
Note Warrants. Upon the occurrence of a transaction involving a permitted change
of control, the holders of the Senior Note Warrants will have the right, among
others, to have the Senior Note Warrants repurchased for a purchase price in
cash equal to the Black Scholes value (as calculated pursuant to the Senior Note
Warrants) of the then unexercised portion of the Senior Note Warrants.

         PURCHASE RIGHTS

         If we issue options, convertible securities, warrants, stock, or
similar securities to holders of our common stock, the holders of the Senior
Note Warrants shall have the right to acquire the same as if it had exercised
its Senior Note Warrants.


                                      -36-




<PAGE>

         Amended and Restated Registration Rights Agreement
         --------------------------------------------------

         The amended and restated registration rights agreement required that we
file a registration statement with the SEC on or before January 29, 2007 (the
"Initial Registration Statement") for the resale by the investors of at least
15,267,292 shares of our common stock underlying the senior convertible notes.
We filed the Initial Registration Statement with the SEC on January 24, 2007.
The Initial Registration Statement must be declared effective by the SEC on or
before April 15, 2007.

         We are also required to file additional registration statements (each
an "Additional Registration Statement") for the resale of our common stock
underlying the senior convertible notes and Senior Note Warrants, which are to
be filed with the SEC within 30 days of the request of an investor. Investor
requests may be made at any time on or after the five month anniversary of the
effective date of the most recent registration statement covering shares
underlying the senior convertible notes or Senior Note Warrants. Each Additional
Registration Statement shall cover the maximum number of shares permitted by the
SEC. Each Additional Registration Statement must be declared effective by the
SEC within 60 days of the applicable investor request (or 90 days if there is a
full review by the SEC of the applicable Additional Registration Statement). Our
obligation to file Additional Registration Statements continues until either all
of the shares of our of common stock underlying the senior convertible notes and
Senior Note Warrants have been covered by a registration statement or all of the
shares of our common stock underlying the senior convertible notes and Senior
Note Warrants may be sold by the investors without restriction under Rule 144(k)
promulgated under the Securities Act.

         Subject to certain grace periods, the Initial Registration Statement
and each Additional Registration Statement must remain effective and available
for use until the earlier of the date the investors can sell all of the
securities covered by the registration statement without restriction pursuant to
Rule 144(k) and the date all such securities have been sold pursuant to the
registration statement. If we fail to meet the filing or effectiveness
requirements of the Initial Registration Statement or any Additional
Registration Statement, subject to certain grace periods, we are required to pay
liquidated damages of $132,000 on the date of such failure and on every 30th day
thereafter until such failure is cured. The total penalties payable by us for
our failure to meet these filing and effectiveness requirements are capped at
$825,000. The amended and restated registration rights agreement provides for
customary indemnification for us and the investors.

         Placement Agent Fees and Warrants
         ---------------------------------

         In connection with the Senior Convertible Note Financing, we paid
aggregate placement agent fees to Montgomery & Co., LLC (a NASD-registered
broker-dealer) in the amount of $396,000 in cash ($300,000 associated with the
July 30, 2006 private placement and $96,000 associated with the January 18, 2007
private placement) and issued warrants to the Montgomery 2006-5 Partnership, as
a designee of Montgomery & Co., LLC, to purchase an aggregate of 600,710 shares
of our common stock (455,084 warrants associated with the July 30, 2006 private
placement and 145,626 warrants associated with the January 18, 2007 private
placement). The warrants have an exercise price of $0.43948 per share and expire
5 years from the date of issuance.

         The foregoing raises during fiscal years ended December 31, 2004, 2005
and 2006 and during the first several weeks of 2007 have enabled us to further
enhance and stabilize product performance, reduce the cost of manufacturing by
redesign, build an inventory of finished products, generate a certain level of
interest in the marketplace and support our continuing operations. We anticipate
that the proceeds from our Senior Convertible Note Financing described above
will be sufficient to support our operations through August 30, 2007. However,
if we do not experience a significant increase in revenues by June 30, 2007, we
expect that additional capital will need to be raised to fund our continuing
operations and there can be no assurance that we will be able to obtain
requisite financing on acceptable terms, if at all.

         The descriptions of the documents and agreements discussed above are
qualified by reference to the complete text of those documents and agreements.
However, those documents and agreements, including without limitation the
representations, warranties, covenants and other provisions of those documents
and agreements, are not intended as documents for investors and the public to
obtain factual information about the current state of affairs of the parties to
those documents and agreements. Rather, investors and the public should look to
other disclosures contained in our reports under the Securities Exchange Act of
1934, as amended.


                                      -37-




<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

         The financial statements and corresponding notes to the financial
statements called for by this item appear under the caption "Index to Financial
Statements" beginning on Page F-1 of this Report.

                                    PART III

ITEM 13.   EXHIBITS

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

     2.1       Agreement and Plan of Merger dated August 23, 2003 between
               Pacific InterMedia, Inc., and Raptor Networks Technology, Inc.
               (incorporated herein by reference to Exhibit 2.1 to the Company's
               Form 8-K filed with the SEC on October 22, 2003)
     2.2       Amendment to Agreement and Plan of Merger dated October 15, 2003
               between Pacific InterMedia, Inc., and Raptor Networks Technology,
               Inc. (incorporated herein by reference to Exhibit 2.2 to the
               Company's Form 8-K filed with the SEC on October 22, 2003)
     3.1       Articles of Incorporation, as amended as of June 8, 2005
               (incorporated herein by reference to Exhibit 3.1 to the Company's
               10-KSB for fiscal year ended December 31, 2004, filed with the
               SEC on April 15, 2005)


                                      -48-




<PAGE>

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

     3.2       Articles of Amendment to Articles of Incorporation increasing
               Company's authorized common stock to 75,000,000 shares, effective
               June 9, 2005 (incorporated herein by reference to Exhibit 3.1 to
               the Company's Form 8-K filed with the SEC on June 15, 2005)
     3.3       Articles of Amendment to Articles of Incorporation increasing
               authorized common stock to 110,000,000 shares, effective May 31,
               2006 (incorporated herein by reference to Exhibit 3.1 to the
               Company's Form 8-K filed with the SEC on June 5, 2006)
     3.4       Bylaws (incorporated herein by reference to Exhibit 3.2 to
               Registration Statement on Form SB-2, Registration No. 333-74846,
               filed with the SEC on December 10, 2001)
     3.5       Amendment to Bylaws - Article II, Section 1 (incorporated herein
               by reference to Exhibit 3.3 to the Company's 10-KSB for fiscal
               year ended December 31, 2004, filed with the SEC on April 15,
               2005)
    10.1       Full Service Lease dated May 3, 2004 between PS Business Parks,
               L.P., and Raptor Networks Technology, Inc. (incorporated herein
               by reference to Exhibit 10.1 to the Company's 10-KSB for fiscal
               year ended December 31, 2004, filed with the SEC on April 15,
               2005).
    10.2       Turnkey Manufacturing Services Agreement dated November 7, 2003
               between Express Manufacturing, Inc. and Raptor Networks
               Technology, Inc. (incorporated herein by reference to Exhibit
               10.2 to the Company's 10-KSB for fiscal year ended December 31,
               2005, filed with the SEC on April 3, 2006)
    10.3       Securities Purchase Agreement by and among Raptor Networks
               Technology, Inc., DMK Investments, LLC, Transglobal Investments,
               LLC, and Uptrend Investments, Inc. in conjunction with June 2004
               private placement of common stock and warrants (incorporated
               herein by reference to Exhibit 10.14 to the Company's 10-KSB for
               fiscal year ended December 31, 2004, filed with the SEC on April
               15, 2005)
    10.4       Registration Rights Agreement by and among Raptor Networks
               Technology, Inc., DMK Investments, LLC, Transglobal Investments,
               LLC, and Uptrend Investments, Inc. in conjunction with June 2004
               private placement of common stock and warrants (incorporated
               herein by reference to Exhibit 10.15 to the Company's 10-KSB for
               fiscal year ended December 31, 2004, filed with the SEC on April
               15, 2005)
    10.5       Amendment No. 1 to Registration Rights Agreement, effective
               December 12, 2005, by and among Raptor Networks Technology, Inc.,
               DMK Investments, LLC, Transglobal Investments, LLC, and Uptrend
               Investments, Inc. (incorporated herein by reference to Exhibit
               4.4 to the Company's Registration Statement on Form SB-2,
               Registration No. 333-131184, filed with the SEC on January 20,
               2006)
    10.6       Letter Agreement, effective as of September 20, 2005, by and
               among Raptor Networks Technology, Inc., DMK Investments, LLC,
               Transglobal Investments, LLC, and Uptrend Investments, Inc.
               (incorporated herein by reference to Exhibit 10.1 to the
               Company's Current Report of Form 8-K filed with the SEC on
               September 26, 2005)
    10.7       Form of Series C Warrant (incorporated herein by reference to
               Exhibit 10.6 to the Company's 10-KSB for fiscal year ended
               December 31, 2004, filed with the SEC on April 15, 2005)
    10.8       Form of Letter Amendment to Series C Warrant reducing exercise
               price to $1.25 per share (incorporated herein by reference to
               Exhibit 10.7 to the Company's 10-KSB for fiscal year ended
               December 31, 2004, filed with the SEC on April 15, 2005)
    10.9       Amendment No. 1 to Series C Warrant, effective December 12, 2005,
               by and among Raptor Networks Technology, Inc., DMK Investments,
               LLC, Transglobal Investments, LLC, and Uptrend Investments, Inc.
               (incorporated herein by reference to Exhibit 4.8 to the Company's
               Registration Statement on Form SB-2, Registration No. 333-131184,
               filed with the SEC on January 20, 2006)
    10.10      Form of Series D Warrant (incorporated herein by reference to
               Exhibit 10.8 to the Company's 10-KSB for fiscal year ended
               December 31, 2004, filed with the SEC on April 15, 2005)
    10.11      Amendment No. 1 to Series D Warrant, effective December 12, 2005,
               by and among Raptor Networks Technology, Inc., DMK Investments,
               LLC, Transglobal Investments, LLC, and Uptrend Investments, Inc.
               (incorporated herein by reference to Exhibit 4.10 to the
               Company's Registration Statement on Form SB-2, Registration No.
               333-131184, filed with the SEC on January 20, 2006)


