<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, 2007

                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______

                        COMMISSION FILE NUMBER: 000-51443

                                     -------

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

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

     1241 E. DYER ROAD, SUITE 150
           SANTA ANA, CA                                  92705
(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 $1,035,108.

      The aggregate market value of the voting and non-voting common stock held
by non-affiliates computed by reference to the closing sale price (as reported
by Pink Sheets, LLC) of $0.88 per share as of March 27, 2008 was $57,237,289.
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, as of the latest practicable date: 65,042,374 shares of Common
Stock, $0.001 par value, as of March 27, 2008.

      Documents Incorporated by Reference: None.

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

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



<PAGE>

                                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.............................................32
Item 8.      Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure.........................................32
Item 8A(T).  Controls and Procedures..........................................33
Item 8B.     Other Information................................................34

                                PART III

Item 9.      Directors and Executive Officers of the Registrant...............35
Item 10.     Executive Compensation...........................................37
Item 11.     Security Ownership of Certain Beneficial Owners and
             Management and Related Stockholder Matters.......................42
Item 12.     Certain Relationships and Related Transactions...................44
Item 13.     Exhibits.........................................................44
Item 14.     Principal Accountant Fees and Services...........................46
Signatures....................................................................47
Index to Financial Statements                                                F-1
Index to Exhibits




<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 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. 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 the cost 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 currently up to 120 kilometers per hop (in line
with what optics technology allows; distance can be increased using lighted
fiber). 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.


                                      -3-



<PAGE>

      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
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 more than 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.

      We have filed patents with respect to both distributed fabric over long
range distances and for certain security features of our products. We believe
the combination of these pending patents gives us a strong competitive advantage
because of the added level of security these technologies provide to our
products. Users increasingly require high security for their distributed
networks and Raptor products provide additional security because of both the
patented distributed fabric technology and the additional security features now
submitted for a patent

      Although our sales to date have been minimal in 2006 and 2007, we entered
into contracts with large systems integrators, including government contractors,
which we believe may add significantly to our distribution structure. Important
milestones for us in 2007 were the certification of our product by a
government-approved test lab in April 2007, opening the government market for
our products. Other important milestones for us were the first-time sales of our
product to one of the leading cable providing companies in the United States and
the first sale of our product in connection with a storage application that
provides storage of large data warehouses in servers located in geographically-
remote locations. In addition, we continue to focus our sales efforts on those
business segments where we have had sales in prior years - namely education,
internet media and financial institutions. We also continue to pursue OEM
business, private labeling and licensing opportunities. Taking into account the
price and performance value of our technologies and the increased acceptance of
our core technology in the networking world, we believe the before-mentioned
opportunities may be a potential source of revenues in the future. It should be
noted that our efforts to get into the OEM, private labeling and licensing
business has not yet resulted in any final contracts and there can be no
assurance that we will generate revenues from these activities.

OUR PRODUCTS

      Our flagship product is a core switch, the Ether-Raptor-1010 ("ER-1010),
which is a combination 10Gb/GbE switch. In line with what we believe to be
current market requirements, we cancelled the introduction of another core
switch, the Ether-Raptor-1808. We started development of an advanced version of
the ER-1010, the ER-1010E and this product became available for shipment in late
March 2008. We also offer a pure edge switch, the Ovi-Raptor-1048 ("OR-1048")
and three types of NIC cards. All our switches are based upon a common family of
merchant silicon and embedded software.


                                      -4-



<PAGE>

      ER-1010/ER-1010E
      ----------------

      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
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.

      The ER-1010E enhances the ER-1010 performance substantially. The CPU speed
which was 300 Mhz in the ER-1010 is now 1Gh in the ER-1010E resulting in lower
latency and higher performance, including stacking capabilities. In addition,
memory has been increased by 400% and functionality of the system's user
interface has been substantially improved. We will also plan to offer an
ER-1010E version with dual redundant power supply capabilities.

      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.

      Network Interface Cards (NICs)
      ------------------------------

      Raptor provides three types of NIC cards providing users with 2, 4, or 6
1Gigabit Ethernet ports for hooking up personal computers and servers to the
network through Ethernet switches.

MARKET TRENDS AND OUR RESPONSE

      We believe that the Ethernet switching and routing market is poised for
growth. Based on recent research issued by the firm Infonetics Research, the
Ethernet switch market surged in 2007 to $17 billion in worldwide revenues - a
9% jump from the 2006. Researchers have forecasted that global Ethernet switch
market sales will grow to $18.3 billion in 2010. Infonetics Research has further
reported that increased shipments of Layer 3 Ethernet switch products, driven by
strong 1G and 10G port shipments, jumped 35% worldwide during 2007.

      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 66% 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 switch 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 replicas 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. To date we were not able to generate this type of business.


                                      -5-



<PAGE>

      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.

      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. Taking into account the increased demand for IPv6
functionality we plan to accelerate availability of this functionality in our
"hardware" product.

      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 spent $1,336,518 and $1,356,326 in 2006 and 2007, respectively, on
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. 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 "virtual chassis" system, even if such systems are
located up to 120 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. In the fourth quarter of 2005, certain parts of the ER-1010 were
upgraded, including 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.


                                      -6-



<PAGE>

      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. 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.

