<PAGE>

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

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

                                   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: 333-74846
                                  ____________

                        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 [X] No [ ]

         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 average bid and asked prices (as reported by Pink
Sheets, LLC) of $1.38 per share as of March 12, 2007 was $75,742,491. 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: 54,885,863
shares of Common Stock, $0.001 par value, as of March 12, 2007.

         Until December 2, 2003, the Registrant's common stock traded on the
Over-The-Counter Bulletin Board under the symbol "PFII". On December 3, 2003,
the Registrant's name was changed to "Raptor Networks Technology, Inc." and the
common stock began trading on the Over-The-Counter Bulletin Board under the
symbol "RPTN."

         Documents Incorporated by Reference:  None.

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



<PAGE>

<TABLE>
<S>     <C>
                                                      TABLE OF CONTENTS

                                                                                                                         PAGE
                                                                                                                         ----
                                                            PART I

Item 1.         Business.................................................................................................   2
Item 2.         Properties...............................................................................................  20
Item 3.         Legal Proceedings........................................................................................  20
Item 4.         Submission of Matters to a Vote of Security Holders......................................................  20

                                                           PART II

Item 5.         Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of
                Equity Securities........................................................................................  21
Item 6.         Management's Discussion and Analysis of Financial Condition and Results of Operations....................  22
Item 7.         Financial Statements.....................................................................................  37
Item 8.         Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................  37
Item 8A.        Controls and Procedures..................................................................................  38
Item 8B.        Other Information........................................................................................  38

                                                           PART III

Item 9.         Directors and Executive Officers of the Registrant.......................................................  39
Item 10.        Executive Compensation...................................................................................  41
Item 11.        Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...........  46
Item 12.        Certain Relationships and Related Transactions...........................................................  48
Item 13.        Exhibits.................................................................................................  48
Item 14.        Principal Accountant Fees and Services...................................................................  51
Signatures...............................................................................................................  52
Index to Financial Statements............................................................................................ F-1
Index to Exhibits


                                                             -i-
</TABLE>


<PAGE>

                                     PART I

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.

           When used in this report on Form 10-KSB (this "Report"), the words
"plan," "estimate," "expect," "believe," "should," "would," "could,"
"anticipate," "may," "forecast," "project," "pro forma," "goal," "continues,"
"intend," "seek" and other expressions that convey uncertainty of future events
or outcomes are intended to identify "forward-looking statements." We caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date of this Report. While forward-looking statements
represent our management's best judgment as to what may occur in the future,
they are subject to risks, uncertainties and important factors beyond our
control that could cause actual results and events to differ materially from
historical results of operations and events as well as those presently
anticipated or projected. These factors include, but are not limited to, adverse
economic conditions, entry of new and stronger competitors, capital
availability, unexpected costs, and failure to establish relationships with and
capitalize upon access to new customers. 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.


                                       -1-


<PAGE>

ITEM 1.    BUSINESS

OVERVIEW

         We were organized under the laws of the State of Colorado on January
22, 2001 under the name Pacific InterMedia, Inc. We originally were engaged in
the business of offering EDGAR filing services to companies outsourcing the
formatting and electronic filing of registration statements, periodic reports
and other forms with the U. S. Securities and Exchange Commission ("SEC" or
"Commission"), but generated minimal revenues from these operations. On October
17, 2003, we completed a business combination transaction with Raptor Networks
Technology, Inc., a California corporation ("Raptor"), whereby we acquired all
of the issued and outstanding capital stock of Raptor in a cashless common stock
share-for-share exchange in which Raptor became our wholly-owned subsidiary.

         Upon the completion of this acquisition transaction, we changed our
name to Raptor Networks Technology, Inc., terminated our EDGAR filing services
operations and, by and through our subsidiary Raptor, became engaged in the data
network switching industry. Since that time, our focus has been to design,
produce and sell standards-based, proprietary high-speed network switching
technologies. Our "distributed network switching technology" allows users to
upgrade their traditional networks with our switches to allow for more efficient
management of high-bandwidth applications. The implementation of our products in
a user's network provides increased speed and greater capacity and, we believe,
a cost-effective alternative to existing switching and routing technologies.

         We have designed a family of modular network switch products branded
the "Ether-Raptor" line, which consist of core and edge switch products that
operate together in a unique and highly efficient manner. In a sharp departure
from traditional, centralized chassis-based switch architectures that were
originally designed to handle latency (a time delay in the transfer of data)
insensitive traffic such as email and block data transfers, we have developed
the ability to "bind" physically separated network switches into a common
"virtual chassis," creating the ability for a single network switch to exist in
multiple locations at distances spanning over 1,000 kilometers and to transport
data over that network at very high speeds. This functionality is essential to
new high-bandwidth applications such as Voice over Internet Protocol ("VoIP"),
streaming video, Internet Protocol Television ("IPTV") and high speed digital
access, none of which existed when traditional chassis-based network switch
designs were created. We believe that our Ether-Raptor architecture and
associated products may redefine the manner in which data distribution occurs
for service providers offering VOIP, streaming video, IPTV and other
high-bandwidth applications. Due to the full, open-standards compatibility of
our Ether-Raptor product line, our network switches have nearly universal
applicability on legacy as well as newly installed Ethernet networks where
speed, high bandwidth, redundancy and high reliability are essential.

         We believe the unique features of us and our products can best be
summarized as follows:

     o   we were first to market with "distributed common core fabric," a
         network switch technology that eliminates dependency on complex and
         costly chassis products;

     o   our simplified architectures improve redundancy and resiliency;

     o   the reduced complexity, tighter hardware integration, and common
         components (including common software components) of our products
         provides users the opportunity for economies of scale and reduced
         costs;

     o   the open standards of our products provide for compatibility with
         legacy products;

     o   our products' low transport latency can support emerging converged
         video, voice and data applications without sacrificing
         Quality-of-Service; and

     o   the Layer 2-7 Classification of our products provides full feature sets
         across a user's network.


                                      -2-


<PAGE>

         We remain an early stage technology company and, commencing with our
inception, have operated, and are now operating, at a significant loss. Although
our management is optimistic with regard to prospective business, there can be
no assurance that we will not encounter unforeseen and unanticipated obstacles
to near-term revenue or ultimately achieving profitability.

         Our principal headquarters are located at 1241 E. Dyer Road, Suite 150,
Santa Ana, California 92705 and our phone number is 949-623-9300. Our Internet
address is www.raptor-networks.com. Our Code of Ethics, Audit Committee Charter,
Nominating and Governance Committee Charter, and Compensation Committee Charter
may be found on our website at the Internet address set forth above. Our filings
with the SEC may be read and copied at the SEC's Public Reference Room at 100 F
Street N.E., Washington, D.C. 20549. You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers, such as us, that file
electronically with the SEC. The SEC's web site address is www.sec.gov.

INDUSTRY BACKGROUND

         Distributed computing and accelerating use of the Internet for
information access as well as communication have driven an exponential expansion
in the use of internetworking for more than thirty years. Most of today's
networks were engineered based upon standards and technology optimized for
handling a single data type - character data, which was previously the prevalent
form of data. However, today's sophisticated applications often require multiple
data types with speed and bandwidth requirements so high that prevailing network
technology is simply not up to the task. Often times the system upgrades
required to support these new applications is not cost justifiable, thereby
slowing the rate of adoption and utilization of advanced network applications.

         New applications such as video on demand, remote synchronous data
storage mirroring, global server clustering, business continuity, disaster
recovery and distance collaboration are just a few of the high-bandwidth network
applications that can have great value to an enterprise embracing them. However,
the cost to replace or upgrade existing networks with the requisite efficient,
high-bandwidth infrastructure to support these new applications is, in many
cases, financially prohibitive. For example, a typical chassis-based upgrade,
the type of which is offered by some of our competitors, involves replacing the
power supplies, management units, backplane, fan trays and interconnect blades
in the unit being upgraded. It is not unusual for the upgrade to cost as much or
more than the original machine.

OUR STRATEGY

         Our answer to this significant barrier to the adoption of
high-bandwidth (full 10 Gigabit) networking is the introduction of
next-generation networking products that are fundamentally less complex, more
architecturally flexible, compatible with legacy products, and faster than
traditional chassis-based alternatives. We believe that being in a position to
offer customers a low cost-of-entry network alternative will ultimately allow us
to achieve success in the network switch market.

         The core philosophy underlying our technological approach is to strive
to do at Layer 2 (the Data Link Layer) in hardware what traditional network
switch architectures require Layer 3 protocols (the Network Layer) in software
to achieve. Our "distributed switch fabric" approach provides a means to achieve
seamless and coherent peer-to-peer communication between physically separated
switches at Layer 2. The result is, effectively, a single network switch
consisting of a cluster of standalone, high-performance blades physically
separated from one another by up to 80 kilometers per hop. This flexibility
permits the use of unique network topologies that allow for highly-robust,
super-redundant networks to be designed and implemented that provide data
transport at wire-speed (the maximum speed at which the equipment is built to
operate) with the versatility to run the new latency-sensitive data applications
(such as VoIP or streaming video) at a cost-effective price without sacrificing
quality.

         The ultimate goal in networking is to maximize effective transport
bandwidth without sacrificing quality. In our architecture, Quality-of-Service
is maintained by providing for intelligent management of the different data
types traveling from the same source to the same destination. Latency variations
caused by heavy traffic can be devastating to certain data types and
applications. In traditional centralized architectures, latency problems are
resolved with the costly deployment of dedicated parallel networks, increasing
system complexity and hampering system scalability. Our technology optimizes the


                                      -3-


<PAGE>

handling of all data packets on a single, common network by monitoring and
differentiating between data types and adjusting transport parameters
accordingly, thus assuring low latency on common transport paths.

         Our proprietary Raptor Adaptive Switch Technology ("RAST") provides an
innovative new way to connect local and wide area networks, allowing users new
options in the way they design their distribution networks. Simply stated, RAST
allows discrete network elements, separated in distance by as much as 1,000
kilometers, to "bind" into a common "virtual switch," providing for ultra-fast
Layer 2 transport across those distances. Compatible with existing open
standards legacy products, RAST allows customers to add significant capability
to converge voice, video, and all data types on to their existing network
without the need for expensive, end-to-end upgrades. RAST also allows highly
resilient networks to be created at lower costs, both in terms of initial
capital expenditure and ongoing operating costs, than traditional legacy
chassis-based systems. Because RAST allows virtually any network size and
topology to be engineered from our common "building block" switches, the cost of
adoption, as well as the cost of support, is minimized.

         One of the most difficult data types for networks to handle is VoIP. By
optimizing the handling of all data packet types on a given network, treating
them as though they were all video data, our architecture enables the
construction of true wire-speed networks and achieves multiple objectives for
the user community. First, it allows for voice, video, storage, and other
sophisticated applications that can improve operations and establish new revenue
streams. Second, it augments, rather than replaces, the existing internetworking
infrastructure already in place, leveraging the user's existing capital
investment and minimizing the incremental capital outlay required to support
these new applications.

         Beginning in late 2004 and continuing throughout 2005, we placed
evaluation units with high-potential launch customers for extended period of
times. We were able to convert these evaluation units into sales in late 2005
and early 2006. In 2005, we had sales to clients in the scientific research
community and to budget-constrained customers upgrading their legacy networks.
During 2006, we entered into contracts with large systems integrators, which we
believe may add significantly to our potential distribution infrastructure.
During that period we were also successful in presenting our products to certain
government contractors and sold our product into new vertical markets such as
banking and internet media. Opportunities with potential end-user and systems
integration customers continue to progress and we are in ongoing discussions
with target clients for whom we might serve as an original equipment
manufacturer (OEM). However, due to longer selling cycles than anticipated, our
efforts have not yet resulted in significant sales. Taking into account the
price and performance value of our technologies, we believe that OEM business,
private labeling, and licensing may in the future be a potential source of
revenues, in addition to our current efforts to secure direct product sales to
end-users and integration customers. We also expect that our added distribution
infrastructure and our entrance in new vertical markets could contribute to
additional product sales in the future. It should be noted that our efforts to
get into the OEM, private labeling, and licensing business did not yet result in
any final contracts and there can not be any guarantee that we will generate
revenues from these activities.

OUR PRODUCTS

         Our products include two core switches: the Ether-Raptor-1010
("ER-1010"), which is a combination 1Gb/GbE and 10 Gb/GbE switch, and the
Ether-Raptor-1808 ("ER-1808"), which is a pure 10GbE switch still in the
development stages. The introduction of the ER-1808, which was previously
planned to be introduced to the market in 2006, is now anticipated to be delayed
until sometime in 2007. We also offer a pure edge switch, the Ovi-Raptor-1048
("OR-1048"), which was added to our product line in 2006 to allow us to offer an
end-to-end solution in new systems integration projects. All of our products are
based upon a common family of merchant silicon and embedded software.

         ER-1010
         -------

         Our ER-1010 1Gb/GbE and 10Gb/GbE network switch significantly reduces
the cost of adoption of ten gigabit networking by allowing for the construction
of an entire network from a series of our common, high performance "building
blocks." The ER-1010 consists of 24 ports of 1Gb/GbE and six ports of 10Gb/GbE.
The ER-1010 is built in a 1U high, self-powered, self-managed enclosure. Unlike
the large and complex chassis-based switches from which they evolved, our


                                      -4-


<PAGE>

network switches are physically placed near the devices or clients they serve.
When these switches are then subsequently connected together, either over copper
or fiber links, they collectively "bind" into a single "virtual" network switch.
This patent-pending "distributed virtual switch" architecture, filed under
Raptor Networks Technology, Inc.'s name, scales linearly, reduces inter-network
disconnects and moves data at very high speeds. Because the topology consists of
a collection of self-managed, interconnected building blocks of identical
composition, the architecture of the ER-1010 improves redundancy, keeps latency
very low across broad distances, allows for simpler management, and is priced
lower than chassis-based alternatives.

         OR-1048
         -------

         The OR-1048 is a 48-port 1GbE edge switch with the option for two 10GbE
uplinks and four optional 1GbE fiber ports. The OR-1048's standard features
include comprehensive management functions and Web management.