                                      -49-




<PAGE>

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

    10.12      Managing Dealer Agreement dated March 22, 2005 between
               Brookstreet Securities Corporation and Raptor Networks
               Technology, Inc., entered into in conjunction with our 2005
               Private Placement of "units" (incorporated herein by reference to
               Exhibit 10.16 to the Company's 10-KSB for fiscal year ended
               December 31, 2004, filed with the SEC on April 15, 2005)
    10.13**    2005 Stock Plan effective June 9, 2005 (incorporated herein by
               reference to Exhibit 10.18 to the Company's 10-KSB for fiscal
               year ended December 31, 2005, filed with the SEC on April 3,
               2006)
    10.14**    Form of 2005 Stock Plan Stock Option Agreement (incorporated
               herein by reference to Exhibit 10.19 to the Company's 10-KSB for
               fiscal year ended December 31, 2005, filed with the SEC on April
               3, 2006)
    10.15      Loan and Security Agreement, dated April 27, 2006, by and among
               Raptor Networks Technology, Inc., a Colorado corporation, Bridge
               Bank National Association and Agility Capital, LLC (incorporated
               herein by reference to Exhibit 10.1 to the Company's Form 8-K
               filed with the SEC on May 4, 2006)
    10.16      First Amendment to Loan and Security Agreement, dated April 27,
               2006, by and among Raptor Networks Technology, Inc., a Colorado
               corporation, Raptor Networks Technology, Inc., a California
               corporation, Bridge Bank National Association and Agility
               Capital, LLC (incorporated herein by reference to Exhibit 10.2 to
               the Company's Form 8-K filed with the SEC on May 4, 2006)
    10.17      Payoff Agreement, dated July 27, 2006, by and among Raptor
               Networks Technology, Inc., a Colorado corporation, Raptor
               Networks Technology, Inc., a California corporation, Bridge Bank
               National Association and Agility Capital, LLC (incorporated
               herein by reference to Exhibit 10.6 to the Company's Form 8-K
               filed with the SEC on July 31, 2006)
    10.18      Securities Purchase Agreement dated July 30, 2006 (incorporated
               herein by reference to Exhibit 10.1 to the Company's Form 8-K
               filed with the SEC on July 31, 2006)
    10.19      Form of Amended and Restated Amendment and Exchange Agreement
               dated January 22, 2007 (incorporated herein by reference to
               Exhibit 10.1 to the Company's Form 8-K filed with the SEC on
               January 23, 2007)
    10.20      Form of Amended and Restated Senior Convertible Note dated July
               31, 2006 (incorporated herein by reference to Exhibit 10.3 to the
               Company's Form 8-K filed with the SEC on January 22, 2007)
    10.21      Senior Convertible Note dated January 19, 2007 (incorporated
               herein by reference to Exhibit 10.4 to the Company's Form 8-K
               filed with the SEC on January 22, 2007)
    10.22      Amended and Restated Registration Rights Agreement dated January
               18, 2007 (incorporated herein by reference to Exhibit 10.9 to the
               Company's Form 8-K filed with the SEC on January 22, 2007)
    21         Subsidiaries of the Registrant (incorporated herein by reference
               to Exhibit 21 to the Company's 10-KSB for fiscal year ended
               December 31, 2005, filed with the SEC on April 3, 2006)
    31.1x      Certification of Chief Executive Officer 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
    31.2x      Certification of Chief Financial Officer 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
    32.1x      Certification of Chief Executive Officer Pursuant to 18
               U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002
    32.2x      Certification of Chief Financial Officer Pursuant to 18
               U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002

x   Filed herewith.
**  This exhibit is a management contract or a compensatory plan or arrangement.


                                      -50-




<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August 20, 2007                    RAPTOR NETWORKS TECHNOLOGY, INC.


                                         By:  /s/ Thomas M. Wittenschlaeger
                                             -----------------------------------
                                              Thomas M. Wittenschlaeger,
                                              Chief Executive Officer

Dated: August 20, 2007                     RAPTOR NETWORKS TECHNOLOGY, INC.


                                         By:  /s/ Bob van Leyen
                                             -----------------------------------
                                              Bob van Leyen,
                                              Chief Financial Officer

         Pursuant to requirements of the Securities Exchange Act of 1934, an
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:

            Signature                         Capacity                Date
            ---------                         --------                ----

/s/ Thomas M. Wittenschlaeger                 Director           August 20, 2007
---------------------------------
    Thomas M. Wittenschlaeger

/s/ Ken Bramlett                              Director           August 20, 2007
---------------------------------
    Ken Bramlett

/s/ Larry L. Enterline                        Director           August 20, 2007
---------------------------------
    Larry L. Enterline


                                      -52-




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.

                          INDEX TO FINANCIAL STATEMENTS



Report of Independent Registered Public Accounting Firm ....................F-2

Financial Statements

     Consolidated Balance Sheets............................................F-3

     Consolidated Statements of Operations..................................F-4

     Consolidated Statements of Stockholders' Equity (Deficit)..............F-5

     Consolidated Statements of Cash Flows..................................F-6

     Notes to Consolidated Financial Statements.............................F-7


                                      F-1




<PAGE>
                   (Comiskey & Company letterhead)

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors
Raptor Networks Technology, Inc.


We have audited the accompanying consolidated balance sheets of Raptor Networks
Technology, Inc. as of December 31, 2005 and 2006, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
years ended December 31, 2005 and 2006. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (U.S.). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As more fully described in Note 12 to the financial statements, the Company
has restated its 2006 financial statements to account for a change in its method
of accounting for value assigned to a beneficial conversion feature of senior
convertible notes and warrants.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Raptor Networks
Technology, Inc. as of December 31, 2005 and 2006, and the consolidated results
of its operations, changes in stockholders' equity (deficit) and cash flows for
the years ended December 31, 2005 and 2006 in conformity with accounting
principles generally accepted in the United States of America.

The accompanying financial statements are presented assuming the company will
continue as a going concern. As more fully described in Note 1 to the financial
statements, the Company has sustained accumulated losses from operations
totaling more than $60,700,000 at December 31, 2006. This condition, and the
fact that the Company has had no significant sales of its products to date,
raise substantial doubt about its ability to continue as a going concern.
Management's plans to address these conditions are also set forth in Note 1 to
the financial statements. The accompanying financial statements do not include
any adjustments which might be necessary if the Company is unable to continue.


Denver, Colorado
March 17, 2007, except Note 12
which is August 14, 2007

                                                          /S/ COMISKEY & COMPANY
                                                        PROFESSIONAL CORPORATION


                                      F-2




<PAGE>

<TABLE>
<S>     <C>
                                       RAPTOR NETWORKS TECHNOLOGY, INC.
                                         CONSOLIDATED BALANCE SHEETS


                                                                             DECEMBER 31,       DECEMBER 31,
                                                                                 2005               2006
                                                                                                  (restated)
                                                                             -------------      -------------
                                                    ASSETS

CURRENT ASSETS
   Cash and cash equivalents                                                 $   1,442,130      $     821,388
   Accounts Receivable                                                             178,640            319,764
   Inventory, net                                                                1,132,322            951,618
   Prepaid expenses                                                                199,246            218,650
   License fees                                                                    305,320            297,520
   Other current assets                                                             21,259             22,176
                                                                             -------------      -------------
      Total current assets                                                       3,278,917          2,631,116

PROPERTY AND EQUIPMENT, NET                                                        587,659            282,560

OTHER ASSETS
   Debt discount cost                                                                   --                 --
   Debt issue cost                                                                  12,838             97,176
   Deposits                                                                        102,362            102,362
                                                                             -------------      -------------

TOTAL ASSETS                                                                 $   3,981,776      $   3,113,214
                                                                             =============      =============

                               LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
   Accounts payable                                                          $     155,412      $      87,488
   Deferred revenue                                                                     --             36,376
   Accrued liabilities                                                             144,239            205,619
   Detachable  warrants                                                                 --          9,773,967
   Conversion option liability                                                          --          6,806,620
   Senior convertible note payable                                                      --          1,041,666
   Short-term convertible debt                                                          --          1,214,290
   Accrued interest payable                                                         52,464            265,055
                                                                             -------------      -------------
      Total current liabilities                                                    352,115         19,431,081

Long-term convertible debt                                                       1,214,290                 --

STOCKHOLDERS' EQUITY (DEFICIT)
   Preferred stock, no par value; 5,000,000 shares authorized                           --                 --
   Common stock, $.001 par; 75,000,000 and 110,000,000 shares
      authorized 54,204,367 and 54,360,096 shares issued and outstanding            54,204             54,360
   Additional paid-in capital                                                   43,971,664         44,316,848
   Accumulated deficit                                                         (41,610,497)       (60,689,075)
                                                                             -------------      -------------
      Total stockholders' equity (deficit)                                       2,415,371        (16.317,867)
                                                                             -------------      -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                         $   3,981,776      $   3,113,214
                                                                             =============      =============


            The accompanying notes are an integral part of these consolidated financial statements

                                                     F-3




<PAGE>

                                   RAPTOR NETWORKS TECHNOLOGY, INC.
                                CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                      DECEMBER 31,      DECEMBER 31,
                                                                          2005              2006
                                                                                         (restated)
                                                                     -------------      -------------

REVENUE, NET                                                         $     289,236      $     849,285
COST OF SALES                                                              120,300            320,073
                                                                     -------------      -------------