      In 2007, we successfully finished testing of our product with a U.S.
Federal Government-approved test organization. The research and development team
spent considerable time on developing the ER-1010E, an enhanced version of the
ER-1010 as described above under the caption "Our Products." In addition, we
developed a redundant power supply version of the ER-1010E and designed various
new boards, which improved the stability of the ER-1010 and ER-1010E and
suitability of our core system for the data storage market. Our software
development group upgraded our software to include additional protocols
addressing customer-reported issues.

      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.

      In 2008, we finished the development of the ER-1010E, including the
redundant power supply version. We also expect to start development on a number
of new products, addressing the needs of those markets where we have been
successful in 2007, such as the cable industry and government sector. Features
considered for development are IPv6, MPLS and various security-related
enhancements.

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, Maryland 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 assurance 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, brand recognition and
interoperability (compatibility with legacy products). We intend to become
competitive by offering products that offer architectural performance,
resiliency and power efficiency advantages at a price that cannot be matched by
today's centrally-architected legacy networks alternatives. 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.


                                      -7-



<PAGE>

      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, Juniper
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.

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's manufacturing activities for us consist of printed
circuit board assembly and, final assembly of our products. All of our inventory
is stored at our principal headquarters and we supply it to EMI as needed to
meet our orders. We currently conduct final systems testing at our principal
headquarters, but we anticipate that this responsibility will be transferred to
EMI sometime during 2008.

      We utilize high quality 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 27, 2008 we had 23 full-time 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 seven U.S. patent applications pending, one allowed, two foreign
applications pending, and eight additional U.S. provisional 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. The foreign applications
pending are 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
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.


                                      -9-



<PAGE>

      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, 2003 through December 31, 2007. 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
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.


                                      -10-



<PAGE>

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, 2007, we had an accumulated deficit of
$70,198,322. 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 2007 and 2006 were $9,509,247 and $19,078,578
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 July 2007 senior secured
convertible note financing will be sufficient to support our operations into
April 2008. We are currently in final discussions on an additional financing
which we believe would support our operations into the fourth quarter of 2008.
Although the Company believes that the outcome of these discussions will result
in additional financing, there can be no assurances we will complete such
financing. 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 2006, 2007 senior convertible note financings 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 2006 and 2007 senior
convertible note financings 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.

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

      As of March 27, 2008, the principal amount of our total indebtedness was
$9,597,434. Our level of indebtedness affects our operations in several ways,
including the following:


                                      -11-



<PAGE>

   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.

IF WE DEFAULT ON OUR SENIOR SECURED CONVERTIBLE NOTES, WE COULD LOSE ALL OF OUR
ASSETS.

      Pursuant to the July 2007 senior secured convertible note financings, we
granted the investors a security interest in all of our assets. If we default on
our obligations relating to those notes, the investors could foreclose on all of
our assets, both tangible and intangible, leaving us with no assets.

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 MINIMAL 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 product 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 affect 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. 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 affected 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 PRINCIPLES 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, 2007, we recognized $360,058 in
share-based compensation costs and had total unrecognized share-based
compensation cost related to unvested stock options of approximately $119,817 as
of December 31, 2007.

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. During 2007, the high and low closing sale
prices of a share of our common stock were $2.22 and $0.60, respectively. On
March 27, 2008, the last reported sale price of a share of our common stock was
$0.88. 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;
         o  economic conditions specific to the network switching or related
            information technology industries;


                                      -16-



<PAGE>

         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 27, 2008, we had
outstanding 65,042,374 shares of common stock, of which approximately 11,723,105
shares were restricted under the Securities Act of 1933, as amended (the
"Securities Act"). As of March 27, 2008, we also had outstanding options,
warrants, and convertible promissory notes that were exercisable for or
convertible into approximately 56,208,681 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 2006 and 2007 senior convertible note financings, 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
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.


                                      -17-



<PAGE>

      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.

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 2006 and 2007 senior
convertible note financings 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 2006 and 2007 senior
convertible note financings 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
an amount up to approximately $200,000 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 $1,262,500. 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.


                                      -18-



<PAGE>

      In addition, failure to meet our registration requirements for certain
required periods will result in an event of default under the senior convertible
notes. Among other things, upon an event of default the convertible note holders
are entitled to demand that we immediately pay the entire principal balance of
the notes in full, plus a significant cash redemption penalty beyond the full
payment of such principal. If one or more of the note holders exercised their
redemption rights upon an event of default, it would have a significant negative
impact on our financial condition and would likely render us insolvent. In
addition, upon an event of default of our 2007 senior secured convertible notes,
the holders are entitled to foreclose on all of our assets. If our assets were
to be foreclosed upon, we would not be able to operate.

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 leased 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. Effective August 1, 2007, we extended our current lease
for an additional 24 months. The lease has a scheduled termination date of July
31, 2009. The base rent for the first year of the extended one-year term is
$23,348 per month ($2.10 per rentable square foot). On August 1, 2008, the
monthly rent will increase to $24,126 ($2.17 per rentable square foot), which
will be the monthly rate until termination of the lease on July 31, 2009. 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
believe that the current facilities are adequate for our expected needs through
at least the end of 2009.

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, 2007.