MARKET TRENDS AND OUR RESPONSE

         We believe that the Ethernet switching and routing market is poised for
growth. Based on recent publications issued by the research firm the Dell'Oro
Group, the Ethernet switch market surged in the third quarter of 2006 to $4.3
billion in worldwide revenues - a 16% jump from the comparable period in 2005.
Researchers have forecasted that global Ethernet switch market sales will grow
from $14.6 billion in 2004 to $18.3 billion in 2010. The Dell'Oro Group has
reported that increased shipments of advanced Ethernet switch technologies,
including, among others, 10GbE switch technologies, drove up worldwide LAN
switch sales in the third quarter of 2006.

         We see two business drivers that are pacing the growth and viability of
any network switching company in today's marketplace: (1) the presence of a
leader in the industry who commands in excess of 70% market share, and (2) the
market entry of low cost replicas of the market leader's products, largely from
Far East competitors. We believe that the key to success for any network
switching company is to successfully compete with the market leader in the
developed world, while addressing the availability of low cost replica products
in the developing world.

         We believe our solution is unique with respect to both of these
challenges. Our patent-pending distributed network architecture is significantly
less expensive and more efficient than the products offered by our competitors,
which allows us to compete with the industry leader on performance, while
simultaneously competing with the low cost replica products on price. Given the
advantages of our products, we believe that the most significant impediment to
our success is developing brand awareness and acceptance of the quality and
technological features of our products. For this reason, we have pursued and
continue to pursue OEM partnerships with companies having well established
channels to market competitively undifferentiated networking products.

         The key architectural driver we see in the current marketplace is the
conflict between the desire for new features, such as network security, and the
need for increased speed to handle latency-sensitive applications such as VoIP,
streaming video and other high-bandwidth applications. However, increased speed
demands that network transport occur at Layer 2, yet the function of inline
network security and similar functions occur at Layer 3 or 4, and the two cannot
both be met by current technologies. Customers must choose between the speed of
Layer 2 transport networks or the functionality, such as security, offered by
slower Layer 3 and Layer 4 transport. We believe that the market's requirement
for speed outweighs the benefits of additional functionality and we have
designed our products to operate at wire-speed, rather than adding
functionalities that would impede the speed and efficiency by which our products
transport data.

         The importance of network transport speed is illustrated by the
emerging applications of VoIP, streaming video, IPTV and high speed digital
access, referred to as the "triple play" service offering due to their high
sensitivity to time delays in the network over which they operate. Users have
discovered that VoIP on traditional networks, which were originally designed to
handle uncomplicated traffic such as email and simple data transfers, suffers
from poor voice quality and, under heavy network load, can cease to function
entirely. These problems can be even more pronounced when running IPTV on
traditional networks. The fundamental cause of these problems is that the
latencies inherent in traditional centralized networks are incongruent with the
speed requirements of these "triple play" applications. It was a desire to
create a practical, cost-effective solution to these problems that drove the
creation of our distributed network architecture, which provides for seamless
Layer 2 transport at wire-speed over significant distances.


                                      -5-


<PAGE>

         Internet Protocol version 6 ("IPv6") is a standard providing a much
larger global address space than its predecessor IPv4. Interest in and adoption
of IPv6 is gaining momentum in international markets, and the U.S. Federal
Government has made IPv6 a requirement for its upcoming procurements in the next
several years. However, we believe the widespread adoption of IPv6 in the U.S.
commercial sector is likely to take several years. Given that our primary focus
is to offer products with ultra-high speed transport, while we are currently
capable of implementing full IPv6 software in our products, we have elected not
to do so at this time because it would result in slower network transport
performance. Instead, our products are configured as protocol agnostic transport
pipes operating at wire speed that seamlessly pass IPv6 traffic. At such time as
IPv6 functionality is fully implemented in hardware rather than in software, we
intend to design, develop and offer fully compliant IPv6 switch products that
operate at wire-speed.

         Security is another Layer 3 or Layer 4 function generating great
interest in today's marketplace. We have recognized that network security is a
major concern for many customers and have incorporated several major security
features into our systems. These include IEEE 802.1X support with Radius
authentication, Layer 2 ACLs and MAC filters, and Layer 3 and 4 ACLs. More
unique, however, is the fact that our distributed fabric technology, RAST, is
inherently more secure from monitoring because it is a unique and unrecognizable
protocol to those attempting to breach the network fabric from outside the
network. We consider our products among the most secure on the market today, but
plan to continuously evaluate the possible addition of new security functions so
long as such additions do not compromise the wire-speed performance of our
products.

RESEARCH AND DEVELOPMENT

         We commenced our transition into the data network switching industry in
October 2003. From October 2003 until early 2005, we worked to develop our first
flagship product, the ER-1010, and made progress toward the development of our
second product, the ER-1808. By the end of the third quarter of 2004, our design
team had finalized the design work on a fiber based RAST card. This card enables
all of our network switching systems employed in a network connected through
fiber to work as one system, even if such systems are located up to 80
kilometers apart. In September and October 2004, we developed a 10-Giga-fiber
card, which enables our systems to communicate with other brands of network
switches.

         During 2005, our research and development resources were mainly focused
on adding features to the ER-1010, such as Data Management Software (software
enabling analysis of data flows handled by the ER-1010) and other enriching
functions. Throughout 2005, substantial testing of the ER-1010 was carried out
internally for the purpose of ensuring that product features worked as expected
and extensive external testing was conducted to validate the quality of our
products. Toward the end of 2005, the development of the ER-1808 was to a large
extent finalized and we began the testing of a new edge switch, the OR-1048. In
the fourth quarter of 2005, certain parts of the ER-1010 were upgraded,
including the design of a dual power supply to replace the existing single power
supply, the replacement of certain cables to reduce manufacturing costs, and an
upgrade to a more powerful processor. We also made significant progress in 2005
debugging software included in the ER-1010, resulting in substantial improvement
of the ER-1010's performance in terms of reduced failover time, increased
stacking possibilities, and smooth running of jumbo frames.

         During 2006, our research and development team completed various
enhancements to the ER-1010, resulting in an improvement of the control plane
and increasing memory and processing power. We also began work on upgrading the
existing ER-1010 to a more powerful product and expect to finalize this project
during the first half of 2007. During the second half of 2006, we continued
testing various applications that may better position our products for various
markets. We also began testing our products with a government approved test
organization. We expect to have these tests finalized in early 2007, which may
provide an opportunity for the entrance of our products into certain government
markets.

         None of our research and development to date has been customer
specific. Therefore, we have not billed any of our customers for non-recurring
engineering or other research and development expenses. In the future, we expect
that there may be periodic opportunities to engage in customer specific projects
for which we can bill a portion of our research and development expenses to such
customers.


                                      -6-


<PAGE>

         In 2007, we expect to bring a new enhanced version of the ER-1010 to
market and to be increasingly engaged in customer-specific design service
activities. In the second part of 2007, we expect to expand our line of
products, including the possible introduction of a new high density RAST core
switch and an edge switch. We anticipate that the introduction of these two
switches will allow us to create single switch solutions of 2000 Gigabit ports
and more. In addition, our R&D team will be working on adding functionality to
our existing products, such as power over Ethernet and wire speed inline
encryption. We also anticipate that we will spend additional time and resources
on testing our products and further improving documentation and customer
support.

SALES AND MARKETING

         We market and sell our products to customers through a combination of
direct sales to end users and sales through resellers. Our sales offices are
located at our principal headquarters in Santa Ana, California and we have sales
employees in California, Georgia and Virginia. In addition, we have finder's fee
and consulting agreements in place with a number of independent third parties to
facilitate the sale of our products on a global basis.

         We anticipate that original equipment manufacturers (OEMs) may
eventually constitute another important sales channel. Potential OEMs may
include our product in their offerings to end users and system integrators.
While we are currently pursuing multiple OEM relationships, at this time none
have been secured and there can be no guarantee that we will succeed in securing
such relationships.

COMPETITION

         We believe the key competitive factors in today's network switching
market are, in order of priority: price, speed, capacity and compatibility with
legacy products. We intend to become competitive by offering products that offer
unique wire-speed performance at a price that cannot be met by today's legacy
alternative networks. We seek to gain and expand a market presence through
aggressive marketing and sales efforts. However, our market continues to evolve
and we may not be able to compete successfully against current and future
competitors.

         We operate in a competitive industry with many established and
well-recognized competitors. In particular, Cisco Systems maintains a dominant
position in our industry and several of its products compete directly with our
products. We also compete with, among others, Extreme Networks, Nortel Networks,
Enterasys Networks, 3Com, Huawei Technologies, Force 10 Networks, and Alcatel.
Most of our competitors (including all of the competitors referenced above) have
substantially greater market leverage, distribution networks, and vendor
relationships, longer operating histories and industry experience, greater
financial, technical, sales, marketing and other resources, more name
recognition and larger installed customer bases than we do and can be expected
to react strongly to our marketing efforts.

         In addition, many competitors exist who, because of their substantial
resources, distribution relationships and customer base, could temporarily drop
prices to stave off a potential successful market launch by us. Other
competitive responses might include, without limitation, intense and aggressive
price competition and offers of employment to our key marketing or management
personnel. There can be no assurance that we will be successful in the face of
increasing competition from existing or new competitors, or that competition
will not have a material adverse effect on our business, financial condition and
results of operations.

         Competitive pressures and other factors, such as new product or new
technology introductions by us or our competitors, may result in price or market
share erosion that could have a material adverse effect on our business, results
of operations and financial condition. In addition, there can be no assurance
that our products and services will achieve broad market acceptance or will
successfully compete with other products targeting the same customers.


                                      -7-


<PAGE>

MANUFACTURING AND SUPPLIERS

         Our success will depend on partnerships in both technology and related
support. Our primary technology provider is Broadcom Corporation. Broadcom's 10
Gigabit Ethernet, Gigabit Ethernet and fast Ethernet transceivers provide the
Ethernet and 10 Gigabit switching fabric in our distributed architecture.
Another major supplier is TTM Corporation, which supplies PCB fabrication and
PCB design and analyses support. Our operating system is based on WindRiver's
VxWorks, which is widely used throughout the information technology industry.

         All of our manufacturing activities have been outsourced to Express
Manufacturing Inc. ("EMI"), a subcontractor located in the same vicinity as our
principal headquarters. EMI is owned and controlled by the in-laws of our
director Albert Wong. We entered into a manufacturing agreement with EMI in
November 2003, six months prior to Mr. Wong joining our Board of Directors. The
agreement has never been modified or amended. We do not have any minimum
purchase requirements under the agreement and the agreement does not create an
exclusive relationship between us and EMI. The term of the agreement is one
year, which automatically renews on an annual basis unless earlier terminated
pursuant to terms of the agreement. The agreement may be terminated for
convenience by either party upon providing the other party 180 days' prior
written notice or by the non-defaulting party in an event of default. Prices are
quoted to us by EMI on an order-by-order basis. We are required to provide EMI
firm purchase orders at least 90 days prior to the scheduled delivery date. The
prices quoted to us by EMI may be adjusted up or down subsequent to us
submitting a firm purchase order based on a number of factors, including without
limitation rescheduling, cancellations, engineering changes, specification
changes and the cost of required supplies and materials. The costs charged to us
by EMI may also increase if we provide EMI less than the required 90-day lead
time. Payment terms are net 30 days after our receipt of an order.

         EMI's manufacturing activities for us consist of printed circuit board
assembly and, final assembly of our products. We store our high-cost inventory
at our principal headquarters and supply it to EMI as needed to meet our orders.
Our low-cost inventory (such as component parts) are stored at EMI's warehouse
at no additional cost to us so long as we continue to utilize EMI as our
manufacturer. We currently conduct final systems testing at our principal
headquarters, but we anticipate that this responsibility will be transferred to
EMI sometime during 2007.

         All price quotes received by us from EMI must be reviewed and approved
by both our operations department and financing department prior to us placing
any firm purchase order with EMI. Our management and operations team believe,
based on their industry experience, that the prices quoted and charged to us by
EMI are competitive within the industry given our low order quantities. We also
engage in comparative manufacturing pricing analysis from time to time to ensure
EMI's price quotes are in line with current market rates. We have no reason to
believe that Mr. Wong's relationship with EMI has resulted in us being charged
materially less or materially more than EMI would charge unaffiliated third
parties for comparable services.

         We utilize "best in class" providers of merchant silicon, embedded
software, production circuit boards, and loss-free interconnects to craft our
switch products. No extraordinary investments in custom ASICs, software or
infrastructure was required to engineer our family of products. In furtherance
of our dedication to cost consciousness, in August 2004 we relocated our
operations to a Federal Empowerment Zone and local enterprise zone, directly
between EMI, our contract manufacturer, and Broadcom, our merchant silicon
provider, in order minimize facility costs and speed the design-to-production
transition of new silicon switching innovations.

EMPLOYEES

         As of March 12, 2007 we had 26 employees. None of our employees are a
party to any collective bargaining agreements with us. We consider our relations
with our employees to be good.

PATENTS, TRADEMARKS, AND LICENSING AGREEMENTS

         We have eight U.S. patent applications pending, with broad claim sets
covering numerous aspects of our Ethernet Distributed Switch Fabrics. Due to
delays at the patent office, the latest application was filed using the new
accelerated examination procedure. We also have applications pending in Europe
(EPO) and Japan.


                                      -8-


<PAGE>

         While we believe that our use of the technology encompassed in the
Ethernet Distributed Switch Fabrics patent applications is neither infringed
upon by any third party, nor infringes on any prior art of any third party, we
are unable to assess the validity, scope, or defensibility of our patent
applications, and any challenge to or claim of infringement relating to one or
more of the patent applications could materially and adversely affect our
business and results of operations.

         We have not entered into any licensing or franchising agreements for
revenue generating purposes.

ORGANIZATION

         We were organized under the laws of the State of Colorado on January
22, 2001 under the name Pacific InterMedia, Inc. We originally were engaged in
the business of offering EDGAR filing services to companies outsourcing the
formatting and electronic filing of registration statements, periodic reports
and other forms with the SEC, but generated minimal revenues from these
operations. On October 17, 2003, we completed a business combination transaction
with Raptor Networks Technology, Inc., a California corporation ("Raptor"),
whereby we acquired all of the issued and outstanding capital stock of Raptor in
a cashless common stock share-for-share exchange in which Raptor became our
wholly-owned subsidiary (the "Raptor Acquisition").