GROSS PROFIT                                                               168,936            529,212
                                                                     -------------      -------------

OPERATING EXPENSES
   Consulting                                                                   --            105,508
   Finder's Fees                                                         1,064,405            465,000
   Cost of warrants granted                                              3,432,994                 --
   Salary expense and salary related costs                               3,072,206          2,890,942
   Marketing expense                                                       349,310            229,381
   Research & Development                                                  403,057            545,522
   Selling, general and administrative                                   2,324,939          2,404,743
                                                                     -------------      -------------

    Total operating expenses                                            10,646,911          6,641,096
                                                                     -------------      -------------

Loss from operations                                                   (10,477,975)        (6,111,884)
                                                                     -------------      -------------

OTHER INCOME (EXPENSE)
   Interest income                                                           2,779              1,609
   Change in fair value of warrants and conversion feature                      --         (9,080,794)
   Cost associated with convertible debt                                (2,652,000)                --
   Cost of financing senior convertible note                                    --         (2,499,794)
   Debt financing amortization - warrants and conversion feature                --         (1,041,666)
   Interest expense                                                       (263,744)          (346,049)
                                                                     -------------      -------------

Total other income (loss)                                               (2,912,965)       (12,966,694)
                                                                     -------------      -------------

Loss before income taxes                                               (13,390,940)       (19,078,578)
                                                                     -------------      -------------

Income tax benefit                                                              --                 --

NET LOSS                                                             $ (13,390,940)     $ (19,078,578)
                                                                     =============      =============

Basic and diluted net loss per share                                 $       (0.33)     $       (0.35)
                                                                     =============      =============

Basic and diluted weighted average number
  of shares outstanding                                                 40,001,954         54,213,443
                                                                     =============      =============


        The accompanying notes are an integral part of these consolidated financial statements

                                                 F-4



<PAGE>

                                                  RAPTOR NETWORKS TECHNOLOGY, INC.
                                      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                                       Common Stock                         Additional             Total
                                  -------------------    Additional    Paid-in                 stockholders'
                                  Number of               Paid-in      Capital-   Accumulated     equity
                                   shares      Amount     Capital      Warrants     Deficit      (deficit)
                                  ----------   ------    ----------   ----------  -----------   -----------

Balance, December 31, 2004        30,845,942   30,846    26,836,247      120,000  (28,219,557)   (1,232,464)
                                  ----------   ------    ----------   ----------  -----------   -----------
Common stock issued for legal        975,000      975       388,538           --           --       389,513
settlement, January 12, 2005
$0.40 per share

Common stock issued for legal
settlement, January 12, 2005
$0.578 per share                     262,500      262       151,463           --           --       151,725

Common stock and warrants issued
for Cash, April - June 2005 $0.50
per share                          4,262,000    4,262     2,126,738           --           --     2,131,000

Common stock and warrants issued
for Cash, July - September 2005
$0.50 per share                    6,355,000    6,355     3,171,145           --           --     3,177,500

Common stock issued in bridge
loan conversion $0.40 per share    1,540,244    1,540       614,557           --           --       616,097

Common stock issued in bridge
loan conversion $0.50 per share    6,023,931    6,024     2,503,947           --           --     2,509,971

Common stock issued for services
issued for Note                      300,000      300       157,800           --           --       158,100

Beneficial conversion
Feature of convertible notes              --       --            --    2,271,400           --     2,271,400

Detachable common stock purchase
warrants                                  --       --            --      380,600           --       380,600

Warrants issued as a financing
incentive                                 --       --            --    3,432,994           --     3,432,994

Common stock and warrants issued
for Cash, Oct - December 2005
$0.50 per share                    3,639,750    3,640     1,816,235           --           --     1,819,875

Net loss for the year ended
December 31, 2005                         --       --            --           --  (13,390,940)  (13,390,940)
                                  ----------   ------    ----------   ----------  -----------   -----------
Balance, December 31, 2005        54,204,367   54,204    37,766,670    6,204,994  (41,610,497)    2,415,371
                                  ----------   ------    ----------   ----------  -----------   -----------
Common stock issued upon cashless     46,979       47        23,442      (23,489)          --            --
exercise of Warrants

Common stock issued for cash upon
exercise of Warrants                 108,750      109        54,266           --           --        54,375

Stock Based Compensation                  --       --       168,214           --           --       168,214

Beneficial Conversion Privilege           --       --       122,751           --           --       122,751

Net loss for the year ended
December 31, 2006                         --       --            --           --  (19,078,578  (19,078,578)
                                  ----------   ------    ----------   ----------  -----------   -----------
Balance, December 31, 2006        54,360,096   54,360    38,135,343    6,181,505  (60,689,075  (16,317,867)
                                  ----------   ------    ----------   ----------  -----------   -----------

                        The accompanying notes are an integral part of the consolidated financial statements.

                                                                F-5




<PAGE>

                                           RAPTOR NETWORKS TECHNOLOGY, INC.
                                        CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                              December 31, 2005      December 31, 2006
                                                                                                         (restated)
                                                                              -----------------      -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                                    $(13,390,940)          $(19,078,578)
     Adjustments to reconcile net loss to net cash flows from
      operating activities:
         Depreciation                                                                 316,388                311,563
         Amortization                                                                  12,838              1,080,077
         Common stock issued for services/settlements                                 699,338                     --
         Change in fair value of warrants and conversion options                           --              9,080,794
         Interest expense related to debt conversion                                2,652,000                     --
         Common stock compensation expense                                                 --                168,214
         Common stock issued for interest payable related to debt conversion          166,068                     --
         Warrants issued                                                            3,432,994                     --
         Cost of financing senior convertible note                                         --              2,499,794
         Changes in operating assets and liabilities:
           Accounts receivable                                                             --               (141,124)
           Other current assets                                                      (190,266)                  (916)
           Deposits                                                                     1,971                     --
           Prepaid assets                                                              61,051                (19,404)
           License fees                                                               (45,840)                 7,800
           Inventories                                                                 79,968                180,704
           Accounts payable                                                          (262,908)               (67,924)
           Interest payable                                                               745                212,591
           Other accrued liabilities                                                 (953,447)                61,380
           Deferred Revenue                                                           (44,000)                36,376
                                                                                 ------------           ------------
     Net cash flows from operating activities                                      (7,464,040)            (5,668,653)
                                                                                 ------------           ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
         Property and equipment purchases                                            (133,601)                (6,464)
                                                                                 ------------           ------------
     Net cash flows from investing activities                                        (133,601)                (6,464)
                                                                                 ------------           ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
         Issuance of Common Stock                                                   7,128,375                 54,375
         Proceeds from issuance of convertible note payable                                --              5,000,000
         Payments on short-term debt                                                  (87,817)              (689,410)
         Proceeds from convertible Debt                                             1,960,000                689,410
                                                                                 ------------           ------------
     Net cash flows from investing activities                                       9,000,558              5,054,375
                                                                                 ------------           ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                1,402,917               (620,742)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                       39,213              1,442,130
                                                                                 ------------           ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       $  1,442,130           $    821,388
                                                                                 ============           ============

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITY

Property and equipment acquired by short term note                                         --                     --
Interest paid                                                                          80,922                 95,043
Taxes paid                                                                                 22                     --

                The accompanying notes are an integral part of the consolidated financial statements.

                                                         F-6
</TABLE>




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2006


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         ------------------------------------------

DESCRIPTION
-----------
The Company is a provider of integrated high-speed Ethernet switching systems
which enable new emerging high bandwidth critical applications. The data network
market areas that the Company is targeting include video, storage, Internet
Protocol telephony, and technology refresh. The Company is currently focusing on
the United States market. Principal operations have commenced, although minimal
revenues have been recognized to date.

The Company was incorporated under the laws of the state of Colorado on January
22, 2001 under the name Pacific InterMedia, Inc. ("Pacific"). The principal
office of the corporation is 1241 E. Dyer Rd., Suite 150, Santa Ana, California
92705.

On October 17, 2003, Pacific completed a business combination transaction with
Raptor Networks Technology, Inc. ("Raptor"), a closely-held California
corporation, through acquisition of all of the issued and outstanding common
stock of Raptor in exchange for authorized but previously unissued restricted
Common Stock of Pacific. Immediately prior to completion of the acquisition
transaction, Pacific had a total of 4,034,000 shares of its Common Stock issued
and outstanding comprised of 1,034,000 registered shares held by approximately
25 stockholders and 3,000,000 shares of restricted stock held by Pacific's
founder and sole officer and director.

As a material aspect of the acquisition, Pacific re-acquired and cancelled the
3,000,000 restricted shares as consideration for transfer of its remaining
assets consisting of cash and office equipment to the officer and director,
leaving only the registered common stock, 1,034,000 shares, as all of its issued
and outstanding capital stock prior to completion of the Raptor acquisition.

Pursuant to terms of the acquisition agreement, all of the issued and
outstanding common stock of Raptor, 19,161,256 shares, was acquired by Pacific,
share-for-share, in exchange for its authorized but previously unissued common
stock. Upon completion of the acquisition, Raptor became a wholly owned
subsidiary of Pacific and the Raptor shareholders became shareholders of
Pacific. Unless otherwise indicated, all references in these financial
statements to "the Company" include Pacific and its wholly owned subsidiary,
Raptor. All intercompany transactions have been eliminated. On December 3, 2003,
Pacific changed its name to Raptor Networks Technology, Inc.

The acquisition transaction has been treated as a reverse merger, with Raptor
considered the accounting acquirer. The Company's reporting year end was
subsequently changed from August 31 to December 31.

REVENUE RECOGNITION
-------------------
The Company records revenues when the following criteria are met: (i) persuasive
evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price
to the customer is fixed or determinable; and (iv) collection of the sales price
is reasonably assured. Delivery occurs when goods are shipped and title and risk
of loss have passed to the customer. Revenue is deferred in all instances where
the earnings process is incomplete. The Company recognizes revenue from
distribution sales when all contingencies are satisfied and upon persuasive
evidence of a sale to end users until such time that historical sell through
ratios have been developed.