                                      -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 trades under the symbol "RPTN" on the
OTC Bulletin Board. 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 2007
                                            ------------------
            Fiscal Quarter Ended:             High       Low
                                            --------   -------
                 December 31                 $1.09      $0.60
                 September 30                $1.41      $0.84
                 June 30                     $2.22      $1.19
                 March 31                    $1.67      $0.71

                                                Fiscal 2006
                                            ------------------
            Fiscal Quarter Ended:             High       Low
                                            --------   -------
                 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
                                            ------------------
            Fiscal Quarter Ended:             High       Low
                                            --------   -------
                 December 31                 $0.85      $0.50
                 September 30                $0.64      $0.43
                 June 30                     $0.73      $0.48
                 March 31                    $0.90      $0.39

      On March 27, 2008 the high and low sale prices for a share of our common
stock as reported by Pink Sheets, LLC, were $0.89 and $0.86, respectively.

HOLDERS

      On March 27, 2008, we had 65,042,374 shares of our common stock
outstanding held by approximately 421 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, 2007. 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, 2006 and 2007. 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.

Inventory Valuations
--------------------

      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. For example, our provision for excess and
obsolete inventory has increased from $103,290 at December 31, 2006 to $204,758
at December 31, 2007. This increase of obsolescence was mainly due to the
write-off of our ER-1808 inventory parts in the second quarter of 2007, a
product whose release was initially postponed, but was cancelled in June 2007.

Accounting Treatment for Derivatives
------------------------------------

EMBEDDED CONVERSION FEATURE

Paragraph 12 of SFAS 133 indicates that the conversion features should be
considered a derivative if the following criterion are met:


                                      -22-



<PAGE>

   o  The economic characteristics and risks differ between the host and
      embedded conversion feature. This condition, relative to our senior
      convertible notes, is met because the embedded conversion feature
      valuation depends on factors such as volatility, stock price and expected
      life whereas the valuation of the host is not impacted by these factors.
      SFAS 133, paragraph 61 (k) further confirms the above position as this
      paragraph states that "the changes in fair value of an equity interest and
      the interest rates on a debt instrument are not clearly and closely
      related. Thus, for a debt security that is convertible into a specified
      number of shares of the debtor's common stock or another entity's common
      stock, the embedded derivative (that is, the conversion option) must be
      separated from the debt host contract and accounted for as a derivative
      instrument provided that the conversion option would, as a freestanding
      instrument, be a derivative instrument subject to the requirements of this
      Statement."
   o  The contract that includes the host and the conversion feature is not
      re-measured at fair value. This condition is met because the contract (our
      senior convertible notes) is not re-measured.
   o  A separate instrument with the same terms as the embedded conversion
      feature would be derivative as per paragraphs 6 of SFAS 133. Our review of
      paragraph 6 revealed that the embedded conversion feature without a host
      would be considered a derivative because the embedded conversion feature
      (1) has underlying and notional amounts (2) requires no initial net
      investments and (3) permits net settlement.

Based on the above considerations it is implied that the embedded conversion
feature related to our senior convertible notes is a derivative that must be
bifurcated from the host instrument and accounted for as a derivative at fair
value with changes in fair value recorded in earnings. However, before reaching
a final conclusion on whether we are dealing with an embedded conversion feature
that needs to be considered a derivative we need to review paragraph 11(a) of
SFAS 133. Paragraph 11(a) states that "contracts issued or held are both (1)
indexed to its own stock and (2) classified in stockholders equity shall not be
considered derivative instruments." Our contract is indexed to our own stock
however to determine the correct classification of the embedded conversion
feature with respect to possible stockholders equity classification, we reviewed
the guidelines provided in EITF 00-19.

Specifically, EITF 00-19, paragraph 4 and EITF 05-2 indicate that an embedded
conversion feature is conventional if the holder is entitled to convert their
position into a fixed number of shares. The embedded conversion features of our
senior convertible note financings and subject of this review entitles the
holder, under certain circumstances beyond the control of the Company, to
convert their position into a variable number of shares. This implies that the
embedded conversion feature under discussion does not qualify as a conventional
convertible instrument. Because the embedded conversion feature does not qualify
as a conventional convertible instrument, we then had to analyze paragraphs
12-32 of EITF 00-19 to determine whether the embedded conversion feature should
be accounted for as a equity or as a liability.

Paragraph 19 of EITF 00-19 stipulates that in order to qualify for equity
treatment the Company must have sufficient authorized and unissued shares
available to settle the contract after considering all other commitments that
may require the issuance of stock during the maximum period the derivative
contract could remain outstanding. The total number of shares that the Company
could need to settle the current contract could exceed the level of authorized
shares available for issuance and this would result in a situation where the
Company does not control settlement of shares. Consequently, the embedded
conversion feature is classified as a liability under EITF 00-19 and therefore
does not qualify for paragraph 11 scope exception in SFAS 133. As a result the
embedded conversion feature will be accounted for as a derivative at fair value,
with changes in fair value recorded in earnings. Based on before mentioned
criteria we classified the conversion feature as a liability on our balance
sheet measured at fair value using the Black-Scholes option pricing model.