         Immediately prior to the Raptor Acquisition, we had 4,034,000 shares of
common stock issued and outstanding. Of those shares, 3,000,000 were "restricted
securities," as defined in Rule 144 ("Rule 144") under the Securities Act, held
by our founder, Tina Bogani, who was our sole officer and director immediately
prior to the Raptor Acquisition. The remaining 1,034,000 shares were sold and
issued by us pursuant to our Registration Statement on Form SB-2 filed with the
Commission on May 22, 2002 (Registration No. 333-74846) and were held by
approximately 25 holders as of the Raptor Acquisition.

         Raptor was organized under the laws of the State of California on July
24, 2003. At the time of the Raptor Acquisition, Raptor was a start-up,
development stage company working on the design and development of data network
switching technologies based on the pre-incorporation design efforts of its
founders. Immediately prior to the Raptor Acquisition, Raptor had 19,161,256
shares of its common stock issued and outstanding, all of which were "restricted
securities" as defined under Rule 144. Of those shares, 10,000,000 were held by
Raptor's three founders in the following amounts: Lyle Pearson, 4,000,000
shares; Eddie Hoffman, 3,000,000 shares; and Ananda Perera, 3,000,000. The
remaining 9,161,256 shares were issued to private investors and service
providers in reliance upon the exemption from registration available under
Section 4(2) of the Securities Act, among others, as transactions not involving
a public offering, and were held by approximately 32 holders as of the Raptor
Acquisition.

         The Raptor Acquisition was structured as a share-for-share exchange
whereby we issued to Raptor's shareholders, on a one-for-one basis, an aggregate
of 19,161,256 shares of our authorized but previously unissued common stock in
exchange for the 19,161,256 shares of Raptor common stock collectively held by
them. As a material term of the Raptor Acquisition, we redeemed the 3,000,000
shares of our common stock held by Tina Bogani in consideration for us
transferring to Ms. Bogani all of the assets held by us immediately prior to the
Raptor Acquisition. As a result of these transactions, Raptor became our
wholly-owned subsidiary, with the former shareholders of Raptor owning
19,161,256, or 94.9%, of our issued and outstanding common stock.

         Concurrently with the Raptor Acquisition, Tina Bogani appointed
Raptor's directors, Lyle Pearson and Edwin Hoffman, as our directors and,
immediately thereafter, Ms. Bogani resigned as our officer and director.
Concurrently with Ms. Bogani's resignation, Lyle Pearson and Edwin Hoffman, in
their capacity as directors, appointed the officers of Raptor as our officers as
follows: Lyle Pearson, President and Chief Executive Officer; Edwin Hoffman,
Vice President and Chief Technical Officer; Ananda Perera, Vice President of
Engineering; and Bob van Leyen, Chief Financial Officer.

         As of the date of the Raptor Acquisition, both we and Raptor were
start-up, development stage companies and had each realized negligible revenues.
We are unable to locate any documentation or other information regarding how the
value of our common stock or Raptor's common stock was calculated in determining
that the stock be exchanged on a one-for-one basis in the Raptor Acquisition. In
addition, there was no public market for either our or Raptor's stock at the
time of the Raptor Acquisition on which to base such an evaluation. We have no
reason to believe the Raptor Acquisition was not an arms-length transaction or


                                      -9-


<PAGE>

that the terms of the Raptor Acquisition were not reasonable at the time the
transactions were entered into. However, we can provide no assurance that our
common stock or Raptor's common stock was not over-valued or under-valued in the
Raptor Acquisition.

         Based on our review of the Raptor Acquisition documentation, our
discussions with Edwin Hoffman, Ananda Perera and Bob van Leyen (each of which
was an officer of Raptor as of the date of the Raptor Acquisition), and our
communications with various other parties related to the Raptor Acquisition, we
believe that the Raptor Acquisition was planned and structured for the most part
by our former CEO and President, Lyle Pearson, while he was CEO and President of
Raptor prior to the Raptor Acquisition.

         Mr. Pearson resigned as our officer and director on March 12, 2004,
however, we were able to contact Mr. Pearson to confirm certain details
surrounding the Raptor Acquisition as follows: Mr. Pearson informed us that his
actions in conjunction with the Raptor Acquisition were based on advice he
received from one of the early investors in Raptor, Mr. Mirco Teta. Mr. Teta,
who we are informed later deceased in 2005, informed Mr. Pearson approximately
in July 2003 that he would be able to secure investors and funding for Raptor
contingent upon the consummation of Raptor's reverse merger with a publicly
traded company. Mr. Teta then introduced Mr. Pearson to Mr. Keith Webb who, in
turn, set up meetings with, and introduced Mr. Pearson to, Sierra West Capital
("Sierra") and an attorney, Mr. Randall Lanham, to assist Raptor in finding a
suitable publicly traded "shell" company with which Raptor could enter into a
reverse merger transaction.

         It is our understanding that Sierra enabled Mr. Pearson to make contact
with our pre-Raptor Acquisition management, who together with Mr. Pearson and
Mr. Lanham negotiated the terms of the Raptor Acquisition. It is our belief that
Marc Bogani, brother to Tina Bogani, also had some involvement in bringing us
and Raptor together and facilitating the Raptor Acquisition. As consideration
for the services rendered by them in connection with the Raptor Acquisition, we
granted Keith Webb a total of 250,000 shares of our common stock and we granted
Jeff Chatfield (a representative of Sierra) and Mark Bogani each warrants to
purchase 100,000 shares of our common stock at an exercise price of $0.01 per
share. Messrs. Chatfield and Bogani each exercised their respective warrants in
December 2003. To our knowledge, other than (i) the shares granted to Mr. Webb,
(ii) the warrants granted to Messrs. Chatfield and Bogani, (iii) the payment of
attorneys' fees, and (iv) the issuance of 19,161,256 shares of our common stock
in exchange for an equal number of shares of Raptor, no other consideration was
paid by us in conjunction with the Raptor Acquisition.

         The issuances of shares and warrants in connection with the Raptor
Acquisition were made in reliance upon the exemption from registration available
under Section 4(2) of the Securities Act, among others, as transactions not
involving a public offering. This exemption was claimed on the basis that these
transactions did not involve any public offering and the purchasers in each
offering were accredited or sophisticated and had sufficient access to the kind
of information registration would provide. In each case, appropriate investment
representations were obtained and certificates representing the securities were
issued with restrictive legends.

         Upon the completion of the Raptor Acquisition, we changed our name to
Raptor Networks Technology, Inc., terminated our EDGAR filing services
operations and, by and through our subsidiary Raptor, became engaged in the data
network switching industry. The Raptor Acquisition has been treated as a reverse
merger, with Raptor being considered the acquiring entity for accounting
purposes.

                                  RISK FACTORS

OUR INDEPENDENT AUDITORS HAVE ISSUED A REPORT QUESTIONING OUR ABILITY TO
CONTINUE AS A GOING CONCERN. THIS REPORT MAY IMPAIR OUR ABILITY TO RAISE
ADDITIONAL FINANCING AND ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.

         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


                                      -10-


<PAGE>

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
our 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 and to seek independent advice concerning
the substantial risks related thereto before making a decision to invest in us.

OUR SUBSTANTIAL ACCUMULATED DEFICIT, LIMITED WORKING CAPITAL AND EXPECTATION OF
FUTURE LOSSES MAY REQUIRE THAT WE OBTAIN ADDITIONAL FINANCING TO CONTINUE
OPERATIONS, WHICH WE MAY NOT BE ABLE TO SECURE ON ACCEPTABLE TERMS, IF AT ALL.

         We are an early stage company and have had no significant revenues from
operations to date. As of December 31, 2006, we had an accumulated deficit of
$58,710,071. We have operated at a loss since our inception and expect to
continue to experience losses from our operations for the foreseeable future.
Our net losses for fiscal 2006 and 2005 were $17,099,574 and $13,390,940,
respectively. We will be required to conduct product feature enhancement and
testing activities which, together with expenses to be incurred for the
establishment of a sustainable marketing and sales presence and other general
and administrative expenses, are expected to result in operating losses through
the foreseeable future. Accordingly, there is a risk that we will not achieve
profitable operations in the near future, if at all.

         Historically, we have relied upon cash from equity and debt financing
activities to fund nearly all of the cash requirements of our operating
activities. We anticipate that the proceeds from our Senior Convertible Note
Financing (as described under the caption "Senior Convertible Note Financing"
beginning on page 30 of this Report) 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 or sooner, 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. In addition, the terms of our Senior Convertible
Note Financing subject us to financial and other covenants that significantly
restrict our flexibility to conduct future securities offerings and incur debt.
Should we be unable to raise additional capital, our investors could lose their
entire investment. Moreover, in the event we raise additional funds through the
sale of shares of our common stock or other interests in us, our investors may
experience significant dilution of their equity invested in us.

WE HAVE NO PROFITABLE OPERATING HISTORY AND MAY NEVER ACHIEVE PROFITABILITY.

         We are an early stage company and have a limited history of operations
and have not generated meaningful revenues from operations since our inception.
We are faced with all of the risks associated with a company in the early stages
of development. Our business is subject to numerous risks associated with a
relatively new, low-capitalized company engaged in the network switch industry.
Such risks include, but are not limited to, competition from well-established
and well-capitalized companies, technological obsolescence and unanticipated
difficulties regarding the development and marketing of our products. There can
be no assurance that we will ever generate significant commercial sales or
achieve profitability. Should this be the case, investors in our common stock or
other securities could lose their entire investment.

WE DO NOT PRESENTLY HAVE A TRADITIONAL CREDIT FACILITY WITH A FINANCIAL
INSTITUTION. THIS ABSENCE MAY ADVERSELY IMPACT OUR OPERATIONS.

         We do not presently have a traditional credit facility with a financial
institution. The absence of a traditional credit facility could adversely impact
our operations. If adequate funds are not otherwise available, we may be
required to delay, scale back or eliminate portions of our operations and
product development efforts. In addition, the terms of our Senior Convertible
Note Financing subject us to certain covenants that prohibit us from borrowing
additional funds unless certain conditions are satisfied, including, but not
limited to, the closing price of our common stock being greater than $1.00 per
share for 40 consecutive trading days or the aggregate dollar trading volume of
our common stock being greater than $200,000 per day for 40 consecutive trading
days.


                                      -11-


<PAGE>

OUR LEVEL OF INDEBTEDNESS REDUCES OUR FINANCIAL AND OPERATIONAL FLEXIBILITY, AND
OUR LEVEL OF INDEBTEDNESS MAY INCREASE.

         As of March 12, 2007, the principal amount of our total indebtedness
was $10,019,199. Our level of indebtedness affects our operations in several
ways, including the following:

         o        A significant portion of our cash flow may be required to
                  service our indebtedness;
         o        A high level of debt increases our vulnerability to general
                  adverse economic and industry conditions;
         o        The covenants contained in the agreements governing our
                  outstanding indebtedness significantly limit our ability to
                  borrow additional funds, dispose of assets, pay dividends,
                  sell common stock and make certain investments;
         o        Our debt covenants may also affect our flexibility in planning
                  for, and reacting to, changes in the economy or in our
                  industry;
         o        A high level of debt may impair our ability to obtain
                  additional financing in the future for working capital,
                  capital expenditures, acquisitions or general corporate
                  purposes; and
         o        A default under our debt covenants could result in required
                  principal payments that we may not be able to meet, resulting
                  in higher penalty interest rates and/or debt maturity
                  acceleration.

         We may incur additional debt, including significant secured
indebtedness, in order to fund our continuing operations or to develop and/or
improve our products. A higher level of indebtedness increases the risk that we
may default on our debt obligations. Our ability to meet our debt obligations
and to reduce our level of indebtedness depends on our future performance.
General and industry specific economic, financial and business conditions and
other factors affect our operations and our future performance. Many of these
factors are beyond our control. We may not be able to generate sufficient cash
flow to fulfill our interest or principal payment obligations on our debt and
future working capital, borrowings or equity financing may not be available to
pay or refinance such debt.

THERE IS A RISK THAT THERE MAY BE PROCEDURAL ISSUES RELATED TO OUR ACQUISITION
OF RAPTOR NETWORKS TECHNOLOGY, INC., A CALIFORNIA CORPORATION, WHICH COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

         We were organized under the laws of the State of Colorado on January
22, 2001 under the name Pacific InterMedia, Inc. On October 17, 2003, we
completed a transaction with Raptor Networks Technology, Inc., a California
corporation ("Raptor"), whereby we acquired all of the issued and outstanding
capital stock of Raptor in a cashless common stock share-for-share exchange in
which Raptor became our wholly-owned subsidiary. With the completion of the
acquisition transaction we changed our name to Raptor Networks Technology, Inc.,
terminated our previous operations (consisting of the "EDGARization" of SEC
securities filings) and, by and through our subsidiary Raptor, became engaged in
the data network switching industry. After the transaction, our Board of
Directors engaged new management to, among other things, review our operating
and legal status.

         As a result of management's review of our historical corporate records,
it appears that certain material documents and approvals regarding the
transaction were not properly retained. Furthermore, it appears that, from a
review of the records available to us, certain procedural irregularities may
exist regarding the structure and approval of the acquisition transaction under
applicable law. After a review of available documents and records relating to
the acquisition transaction, Colorado counsel engaged by us has determined that
the shares issued in the transaction were lawfully issued. However, there is a
risk, given the lack of complete records regarding the transaction, that the
acquisition was not properly structured or approved. The inability to resolve
such deficiencies, should such deficiencies exist, could have a material adverse
effect on our business, financial condition and results of operations.
Furthermore, there is a risk that we may be subject to currently unknown
liabilities resulting from our operations, or the operations of Raptor, prior to
the acquisition transaction. Should a claimed liability arise, we could expend
significant time and resources defending or satisfying such claim, including,
without limitation, the amount of any judgment or settlement required to satisfy
any such claim and the payment of attorneys' fees and other costs incurred in
defending any such claim.


                                      -12-


<PAGE>

OUR INABILITY TO SUCCESSFULLY ACHIEVE SUSTAINABLE MARKET PENETRATION COULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION.

         No assurance can be given that we will be able to successfully achieve
sustainable market penetration with any of our products. Our success in
marketing our products will be substantially dependent on educating our targeted
markets as to the unique topologies, as well as what we believe are the
performance and cost benefits, of our distributed Ethernet switch architecture.
There can be no assurance that our efforts or the efforts of others will be
successful in fostering acceptance of our technology among the targeted markets.