CASH AND CASH EQUIVALENTS
-------------------------
The Company considers all short-term marketable securities with a maturity of
three months or less to be cash equivalents.

PREPAID EXPENSES
----------------
Prepaid expenses represent amounts paid in advance for contracts extending past
the period end date.


                                       F-7




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         ------------------------------------------------------

INVENTORY
---------
Inventory is recorded at the lower of average cost or market. When required, a
provision is made to reduce excess and obsolete inventory to estimated net
realizable value. Inventory at December 31, 2006 consists of raw materials and
finished goods.

LICENSE FEES
------------
The Company capitalizes software license fees from third party software which is
included in its systems. These costs will be amortized and charged to cost of
sales over the projected number of systems expected to be sold incorporating the
capitalized software. The amount of capitalized license fees totaled $310,000
for the years ended December 31, 2005 and December 31, 2006. Amortization of
these license fees included in cost of sales for the years ended December 31,
2005 and 2006 totaled 4,160 and $7,800 respectively.

PROPERTY AND EQUIPMENT
----------------------
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows: computer equipment, furniture and fixtures
and testing equipment are depreciated over three years, office equipment is
depreciated over seven years and leasehold improvements are depreciated over the
term of the lease.

REPAIRS AND MAINTENANCE
-----------------------
Repairs and maintenance of a routine nature are charged as incurred, while those
which extend or improve the life of existing assets are capitalized.

MARKETING COSTS
---------------
Advertising costs are expensed as incurred. For the years ended December 31,
2005 and 2006, advertising costs were $349,310 and $229,381 respectively.

RESEARCH AND DEVELOPMENT COSTS
------------------------------
Research and development (R&D) costs, which are expensed as incurred, are
comprised of the following costs incurred in performing R&D activities: product
design cost including rental of design tools, consumables, and costs of
prototypes.

IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
-------------------------------------------
The Company reviews its long-lived assets and certain related intangibles for
impairment periodically, and whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. When
necessary, impaired assets are written down to estimated fair value based on the
best information available. Estimated fair value is generally based on either
appraised value or measured by discounting estimated future cash flows.
Considerable management judgment is necessary to estimate discounted future cash
flows. Accordingly, actual results could vary significantly from such estimates.
No assets were considered impaired for the years ended December 31, 2005 and
2006.

DEPOSITS
--------
Deposits represent amounts paid under the Company's office space lease and
various other arrangements with state agencies.

USE OF ESTIMATES
----------------
The preparation of 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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.


                                      F-8




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         ------------------------------------------------------

INCOME TAXES
------------
The Company recognizes deferred tax assets and liabilities based on differences
between the financial reporting and tax bases of assets and liabilities using
the enacted federal, state, and local income tax rates and laws that are
expected to be in effect when the differences reverse.

FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Unless otherwise indicated, the fair value of all reported assets and
liabilities which represent financial instruments (none of which are held for
trading purposes) approximate the carrying values of such instruments.

RECLASSIFICATIONS
-----------------
Certain previous year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no impact on net earnings,
financial position or cash flows.

STOCK-BASED COMPENSATION
------------------------
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(revised 2004), "Shared Based Payment" ("SFAS No.123R"), which
requires the measurement and recognition of compensation cost for all
share-based payment awards made to employees and directors based on estimated
fair values. Prior to the adoption of SFAS No. 123R, the Company accounted for
its stock-based employee compensation related to stock options under the
intrinsic value recognition and measurement principles of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
the disclosure alternative prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." Accordingly, the Company
presented pro forma information for the periods prior to the adoption of SFAS
No. 123R and no employee compensation cost was recognized for the stock-based
compensation plan.

The Company has elected to use the modified prospective transition method for
adopting SFAS No. 123R, which requires the recognition of stock-based
compensation cost on a prospective basis; therefore, prior period financial
statements have not been restated. Under this method, the provisions of SFAS No.
123R are applied to all awards granted after the adoption date and to awards not
yet vested with unrecognized expense at the adoption date based on the estimated
fair value at grant date as determined under the original provisions of SFAS No.
123. The impact of forfeitures that may occur prior to vesting is also estimated
and considered in the amount recognized. Pursuant to the requirements of SFAS
No. 123R, the Company will continue to present the pro forma information for
periods prior to the adoption date.

The 2005 Stock Plan was approved by the Company's shareholders on June 9, 2005
at the Company's 2005 Annual Meeting of Shareholders. The Company does not
intend to grant any stock options under the 2005 Stock Plan until the plan has
been registered under applicable federal and state securities laws. The Company
is in the process of preparing a registration statement on Form S-8 covering our
2005 Stock Plan with the Securities and Exchange Commission and comparable
California state securities filings for option outside of the plan. As of
December 31, 2006, all stock options have been issued outside of the 2005 Stock
Plan. Effective January 4, 2005, the Company re-priced 895,000 of its issued and
outstanding stock options, with original exercise prices ranging from
$1.50-$1.75 per share, to a new exercise price of $1.00 per share. The Company
performed an analysis of the variable portion of the re-priced options and
determined there was no financial impact to be recognized.

The Company has historically and continues to utilize the Black-Scholes option
pricing model to determine the fair value of stock options on the date of grant.
This model derives the fair value of stock options based on certain assumptions
related to the expected stock price volatility, expected option life, risk-free
interest rate and dividend yield. The Company's expected volatility is based on
the historical volatility of the Company's stock price over the most recent
period commensurate with the expected term of the stock option award. The
estimated expected option life is based primarily on historical employee
exercise patterns. The Company has not paid dividends in the past and does not
plan to pay any dividends in the future.


                                      F-9




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         ------------------------------------------------------

As of December 31, 2006, the total unrecognized share-based compensation cost
related to unvested stock options was approximately $130,049. For the year ended

December 31, 2006 the Company recognized $168,214 in stock-based compensation
costs related to the issuance of stock options to employees. This cost was
calculated in accordance with SFAS No. 123R and is reflected in the Company's
operating expenses.

Information with respect to stock option activity is as follows:

                                                                Weighted Average
                                                  Shares         Exercise Price
                                              -------------     ----------------
Outstanding at December 31, 2005                 2,020,000           $1.00
  Granted                                          253,500           $1.00
  Exercised                                              -               -
  Forfeited or expired                            (628,000)          $1.00
                                              -------------     ----------------
Outstanding at December 31, 2006                 1,645,500           $1.00
                                              =============     ================
Options exercisable at December 31, 2006          981,664

The fair value of each stock option grant for the year ended December 31, 2006
was estimated on the date of grant using the following assumptions:

         Dividend Yield......................................           0.0%
         Risk-Free Interest Rate.............................           6.0%
         Expected Life.......................................     .75 - 3 years
         Expected Volatility.................................       91% - 164%

The following table illustrates the effect on net loss and basic loss per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to options granted under the Company stock option plans for the year ended
December 31, 2005:

                                                               December 31, 2005
                                                               -----------------
Net Income (loss)
   As reported.............................................     $ (13,390,940)
                                                                ==============
Stock-based employee compensation expense determined
  under the fair value method..............................          (167,392)
                                                                ==============
    Pro forma..............................................     $ (13,558,332)
                                                                ==============

Basic net loss per share
   As reported.............................................     $       (0.33)
                                                                ==============
   Pro forma...............................................     $       (0.34)
                                                                ==============


                                      F-10




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         ------------------------------------------------------

CONSIDERATION OF OTHER COMPREHENSIVE INCOME ITEMS
-------------------------------------------------
The Financial Accounting Standards Board has issued "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires companies to present comprehensive
income (consisting primarily of net income plus other direct equity changes and
credits) and its components as part of the basic financial statements. For the
year ended December 31, 2006 and the year ended December 31, 2005, the Company's
financial statements do not contain any changes in equity that are required to
be reported separately in comprehensive income.

CONCENTRATION OF RISK
---------------------
From time-to-time, the Company maintains cash balances in excess of FDIC insured
limits. The amount of such excess at December 31, 2006 was approximately
$750,000.

LOSS PER SHARE
--------------
Loss per share was computed using the weighted average number of shares of
common stock and common stock equivalents outstanding during the period.

COMPENSATED ABSENCES
--------------------
The Company maintains a personal time off policy. Employees of the Company are
entitled to compensated absences depending on their length of service to a
maximum of 25 days. For the years ended December 31, 2005 and 2006 the balance
owed for compensated absences was $82,821 and $108,752 respectively.

NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48, ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES--AN INTERPRETATION OF FASB STATEMENT NO. 109. FIN 48
clarifies the accounting for uncertainty in income taxes recognized under SFAS
No. 109, ACCOUNTING FOR INCOME TAXES. FIN 48 prescribes a recognition threshold
and measurement attribute for financial statement recognition and measurement of
a tax position taken, or expected to be taken, in a tax return and also provides
guidance on various related matters such as derecognition, interest and
penalties, and disclosure. FIN 48 is effective with the Company's fiscal year
beginning January 1, 2007. The Company expects that the financial impact, if
any, of applying the provisions of FIN 48 to all tax positions will not be
material upon the initial adoption of FIN 48. The Company has not yet determined
the impact of this new accounting interpretation on its financial statements.