WARRANTS

The warrants that were issued as part of our 2006 and 2007 financings represent
freestanding instruments. We analyzed these warrants as to their characteristics
similarly to our analysis of the embedded conversion feature discussion above.
Based on the conclusions we reached while evaluating the embedded conversion
feature we determined that the warrants (1) are derivatives as per the
definitions of paragraphs 6-9 of SFAS 133 and (2) will be accounted for as a
liability based on paragraph 19 of EITF 00-19. As such, the warrants are
classified as a liability and are measured at fair value, with changes in fair
value reported in earnings.


                                      -23-



<PAGE>

We will review the warrants under EITF 00-19 at each balance sheet reporting
date to determine if circumstance exist requiring a reclassification of the
warrants to equity.

COST OF FINANCING DERIVATIVE INSTRUMENTS

The fair value of the conversion features and warrants in excess of the face
value of the debt host instrument is expensed at the time of closing the
financing. These transactions are analogous to paragraph 6 of EITF 98-5, which
states, "... IN CERTAIN CIRCUMSTANCES, THE INTRINSIC VALUE OF THE BENEFICIAL
CONVERSION FEATURE MAY BE GREATER THAN THE PROCEEDS ALLOCATED TO THE CONVERTIBLE
INSTRUMENT. IN THOSE SITUATIONS, THE TASK FORCE REACHED A CONSENSUS THAT THE
AMOUNT OF THE DISCOUNT ASSIGNED TO THE BENEFICIAL CONVERSION FEATURE IS LIMITED
TO THE AMOUNT OF THE PROCEEDS ALLOCATED TO THE CONVERTIBLE INSTRUMENT." The
discount amount up to the face value of the debt host instrument is amortized
over the life of the note.

Stock-Based Compensation Expense
--------------------------------

         On January 1, 2006, we adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), "Shared Based Payment" ("SFAS No. 123(R)"),
which requires the measurement and recognition of compensation cost for all
stock-based payment awards made to employees and directors based on estimated
fair values. We have elected to use the modified prospective transition method
for adopting SFAS No. 123(R), which requires the recognition of stock-based
compensation cost on a prospective basis. Our Consolidated Statement of
Operations as for the year ended December 31, 2007 on page F-5 of this Report
reflects the impact of SFAS No. 123(R). In accordance with the modified
prospective transition method, our Consolidated Statement of Operations for
periods prior to January 1, 2006 have not been restated to reflect, and do not
take into account, the impact of SFAS No. 123(R). As of December 31, 2007, there
was $119,817 of total unrecognized compensation cost related to all of our
outstanding non-vested stock-based payment awards. This total unrecognized
compensation cost will be adjusted for future changes in estimated forfeitures.
The additional stock-based compensation expense for any new stock-based payment
awards granted after December 31, 2007 cannot be predicted at this time because
calculation of that expense depends upon, among other factors, the amount of
stock-based payment awards granted by us in the future.


                                      -24-



<PAGE>

Deferred Assets
---------------
In 2004, we paid $260,000 to a supplier for a software platform related to our
ER-1010 product. This software platform license fee is being amortized and
charged to cost of sales over the projected number of systems expected to be
sold using the platform. As of December 31, 2007 a total amount of $33,310 in
amortization expense has been included in cost of sales.

In the fourth quarter of 2007 we revised our estimate for the projected number
of systems expected to be sold utilizing the current capitalized software. The
estimated number of units to be sold utilizing this software was changed from
1,000 units through the end of 2006 to 500 units beginning in 2007. The revised
estimate is thought to provide a better estimate of amortization expense with
sales. The effect of the change in estimate was to decrease our 2007 net income
by $10,944.

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, 2007,
         COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2006 (IN THOUSANDS)

                                              December 31,      December 31,
                                                  2007              2006
                                              ------------      ------------
Net Sales                                     $      1,035      $        849
Cost of Sales                                          385               320
                                              ------------      ------------

Gross Profit                                           650               529

Operating expenses
   Salary expense                                    2,597             2,100
   Marketing expense                                    97               230
   Research and development costs                    1,356             1,336
   Selling, general and administrative               2,999             2,975
                                              ------------      ------------
Total operating expenses                             7,049             6,641

  Net Other Income (loss)                           (3,110)          (12,967)

Loss before Income tax provision                    (9,509)          (19,079)
  Income tax provision                                   -                 -
                                              ------------      ------------
Net loss                                      $     (9,509)     $    (19,079)
                                              ============      ============

NET SALES

      For the fiscal years ended December 31, 2006 and December 31, 2007, we
realized revenues of $849,285 and $1,035,108 respectively. This $185,823
increase (an increase of 22%) in revenues between 2006 and 2007 resulted
primarily from the first significant sales of our products to a division of the
U.S. federal government in the third quarter of 2007.

      In 2007, we sold 38 ER-1010 core switch units and 25 OR-1048 edge switch
units versus the sale of 30 ER-1010 units and 23 OR-1048 units in 2006.