MANY COMPANIES WITH GREATER RESOURCES AND OPERATING EXPERIENCE OFFER TECHNOLOGY
SIMILAR TO OUR PRODUCTS. THESE COMPANIES COULD SUCCESSFULLY COMPETE WITH US AND
NEGATIVELY AFFECT OUR OPPORTUNITY TO ACHIEVE PROFITABILITY.

         We operate in a competitive industry with many established and
well-recognized competitors. In particular, Cisco Systems maintains a dominant
position in our industry and several of its products compete directly with our
products. We also compete with Extreme Networks, Juniper Networks, F5 Networks,
Nortel Networks, Enterasys Networks, 3Com, Huawei Technologies, Force 10
Networks, and Actel, among others. Most of our competitors (including all of the
competitors referenced above) have substantially greater market leverage,
distribution networks, and vendor relationships, longer operating histories and
industry experience, greater financial, technical, sales, marketing and other
resources, more name recognition and larger installed customer bases than we do
and can be expected to react strongly to our marketing efforts. In addition,
many competitors exist who, because of their substantial resources, distribution
relationships and customer base, could temporarily drop prices to stave off a
potential successful market launch by our Company. Other competitive responses
might include, without limitation, intense and aggressive price competition and
offers of employment to our key marketing or management personnel. There can be
no assurance that we will be successful in the face of increasing competition
from existing or new competitors, or that competition will not have a material
adverse effect on our business, financial condition and results of operations.

OUR MARKETING EFFORTS HAVE YIELDED NEGLIGIBLE REVENUES AND THERE CAN BE NO
ASSURANCE THAT OUR FUTURE MARKETING EFFORTS WILL LEAD TO SALES OF OUR PRODUCTS.

         Our marketing efforts have yielded negligible revenues and we believe
we will have to significantly expand our sales and marketing capabilities in
order to establish sufficient awareness to launch broader sales of our products
and support services. There can be no assurance that we will be able to expand
our sales and marketing efforts to the extent we believe necessary or that any
such efforts, if undertaken, will be successful in achieving substantial sales
of our products or support services.

THE INDUSTRY OF NETWORK SWITCH PRODUCTS IS SUBJECT TO RAPID TECHNOLOGICAL
CHANGE. OUR PRODUCTS COULD BECOME OBSOLETE AT ANY TIME AND OUR LIMITED CAPITAL
PROHIBITS US FROM DEVOTING A SIGNIFICANT AMOUNT OF RESOURCES TO RESEARCH AND
DEVELOPMENT.

         Evolving technology, updated industry standards, and frequent new
product and service introductions characterize the network switching market. Our
current products could become obsolete at any time. Competitors could develop
products similar to or better than ours, finish development before us, or market
their products more successfully than ours, any of which could hinder our
potential success. In order to be competitive, we must continue to develop and
bring to market new products that offer substantially greater performance and
support a greater number of users, all at lower price points than our
competitors. Our future success depends in significant part on our ability to
evolve the performance and software of our existing products and develop and
introduce new products and technologies in response to the evolving demands of
the market and competitive product offerings. However, unless we are able to
raise additional capital or significantly increase revenues, we will not be able
to devote a significant amount of resources to research and development, which
could increase the likelihood that our current products become obsolete and
prevent us from developing new products to keep up with the industry's rapid
technological advancements.


                                      -13-


<PAGE>

BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS,
MISAPPROPRIATION OF THOSE RIGHTS OR CLAIMS OF INFRINGEMENT OR LEGAL ACTIONS
RELATED TO INTELLECTUAL PROPERTY COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION.

         Our success is dependent on our ability to protect our proprietary
technology. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. Monitoring unauthorized use of our technology is difficult, and we
cannot be certain that the steps we have taken will prevent misappropriation of
our technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the U.S. We currently have patent-pending
protection for our proprietary technology and plan to rely on non-disclosure
agreements to further protect this technology. There can be no assurance that
these patents will be granted or that nondisclosure agreements will provide us
meaningful protection.

         In addition, the network industry is subject to frequent claims and
related litigation regarding patent and other intellectual property rights. In
particular, some companies in the network industry claim extensive patent
portfolios. As a result of the existence of a large number of existing patents
and the rate of issuance of new patents in the network industry, it is extremely
difficult to determine in advance whether a product or any of its components may
infringe upon the intellectual property rights claimed by others. Third parties
may in the future assert patent, copyright, trademark and other intellectual
property rights claims against us with respect to existing or future products or
technology. Regardless of the merits of our position, we may incur substantial
legal fees and related costs defending against third party claims, in addition
to monetary damages that may be assessed against us. If there is a successful
claim of infringement and we fail or are unable to develop non-infringing
technology or license the infringed or similar technology on a timely basis, our
business and results of operations may be seriously harmed.

WE RELY HEAVILY ON OUR MANAGEMENT AND OTHER KEY PERSONNEL, AND THE LOSS OF THEIR
SERVICES (OR OUR INABILITY TO RECRUIT AND RETAIN ADDITIONAL QUALIFIED EMPLOYEES)
COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.

         Our future success depends to a significant degree on the continued
service of our key personnel and on our ability to attract, motivate and retain
highly qualified employees. In particular, we are dependent upon the services of
our senior management, including, without limitation: Chief Executive Officer
and President, Thomas M. Wittenschlaeger; and Chief Financial Officer and
Secretary, Bob van Leyen. The loss of the services of our senior management or
other key employees would have a material adverse effect on our business,
financial condition and results of operations.

         In addition, there are a number of other key management, sales and
support positions (including many for which individuals have not yet been hired)
the loss of which (or the inability to recruit and retain) would have a material
adverse effect on our business. If we experience the growth we hope to achieve,
our ability to operate successfully during periods of growth (if any) will
depend on our ability to attract and retain managers and develop adequate
systems and procedures to manage such growth. There can be no assurance that we
will be able to attract and retain additional key management personnel with the
skills and expertise necessary to manage our business should any such period of
growth occur.

OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO OBTAIN COMPONENTS, SOFTWARE AND
SERVICES FROM OUTSIDE SUPPLIERS AND VENDORS.

         Our products are architected and manufactured through the use of
third-party electronic components, device level software and services. We are
highly dependent on the services and products of these other companies. A
discontinuance, disruption or other similar occurrence to the components,
software or services supplied by our vendors and suppliers could materially
diminish our ability to operate efficiently.

         We acquire components through purchase orders and have no long-term
commitments regarding supply or pricing from these suppliers. We depend on
anticipated products orders to determine our material requirements. If orders
for our products do not match forecasts, or if we do not manage inventory
effectively, we may have either excess or insufficient inventory of materials
and components, which could negatively effect our operating results and
financial condition.


                                      -14-


<PAGE>

OUR RELIANCE ON THIRD-PARTY MANUFACTURING VENDORS TO MANUFACTURE OUR PRODUCTS
MAY CAUSE A DELAY IN OUR ABILITY TO FILL ORDERS.

         We subcontract a significant amount of our manufacturing to Express
Manufacturing, Inc. (which is controlled by the in-laws of Albert Wong, one of
our directors) and may in the future subcontract with other third-party
manufacturers. In addition, some Company-branded products are manufactured by
third party original equipment manufacturers ("OEMs"). We may experience delays
in product manufacturing and shipments from our manufacturers, which in turn
could delay product shipments to our customers. In addition, we may experience
problems such as inferior manufacturing quality or failure to manufacture
products according to specifications, any of which could have a material adverse
effect on our business and operating results. In the event we introduce new
products or product enhancements, we may be required to rapidly achieve volume
production by coordinating our efforts with suppliers and manufacturers. The
inability of our manufacturers or OEMs to provide us with adequate supplies of
high-quality products, the loss of any of our third-party manufacturers, or the
inability to obtain components and raw materials could cause a delay in our
ability to fulfill orders.

THE AVERAGE SELLING PRICES OF OUR PRODUCTS, AND OUR GROSS MARGINS RESULTING FROM
THE SALE OF SUCH PRODUCTS, MAY DECLINE AS A RESULT OF COMPETITIVE PRESSURES,
INDUSTRY TRENDS AND OTHER FACTORS.

         The network industry has experienced an erosion of the average product
selling prices due to a number of factors, particularly competitive and
macroeconomic pressures and rapid technological advancements. Our competitors
have and will likely continue to lower sales prices from time to time in order
to gain market share or create more demand. We may have to reduce the sales
prices of our products in response to such intense pricing competition, which
could cause our gross margins to decline and may adversely affect our business,
operating results or financial condition. Our gross margins could also be
adversely effected if we are unable to reduce manufacturing costs and
effectively manage our inventory levels or by fluctuations in manufacturing
volumes, component costs, the mix of products sold and the mix of distribution
channels through which our products are sold.

IF OUR PRODUCTS CONTAIN SOFTWARE OR HARDWARE ERRORS, WE COULD INCUR SUDDEN AND
SIGNIFICANT EXPENSES AND LOST SALES AND BE SUBJECT TO PRODUCT LIABILITY CLAIMS.

         Our products are complex and may contain undetected defects or errors,
particularly when first introduced or as new enhancements and versions are
released. Despite our testing procedures, these defects and errors may be
discovered after they have been shipped to customers. Any defects or errors in
our products or failures of our customers' networks, regardless of whether the
failure is caused by our products, could result in:

         o        negative customer reactions;
         o        product liability claims;
         o        negative publicity regarding us and our products;
         o        delays in or loss of market acceptance of our products;
         o        product returns; and
         o        unexpected expenses to remedy defects or errors.

OUR SUCCESS IS SUBSTANTIALLY DEPENDENT ON GENERAL ECONOMIC CONDITIONS AND
BUSINESS TRENDS, PARTICULARLY IN THE INFORMATION TECHNOLOGY INDUSTRY, A DOWNTURN
OF WHICH COULD ADVERSELY AFFECT OUR OPERATIONS.

         The success of our operations depends to a significant extent upon a
number of factors relating to business spending. These factors include economic
conditions such as employment rates and labor supply, general business
conditions, cost of goods and materials, inflation, interest rates and taxation.
Our business is affected by the general condition and economic stability of our
customers as well as our vendors, suppliers and partners and their continued
willingness to work with us in the future. Our business is particularly
sensitive to information technology ("IT") spending patterns and preferences.
There can be no assurance that IT spending will not be adversely affected by
general business trends and economic conditions, thereby impacting our growth,
net sales and profitability.


                                      -15-


<PAGE>

OUR FAILURE TO MANAGE GROWTH EFFECTIVELY COULD IMPAIR OUR SUCCESS.

         In order for us to expand successfully, management will be required to
anticipate the changing demands of a growth in operations, should such growth
occur, and to adapt systems and procedures accordingly. There can be no
assurance that we will anticipate all of the changing demands that a potential
expansion in operations might impose. If we were to experience growth, we might
be required to hire and train a large number of sales and support personnel, and
there can be no assurance that the training and supervision of a large number of
new employees would not adversely affect the high standards that we seek to
maintain. Our future will depend, in part, on our ability to integrate new
individuals and capabilities into our operations, should such operations expand
in the future, and there can be no assurance that we will be able to achieve
such integration. We will also need to continually evaluate the adequacy of our
management information systems, including our web site. Failure to upgrade our
information systems or unexpected difficulties encountered with these systems
during an expansion in our operations (should such an expansion occur) could
adversely affect our business, financial condition and results of operations.

CHANGES IN GENERALLY ACCEPTED ACCOUNTING PRINCIPALS COULD HAVE AN ADVERSE EFFECT
ON OUR BUSINESS, FINANCIAL CONDITION, CASH FLOWS, REVENUE AND RESULTS OF
OPERATIONS.

         We are subject to changes in and interpretations of financial
accounting matters that govern the measurement of our performance. Based on our
reading and interpretations of relevant guidance, principles or concepts issued
by, among other authorities, the American Institute of Certified Public
Accountants, the Financial Accounting Standards Board, and the United States
Securities and Exchange Commission, our management believes that our current
contract terms and business arrangements have been properly reported. However,
there continue to be issued interpretations and guidance for applying the
relevant standards to a wide range of contract terms and business arrangements
that are prevalent in the industries in which we operate. Future interpretations
or changes by the regulators of existing accounting standards or changes in our
business practices could result in future changes in our revenue recognition
and/or other accounting policies and practices that could have a material
adverse effect on our business, financial condition, cash flows, revenue and
results of operations.

CHANGES IN ACCOUNTING POLICIES REGARDING THE TREATMENT OF EMPLOYEE STOCK OPTIONS
WILL ADVERSELY AFFECT OUR EARNINGS.

         Stock options have from time to time been a component of the
compensation packages for many of our employees. Beginning January 1, 2006, we
were (pursuant to SEC rules) required to change our accounting policy to record
the value of stock options issued to employees as an expense and a charge
against earnings. This required change in our accounting policy will adversely
affect our earnings. For the year ended December 31, 2006, we recognized
$168,214 in share-based compensation costs and had total unrecognized
share-based compensation cost related to unvested stock options of approximately
$130,049 as of December 31, 2006.

OUR COMMON STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL
LOSSES FOR INVESTORS PURCHASING SHARES OF OUR COMMON STOCK.

         The market prices of securities of technology-based companies (such as
us) currently are highly volatile. The market price of our common stock has
fluctuated significantly in the past. In fact, during 2005, the high and low
closing sale prices of a share of our common stock were $0.90 and $0.39,
respectively. During 2006, the high and low closing sale prices of a share of
our common stock were $0.91 and $0.27, respectively. On March 16, 2007, the last
reported sale price of a share of our common stock was $1.71. The market price
of our common stock may continue to fluctuate in response to the following
factors, in addition to others, many of which are beyond our control:

         o        conversion of our convertible notes and exercise of our
                  warrants and the sale of their underlying common stock;
         o        changes in market valuations of similar companies and stock
                  market price and volume fluctuations generally;


                                      -16-


<PAGE>

         o        economic conditions specific to the network switching or
                  related information technology industries;
         o        announcements by us or our competitors of new or enhanced
                  products, technologies or services or significant contracts,
                  acquisitions, strategic relationships, joint ventures or
                  capital commitments;
         o        delays in our introduction of new products or technological
                  innovations or problems in the functioning of our current or
                  new products or innovations;
         o        third parties' infringement of our intellectual property
                  rights;
         o        changes in our pricing policies or the pricing policies of our
                  competitors;
         o        regulatory developments;
         o        fluctuations in our quarterly or annual operating results;
         o        additions or departures of key personnel; and
         o        future sales of our common stock or other securities.