In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108 ("SAB 108"). Due to diversity in practice among
registrants, SAB 108 expresses SEC staff views regarding the process by which
misstatements in financial statements are evaluated for purposes of determining
whether financial statement restatement is necessary. SAB 108 requires
registrants to quantify misstatements using both the balance sheet and income
statement approaches and to evaluate whether either approach results in
quantifying an error that is material in light of relative quantitative and
qualitative factors. SAB 108 is effective for fiscal years ending after November
15, 2006, and early application is encouraged. The adoption of SAB 108 did not
have an effect on the financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "FAIR VALUE MEASUREMENTS" ("SFAS No. 157"). SFAS No. 157 provides
guidance for using fair value to measure assets and liabilities. This standard
also responds to investors' requests for expanded information about the extent
to which companies measure assets and liabilities at fair value, the information
used to measure fair value and the effect of fair value measurements on
earnings. SFAS No. 157 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value. The standard does not expand
the use of fair value in any new circumstances. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years; therefore, the Company expects to
adopt SFAS No. 157 at the beginning of fiscal 2008. The Company is currently
evaluating the impact of this standard.


                                      F-11




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         ------------------------------------------------------

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115". SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the FASB's long-term measurement
objectives for accounting for financial instruments. SFAS No. 159 is effective
as of the beginning of an entity's first fiscal year that begins after November
15, 2007. The Company is currently evaluating the impact of this standard.

PRESENTATION AS A GOING CONCERN
-------------------------------
The Company has had only a limited operating history with minimal sales, and has
sustained operating losses of $13,390,940 in 2005 and $19,078,578 in 2006.
Although at December 31, 2006, the Company had a working capital deficit
position of ($16,799,965) and a stockholders' deficit of $16,317,867, these
results came primarily from additional debt financing and the conversion of debt
to equity. These conditions raise substantial doubt about the Company's ability
to continue as a going concern.

In January, 2007, the Company raised an additional $1.6 million and in the
period January - March 2007, the Company received an additional $161,655 from
the cash exercise of existing warrants. In addition, it is expected that revenue
growth will increasingly cover funding needs the Company may have. However,
there is no guarantee that this revenue growth will occur and the Company
currently has no commitments for any additional financing and there can be no
assurance that the Company will be able to obtain requisite financing on
acceptable terms, if at all. The accompanying financial statements do not
reflect any adjustments which might be necessary if the Company is unable to
continue.

2.       PROPERTY & EQUIPMENT
         --------------------
<TABLE>
<S>     <C>
Property and equipment consisted of the following:
                                                                                        December 31, 2005      December 31, 2006
                                                                                        -----------------      -----------------

         Furniture and Office equipment                                                 $         188,481      $         194,944
         Computer equipment                                                                       193,701                193,701
         Testing equipment                                                                        606,738                606,738
         Leasehold Improvements                                                                   113,317                113,317
                                                                                        -----------------      -----------------

                                                                                                1,102,237              1,108,700
         Less: Accumulated depreciation                                                          (514,578)              (826,140)
                                                                                        -----------------      -----------------

                                                                                        $         587,659      $         282,560
                                                                                        =================      =================

3.       INVENTORY
         ---------

Inventory consisted of the following:
                                                                                        December 31, 2005      December 31, 2006
                                                                                        -----------------      -----------------

         Raw Materials                                                                  $         962,483      $         886,785
         Finished Goods                                                                           169,839                 64,833
                                                                                        -----------------      -----------------

                                                                                        $       1,132,322      $         951,618
                                                                                        =================      =================
</TABLE>

                                      F-12




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)

<TABLE>
<S>     <C>

4.       CONVERTIBLE DEBT
         ----------------

                                    8%, 3 YEAR NOTES    10% BRIDGE NOTES    8% BRIDGE NOTES
                                    ----------------    ----------------    ---------------

Balance at December 31, 2004         $    1,214,290      $    1,000,000      $           --

   Issuance of Notes                             --           1,360,000             600,000
   Conversion on August 25, 2005                 --          (2,360,000)                 --
   Conversion on July 15, 2005
                                                 --                  --            (600,000)
                                     --------------      --------------      --------------

Balance at December 31, 2005         $    1,214,290      $           --      $           --

                                     ==============      ==============      ==============
Balance at December 31, 2006         $    1,214,290      $           --      $           --
                                     ==============      ==============      ==============
</TABLE>

8%, 3 Year Notes
----------------

During the period December 2003 to April 2004, the Company received convertible
loans for a total amount of $1,214,290. Interest on these loans accrues at an
annual rate of 8%. The loans are convertible into shares of the Company's common
stock at any time during the three year period following initial funding of the
loans. The conversion rate is $3.50 per share. If the loans are not earlier
voluntarily converted, the total amount owed shall automatically convert into
shares of the Company's common stock at a conversion price of $3.50 per share on
April 15, 2007.

10% Convertible Bridge Notes
----------------------------

During the period between November 2004 and February 2005, the Company issued
forty-two convertible notes (the "10% Notes") to various private-party
non-affiliate accredited investors in the aggregate principal amount of
$2,360,000 in exchange for $2,360,000 in cash, less a 10% placement fee, for net
proceeds of $2,124,000. The 10% Notes bore interest at a rate of 10% per annum.
Pursuant to the terms of the 10% Notes, the outstanding principal amount of
these loans, together with all accrued but unpaid interest thereunder, would
automatically convert into shares issued in an equity based financing with gross
proceeds of at least $4,000,000, if any, of the sale of the Company's common
stock or other equity based equivalent, and at a price per share not to exceed
$0.50 per share (a "10% Note Qualified Financing"); provided, however, that for
the purpose of determining the number of shares and warrants to be received by
the holders upon such conversion, the holders would be deemed to have tendered
120% of the outstanding balance of the 10% Notes.

The 10% Convertible Notes were issued along with 1,416,000 Series E Common Stock
Purchase Warrants to purchase Common shares at $0.60 per share for a term of
five years from issuance. The net proceeds from the issuance of convertible debt
and warrants was first allocated to the convertible debt and the warrants in the
ratio of their respective fair values, resulting in a discount from the debt
related to the Series E Warrants (of which $120,000 was recognized in 2004).
Since the 10% Convertible Notes were due on demand, the entire discount of
$1,743,300 on the convertible debt and $380,600 for the Series E Warrants was
charged to operations in the year incurred. Upon resolution of the 10% Note
Qualified Financing contingency, the value assigned to the beneficial conversion
feature was recorded as additional debt discount in the amount of $2,124,000 and
charged to operations in 2005.

The Series E Warrants have an exercise price of $0.60 per share and shall expire
five years from the date of issuance. Management believes that it is reasonable
to assume that the 1,416,000 Series E Warrants will be settled in shares. With
respect to the valuation of the 1,416,000 Series E Warrants, issued between
November 2004 and February 2005, a volatility of 88%, a strike price of $0.60,
an option value of $0.27 - $0.72 and using the Black-Scholes model, an
additional expense of financing of $395,190 has been recognized during the year
2005.


                                      F-13




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)


As of the August 25, 2005 closing of the Company's "2005 Private Placement" of
units consisting of common stock and warrants, the Company had raised total
gross proceeds of $3,558,500 through such 2005 Private Placement. In addition,
between February 2005 and April 2005 (and as described in more detail below),
the Company secured additional private debt financing from various private-party
non-affiliates in the original aggregate principal amount of $600,000 through
the issuance of 8% Convertible Bridge Notes. After adding this $600,000 in
convertible debt financing to the gross proceeds of the 2005 Private Placement,
the aggregate gross proceeds to the Company were $4,158,500. As a result, the
Company achieved a 10% Note Qualified Financing and, accordingly, the $4,000,000
automatic conversion event of the 10% Notes was triggered upon the August 25,
2005 closing of the 2005 Private Placement.

As of August 25, 2005, the total principal and accrued interest under the 10%
Notes was $2,509,971. After taking into account the provision of the 10% Notes
which provided that the holders would be deemed to have tendered 120% of the
outstanding balance of the 10% Notes, the holders of the 10% Notes were deemed
to have tendered $3,011,965 for the purpose of determining the number of shares
and warrants to be received by the holders upon such conversion. Based on the
offering terms of the Company's 2005 Private Placement, the holders were
entitled to an aggregate of 6,023,932 shares of the Company's common stock
(based on a $0.50 price per share of common stock included within the units
offered to investors in the 2005 Private Placement) and 1,505,989 Series G-BH
Warrants to purchase the Company's common stock. The Series G-BH Warrants have
an exercise price of $2.50 per share of common stock, expire five years from the
date of issuance, and are callable by the Company the first day after the
30-trading-day average price of the Company's common stock exceeds $3.50 per
share. With respect to the valuation of the 1,505,989 Series G-BH Warrants,
issued between November 2004 and February 2005, a volatility of 88%, a strike
price of $2.50, an option value of $0.17 - $0.51 and using the Black-Scholes
model, an additional expense of financing of $552,126 has been recognized during
the year 2005.

8% Convertible Bridge Notes
---------------------------

Between February 2005 and April 2005, the Company obtained private debt
financing from various private-party non-affiliates in the original aggregate
principal amount of Six Hundred Thousand Dollars ($600,000). The net proceeds to
the Company were Five Hundred Twenty-Eight Thousand Dollars ($528,000) after the
payment of a 12% placement fee to the placement agent. The debt was evidenced by
thirteen Convertible Bridge Notes (the "8% Notes"), which bore interest at a
rate of 8% per annum. The 8% Notes contained a conversion provision whereby the
entire principal and accrued interest of the 8% Notes would automatically
convert into shares of the Company's common stock if the Company raised at least
Three Million Dollars ($3,000,000) in a private equity financing after the
issuance of the 8% Notes (an "8% Note Qualified Financing"). For purposes of
such conversion, the conversion price would reflect a 20% discount from the per
share purchase price in the 8% Note Qualified Financing. In addition, the
$600,000 in 8% Notes was to be added to the proceeds from the 8% Note Qualified
Financing for purposes of calculating the $3,000,000 amount, which triggered the
automatic conversion.