                                      -25-



<PAGE>

      From a strategic point of view, we believe the most important sales
realized during 2007 were the sales to a division of the federal government in
the third quarter and the sale to one of the leading cable service providing
companies in the fourth quarter. Within the year 2007, our third quarter was the
strongest quarter with revenues totaling $431,336. Revenues for the other 2007
quarters amounted to $162,771, $237,857 and $203,144 for the first, second and
fourth quarters respectively. The decrease of revenues in the fourth quarter of
2007 compared to the third quarter of 2007 is mainly due to the relatively large
order received in the third quarter from the federal government. Another
important reason for the lower fourth quarter level of revenues is the fact that
in March-July 2007, we re-organized our entire sales team. Taking into account
selling cycles which amount to some 6-9 months, the positive impact on revenues
from this reorganization can be expected to occur in early to mid 2008.

      In 2006, we realized that our products have attractive features for
government networks. Such features are price, security, resiliency and speed.
Agreements that were signed in 2006 and 2007 with large systems integrators who
provide products and services to the government sector along with the fact that
one of our products was certified by a government test organization in 2007,
helped result in our first significant order with a division of the federal
government in the third quarter. As a result of this sale and our other 2007
sales efforts directed at the government sector, we believe that we have made
significant progress toward establishing ourselves as an on-going supplier of
products and services to the federal government.

      During 2007, we also made progress in introducing our products to cable
service providers. Our ER-1010 is an attractive network product for the cable
industry which needs low-latency switches for video streaming. Evaluation units
were placed in various leading cable companies and a first order was received in
the fourth quarter of 2007. We expect that cable service providers, together
with the government customers as described above will be an important
contributor towards growth in the foreseeable future.

      With respect to industry verticals other than government and cable, we
noticed that during 2007 selling cycles shortened. We expect that with the new
selling team getting on speed, we will see higher growth rates in these
verticals in 2008 and beyond. The most important examples of these verticals are
manufacturing services, banking, call centers, entertainment and education.

GROSS MARGIN

      Our gross margin was $529,212 and $649,997 in 2006 and 2007, respectively,
representing an increase of $120,785 or 23% in line with the increase of
revenues during the same period of approximately 22%.

OPERATING EXPENSES

      Total operating expenses were approximately $6,641,096 and $7,048,741 in
2006 and 2007, respectively, representing an increase of $407,645 or 6%. This
increase was mainly due to an increase of salaries partially offset by a
decrease of marketing expenses.

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

SALARY EXPENSE

      Total salary expenses (excluding R&D related salaries which are captured
under "Research and "development costs") increased from $2,099,946 in 2006 to
$2,596,537 in 2007, an increase of $496,591 or 24%. The main reason for this
increase was the increased charges booked for expensing stock options in 2007 as
compared to 2006. The total increase in this respect amounted to approximately
$200,000 and was mainly caused by the fact that our actual employee turnover was
less than forecasted resulting in a higher expense charge for stock options.
Another reason for the increase in salary expense was increased health premiums,
which increased by approximately $90,000 in 2007 over 2006. The remaining
increase in salary expenses in 2007 over 2006 amounted to approximately
$200,000, and was caused by salary increases, bonus payments and an average
headcount increase over the year by one person.


                                      -26-



<PAGE>

MARKETING EXPENSES

      Marketing expenses decreased from $229,381 in 2006 to $97,237 in 2007, a
decrease of $132,144 or 58%. The main reason for this decrease was that in 2006
we engaged in a marketing campaign through a third party in connection with lead
generation. In 2007, we did not engage any third parties for these activities.

RESEARCH AND DEVELOPMENT

      We spent $1,336,518 and $1,356,326 on research and development (R&D) in
2006 and 2007, respectively, an increase of $19,808 or 1%. This increase was due
in part to increases in salaries of $131,000 as a result of a slight R&D
headcount increase, increased use of prototypes resulting in an expense increase
of $40,000 and an increase of charges in 2007 over 2006 for parts consumption of
$52,000. These increases were offset by reduced costs for design tools (down by
$160,000) and reduced project charges and costs of obsolescence (down by
$80,000).

SELLING, GENERAL AND ADMINISTRATIVE

      Selling, general and administrative (SG&A) expenses increased from
$2,975,251 in 2006 to $2,998,641 in 2007, an increase of $23,390 or 1%. The main
increases were: a $39,000 increase of consulting expenses in connection with
increased engagement of sales consultants in important verticals such as the
government and cable industries; an $87,000 increase of legal expenses, mainly
in connection with patent application-related fees and opinion letters required
with various financings during 2007; an increase of $151,000 in connection with
increased use of contract labor used for business development; issuance of
warrants in April 2007 for investment relation services valued at $165,000 (such
an expense did not occur in 2006; an increase in expenses for audit and
accounting services of $131,000 over 2006, in connection with the engagement of
a new audit firm and support required for the analysis of derivative instruments
included in our financial statements. These increases were largely offset by
decreases of employee recruitment expenses by $92,000; bank charges which
decreased by $40,000; a decrease of inventory variances of $206,000; decreased
depreciation expenses of $137,000 (a large portion of fixed assets was fully
written off in early 2007) and a $159,000 decrease in finder's fees expenses
resulting from a lower level of fund raising in 2007 compared to 2006.