         The price at which you purchase shares of common stock may not be
indicative of the price of our stock that will prevail in the trading market.
You may be unable to sell your shares of common stock at or above your purchase
price, which may result in substantial losses to you. Moreover, in the past,
securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. We may in
the future be the target of similar litigation. Securities litigation could
result in substantial costs and divert our management's attention and resources.

SHARES OF OUR COMMON STOCK ELIGIBLE, OR TO BECOME ELIGIBLE, FOR PUBLIC SALE
COULD ADVERSELY AFFECT OUR STOCK PRICE AND MAKE IT DIFFICULT FOR US TO RAISE
ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES.

         We cannot predict the effect, if any, that market sales of shares of
our common stock or the availability of shares of common stock for sale will
have on the market price prevailing from time to time. As of March 12, 2007, we
had outstanding 54,885,863 shares of common stock, of which approximately
23,626,910 shares were restricted under the Securities Act of 1933, as amended
(the "Securities Act"). As of March 12, 2007, we also had outstanding options,
warrants, and convertible promissory notes that were exercisable for or
convertible into approximately 76,638,559 shares of common stock. Sales of
shares of our common stock in the public market, or the perception that sales
could occur, could adversely affect the market price of our common stock. Any
adverse effect on the market price of our common stock could make it difficult
for us to raise additional capital through sales of equity securities at a time
and at a price that we deem appropriate.

THE CONVERSION OF CONVERTIBLE SECURITIES AND THE EXERCISE OF OUTSTANDING OPTIONS
AND WARRANTS TO PURCHASE OUR COMMON STOCK COULD SUBSTANTIALLY DILUTE YOUR
INVESTMENT, IMPEDE OUR ABILITY TO OBTAIN ADDITIONAL FINANCING, AND CAUSE US TO
INCUR ADDITIONAL EXPENSES.

         Under the terms of existing notes convertible into our common stock,
warrants to purchase our common stock, non compensatory options to acquire our
common stock, and other outstanding options to acquire our common stock issued
to employees and others, the holders thereof are given an opportunity to profit
from a rise in the market price of our common stock that, upon the exercise of
such warrants and/or options or conversion of such notes, could result in
dilution in the interests of our other shareholders. The terms on which we may
obtain additional financing may be adversely affected by the existence and
potentially dilutive impact of such convertible notes, options and warrants. In
addition, holders of certain convertible notes, options and warrants have
registration rights with respect to the common stock underlying such convertible
notes, options and warrants, the registration of which will cause us to incur a
substantial expense.

THE VOTING POWER AND VALUE OF YOUR INVESTMENT COULD DECLINE IF OUR SENIOR
CONVERTIBLE NOTES AND WARRANTS ARE CONVERTED AT A REDUCED PRICE DUE TO OUR
ISSUANCE OF LOWER-PRICED SHARES OR MARKET DECLINES WHICH TRIGGER RIGHTS OF THE
HOLDERS OF OUR CONVERTIBLE NOTES AND WARRANTS TO RECEIVE ADDITIONAL SHARES OF
OUR STOCK.

         As part of our Senior Convertible Note Financing, we issued a
significant additional amount of convertible notes and warrants, the exercise or
conversion of which could have a substantial negative impact on the price of our
common stock and could result in a dramatic decrease in the value of your
investment. The initial conversion price of our senior convertible notes is


                                      -17-


<PAGE>

subject to market-price protection that will cause the conversion price of our
senior convertible notes to be reduced in the event of a downward fluctuation in
the market price of our common stock. In addition, the initial conversion price
of our senior convertible notes and the initial exercise price of a majority of
our warrants will be subject to downward anti-dilution adjustments in most
cases, from time to time, where we issue securities at a purchase, exercise or
conversion price that is less than the then-applicable conversion price of our
senior convertible notes or exercise price of our warrants. Consequently, the
voting power and value of your investment in each such event would decline if
our senior convertible notes or warrants are converted or exercised for shares
of our common stock at the new lower price as a result of such declining
market-price or sales of our securities are made below the conversion price of
the notes and/or the exercise price of the warrants.

         The market-price protection feature of our senior convertible notes
could also allow those notes to become convertible into a greatly increased
number of additional shares of our common stock, particularly if a holder of our
senior convertible notes sequentially converts portions of the note into shares
of our common stock at alternate conversion prices and resells those shares into
the market. If a holder of our senior convertible notes sequentially converts
portions of the notes into shares of our common stock at alternate conversion
prices and resells those shares into the market, then the market price of our
common stock could decline due to the additional shares available in the market,
particularly in light of the relatively thin trading volume of our common stock.
Consequently, if a holder of our senior convertible notes repeatedly converts
portions of the notes at alternate conversion prices and then resells those
underlying shares into the market, a continuous downward spiral of the market
price of our common stock could occur that would benefit a holder of our senior
convertible notes at the expense of other existing or potential holders of our
common stock, potentially creating a divergence of interests between a holder of
our senior convertible notes and investors who purchase the shares of common
stock resold by a holder of the notes following conversion of the notes.

THE MARKET PRICE OF OUR COMMON STOCK AND THE VALUE OF YOUR INVESTMENT COULD
SUBSTANTIALLY DECLINE IF OUR CONVERTIBLE NOTES, WARRANTS OR OPTIONS ARE
CONVERTED INTO SHARES OF OUR COMMON STOCK AND RESOLD INTO THE MARKET, OR IF A
PERCEPTION EXISTS THAT A SUBSTANTIAL NUMBER OF SHARES WILL BE ISSUED UPON
CONVERSION OR EXERCISE OF OUR CONVERTIBLE NOTES, WARRANTS OR OPTIONS AND THEN
RESOLD INTO THE MARKET.

         If the conversion prices at which the balances of our convertible
notes, warrants and options are converted are lower than the price at which you
made your investment, immediate dilution of the value of your investment will
occur. In addition, sales of a substantial number of shares of common stock
issued upon conversion of our convertible notes, warrants and options, or even
the perception that such sales could occur, could adversely affect the market
price of our common stock, which would mean that certain convertible notes and
warrants would be convertible into an increased number of shares of our common
stock in cases where, as described elsewhere in these risk factors, the
conversion price is based upon a discount from the market price of our common
stock. You could, therefore, experience a substantial decline in the value of
your investment as a result of both the actual and potential conversion of our
outstanding convertible notes, warrants or options.

CONVERSIONS OF OUR SENIOR CONVERTIBLE NOTES AT DRAMATICALLY REDUCED CONVERSION
PRICES COULD RESULT IN A CHANGE OF CONTROL OF OUR COMPANY.

         A change of control of our Company could occur if, as discussed
elsewhere in these risk factors, conversions of our senior convertible notes
occur at dramatically reduced conversion prices, such as if a holder of the
notes sequentially converts portions of the notes at alternate conversion prices
into shares of our common stock and resells those shares into the market. If a
change of control occurs, then the stockholders who historically have controlled
our Company would no longer have the ability to exert significant control over
matters that could include the election of our directors, changes in the size
and composition of our Board of Directors, and mergers and other business
combinations involving our Company. Instead, one or more other stockholders
could gain the ability to exert this type of control and may also, through
control of our Board of Directors and voting power, be able to control certain
decisions, including decisions regarding the qualification and appointment of
officers, dividend policy, access to capital (including borrowing from
third-party lenders and the issuance of additional equity securities), and the
acquisition or disposition of our assets.


                                      -18-


<PAGE>

IF WE ARE UNSUCCESSFUL IN MAINTAINING COMPLIANCE WITH OR MODIFYING OUR
REGISTRATION OBLIGATIONS WITH REGARD TO OUR SENIOR CONVERTIBLE NOTES AND RELATED
WARRANTS, WE MAY INCUR SUBSTANTIAL MONETARY PENALTIES.

         The agreements we entered into in connection with our Senior
Convertible Note Financing require us to, among other things, register for
resale the shares of common stock issued or issuable under our senior
convertible notes and the warrants issued by us in connection with those notes,
and maintain the effectiveness of the registration for an extended period of
time. We will be required to file a number of registration statements to ensure
that all shares to be issued in connection with the Senior Convertible Note
Financing will be registered. If we are unable to have any one of these
registration statements declared effective by the SEC, or maintain effectiveness
of the required registration statements, or to modify our registration
obligations, then we may be required to pay liquidated damages in the amount of
$132,000 on the date of such failure and on every 30th day thereafter until such
failure is cured. The total liquidated damages payable by us for our failure to
meet these filing and effectiveness requirements are capped at $825,000. The
payment of liquidated damages would adversely affect our business, operating
results, financial condition, and ability to service our other indebtedness by
adversely affecting our cash flows. In addition, failure to meet our
registration requirements for certain required periods will result in an event
of default under the senior convertible notes.

THE VOTING POWER OF YOUR INVESTMENT AND OUR EARNINGS PER SHARE WOULD BE
SUBSTANTIALLY DILUTED IF ALL OR A SIGNIFICANT PORTION OF OUR CONVERTIBLE NOTES,
WARRANTS OR OPTIONS WERE CONVERTED INTO SHARES OF OUR COMMON STOCK.

         If the aggregate number of shares of common stock underlying our
convertible notes, warrants or options had been issued and outstanding as of
this date, substantial dilution of the voting power of your investment and of
our earnings per share would occur.

BECAUSE WE ARE SUBJECT TO "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITY IN
OUR COMMON STOCK MAY BE REDUCED.

         Our stock is listed on the Over the Counter Bulletin Board (OTC
Bulletin Board) and constitutes "Penny Stock." Broker-dealer practices in
connection with transactions in Penny Stocks are regulated by rules adopted by
the SEC. Penny Stocks are generally equity securities with a price per share of
less than $5.00 (other than securities registered on certain national exchanges
or quoted on the NASDAQ system). The Penny Stock rules require a broker-dealer,
prior to a transaction in Penny Stocks not exempt from the rules, to deliver a
standardized risk disclosure document that provides information about Penny
Stocks and the nature and level of risks in the Penny Stock Market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the Penny Stock, the compensation of the broker-dealer and the
salesperson in the transaction, and monthly accounting statements showing the
market value of each Penny Stock held in the customer's account. In addition,
the broker-dealer must make a special written determination that the Penny Stock
is a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These requirements may have the effect of reducing
the level of trading activity in a Penny Stock, such as our common stock, and
investors in our common stock may find it difficult to sell their shares.

BECAUSE OUR COMMON STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU
MAY FIND IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK.

         Our common stock trades under the symbol "RPTN" on the OTC Bulletin
Board. Because our stock trades on the OTC Bulletin Board rather than on a
national securities exchange, you may find it difficult to either dispose of, or
to obtain quotations as to the price of, our common stock.


                                      -19-


<PAGE>

ITEM 2.    PROPERTIES

         In August 2004, we relocated into a Federal Empowerment Zone in Santa
Ana, California, which reduced our overhead expenses and created a more
appropriate facility for our activities. The address of our facilities is 1241
E. Dyer Road, Suite 150, Santa Ana, California 92705. Those facilities,
consisting of 11,118 square feet, include our executive offices and research and
development laboratory and are leased from an unrelated third party. The term of
the lease is 36 months commencing August 1, 2004, with a scheduled termination
date of July 31, 2007. The base rent for the first year of occupancy was $16,677
per month ($1.50 per rentable square foot) and for the second year of occupancy
was $17,232.90 ($1.55 per square foot). On August 1, 2006, the monthly rent
increased to $17,788.80 ($1.66 per square foot), which will be the monthly rate
until termination of the lease on July 31, 2007. Our suite is on the first floor
of a two-story multi-unit business complex and is in good condition.

         We believe that the monthly rental rates are comparable to rents
charged for comparable properties in the market area. We require full compliance
by the lessor with applicable state and EPA environmental standards at our
facility. We are currently in the process of reviewing the appropriateness of
extending the current lease, which, as mentioned above, is scheduled to expire
on July 31, 2007. Assuming we are able to successfully negotiate and enter into
an extension of the current lease, we believe that the current facilities are
adequate for our expected needs through at least the end of 2008.

ITEM 3.    LEGAL PROCEEDINGS

         From time to time, we may be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract actions incidental to the operation of our business. However,
we are not currently involved in any litigation which we believe could have a
materially adverse effect on our financial condition or results of operations.

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

         No matter was submitted to a vote of our shareholders during the fourth
quarter ended December 31, 2006.


                                      -20-


<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
         BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

         Our $0.001 par value common stock commenced trading under the symbol
"RPTN" on the OTC Bulletin Board during December 2003. The following table sets
forth, for the quarters indicated, the high and low bid information for our
common stock as reported by Pink Sheets, LLC, a research service that compiles
quote information reported on the National Association of Securities Dealers
composite feed or other qualified interdealer quotation medium. The quotations
reflect inter-dealer prices, without retail markup, markdown, or commissions,
and may not necessarily represent actual transactions.

                                                             Fiscal 2006
                                                      -------------------------
                                                       High                Low
                  Fiscal Quarter Ended:               -----               -----
                       December 31                    $0.91               $0.27
                       September 30                   $0.54               $0.27
                       June 30                        $0.76               $0.42
                       March 31                       $0.83               $0.59

                                                             Fiscal 2005
                                                      -------------------------
                                                       High                Low
                  Fiscal Quarter Ended:               -----               -----
                       December 31                    $0.85               $0.50
                       September 30                   $0.64               $0.43
                       June 30                        $0.73               $0.48
                       March 31                       $0.90               $0.39

                                                             Fiscal 2004
                                                      -------------------------
                                                       High                Low
                  Fiscal Quarter Ended:               -----               -----
                       December 31                    $0.90               $0.36
                       September 30                   $1.50               $0.80
                       June 30                        $4.40               $1.45
                       March 31                       $4.65               $3.20

         On March 12, 2007 the high and low sale prices for a share of our
common stock as reported by Pink Sheets, LLC, were $1.54 and $1.26,
respectively.