As of the July 15, 2005 closing of the Company's 2005 Private Placement, the
Company had raised total gross proceeds of $2,416,000 through such 2005 Private
Placement. After adding the $600,000 in 8% Notes to these gross proceeds as
required by the conversion provisions of the 8% Notes, the aggregate gross
proceeds from the 2005 Private Placement and 8% Notes was $3,016,000. As a
result, the Company achieved an 8% Note Qualified Financing and, accordingly,
the $3,000,000 automatic conversion event of the 8% Notes was triggered upon the
July 15, 2005 closing of the 2005 Private Placement.

As of July 15, 2005, the total principal and accrued interest under the 8% Notes
was $616,097. Pursuant to the 20% discount in conversion price discussed above,
the conversion price of the 8% Notes was $0.40 per share of the Company's common
stock (based on a $0.50 price per share of common stock included within the
units offered to investors in the 2005 Private Placement). Based on this $0.40
per share conversion price, the holders of the 8% Notes were entitled to an
aggregate of 1,540,244 shares of the Company's common stock. The conversion of
the 8% Notes did not entitle the holder's thereof to any warrants to purchase
common stock.


                                      F-14




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)


Since the conversion of the 8% Notes was contingent on the fact that an equity
based financing of at least $3,000,000 be obtained, the total charge was
measured as per the date of issuance of the notes in the first and second
quarter of 2005 and this charge was recognized during the third quarter of 2005
as prescribed under paragraph 13 of EITF 98-5 upon obtaining the 8% Note
Qualified Financing of $3,000,000. For the valuation of the conversion feature
of the note, an effective conversion price was assumed to be $0.40 per share
(based on an offering price of $0.50); using the fair market values on the dates
of receipt of proceeds ranging from $0.55 - $0.76 and a volatility of 88%, the
total amount charged to operations during the year 2005 is $528,000.

The total interest expenses for all of the notes referenced in this Note 4
amounted to $2,586,678 and $97,183 for the years ended December 31, 2005 and
2006 respectively.

5.       SENIOR CONVERTIBLE NOTE PAYABLE
         -------------------------------

<TABLE>
<S>     <C>
                                           SENIOR                         DETACHABLE       CONVERSION
                                        CONVERTIBLE     NOTE PAYABLE       WARRANTS          OPTION
                                        NOTE PAYABLE    DEBT DISCOUNT      LIABILITY        LIABILITY
                                        -----------      -----------      -----------      -----------
Balance at December 31, 2005            $        --      $        --      $        --      $        --

July 31 Senior convertible notes
                                         (5,000,000)              --               --               --
Detachable warrant and Conversion
  feature July 31,2006                           --        5,000,000       (4,431,011)      (3,068,783)

Change in fair value of warrants
                                                 --               --       (5,342,956)              --
Change in fair value of conversion
  feature                                        --               --               --       (3,737,837)

Amortization of debt discount to
  other expense                                  --       (1,041,666)              --               --
Amortization of debt discount asset
  to other expense                               --               --               --               --
                                        -----------      -----------      -----------      -----------

Balance at December 31, 2006            $(5,000,000)     $ 3,958,334      $(9,773,967)     $(6,806,620)
                                        ===========      ===========      ===========      ===========
</TABLE>

Senior Convertible Note Financing
---------------------------------

On July 31, 2006, the Company completed a private placement of senior
convertible notes and warrants to purchase common stock to certain institutional
investors for gross proceeds of $5,000,000. The Company will make monthly
installment payments on the convertible notes beginning on the earlier of (i)
the first day of the calendar month following the month that the registration
statement required to be filed by the Company covering certain shares underlying
the convertible notes and warrants is declared effective by the Securities and
Exchange Commission ("SEC") or (ii) December 1, 2006. The convertible notes have
a maturity date of July 31, 2008. The notes bear interest at a rate of 9.25% per
annum, which rate may be adjusted to 7% per annum if certain conditions are
satisfied.

Subject to the satisfaction of certain conditions, including without limitation
the above referenced registration statement being declared and remaining
effective for certain extended periods of time, the Company may elect to make
monthly installment payments in cash or in shares of the Company's common stock
at a discount to the then current price of the Company's common stock. If such
conditions are not satisfied, the Company will be required to pay such
installment payments in cash. The notes have an initial conversion price of
0.43948 per share, which is subject to adjustment based on various factors, some
of which are beyond the Company's control. Since the actual conversion price
that would apply to future installment payments made in shares of the Company's
common stock or other conversion events under the convertible notes cannot be
predicted at this time, the actual number of shares of the Company's common
stock that will be required if installment payments are made in shares, or
should some other conversion events occur, cannot be predicted at this time.


                                      F-15




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)


The Company also issued as part of the convertible note private placement Series
L Warrants and Series M Warrants to investors in the notes. The Series L
Warrants are immediately exercisable and enable the holders thereof to purchase
an aggregate of up to 17,065,623 shares of the Company's common stock. The
Series M Warrants become exercisable only upon a mandatory conversion of the
notes by the Company, if any, and entitle the holders thereof to purchase an
aggregate of up to 7,395,103 shares of the Company's common stock. Both the
Series L Warrants and Series M Warrants have an initial exercise price of
$0.5054 per share and expire on July 31, 2011.

Pursuant to the terms of the convertible note private placement agreements, the
Company is required to file a registration statement with the SEC registering
for resale certain shares of common stock underlying the convertible notes,
Series L Warrants and Series M Warrants. Failure to meet the registration
requirements for certain required periods will result in an event of default
under the senior convertible notes. Because the Company was unable to register
the number of shares agreed upon in the Senior Convertible Note financing, the
registration statement filed with the SEC was withdrawn and an amended financing
was agreed upon on January 22, 2007. See our Subsequent Events Note 11 below for
further details.

The terms of the convertible notes include certain conversion features that
represent derivative financial instruments under paragraph 12 of SFAS No. 133.
These conversion features could result in a variable number of shares to be
issued upon conversion and therefore the convertible note does not qualify as
conventional convertible debt as defined by EITF 05-02. As such, in accordance
with paragraph 4 of EITF 00-19, the Company has classified the conversion
feature as a liability on its balance sheet measured at fair value using the
Black-Scholes option pricing model. The initial amount of this conversion
liability on July 31, 2006 was valued at $3,068,783. SFAS 133 and EITF 00-19
further require the Company to account for the conversion feature using the fair
value method at the end of each quarter, with the resultant gain or loss
recognition recorded against earnings. The fair market value of the conversion
feature after applying the Black-Scholes option pricing model was determined to
be $6,806,620 and was recognized by recording a charge to Other Losses in the
amount of $3,737,837.

With respect to the Series L Warrants and the Series M Warrants, it is noted
that the conversion feature as mentioned before could result in a variable
number of shares to be issued upon conversion. This condition, which is outside
of the Company's control, could impact the Company's ability to maintain the
appropriate level of reserved shares in place required for the Series L Warrants
and the Series M Warrants. This could result in the need for the Company to
obtain approval from its shareholders to increase its authorized share capital
to accommodate appropriate reserves for shares issuable upon exercise of the
Series L Warrants and Series M Warrants. Since shareholder approval for this
increase of authorized share capital cannot be guaranteed the Series L Warrants
and Series M Warrants, in accordance with EITF 00-19, need to be classified as a
liability on the Company balance sheet measured at fair value using the
Black-Scholes option pricing model. The initial amount of this detachable
warrant on July 31, 2006 was valued at $4,431,011. SFAS 133 and EITF 00-19,
further require the Company to account for the conversion feature using the fair
value method at the end of each quarter, with the resultant gain or loss
recognition recorded against earnings. The fair market value of the detachable
warrant after applying the Black-Scholes option pricing model was determined to
be $9,773,967 and was recognized by recording a charge to Other Losses in the
amount of $5,342,956.

The initial fair value of both the conversion feature and the detachable warrant
at July 31, 2006 was $7,499,794. The face value of the senior convertible note
was $5,000,000 and the Company expensed the excess over $5,000,000 for an amount
of $2,499,794 and charged this amount as a Cost of financing in July 2006.
Amortization of the net debt discount liability equals $1,041,666.

Since conversion of the Series M Warrants is contingent on a mandatory
conversion of the notes by the Company, as described above, the total charge was
measured as per the date of issuance of these warrants; however, this charge
will not be recognized until the mandatory conversion "contingency" has been
removed as allowed under paragraph 13 of EITF 98-5. The value of the Series M
Warrants measured at fair value on July 31, 2006 and using the Black-Scholes
option pricing model amounted to $1,920,105.


                                      F-16




<PAGE>

In connection with the $5,000,000 private placement, the Company issued to the
placement agent, warrants with a term of five-years, to purchase 455,084 shares
of the Company's common stock. These placement agent warrants are immediately
exercisable and have an exercise price of $0.43948 per share. The placement
agent warrants were measured at fair value using the Black-Scholes option
pricing model. The resulting net debt issuance cost at December 31, 2006 was
$97,176. During the year ended December 31, 2006 the Company charged an amount
of $25,575 to interest expense.

6.       STOCKHOLDERS' EQUITY
         --------------------

As of December 31, 2004, 30,845,942 shares of the Company's $0.001 par value
common stock were issued and outstanding. Of these, 20,712,100 shares had been
issued for services, 4,627,619 shares had been issued at $0.50 per share for
total proceeds of $2,313,810, 3,200,000 shares were issued at $1.75 per share
for total proceeds of $5,600,000, 972,223 shares were issued at $1.80 per share
for total proceeds of $1,750,000, 300,000 shares had been issued at $0.01 per
share for total proceeds of $3,000, and 1,034,000 shares remain from the reverse
merger described in the audited financial statements at December 31, 2003.

 In the fourth quarter of 2004, the Company retired a total of 3,600 shares.
These shares were initially issued in connection with an agreed upon contract
with a provider of investment relations (IR) services. The parties agreed on a
change of contract conditions and the shares were no longer required. The IR
firm never received the shares and the Company returned these shares to the
transfer agent for retirement.