OTHER INCOME/(LOSS)

      Other income (loss) improved from a loss in 2006 of $12,966,694 to a loss
in 2007 of $3,110,503. The primary reason for the improvement of other income is
the decrease of our stock price during most of 2007, which resulted in the
recognition of substantial gains related to the change in the fair value of the
conversion features embedded in our senior convertible notes at December 31,
2007. In 2006, our stock price increased during the year resulting in
substantial re-measurement losses for that period. Additional detail regarding
Other Income/Loss follows:

      o  We are required by EITF 96-19 to record the extinguishment of the July
         31, 2006 senior convertible notes as valued at January 18, 2007,
         resulting in a gain of $11,571,860.

      o  With respect to all three of our senior convertible note financing
         transactions that took place between July 2007 and August 2007, as
         prescribed by SFAS No. 133 and EITF 00-19, we are required to account
         for the warrants and the embedded conversion feature associated with
         the transactions as liabilities at their respective estimated fair
         values. In connection with the forced conversion of a portion of the
         notes which took place in the third quarter of 2007, the main portion
         of the M-1 and M-2 warrants became due to investors. Therefore,
         starting in the third quarter of 2007, we included the impact of the
         valuation of M-1 and M-2 Warrants. 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. For the year 2007,
         ending December 31, the price of our common stock decreased by $0.27


                                      -27-



<PAGE>

         from $0.94 per share at January 1, 2007 to $0.67 per share at December
         31, 2007, resulting in a gain of $18,956,186. In 2006, we charged an
         amount of $9,080,794 in connection with the adjustment of fair values
         of these liabilities regarding conversions and warrants. 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 three separate senior convertible
         note financing transactions, we have expensed the excess value of the
         debt discount over the proceeds of the notes totaling $12,304,909 for a
         total amount of $24,557,055. In July 2006, an amount of $2,499,794
         representing the excess value of the debt discount over the $5,000,000
         in proceeds from the 2006 note was written off.

      o  The total net discount cost associated with our senior convertible
         notes amounted to $12,304,909 and is amortized over the lifetime of the
         respective notes. The total charge for 2007 amounts to $6,073,699. In
         2006, we incurred $1,041,666 in discount cost amortization expense.

      o  In connection with the restructuring of the July 31, 2006 financing, we
         agreed to increase the principal amount of the related senior
         convertible notes by $2,204,909 and recorded this increase of principal
         after deduction of interest for a total restructuring amount of
         $2,089,284 as a cost of financing our senior convertible notes in
         January 2007.

      o  Interest expense increased from $346,049 in 2006 to $941,839 in 2007.
         The primary reason for this difference is the increased amount of
         convertible notes which are subject to interest payments on a quarterly
         basis. In 2006, the convertible notes outstanding in the period of July
         30, 2006 to December 31, 2006 amounted to $5,000,000. In 2007, the
         outstanding amount during the entire year was on an average basis,
         approximately $9,164,363.

THIRD QUARTER 2007 RESTATEMENT

      On July 30, 2007 we effected a mandatory conversion in the amount of
$2,707,475 carrying a corresponding conversion feature, valued at $3,607,648. In
our third quarter 2007 statement of operations this amount was recognized as a
gain to "other income/loss" whereas this amount should have been accounted for
as an increase to "additional paid in capital" (APIC). This restatement
was corrected in our fourth quarter of 2007 financial statements. The financial
data for the 2007 fiscal year as included in this 10-KSB, therefore, are correct
and consistent with our restatement. The adjustments in the fourth quarter
of 2007 regarding the third quarter 2007 did not affect the Company's cash
position. For further details on this matter, please see explanations under
"Third Quarter 2007 Restatement" in footnote 1 on Page F-9 of this 10-KSB

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 and 2007. 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 year ended December 31, 2006 and 2007 we sustained net losses of
$19,078,578 and $9,509,247, respectively. Since our inception, including the
period ended December 31, 2007 we have realized negligible revenues and have
financed our operations almost exclusively from cash on hand raised through the
sale of our securities and borrowings. As of December 31, 2007, we had a deficit
in working capital of $ 14,158,731 of which $12,990,976 relates to the fair
value of derivative financial instruments. 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. However, we anticipate that additional capital must be raised
to fund operations beyond early 2008 and there can be no assurance that
sufficient revenues will be generated thereafter to fund our operating
requirements. We currently have no commitments for any additional financing and
there can be no assurance that we will be able to obtain requisite financing on
acceptable terms, if at all.




July 2006 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.


                                      -28-



<PAGE>

      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
Warrants and the Series M Warrants from $0.5054 per share to $0.43948 per share.
We also modified our registration obligations to require that we initially
register 15,267,292 shares of our common stock underlying the senior convertible
notes with the SEC, with the remaining shares underlying the senior convertible
notes and the shares underlying the Series L Warrants and Series M Warrants to
be registered by subsequent registration statements to be filed at a later date
as permitted by the SEC. 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, our
issuance of Series L-1 Warrants and Series M-1 Warrants that replaced the Series
L and Series M Warrants and our entry 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, which
resulted 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.