HOLDERS

         On March 12, 2007, we had 54,885,863 shares of our common stock
outstanding held by approximately 521 record shareholders. This number of
shareholders does not include beneficial owners, including holders whose shares
are held in nominee or "street" name.

DIVIDENDS

         We have never paid a cash dividend with respect to our common stock,
and have no present intention to pay cash dividends in the foreseeable future.
The current policy of our Board of Directors is to retain earnings to provide
funds for the operation and expansion of our business. Our Board of Directors,
in light of the circumstances then existing, including our earnings and
financial requirements and general business conditions, will determine the
timing and amount of future dividends, if any. In addition, the terms of our
senior convertible notes prohibit us from paying cash dividends for the term of
the loan arrangement.


                                      -21-


<PAGE>

SALES OF UNREGISTERED SECURITIES

         We engaged in several private placement offerings of our securities
during the fiscal year ended December 31, 2006. All such sales previously have
been reported on our Quarterly Reports on Form 10-QSB or on Current Reports on
Form 8-K and were made in reliance upon the exemption from registration
available under Section 4(2) of the Securities Act, among others, as
transactions not involving a public offering. This exemption was claimed on the
basis that these transactions did not involve any public offering and the
purchasers in each offering were accredited or sophisticated and had sufficient
access to the kind of information registration would provide. In each case,
appropriate investment representations were obtained and certificates
representing the securities were issued with restrictive legends.

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

         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)             (10,987)

Loss before Income tax provision                   (13,390)             (17,099)
  Income tax provision                                  --                   --
                                           ---------------      ---------------
Net loss                                   $       (13,390)     $       (17,099)
                                           ===============      ===============

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,


                                      -23-


<PAGE>

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.

         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
$10,987,690 in 2006. The primary reason for the $8,074,725 increase in other
losses is non-cash charges in the aggregate amount of $9,080,794 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. In connection with our July 31, 2006 financing transaction, we also
recorded debt discounts of $7,499,794 and we amortized $1,562,456 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 $17,099,574, 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.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         We have had no change of, nor disagreements with, our accountants since
our inception.

ITEM 8A.   CONTROLS AND PROCEDURES.

         Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of December 31, 2006, that the design and operation
of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective
to ensure that information required to be disclosed by us in the reports filed
or submitted by us under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms,
including to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is accumulated and communicated
to our management, including our principal executive officer and principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions regarding whether or not disclosure is required.

         During the quarter ended December 31, 2006, there were no changes in
our "internal controls over financial reporting" (as defined in Rule 13a-15(f)
under the Exchange Act) that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.

ITEM 8B.   OTHER INFORMATION.

         None.


                                      -38-


<PAGE>

                                    PART III

ITEM 9.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

         Set forth below is certain information with respect to our directors
and executive officers.

NAME                              AGE     POSITION WITH COMPANY
----                              ---     ---------------------
Thomas M. Wittenschlaeger          49     Chief Executive Officer, President,
                                          Director and Chairman of the Board
Bob van Leyen                      63     Chief Financial Officer and Secretary
Ken Bramlett                       47     Director (1) (2)
Larry L. Enterline                 54     Director (1) (3)
Albert Wong                        58     Director (1) (4)
___________________

(1) Member of the Audit, Nominating and Governance, and Compensation Committees.
(2) Chairperson of the Nominating and Governance Committee.
(3) Chairperson of the Audit Committee.
(4) Chairperson of the Compensation Committee.

         THOMAS M. WITTENSCHLAEGER, (age 49), is our Chief Executive Officer,
President, a director and Chairman of the Board. Mr. Wittenschlaeger has
accumulated more than twenty-two years of experience in the high technology
products and services area, much of it in general management with leadership
positions in operating units ranging in size from $3 million to $500 million in
annual revenues. From 2002 to 2004, he was Senior Vice President of Corporate
Development and Chief Technical Officer at Venturi Partners, Inc., a leading
provider of information technology and professional staffing services
nationwide. From 2000 to 2002, he was Senior Vice President and General Manager
of ViaSat Satellite Networks, the commercial arm of ViaSat, Inc. He is a 1979
graduate of the U.S. Naval Academy in Annapolis, Maryland with a B.S. in
electrical engineering and post-graduate work in nuclear engineering. He is also
a graduate of the UCLA Executive Program in Business and co-founder of UCLA's
Executive Program in Marketing. Mr. Wittenschlaeger has been our Chairman of the
Board, President and Chief Executive Officer since March 15, 2004.

         LARRY L. ENTERLINE, (age 54), is one of our directors and Chairperson
of the Audit Committee. In February 2006, Mr. Enterline was reappointed as the
Chief Executive Officer of COMSYS IT Partners, Inc., a leading provider of
information technology services, having previously served from December 2000 to
September 2004 as the Chief Executive Officer of Venturi Partners, Inc. (the
predecessor to COMSYS IT Partners prior to the September 2004 merger between
Venturi Partners and COMSYS Holding, Inc.). Mr. Enterline has also served as a
director of COMSYS IT Partners since the 2004 merger, previously having served
as a director of Venturi Partners from December 2000 to March 2003 and as
chairman of the board of Venturi Partners from April 2003 until the date of the
merger. From 1989 to November 2000, Mr. Enterline served in various management
roles with Scientific Atlanta, Inc., a leading national global manufacturer and
supplier of cable network products, the last of which was Corporate Senior Vice
President for Worldwide Sales and Service. He also held management positions in
the marketing, sales, engineering and products areas with Bailey Controls
Company and Reliance Electric Company from 1974 to 1989. Mr. Enterline brings
decades of market-defining successes to our Board. Mr. Enterline is also a
member of the board of directors of Concurrent Computer Corp. Mr. Enterline has
been one of our directors since October 18, 2004.

         KEN BRAMLETT, (age 47), is one of our directors and Chairperson of the
Nominating and Governance Committee. Mr. Bramlett has served as Senior Vice
President and General Counsel of COMSYS IT Partners, Inc., since January 2006.
Prior to that he served as a partner with the Charlotte, North Carolina law firm
of Kennedy Covington Lobdell & Hickman, L.L.P. from March 2005 to December 2005.
Mr. Bramlett is also a director of World Acceptance Corporation, where he has
served on the board of directors since 1994. From 1996 to 2004, Mr. Bramlett
served as Senior Vice President and General Counsel of Venturi Partners, Inc., a
leading national provider of information technology and professional staffing
services and from 1990 to 1996 as a partner with the law firm of Robinson,


                                      -39-


<PAGE>

Bradshaw and Hinson, P.A. Mr. Bramlett brings 20 years of experience in
corporate law and governance, public and private equity, and mergers and
acquisitions to our Board. Mr. Bramlett has been one of our directors since
December 2, 2004.

         ALBERT WONG, (age 58), is one of our directors and Chairperson of the
Compensation Committee. Mr. Wong has more than twenty years of experience in the
high-tech industry, from start-up phase to executive management. He is a
co-founder of AST Research, a world class PC manufacturer founded in 1980, where
he served as director, Chief Technology Officer & Executive Vice President from
1980 to 1989. Later, he founded AMKLY Systems, a producer of high performance PC
and network servers. He was President & CEO of AMKLY through 1996. In October
1998, Mr. Wong was recruited by Clarion Co., Ltd. to start a North America
research and development center. He served as director, President & CEO of
Clarion Advanced Technology (later as Zandiant Technologies) until June 2003.
Since June 2003, Mr. Wong has acted as a private investor. Mr. Wong has also
served as a member of board of directors with Printrak International, a leading
fingerprint identification company, Netsoft and InfoGation Corporation and
served as an advisor to Express Manufacturing, Inc., a leading contract
manufacturing company, from May 2002 until March 2006. Mr. Wong has been one of
our directors since May 17, 2004.

         BOB VAN LEYEN, (age 63), is our Chief Financial Officer and Secretary.
Mr. van Leyen has more than twenty-four years of experience working in the
high-tech industry, holding various executive positions in finance, operations
and general management. From 2002 to 2003, Mr. van Leyen served as a partner
with Tatum CFO, L.L.C. where he provided financial and operational support to
start-up companies in the high-tech industry. From 1999 to 2001, he was a
divisional Chief Financial Officer at Wyle Electronics. During his twenty-four
years of employment, Mr. van Leyen has managed extensive financial operations
organizations in Europe, Asia, and the United States, providing financial
support to operations. Mr. van Leyen attended the Dutch Institute of Chartered
Auditors and holds a Dutch degree equivalent to a U.S. Bachelor's degree in
Business Administration. Mr. van Leyen has served as our Chief Financial Officer
and Secretary since September 29, 2003.

TERM OF OFFICE AND FAMILY RELATIONSHIPS

         All directors hold office until the next annual meeting of shareholders
or until their respective successors are elected or until their earlier death,
resignation or removal. Executive officers are appointed by and serve at the
discretion of our Board of Directors. There are no family relationships among
our executive officers and directors.

BOARD COMMITTEES

         Our Board of Directors currently has an Audit Committee, a Nominating
and Governance Committee, and a Compensation Committee. Our Board of Directors
has determined that Larry L. Enterline, Ken Bramlett and Albert Wong are each
"independent" as defined in NASD Marketplace Rule 4200(a)(15) and that Messrs.
Enterline and Bramlett meet the applicable NASD listing standards for
designation as an "Audit Committee Financial Expert."

         AUDIT COMMITTEE

         The Audit Committee consists of three Board members, Larry L.
Enterline, Albert Wong and Ken Bramlett. Mr. Enterline is the chairperson of the
Audit Committee. The duties of the Audit Committee include meeting with our
independent public accountants to review the scope of the annual audit and to
review our quarterly and annual financial statements before the statements are
released to our shareholders. The Audit Committee also evaluates the independent
public accountants' performance and has sole authority to appoint or replace the
independent auditor (subject, if applicable, to shareholder ratification) and to
determine whether the independent public accounting firm should be retained for
the ensuing fiscal year. In addition, the Audit Committee reviews our internal
accounting and financial controls and reporting systems practices. A copy of the
Audit Committee's current charter may be found at our website at
www.raptor-networks.com.


                                      -40-


<PAGE>

         NOMINATING AND GOVERNANCE COMMITTEE

         The Nominating and Governance Committee consists of three Board
members, Larry L. Enterline, Ken Bramlett and Albert Wong. Mr. Bramlett is the
chairperson of the Nominating and Governance Committee. The Nominating and
Governance Committee identifies and reviews the qualifications of candidate
nominees to the Board of Directors. The Nominating and Governance Committee
utilizes a variety of methods for identifying and evaluating nominees for
director, including candidates that may be referred by stockholders.
Stockholders that desire to recommend candidates for the board for evaluation
may do so by contacting our Secretary in writing, including the candidate's name
and qualifications and a statement from the candidate that he or she consents to
being named in our proxy statement and will serve as a director if elected.
Candidates may also come to the attention of the Nominating and Governance
Committee through current board members, professional search firms and other
persons. A copy of the Nominating and Governance Committee's current charter may
be found at our website at www.raptor-networks.com.

         COMPENSATION COMMITTEE

         The Compensation Committee consists of three Board members, Larry L.
Enterline, Ken Bramlett and Albert Wong. Mr. Wong is the chairperson of the
Compensation Committee. The Compensation Committee is responsible for advising
the Board of Directors regarding our responsibilities relating to compensation
of our executive officers and Board members. The Compensation Committee is also
responsible for evaluating and recommending to the Board of Directors our
executive compensation plans, policies and programs. A copy of the Compensation
Committee's current charter may be found at our website at
www.raptor-networks.com.

CODE OF ETHICS

         Our board of directors has adopted a Code of Business Conduct and
Ethics that applies to all of our directors, officers and employees and an
additional Code of Ethics that applies to our Chief Executive Officer and our
senior financial officers.

         We intend to satisfy the disclosure requirement under Item 5.05 of Form
8-K relating to amendments to or waivers from provisions of these codes that
relate to one or more of the items set forth in Item 406(b) of Regulation S-B by
describing on our Internet website, located at www.raptor-networks.com, within
four business days following the date of a waiver or a substantive amendment,
the date of the waiver or amendment, the nature of the amendment or waiver, and
the name of the person to whom the waiver was granted.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our executive officers and directors, and persons who
beneficially own more than 10% of our common stock, to file initial reports of
ownership and reports of changes in ownership with the SEC. These officers,
directors and shareholders are required by SEC regulations to furnish us with
copies of all such reports that they file.

         Based solely upon a review of copies of these reports furnished to us
during 2006 and thereafter, or written representations received by us from
reporting persons that no other reports were required, we believe that all
Section 16(a) filing requirements applicable to our reporting persons during
2006 were complied with.

ITEM 10.   EXECUTIVE COMPENSATION AND RELATED INFORMATION

COMPENSATION OF EXECUTIVE OFFICERS

         The following section contains information about the compensation paid
to our executive officers and directors during the year ended December 31, 2006.


                                      -41-


<PAGE>

SUMMARY COMPENSATION TABLE

         The following table provides information concerning the compensation
for the year ended December 31, 2006 for our principal executive officer and our
principal financial officer, who were the only persons that served as executive
officers during 2006 (collectively, the "named executive officers").