During 2003 the Company's former corporate lawyer was granted 50,000 shares at
$0.01. Based on this grant a stock subscription receivable of $500 was booked.
In connection with the non-renewal of the contract with the Company's former
corporate lawyer, the Company considered it appropriate to write off the
subscription receivable in 2004.

During 2005, the Company issued 975,000 shares and 262,500 shares, respectively,
in connection with the settlement of two lawsuits as more fully described in the
Company's Current Reports on Form 8-K filed with the SEC on January 24, 2005 and
February 22, 2005, respectively. The Company also issued 300,000 shares for
services. In connection with the Company's 2005 Private Placement and the
conversion of convertible debt, the Company issued 14,256,750 shares at $0.50
per share for total proceeds of $7,128,375, 1,540,243 shares at $0.40 per share
for total proceeds of $616,097 (as a result of the conversion of the 8% Notes
discussed in Note 4 above) and 6,023,932 shares at $0.42 per share for total
proceeds of $2,509,971 (as a result of the conversion of the 10% Notes discussed
in Note 4 above).

During 2006, the Company issued a total of 155,729 shares of which 46,979 shares
related to the cashless exercise of Series J warrants and 108,750 shares related
to the cash exercise of Series H warrants issued at $0.50 per share for total
proceeds of $54,375.

The Company's authorized capital consisted of 75,000,000 and 110,000,000 shares
of common stock, par value $0.001 per share at December 31, 2005 and December
31, 2006, respectively, and 5,000,000 shares of preferred stock, no par value
per share as of both dates.


                                      F-17




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)


7.       WARRANTS
         --------

<TABLE>
<S>     <C>

         Warrants granted to investors, brokers and other service providers are
summarized as follows:

                                                                                           Weighted Average
                                                                            Shares          Exercise Price
                                                                       ---------------     ----------------
  Outstanding at December 31, 2004                                          7,196,968      $          2.49
    Granted                                                                 9,058,119                 1.63
    Cancelled/Forfeited                                                             -                    -
    Exercised                                                                       -                    -
                                                                       ---------------     ----------------
  Outstanding at December 31, 2005                                         16,255,087      $          2.01
    Granted                                                                24,915,810                 0.51
    Cancelled/Forfeited                                                     (972,223)                 1.25
    Exercised                                                               (205,800)                  .50
                                                                       ---------------     ----------------
  Outstanding at December 31, 2006                                         39,992,874      $           .98
                                                                       ===============     ================

The following tables summarize warrants outstanding at December 31, 2006:

           Range                 Number           Wtd. Ave. Life        Wtd. Ave. Price         Exercisable
           -----                 ------           --------------        ---------------         -----------
         $.40-2.50             39,992,874              2.04                  $0.98               32,597,771


      SERIES             ISSUE DATE             AMOUNT ISSUED       EXERCISED/ FORFEITED    OUTANDING AT 12/31/06
  ---------------- ------------------------ ---------------------- ------------------------ ----------------------
         A               April 2004                     3,200,000              (3,200,000)                      -
         B               April 2004                     3,200,000                                       3,200,000
         C               June, 2004                       972,223                (972,223)                      -
         D               June, 2004                       972,223                                         972,223
         E                2004-2005                     1,416,000                                       1,416,000
         F               April 2005                       231,036                                         231,036
         G               April 2005                     3,564,188                                       3,564,188
       G-BH              April 2005                     1,505,989                                       1,505,989
         H               April 2005                     2,138,513                (108,750)              2,029,763
         I              February 2005                     200,000                                         200,000
         J               August 2005                      602,393                 (97,050)                505,343
         K                Not Used                              -                                               -
         L                July 2006                    17,065,623                                      17,065,623
         M                July 2006                     7,395,103                                       7,395,103
       MISC               2003-2006                     1,907,606                                       1,907,606
                                            ---------------------- ------------------------ ----------------------
  TOTAL                                                44,370,897              (4,378,023)             39,992,874
                                            ====================== ======================== ======================
</TABLE>

2006 Warrants
-------------

In connection with securing the Senior Convertible Notes (as described in Note 5
above), the three convertible note investors were entitled to Series L Warrants
to purchase up to an aggregate of 17,065,623 shares of the Company's common
stock and Series M Warrants to purchase up to an aggregate of 7,395,103 shares
of the Company's common stock. Both the Series L Warrants and Series M Warrants
have an original exercise price of $0.5054 per share and expire on July 31,
2011. The Series L Warrants are immediately exercisable. The Series M Warrants


                                      F-18




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)


become exercisable only upon a "mandatory conversion" of the notes, which is
callable by the Company. Because the Company was unable to register the number
of shares agreed upon in the Senior Convertible Note financing, the registration
statement filed with the SEC was withdrawn and an amended financing was agreed
upon on January 22, 2007. See our Subsequent Events Note 11 below for further
details.

In connection with the $5,000,000 private placement, the Company issued to the
placement agent, warrants with a term of five-years, to purchase 455,084 shares
of the Company's common stock. These placement agent warrants are immediately
exercisable and have an exercise price of $0.43948 per share.

During the fourth quarter of 2006, 205,800 warrants were exercised of which
97,050 warrants related to the cashless exercise of Series J warrants and
108,750 warrants related to the cash exercise of Series H warrants issued at
$0.50 per share for total proceeds of $54,375.

In addition, during the third quarter of 2006 all of the Company's outstanding
Series C Warrants to purchase an aggregate of 972,223 shares of the Company's
common stock expired. None of the Series C Warrants were exercised prior to
their expiration.

2005 Warrants
-------------

As further consideration for securing the 8% Notes (as described in Note 4
above), our placement agent was entitled to warrants to purchase shares of the
Company's common stock in an amount equal to 15% of the 1,540,243 shares issued
upon conversion of the 8% Notes on July 15, 2005. Based on the 1,540,243 shares
of common stock issuable the placement agent and its designees were issued an
aggregate of 231,036 Series F Warrants. The Series F Warrants shall have an
exercise price of $0.40 per share and shall expire on the earlier of April 23,
2010 or a change of control of the Company. An additional expense of financing
of $146,349 was recognized during the year 2005.

On July 12, 2005, the Company issued a total of 200,000 Series I Warrants to
seven non-affiliate private-parties for providing financial advisory services to
the Company. The Series I Warrants have an exercise price of $0.60 per share of
the Company's common stock and expire on February 11, 2010. Compensation costs
of $86,000 were recorded for these warrants in 2005.

As further consideration to the placement agent that secured the 10% Note
financing (as described in Note 4 above), upon the August 25, 2005 conversion of
the 10% Notes, the Company became obligated to issue to the placement agent
602,393 Series J Warrants to purchase common stock. The Series J Warrants have
an original exercise price of $0.50 per share of common stock and expire on
August 25, 2010. An additional expense of financing of $240,957 has been
recognized during the year 2005.

On September 20, 2005, the Company amended the terms of its 972,223 previously
issued Series D Warrants to reduce the original exercise price of $3.50 per
share to an amended exercise price of $0.50 per share.

Pursuant to the terms of the 2005 Private Placement, the Company issued
3,564,188 Series G Warrants in 2005 to investors in conjunction with the
$7,128,375 in gross proceeds raised from the 2005 Private Placement. The Series
G Warrants have an exercise price of $2.50 per share of common stock, expire
five years from issuance date and are callable by the Company the first day
after the 30-trading-day average price of the Company's common stock exceeds
$3.50 per share. An additional expense of financing of $1,106,349 has been
recognized during the year 2005.

In addition, as further consideration for securing the $7,128,375 in gross
proceed through the Company's 2005 Private Placement, the placement agent was
entitled to warrants to purchase shares of the Company's common stock in an
amount equal to 15% of the number of shares of common stock issued in the 2005
Private Placement. Based upon the issuance of 14,256,750 shares of common stock
as of the final closing of the 2005 Private Placement on November 22, 2005, the
Company issued 2,138,513 Series H Warrants to the placement agent and its


                                      F-19




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)


designees. The Series H Warrants have an exercise price of $0.50 per share of
common stock and expire on the earlier of November 23, 2007 or a change in
control of the Company. An additional expense of financing of $906,023 has been
recognized during the year 2005.

With respect to the Series E and Series G-BH warrants issued in 2004-2005 we
refer to our Convertible Debt referenced in Note 4 above for further details.

2004 Warrants
-------------

In April 2004, we closed an equity based financing for gross proceeds of
$5,600,000. The financing involved the purchase of 3,200,000 shares of our
common stock, 3,200,000 Series A Warrants and 3,200,000 Series B Warrants. The
Series A Warrants expired on September 30, 2004 and no such warrants were
exercised prior to their expiration. The Series B Warrants expire on April 1,
2009 and had an original exercise price of $3.50 per share. However, pursuant to
the anti-dilution provisions of the Series B Warrants, our subsequent issuances
of securities have resulted in a reduced exercise price of $1.19 per share as of
March 12, 2007.

In June 2004, we closed an equity based financing for gross proceeds of
$1,750,000. The financing involved the purchase of 972,223 shares of our common
stock, 972,223 Series C Warrants to purchase common stock and 972,223 Series D
Warrants to purchase common stock. The Series C Warrants were issued with an
original exercise price of $3.00 per share. In August 2004, we amended the terms
of the Series C Warrants to reduce the exercise price to $1.25 per share. The
Series C Warrants subsequently expired on August 15, 2006 and no such warrants
were exercised prior to their expiration. The Series D Warrants expire on June
1, 2009 and had an original exercise price of $3.50 per share. In December 2005,
we amended the terms of the Series D Warrants to reduce the exercise price to
$0.50 per share.


8.       COMMITMENTS AND LEASES
         ----------------------

 As of December 31, 2006, the Company leases for its use office space and
workstations under a non-cancelable operating lease expiring in 2007. In
addition, the Company leases a copier through 2008 and has agreements related to
inventory purchase commitments requiring future payments through 2007.