July 2007 Senior Secured Convertible Note Financing
---------------------------------------------------

On July 31, 2007, we entered into a securities purchase agreement with three
investors for total gross proceeds of $3.5 million, which agreement provides for
the issuance on August 1, 2007 of Senior Secured Convertible Notes in the
aggregate principal amount of $3.5 million ("Secured Notes"), Series N Warrants,
Series O Warrants and Series P Warrants in a private placement transaction. The
agreement also requires us to enter into a security agreement granting the
investors a first priority perfected security interest in all of our assets and
requires our subsidiary to guaranty our obligations under the Secured Notes. The
Secured Notes and accompanying warrants are or may become convertible into or
exercisable for the following number of shares of our common stock:

                    Notes:                        2,909,636
                    N Warrants:                   2,909,636
                    O Warrants:                   1,891,263
                    P Warrants:                   1,246,987
                    ----------------------------------------------------
                    Total:                        8,957,522

In addition, we previously entered into private placement transactions with
these same investors in July 2006 and January 2007 as described under the
caption "July 2006 Senior Convertible Note Financing" above.

The Secured Notes carry an interest rate of 9.25% per annum, which rate may be
increased to 15% upon the occurrence of an event of default, and mature on
August 1, 2010. This date may be extended, at the option of the investors, by up
to two years. Interest will be payable quarterly, starting October 1, 2007. The
Secured Notes are immediately convertible at a conversion price of $1.2029 per
share. The entire outstanding principal balance and any outstanding fees or
interest shall be due and payable in full on the maturity date. Under certain
conditions, we may require investors to convert up to either 50% or 100% of the
outstanding balances of the Secured Notes at any time shares of our common stock
are trading at or above $1.80435 or $2.105075, respectively.


                                      -29-



<PAGE>

The N Warrants carry a strike price of $1.2029 for each share and are
immediately exercisable. The N warrants expire on the earlier of August 1, 2016
or seven years after the date all of the shares issuable upon conversion of the
Secured Notes have been included on an effective registration statement. The O
Warrants also carry a strike price of $1.2029 for each share. The O Warrants
will only become exercisable by an investor if we conduct mandatory conversions,
and then only to the extent of 65% of the number of shares issued to such
investor upon each mandatory conversion. The O Warrants expire on the earlier of
August 1, 2016 or seven years after the date all of the shares issuable upon
conversion of the Secured Notes have been included on an effective registration
statement. The P Warrants carry a strike price of $1.2029 for each share and are
immediately exercisable. The P Warrants expire on the earlier of the maturity
date of the Secured Notes of August 1, 2010, which date may be extended by up to
two years at the option of the investors, and the date we have satisfied our
payment obligations under the warrant holder's Secured Note.

In the event of a default or upon the occurrence of certain fundamental
transactions as defined in the Secured Notes, the investors will have the right
to require us to redeem the Secured Notes at a premium. In addition, at any time
on or after August 1, 2010, the investors may accelerate the partial payment of
the Secured Notes by requiring that we convert at the lower of the then
conversion price or a 7.5% or 10.0% discount to the recent volume weighted
average price of our common stock, 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.

The conversion price of the Secured Notes and the exercise price of the N
Warrants, O Warrants and P Warrants are subject to customary anti-dilution
provisions for stock splits and the like, and are also subject to full-ratchet
anti-dilution protection such that if we issue or are deemed to have issued
certain securities at a price lower than the then applicable conversion or
exercise price, then the conversion or exercise price will immediately be
reduced to such lower price.

The Secured Notes and the N Warrants, O Warrants and P Warrants contain certain
limitations on conversion or exercise, including that a holder of those
securities cannot convert or exercise those securities to the extent that upon
such conversion or exercise, that holder, together with the holder's affiliates,
would 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 the investor to
us, of up to 9.99%).

We have agreed to register the shares of common stock underlying the Secured
Notes, N Warrants, O Warrants and P Warrants. If we fail to meet the filing or
effectiveness requirements, subject to certain grace periods, we may be required
to pay liquidated damages of $70,000 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 failure to meet the filing and effectiveness requirements are
capped at $437,500.

      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, 2006 and 2007
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. However, if we do not
experience a significant increase in revenues by April 2008, 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.


                                      -30-



<PAGE>

      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.

Additional Financing
--------------------

      As noted above, we are currently in discussions on an additional financing
which we believe would support our operations into the fourth quarter of 2008.
Although the Company believes that the outcome of the discussions will result in
additional financing, there can be no assurances we will complete such
financing.

                                      -31-



<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

      On July 6, 2007, we notified Comiskey & Company, P.C. ("Comiskey"), the
independent registered public accounting firm that was engaged as our principal
accountant to audit our consolidated financial statements, that we intended to
engage new certifying accountants and thereby were dismissing Comiskey. The
reason for the change was to allow us to engage a larger firm with offices in
our local area that we believe has greater resources to provide us with the
auditing and tax services we require.

      The audit report dated March 17, 2007, except for paragraph 7 of Note 1,
which is dated August 14, 2007, of Comiskey on our consolidated financial
statements and consolidated financial statement schedules as of and for the
years ended December 31, 2006 and 2005 did not contain any adverse opinion or
disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit
scope, or accounting principles, except that the audit report contained a
separate paragraph stating:

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

      During the years ended December 31, 2006 and 2005 and the subsequent
interim period through July 6, 2007, there were no disagreements with Comiskey
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures which disagreements, if not resolved
to Comiskey's satisfaction, would have caused Comiskey to make reference to the
subject matter of the disagreement in connection with its report.

      Also on July 6, 2007, we engaged Stonefield Josephson, Inc. ("Stonefield")
as our new independent auditors.