<TABLE>
<S>     <C>
                                          SUMMARY COMPENSATION TABLE - 2006

                                                                                              CHANGE IN
                                                                                               PENSION
                                                                                              VALUE AND
                                                                                NON-EQUITY   NONQUALIFIED
                                                                                 INCENTIVE     DEFERRED
                                                             STOCK      OPTION     PLAN      COMPENSATION   ALL OTHER
         NAME AND                    SALARY      BONUS       AWARDS     AWARDS  COMPENSATION   EARNINGS    COMPENSATION   TOTAL
    PRINCIPAL POSITION      YEAR       ($)        ($)         ($)       ($)(1)      ($)          ($)           ($)         ($)
--------------------------  ----   ----------   --------   ---------  ---------- -----------  -----------  ------------  ---------
Thomas M. Wittenschlaeger,
Chief Executive Officer
and President               2006   164,375(2)   70,000(3)        --     148,050      --           --         30,613(4)    413,038
Bob van Leyen,              2006   134,377(5)   30,000(6)        --      18,750      --           --         17,983(7)    201,110
Chief Financial Officer
</TABLE>
-------------------

(1)      This column represents the dollar amount recognized for financial
         statement reporting purposes with respect to the year ended December
         31, 2006 for the fair value of stock options granted to each of our
         named executive officers calculated in accordance with SFAS 123R.
         Pursuant to SEC rules, the amounts shown exclude the impact of
         estimated forfeitures related to service-based vesting conditions. For
         additional information on the valuation assumptions with respect to
         these option grants, refer to Note 1 of our financial statements and
         related notes beginning on page F-1 of this Report. These amounts
         reflect only our accounting expense for these option grants and do not
         correspond to the actual value that will be recognized by our named
         executive officers. See the Outstanding Equity Awards at December 31,
         2006 table below for more information on options held by the named
         executive officers.
(2)      Effective August 8, 2006, our Compensation Committee approved an
         increase to Mr. Wittenschlaeger's annual salary from $155,000 to
         $180,000. Mr. Wittenschlaeger's annual salary had previously been
         decreased from $195,000 to $155,000 in November 2004 in an effort to
         reduce our expense run rates.
(3)      Consists of a $70,000 cash performance bonus in August 2006.
(4)      Consists of $23,730 in reimbursement of living expenses for an
         apartment in Southern California and $6,883 in health and life
         insurance premiums.
(5)      Effective August 8, 2006, our Compensation Committee approved an
         increase to Mr. van Leyen's annual salary from $125,000 to $150,000.
         Mr. van Leyen's annual salary had previously been decreased from
         $190,000 to $125,000 in November 2004 in an effort to reduce our
         expense run rates.
(6)      Consists of a $30,000 cash performance bonus in August 2006.
(7)      Consists of $17,983 in health and life insurance premiums.

EMPLOYMENT AGREEMENTS AND EXECUTIVE COMPENSATION

         There are no employment contracts, termination agreements, or
change-in-control arrangements between us and any of our named executive
officers. The Compensation Committee reviews and, if deemed appropriate, adjusts
the annual salaries of our named executive officers on at least an annual basis.
The Compensation Committee may from time to time grant performance or similar
cash bonuses to our named executive officers at its discretion. The Compensation
Committee may also periodically award options or warrants to our named executive
officers under our existing option and incentive plans at its discretion.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

         The following table sets forth information about outstanding equity
awards held by our named executive officers as of December 31, 2006.


                                      -42-


<PAGE>

<TABLE>
<S>     <C>
                                       OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006

                                                                                                  STOCK AWARDS
                                                                                      --------------------------------------
                                                                                                                    EQUITY
                                                                                                         EQUITY    INCENTIVE
                                              OPTION AWARDS                                            INCENTIVE     PLAN
                     ----------------------------------------------------------------                     PLAN      AWARDS:
                                                                                      NUMBER             AWARDS:   MARKET OR
                                                   EQUITY                              OF      MARKET    NUMBER     PAYOUT
                                                  INCENTIVE                           SHARES  VALUE OF     OF      VALUE OF
                                                    PLAN                               OR      SHARES    UNEARNED   UNEARNED
                       NUMBER        NUMBER        AWARDS:                            UNITS     OR       SHARES,    SHARES,
                         OF            OF         NUMBER OF                            OF     UNITS OF    UNITS    UNITS OR
                     SECURITIES    SECURITIES     SECURITIES                          STOCK    STOCK    OR OTHER     OTHER
                     UNDERLYING    UNDERLYING     UNDERLYING                           THAT    THAT      RIGHTS     RIGHTS
                     UNEXERCISED   UNEXERCISED    UNEXERCISED   OPTION                 HAVE     HAVE      THAT       THAT
                       OPTIONS      OPTIONS        UNEARNED    EXERCISE    OPTION      NOT      NOT     HAVE NOT   HAVE NOT
                         (#)          (#)          OPTIONS      PRICE    EXPIRATION   VESTED   VESTED    VESTED     VESTED
    NAME             EXERCISABLE  UNEXERCISABLE      (#)         ($)        DATE       (#)      ($)        (#)        ($)
-------------------  -----------  -------------  ------------  --------  ----------  --------  -------  ---------  ---------
Thomas M.               233,333    116,667(1)         --        1.00     07/15/2012     --       --         --         --
Wittenschlaeger
Bob van Leyen           300,000         --            --        1.00     09/29/2011     --       --         --         --
</TABLE>

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

(1) These options vest on July 15, 2007.

COMPENSATION OF DIRECTORS

         Each of our non-employee directors is entitled to receive cash
compensation in the amount of $15,000 per year for service on our board of
directors. We reimburse all directors for out-of-pocket expenses incurred in
connection with attendance at board and committee meetings. We currently have a
policy in place to grant each non-employee director an option to purchase shares
of our common stock on the date of his or her commencement of service as a
director. We may also periodically award options or warrants to our directors
under our existing option and incentive plans.

         The following table provides information concerning the compensation of
our directors for the year ended December 31, 2006.

<TABLE>
<S>     <C>
                                                DIRECTOR COMPENSATION

                                                                                  CHANGE
                                                                                IN PENSION
                                                                                VALUE AND
                                                                  NON-EQUITY   NONQUALIFIED
                           FEES EARNED                            INCENTIVE      DEFERRED
                             OR PAID      STOCK        OPTION        PLAN      COMPENSATION   ALL OTHER
                             IN CASH      AWARDS       AWARDS    COMPENSATION    EARNINGS    COMPENSATION    TOTAL
          NAME                 ($)          ($)        ($)(1)        ($)           ($)           ($)          ($)
------------------------  ------------  ----------  -----------  ------------  ------------  ------------  ---------
Larry L. Enterline           15,000         --       19,692(2)        --            --            --         34,692
Ken Bramlett                 15,000         --       20,600(3)        --            --            --         35,600
Albert Wong                  15,000         --       48,667(4)        --            --            --         63,667
</TABLE>
-------------------
(1)   This column represents the dollar amount recognized for financial
      statement reporting purposes with respect to the year ended December 31,
      2006 for the fair value of stock options granted to each of our directors
      calculated in accordance with SFAS 123R. Pursuant to SEC rules, the
      amounts shown exclude the impact of estimated forfeitures related to
      service-based vesting conditions. For additional information on the
      valuation assumptions with respect to these option grants, refer to Note 1
      of our financial statements and related notes beginning on page F-1 of
      this Report. These amounts reflect only our accounting expense for these
      option grants and do not correspond to the actual value that will be
      recognized by our directors.
(2)   At December 31, 2006, Mr. Enterline held options to purchase an aggregate
      of 100,000 shares of common stock at an exercise price of $1.00 per share,
      of which 58,333 options were vested at December 31, 2006.
(3)   At December 31, 2006, Mr. Bramlett held options to purchase an aggregate
      of 100,000 shares of common stock at an exercise price of $1.00 per share,
      of which 66,667 options were vested at December 31, 2006.
(4)   At December 31, 2006, Mr. Wong held options to purchase an aggregate of
      100,000 shares of common stock at an exercise price of $1.00 per share, of
      which 66,667 options were vested at December 31, 2006.


                                      -43-


<PAGE>

STOCK OPTION PLAN

     GENERAL

         Our 2005 Stock Plan (the "2005 Plan") was approved by our Board of
Directors on April 7, 2005 and approved by our shareholders on June 9, 2005 at
our 2005 Annual Meeting of Shareholders. We do not intend to grant any stock
options under our 2005 Plan until the plan has been registered under applicable
federal and state securities laws. We are in the process of preparing a
registration statement on Form S-8 for filing with the Commission and comparable
California state securities filings.

         All stock options issued prior to shareholder approval of our 2005 Plan
were granted outside of a formal stock option plan ("Non-Plan Options"). As of
March 12, 2007, options to purchase a total of 1,275,000 shares of common stock
were outstanding under Non-Plan Options. As of March 12, 2007, there were
897,500 options to purchase common stock which have been committed to by the
Company to new employees and tentatively approved by the Board, subject to the
2005 Plan being registered under applicable federal and state securities laws.
These commitments will not be deemed granted until the 2005 Plan has been
registered under such laws. Excluding these commitments to issue 897,500
options, 2,102,500 shares will remain available for issuance under the 2005
Plan, subject to the limitations of authorized common stock. We anticipate that
future stock options will be issued pursuant to our 2005 Plan or other stock
option plans as may be approved by our Board and shareholders in the future.

     SHARES SUBJECT TO THE PLAN

         A total of 3,000,000 shares of common stock are authorized for issuance
under the 2005 Plan. Any shares of common stock that are subject to an award but
are not used because the terms and conditions of the award are not met, or any
shares that are used by participants to pay all or part of the purchase price of
any option, may again be used for awards under the 2005 Plan.

     ADMINISTRATION

         The 2005 Plan is to be administered by our Board of Directors or an
appropriate committee of our Board of Directors. It is the intent of the 2005
Plan that it be administered in a manner such that option grants and exercises
would be "exempt" under Rule 16b-3 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").

         Our Board of Directors or an appropriate committee is empowered to
select those eligible persons to whom options shall be granted under the 2005
Plan, to determine the time or times at which each option or stock purchase
right shall be granted, whether options will be incentive stock options ("ISOs")
or nonqualified stock options ("NQOs"), and the number of shares to be subject
to each option, and to fix the time and manner in which each such option may be
exercised, including the exercise price and option period, and other terms and
conditions of such options, all subject to the terms and conditions of the 2005
Plan. Our Board of Directors or an appropriate committee has sole discretion to
interpret and administer the 2005 Plan, and our decisions regarding the 2005
Plan are final.

         The 2005 Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time and from time to time by our Board of
Directors. Neither our Board of Directors nor any committee may materially
impair any outstanding options without the express consent of the optionee or
increase the number of shares subject to the 2005 Plan, materially increase the
benefits to optionees under the 2005 Plan, materially modify the requirements as
to eligibility to participate in the 2005 Plan or alter the method of
determining the option exercise price without shareholder approval. No option
may be granted under the 2005 Plan after April 7, 2015.


                                      -44-


<PAGE>

     OPTION TERMS

         ISOs granted under the 2005 Plan must have an exercise price of not
less than 100% of the fair market value of the common stock on the date the ISO
is granted and must be exercised, if at all, within ten years from the date of
grant. In the case of an ISO granted to an optionee who owns more than 10% of
our total voting securities on the date of grant, the exercise price may not be
less than 110% of the fair market value of the common stock on the date of
grant, and the option period may not exceed five years. NQOs granted under the
2005 Plan must have an exercise price of not less than 85% of the fair market
value of the common stock on the date the NQO is granted.

         Options may be exercised during a period of time fixed by our Board of
Directors or an appropriate committee, except that no option may be exercised
more than ten years after the date of grant. In the discretion of our Board of
Directors or an appropriate committee, payment of the purchase price for the
shares of stock acquired through the exercise of an option may be made in the
manner and for the type of consideration determined by our Board of Directors or
an appropriate committee, which may include cash, check, one or more promissory
notes, shares of our common stock, consideration received under a cashless
exercise program implemented in connection with the 2005 Plan, or any
combination of the foregoing.

     FEDERAL INCOME TAX CONSEQUENCES

         Holders of NQOs do not realize income as a result of a grant of the
option, but normally realize compensation income upon exercise of an NQO to the
extent that the fair market value of the shares of common stock on the date of
exercise of the NQO exceeds the exercise price paid. We will be required to
withhold taxes on ordinary income realized by an optionee upon the exercise of a
NQO. In the case of an optionee subject to the "short-swing" profit recapture
provisions of Section 16(b) of the Exchange Act, the optionee realizes income
only upon the lapse of the six-month period under Section 16(b), unless the
optionee elects to recognize income immediately upon exercise of his or her
option.

         Holders of ISOs will not be considered to have received taxable income
upon either the grant or the exercise of the option. Upon the sale or other
taxable disposition of the shares, long-term capital gain will normally be
recognized on the full amount of the difference between the amount realized and
the option exercise price paid if no disposition of the shares has taken place
within either two years from the date of grant of the option or one year from
the date of exercise. If the shares are sold or otherwise disposed of before the
end of the one-year or two-year periods, the holder of the ISO must include the
gain realized as ordinary income to the extent of the lesser of the fair market
value of the option stock minus the option price, or the amount realized minus
the option price. Any gain in excess of these amounts, presumably, will be
treated as capital gain. We will be entitled to a tax deduction in regard to an
ISO only to the extent the optionee has ordinary income upon the sale or other
disposition of the option shares.

         Upon the exercise of an ISO, the amount by which the fair market value
of the purchased shares at the time of exercise exceeds the option price will be
an "item of tax preference" for purposes of computing the optionee's alternative
minimum tax for the year of exercise. If the shares so acquired are disposed of
prior to the expiration of the one-year and two-year periods described above,
there should be no "item of tax preference" arising from the option exercise.

         THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION
ONLY AND IS BASED UPON PRESENT LAW. EACH HOLDER OF OPTIONS UNDER THE 2005 PLAN
SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF
THE TRANSACTION TO HIM OR HER, INCLUDING APPLICATION AND EFFECT OF FEDERAL,
STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER LAWS.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

         Section 7-109-102 of the Colorado Business Corporations Act (the
"Colorado Act") authorizes a Colorado corporation to indemnify any director
against liability incurred in any proceeding if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.


                                      -45-


<PAGE>

         Unless limited by a corporation's articles of incorporation, Section
7-109-105 of the Colorado Act authorizes a director to apply for indemnification
to the court conducting the proceeding or another court of competent
jurisdiction. Unless limited by the articles of incorporation, Section 7-109-107
of the Colorado Act extends this same right to officers of a corporation as
well.

         Unless limited by a corporation's articles of incorporation, Section
7-109-103 of the Colorado Act requires that a Colorado corporation indemnify a
director who was wholly successful in defending any proceeding to which he or
she was a party against reasonable expenses incurred in connection therewith.
Unless limited by the articles of incorporation, Section 7-109-107 of the
Colorado Act extends this same protection to officers of a corporation as well.

         Pursuant to Section 7-109-104 of the Colorado Act, a Colorado
corporation may advance a director's expenses incurred in defending any action
or proceeding upon receipt of an undertaking and a written affirmation of his or
her good faith belief that he or she has met the standard of conduct specified
in Section 7-109-102 described above. Unless limited by the articles of
incorporation, Section 7-109-107 of the Colorado Act extends this same
protection to officers of a corporation as well.