Future minimum payments for commitments over the next three years are as
follows:

                      For the year ended
                         December 31,                            Amount
                         ------------                            ------

                             2007                              $  132,124
                             2008                                   6,974
                             2009                                       -
                                                               ----------
                             Total                             $  139,098
                                                               ==========

Rent expense for the years ended December 31, 2005 and 2006 was $205,062 and
$209,574, respectively.

In addition, at December 31, 2006, the Company has $148,526 in purchase order
commitments. Also, we have entered into a $300,000 software license agreement
related to the implementation of a second software platform. At December 31,
2005, we have capitalized an advance payment of $50,000 towards this agreement.
The payment of the remaining balance of $250,000 has been postponed due to
commercial delays in the release of a third-party chip set.


                                      F-20




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)


9.       INCOME TAXES
         ------------

The Company computes and records taxes payable based upon determination of
taxable income which is different from pre-tax financial statement income. Such
differences arise from the reporting of financial statement amounts in different
periods for tax purposes. The timing differences are a result of different
accounting methods being used for financial and tax reporting.

The Company's total deferred tax assets and deferred tax liabilities at December
31, 2006 and 2005 are as follows:

<TABLE>
<S>     <C>
                                                    December 31, 2005     December 31, 2006
                                                    ----------------      ----------------
Deferred tax assets
      Non-cash compensation                         $             --      $         44,000
           Non-benefited tax losses and credits           12,926,000            14,831,000
                                                    ----------------      ----------------
               Total deferred tax assets                  12,926,000            14,875,000

Deferred tax liabilities
      Net book value of assets                                44,000                (5,000)
                                                    ----------------      ----------------

              Total deferred tax liabilities                  44,000                (5,000)
                                                    ----------------      ----------------
              Total net deferred tax assets               12,882,000            14,870,000

     Valuation allowance                                 (12,882,000)          (14,870,000)
                                                    ----------------      ----------------
              Net deferred tax assets               $             --      $             --
                                                    ================      ================
</TABLE>

A valuation allowance has been established against the realization of the
deferred tax assets since the Company has determined that the operating loss
carryforwards may not be realized.

The Company has federal and state net operating loss carryforwards of
approximately $48,000,000 expiring between 2023 and 2026.

10.      RELATED PARTY TRANSACTIONS
         --------------------------

On November 7, 2003, we entered into an agreement with Express Manufacturing,
Inc. ("Express Manufacturing") to provide us contract manufacturing services.
Express Manufacturing is owned by director Albert Wong's in-laws. Mr. Wong
served as an advisor to Express Manufacturing from May 2002 until March 2006,
but has no direct financial interest in the company. Express Manufacturing
manufactures printed board assemblies for us in quantities and prices as set
forth in quotations delivered to us for review and acceptance. Under this
arrangement, we paid to Express Manufacturing approximately $143,000 and $51,000
in payments during fiscal years ended December 31, 2005 and 2006, respectively.

In addition, during the year ended December 31, 2006, the Company sold several
of its network switch products to EMI for a total amount of $44,801. The price
paid by EMI for the products was in line with the Company's commercial rates.

Director Albert Wong is Manager and controlling shareholder of DMK Investments,
LLC ("DMK"). In June 2004, DMK purchased 138,889 shares of our common stock,
138,889 Series C Warrants and 138,889 Series D Warrants. DMK purchased the
common stock and warrants at the same price ($1.80 per unit, each unit
consisting of one share of common stock, one Series C Warrant and one Series D
Warrant) and on the same terms and conditions as all other investors in our June
2004 financing. The Series C Warrants had an original exercise price of $3.00
per share. On August 13, 2004, we amended the terms of the Series C Warrants to


                                      F-21




<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005 AND 2006 (RESTATED)


have an exercise price of $1.25 per share. The Series C Warrants subsequently
expired on August 15, 2006 and no such warrants were exercised prior to their
expiration. The Series D Warrants expire on June 1, 2009 and had an original
exercise price of $3.50 per share. On December 12, 2005, we entered into an
amendment with the holders of our Series D Warrants, including DMK, to reduce
the exercise price of the Series D Warrants to $0.50 per share. The amendments
to reduce the exercise price of both the Series C Warrants and the Series D
Warrants were in each case unanimously approved by the Company's Board of
Directors.

11.      SUBSEQUENT EVENTS
         ------------------

OPTIONS ISSUED
--------------

Subsequent to December 31, 2006, the Company awarded a total of 552,000 common
stock purchase options, to certain employees which vest at the rate of 33-1/3%
on each of the first, second and third anniversaries of the date of grant,
expire on the eight-year anniversary of the date of grant, and have an exercise
price of $1.00 per share of the Company's common stock. Also, subsequent to
December 31, 2006, the Company cancelled 25,000 options granted in previous
years. These 552,000 options to purchase common stock have been committed to by
the Company to new employees and have been tentatively approved by the Board,
subject to the 2005 Plan being registered under applicable federal and state
securities laws.

RESIGNATION OF DIRECTOR
-----------------------

On February 28, 2007, Albert Wong, a director of the Company, announced his
intention not to stand for re-election as a director at the Company's 2007
annual meeting of shareholders scheduled to be held on April 30, 2007.

JANUARY 22, 2007 AMENDMENT AND RESTATEMENT OF SENIOR CONVERTIBLE NOTE FINANCING
-------------------------------------------------------------------------------

As described in Note 5 above, on July 31, 2006 the Company entered into a
Securities Purchase Agreement with three institutional accredited investors
resulting in the issuance of $5 million senior convertible notes, Series L
Warrants to purchase 17,665,623 shares of our common stock and Series M warrants
to purchase 7,395,103 shares of common stock. Both series of warrants carried an
original exercise price of $0.5054 per share.

On January 22, 2007, the Company amended and restated the July 31, 2006 Senior
Convertible Note Financing agreements to provide for the issuance to the
investors of senior convertible notes in the aggregate principal amount of
approximately $8.8 million and Series L-1 Warrants to purchase an aggregate of
22,754,163 shares of common stock, Series M-1 Warrants to purchase an aggregate
of 7,395,103 shares of common stock, Series L-2 Warrants to purchase an
aggregate of 7,281,332 shares of common stock and Series M-2 Warrants to
purchase an aggregate of 2,366,433 shares of common stock. All of these series
of warrants carry an exercise price of $0.43948 per share. The Company received
aggregate gross proceeds of $6.6 million from the investors for our issuance of
these notes and warrants (which $6.6 million includes the original $5 million
raised on July 31, 2006). For further details on this Amended Purchase Agreement
we refer you to the description of this transaction provided under the paragraph
"Amended Purchase Agreement" on pages 30-38 of this 10-KSB.

WARRANTS EXERCISED
------------------

Subsequent to December 31, 2006, the Company has issued a total of 525,767
shares of which 203,950 shares related to the cashless exercise of Series J
warrants and 321,817 shares related to the cash exercise of $0.40 per share
Series F warrants and $0.50 per share Series H warrants for total proceeds of
$161,655.


                                      F-22



<PAGE>

12.      RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

The restatement of the foregoing financial statements relates to the
accounting treatment that the Company applied with respect to the convertible
notes and accompanying warrants that the Company issued in a private placement
transaction in July 2006.

As described in Note 5, in the July 2006 financing transaction, the Company
issued two-year senior convertible notes and warrants to purchase shares of
the Company's common stock for gross proceeds of $5,000,000. In accordance with
accounting guidelines, the Company treated this financing as debt and calculated
an initial aggregate fair market value for the conversion features and warrants
in the aggregate amount of $7,499,794 ("Initial Aggregate July Value"). The
Company recorded the amount by which the Initial Aggregate July Value exceeded
the $5,000,000 face value of the notes ("July Excess Amount") as a debt discount
asset of $2,499,794 on the balance sheet, and was amortizing the July
Excess Amount to other expense over the lifetime of the notes.

However, on August 14, 2007, the Company concluded, after further review of
relevant accounting literature, including paragraph 6 of EITF 98-5, which
states that the amount of the discount assigned to a beneficial conversion
feature is limited to the amount of the proceeds allocated to the convertible
instrument, that the July Excess Amount should have been expensed in July 2006
rather than capitalized as a debt discount asset. Accordingly, the foregoing
financial statements were restated in order to record an additional non-cash
charge (net of amortization) of $2,291,478 at July 31, 2006 to other expense
and to eliminate the recordation and amortization of a debt discount asset.

The effect of the restatement on debt discount cost, debt financing amortization
expense, cost of financing, other expense, net loss and basic and diluted
earnings per share as of December 31, 2006 are as follows:

<TABLE>
<S>                 <C>
                                             AS ORIGINALLY     RESTATEMENT
                                                REPORTED       ADJUSTMENTS    AS RESTATED
                                              ------------    ------------    ------------
Balance Sheet
-------------
  Debt discount cost                          $  1,979,004    $ (1,979,004)   $          0

Statement of Operations
-----------------------
  Debt financing amortization                 $  1,562,456    $   (520,790)   $  1,041,666
  Cost of financing senior convertible note   $          0    $  2,499,794    $  2,499,794
  Other expense                               $ 10,987,690    $  1,979,004    $ 12,966,694
  Net Loss                                    $ 17,099,574    $  1,979,004    $ 19,078,578

Basic and diluted net loss per share          $      (0.32)   $      (0.03)   $      (0.35)

</TABLE>




                                      F-23




<PAGE>

                    INDEX TO EXHIBITS ATTACHED TO THIS REPORT

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

    31.1       Certification of Chief Executive Officer 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
    31.2       Certification of Chief Financial Officer 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
    32.1       Certification of Chief Executive  Officer Pursuant to 18
               U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002
    32.2       Certification of Chief Financial  Officer Pursuant to 18
               U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002