         Regardless of whether a director or officer has the right to indemnity,
Section 7-109-108 of the Colorado Act allows a Colorado corporation to purchase
and maintain insurance on such directors or officers behalf against liability
resulting from his or her role as director or officer.

         Our Articles of Incorporation do not limit any of the rights afforded
to our directors and officers under the Colorado Act and Article VI of our
Bylaws states that any director or officer who is involved in litigation by
reason of his or her position with us as a director or officer shall be
indemnified and held harmless by us to the fullest extent authorized by law as
it now exists or may subsequently be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the corporation to
provide broader indemnification rights). Our directors and officers are also
presently covered by an insurance policy indemnifying them against certain
liabilities, including certain liabilities arising under the Securities Act,
which might be incurred by them in such capacities and against which they may
not be indemnified by us. We believe that the indemnification and insurance
provided to our directors and officers is necessary to attract and retain
qualified persons as directors and officers.

         To the extent indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to our directors, officers and
controlling persons under the above provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

         The following table sets forth, as of March 12, 2007, certain
information with respect to the beneficial ownership of our stock by (i) each of
our Named Executive Officers, (ii) each of our directors, (iii) each person
known to us to be the beneficial owner of more than 5% of each class of our
outstanding voting securities, and (iv) all of our directors and executive
officers as a group.

         Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC"), and includes voting or investment
power with respect to the securities. To our knowledge, except as indicated by
footnote, and subject to community property laws where applicable, the persons
named in the table below have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them. Shares of common
stock underlying derivative securities, if any, that currently are exercisable
or convertible or are scheduled to become exercisable or convertible for or into
shares of common stock within 60 days after the date of the table are deemed to
be outstanding in calculating the percentage ownership of each listed person or
group but are not deemed to be outstanding as to any other person or group.
Percentage of beneficial ownership is based on 54,885,863 shares of common stock
outstanding as of March 12, 2007.


                                      -46-


<PAGE>

<TABLE>
<S>     <C>
                                              NUMBER OF SHARES OF COMMON STOCK          PERCENT OF COMMON STOCK
NAME OF BENEFICIAL OWNER(1)                          BENEFICIALLY OWNED                   BENEFICIALLY OWNED
------------------------                             ------------------                   ------------------
Thomas M. Wittenschlaeger                             3,233,333 (2)                           5.88%

Bob van Leyen                                           700,000 (3)                           1.27%

Albert Wong                                             377,778 (4)                               *

Ken Bramlett                                             66,667 (5)                               *

Larry L. Enterline                                       66,667 (6)                               *

All executive officers and directors as a             4,444,445 (7)                           7.98%
group (5 persons)
</TABLE>

* Less than 1%.
--------------------------

(1)    Unless otherwise indicated, the address is c/o Raptor Networks
       Technology, Inc., 1241 E. Dyer Road, Suite 150, Santa Ana, California
       92705.
(2)    Thomas M. Wittenschlaeger is our President, Chief Executive Officer and
       Chairman of the Board. Includes 233,333 shares of common stock issuable
       upon the exercise of options which were exercisable as of March 12, 2007
       or exercisable within 60 days after March 12, 2007.
(3)    Bob van Leyen is our Chief Financial Officer and Secretary. Includes
       300,000 shares of common stock issuable upon the exercise of options
       which were exercisable as of March 12, 2007.
(4)    Albert Wong is one of our directors. Includes 100,000 shares of common
       stock issuable upon the exercise of options which were exercisable as of
       March 12, 2007 or exercisable within 60 days after March 12, 2007. Also
       includes 138,889 shares of common stock and 138,889 shares underlying
       Series D Warrants held by DMK Investments, LLC, the power to vote or
       dispose of which is shared by Albert Wong and Lia Wong as Managers of DMK
       Investments, LLC.
(5)    Ken Bramlett is one of our directors. Represents 66,667 shares of common
       stock issuable upon the exercise of options which were exercisable as of
       March 12, 2007 or exercisable within 60 days after March 12, 2007.
(6)    Larry L. Enterline is one of our directors. Represents of 66,667 shares
       of common stock issuable upon the exercise of options which were
       exercisable as of March 12, 2007 or exercisable within 60 days after
       March 12, 2007.
(7)    Represents 3,000,000 shares of common stock and 233,333 shares issuable
       upon the exercise of options held by Thomas M. Wittenschlaeger; 400,000
       shares of common stock and 300,000 shares issuable upon the exercise of
       options held by Bob van Leyen; 100,000 shares issuable upon the exercise
       of options held by Albert Wong; 66,667 shares issuable upon the exercise
       of options held by Ken Bramlett; and 66,667 shares issuable upon the
       exercise of options held by Larry L. Enterline. Also includes 138,889
       shares of common stock and 138,889 shares underlying Series D Warrants
       held by DMK Investments, LLC, the power to vote or dispose of which is
       shared by Albert Wong and Lia Wong as Managers of DMK Investments, LLC.

EQUITY COMPENSATION PLAN INFORMATION

         The following table sets forth information about our common stock that
may be issued upon the exercise of options, warrants and rights under all of our
equity compensation plans as of December 31, 2006.

<TABLE>
<S>     <C>
                                        Number of Shares to be      Weighted Average       Number of Securities
Plan Category                            Issued Upon Exercise        Exercise Price       Available for Issuance
-------------------------------------   ----------------------    -------------------    ------------------------
PLANS APPROVED BY STOCKHOLDERS
   2005 Stock Plan(1)                           370,500                  $1.00                   2,629,500

PLANS NOT APPROVED BY STOCKHOLDERS
   Non-Plan Stock Options(2)                  1,275,000                  $1.00                      N/A
   Warrants for Services(3)                   3,758,917                  $0.65                      N/A

TOTAL                                         5,404,417                  $0.75                   2,629,500
</TABLE>
------------------------------------

(1)      Our 2005 Stock Plan was approved by our Board of Directors on April 7,
         2005 and approved by our shareholders on June 9, 2005 at our 2005
         Annual Meeting of Shareholders. Under the 2005 Stock Plan, options to
         purchase up to 3,000,000 shares of our Common Stock may be granted. As
         of December 31, 2006, there were 370,500 options to purchase common
         stock which have been committed to by the Company to new employees and
         tentatively approved by our Board of Directors, subject to the 2005
         Stock Plan being registered under applicable federal and state
         securities laws. These commitments will not be deemed granted until the
         2005 Stock Plan has been registered under such laws.


                                      -47-


<PAGE>

(2)      Consists of stock options to purchase shares of our common stock
         granted to our employees, executive officers and directors outside of a
         formal stock option plan. These stock options vest at the rate of 33?%
         on each of the first, second and third anniversaries of the date of
         grant and expire on the eight-year anniversary of the date of grant.
(3)      Consists of warrants to purchase shares of our common stock granted in
         consideration for consulting services, advisory services, placement
         agent services and similar services rendered to us by third parties.


ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On November 7, 2003, we entered into an agreement with Express
Manufacturing, Inc. ("EMI") to provide us contract manufacturing services. EMI
is owned by director Albert Wong's in-laws. Mr. Wong served as an advisor to EMI
from May 2002 until March 2006, but has no direct financial interest in the
company. EMI 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 made no payments to EMI in the fiscal year ended
December 31, 2003 and approximately $183,000, $143,000 and $51,000 in payments
during fiscal years ended December 31, 2004, 2005 and 2006, respectively. We
have no reason to believe that Mr. Wong's relationship with EMI has resulted in
us being charged materially less or materially more than EMI would charge
unaffiliated third parties for comparable services. Please refer to the detailed
description of our manufacturing arrangement with EMI set forth in the
"Business" section of this prospectus under the caption "Manufacturing and
Suppliers" beginning on page 8 of this Report for more information regarding our
relationship with EMI.

         In addition, during the year ended December 31, 2006, we sold several
of our network switch products to EMI for a total amount of $44,801. The price
paid by EMI for our products was in line with our 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 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 our Board of
Directors.

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 the 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 the 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 the 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 the 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>


ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The following table sets forth the aggregate fees billed to us for the
fiscal years ended December 31, 2005 and December 31, 2006 by our auditors,
Comiskey & Company, P.C. ("Comiskey & Company").

                                       FISCAL 2005             FISCAL 2006
                                       -----------             -----------

Audit Fees(1)                          $    19,023             $    29,027

Audit-Related Fees(2)                  $       364             $         -

Tax Fees(3)                            $     3,000             $     2,200

All Other Fees(4)                      $         0             $       325
_____________________
(1)      AUDIT FEES consist of fees billed for professional services rendered
         for the audit of our consolidated annual financial statements and
         review of the interim consolidated financial statements included in
         quarterly reports and services that are normally provided by Comiskey &
         Company in connection with statutory and regulatory filings or
         engagements.

(2)      AUDIT-RELATED FEES consist of fees billed for assurance and related
         services that are reasonably related to the performance of the audit or
         review of our consolidated financial statements and are not reported
         under "Audit Fees." This category includes fees related to due
         diligence services pertaining to potential business
         acquisitions/disposition; and consultation regarding accounting or
         disclosure treatment of transactions or events and/or the actual or
         potential impact of final or proposed rules, standard or interpretation
         by the SEC, FASB or other regulatory or standard-setting bodies as well
         as general assistance with implementation of the requirements of SEC
         rules or listing standards promulgated pursuant to the Sarbanes-Oxley
         Act of 2002.

(3)      TAX FEES consist of fees billed for professional services rendered for
         tax compliance, tax advice and tax planning. These services include
         assistance regarding federal, state and local tax compliance, planning
         and advice.

(4)      ALL OTHER FEES consist of fees for products and services other than the
         services reported above.

         Our Audit Committee is responsible for approving all Audit,
Audit-Related, Tax and Other Services. The Audit Committee pre-approves all
auditing services and permitted non-audit services, including all fees and terms
to be performed for us by our independent auditor at the beginning of the fiscal
year. Non-audit services are reviewed and pre-approved by project at the
beginning of the fiscal year. Any additional non-audit services contemplated by
our company after the beginning of the fiscal year are submitted to the Audit
Committee chairman for pre-approval prior to engaging the independent auditor
for such services. Such interim pre-approvals are reviewed with the full Audit
Committee at its next meeting for ratification.


                                      -51-


<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: March 19, 2007                    RAPTOR NETWORKS TECHNOLOGY, INC.


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

Dated: March 19, 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           March 19, 2007
---------------------------------
    Thomas M. Wittenschlaeger

/s/ Ken Bramlett                              Director           March 19, 2007
---------------------------------
    Ken Bramlett

/s/ Larry L. Enterline                        Director           March19, 2007
---------------------------------
    Larry L. Enterline

/s/ Albert Wong                               Director           March 19, 2007
---------------------------------
    Albert Wong


                                      -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>

             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. An audit 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.

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 $58,500,000 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

                                                          /S/ COMISKEY & COMPANY
                                                        PROFESSIONAL CORPORATION


                                      F-2


<PAGE>

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


                                                                             DECEMBER 31,       DECEMBER 31,
                                                                                 2005               2006
                                                                             -------------      -------------
                                                    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                                                                   --          1,979,004
   Debt issue cost                                                                  12,838             97,176
   Deposits                                                                        102,362            102,362
                                                                             -------------      -------------

TOTAL ASSETS                                                                 $   3,981,776      $   5,092,218
                                                                             =============      =============

                               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)       (58,710,071)
                                                                             -------------      -------------
      Total stockholders' equity (deficit)                                       2,415,371        (14,338,863)
                                                                             -------------      -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                         $   3,981,776      $   5,092,218
                                                                             =============      =============


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

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)                --
   Debt financing amortization - warrants and conversion feature                --         (1,562,456)
   Interest expense                                                       (263,744)          (346,049)
                                                                     -------------      -------------

Total other income (loss)                                               (2,912,965)       (10,987,690)
                                                                     -------------      -------------

Loss before income taxes                                               (13,390,940)       (17,099,574)
                                                                     -------------      -------------

Income tax benefit                                                              --                 --

NET LOSS                                                             $ (13,390,940)     $ (17,099,574)
                                                                     =============      =============

Basic and diluted net loss per share                                 $       (0.33)     $       (0.32)
                                                                     =============      =============

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                         --       --            --           --  (17,099,574)  (17,099,574)
                                  ----------   ------    ----------   ----------  -----------   -----------
Balance, December 31, 2006        54,360,096   54,360    38,135,343    6,181,505  (58,710,071)  (14,338,863)
                                  ----------   ------    ----------   ----------  -----------   -----------

                        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
                                                                              -----------------      -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                                    $(13,390,940)          $(17,099,574)
     Adjustments to reconcile net loss to net cash flows from operating
     activities:
         Depreciation                                                                 316,388                311,563
         Amortization                                                                  12,838              1,600,867
         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                     --
     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


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


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


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


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


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
?nancial instruments and certain other items at fair value. The objective is to
improve ?nancial 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 ?nancial instruments. SFAS No. 159 is effective as
of the beginning of an entity's ?rst ?scal 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 $17,099,574 in 2006.
Although at December 31, 2006, the Company had a working capital deficit
position of ($16,799,965) and a stockholders' deficit of $14,338,863, 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

<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


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


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          DEBT
                                        CONVERTIBLE     NOTE PAYABLE       WARRANTS          OPTION          DISCOUNT
                                        NOTE PAYABLE    DEBT DISCOUNT      LIABILITY        LIABILITY         (ASSET)
                                        -----------      -----------      -----------      -----------      -----------

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)       2,499,794

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                                 --               --               --               --         (520,790)
                                        -----------      -----------      -----------      -----------      -----------

Balance at December 31, 2006            $(5,000,000)     $ 3,958,334      $(9,773,967)     $(6,806,620)     $ 1,979,004
                                        ===========      ===========      ===========      ===========      ===========
</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


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 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 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, thus we recorded the excess over $5,000,000 as a Debt discount asset
of $2,499,794. Amortization of the debt discount liability equals $1,041,666 and
amortization of the debt discount asset equals $520,790 for total amortization
of debt discounts of $1,562,456.

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


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


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


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


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


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.      SUBSREQUENT 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?% 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>

                    INDEX TO EXHIBITS FILED WITH THIS REPORT

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

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