      On October 1, 2007, we notified Stonefield Josephson, Inc. ("Stonefield"),
the independent registered public accounting firm that was engaged as our
principal accountant to audit our consolidated financial statements for the
fiscal year ending December 31, 2007, that we intended to engage new certifying
accountants and therefore were dismissing Stonefield.

      Our decision to change accountants was approved by our audit committee and
board of directors, based on our desire to engage an alternative firm that we
believe has similar resources to provide us with the auditing and tax services
we require on a basis that we believe is more cost-effective for an entity with
our financial profile.

      During the interim period from July 6, 2007 through October 1, 2007, there
were no disagreements with Stonefield on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures which
disagreements, if not resolved to Stonefield's satisfaction, would have caused
Stonefield to make reference to the subject matter of the disagreement in
connection with the report that we would have requested Stonefield to render in
the future on our financial statements for the year ending December 31, 2007.

      Also on October 1, 2007, we engaged Mendoza Berger & Company, L.L.P.
("Mendoza") as our new independent auditors. We have not consulted with Mendoza
during the two most recent fiscal years and through October 1, 2007 regarding
the application of accounting principles to a specific completed or contemplated
transaction, or the type of audit opinion that might be rendered on our
consolidated financial statements or as to any disagreement or event as
described in Item 304 (a) (1) (iv) of Regulation S-B under the Securities Act of
1933, as amended.


                                      -32-



<PAGE>

ITEM 8A(T) CONTROLS AND PROCEDURES

      EVALUATION OF DISCLOSURE 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, 2007, 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.

      MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

      Our management is responsible for establishing and maintaining adequate
"internal control over financial reporting" (as defined in Rule 13a-15(f) under
the Exchange Act). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework set forth in INTERNAL CONTROL --
INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, our management concluded that our
internal control over financial reporting was effective as of December 31, 2007.

      Our internal control over financial reporting is supported by written
policies and procedures, that:

      (1)   pertain to the maintenance of records that, in reasonable detail,
            accurately and fairly reflect the transactions and dispositions of
            our assets;

      (2)   provide reasonable assurance that transactions are recorded as
            necessary to permit preparation of financial statements in
            accordance with generally accepted accounting principles, and that
            receipts and expenditures of our company are being made only in
            accordance with authorizations of our management and directors; and

      (3)   provide reasonable assurance regarding prevention or timely
            detection of unauthorized acquisition, use or disposition of our
            assets that could have a material effect on the financial
            statements.

      Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

      This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the SEC that permit us to
provide only management's report in this annual report.


                                      -33-



<PAGE>

      CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

      During the quarter ended December 31, 2007, there were no changes in our
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.

ITEM 8B.   OTHER INFORMATION

      None.


                                      -34-



<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       50       Chief Executive Officer, President,
                                           Director and Chairman of the Board
Bob van Leyen                   64       Chief Financial Officer and Secretary
Ken Bramlett                    48       Director (1) (2) (4)
Larry L. Enterline              55       Director (1) (3)

--------------------
(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 50), is our Chief Executive Officer,
President, a director and Chairman of the Board. Mr. Wittenschlaeger has
accumulated more than twenty-three 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 recently authored and is
pending on 12 Raptor patents related to distributed core transport architectures
and processing. Mr. Wittenschlaeger serves on the board of directors of
Lantronix, Inc. as Chairman of the Nominating and Governance Committee. Mr.
Wittenschlaeger has been our Chairman of the Board, President and Chief
Executive Officer since March 15, 2004.

      LARRY L. ENTERLINE, (age 55), 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. and COMSYS IT
Partners, Inc. Mr. Enterline has been one of our directors since October 18,
2004.

      KEN BRAMLETT, (age 48), is one of our directors and Chairperson of the
Nominating and Governance Committee and the Compensation 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


                                      -35-



<PAGE>

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, 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.

      BOB VAN LEYEN, (age 64), is our Chief Financial Officer and Secretary. Mr.
van Leyen has more than twenty-five 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 and Ken Bramlett 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 two Board members, Larry L. Enterline, 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.

      NOMINATING AND GOVERNANCE COMMITTEE

      The Nominating and Governance Committee consists of two Board members,
Larry L. Enterline and Ken Bramlett. 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.


                                      -36-



<PAGE>

      COMPENSATION COMMITTEE

      The Compensation Committee consists of two Board members, Larry L.
Enterline and Ken Bramlett. Mr. Bramlett 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 2007 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
2007 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 years ended December 31, 2006
and 2007.

SUMMARY COMPENSATION TABLE

      The following table provides information concerning the compensation for
the years ended December 31, 2006 and 2007 for our principal executive officer
and our principal financial officer, who were the only persons that served as
executive officers during 2007 (collectively, the "named executive officers").

<TABLE>

                           SUMMARY COMPENSATION TABLE

                                                                               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)       ($)           ($)          ($)          ($)
---------------------------   ----    ----------  ---------  ------  -------- ------------  ------------  ------------   -------
<S>                           <C>     <C>         <C>        <C>     <C>      <C>           <C>           <C>            <C>
Thomas M. Wittenschlaeger,    2006    164,375(2)  70,000(3)    --     148,050       --            --        30,613(5)    413,038
  Chief Executive Officer     2007    180,000(2)  10,000(4)    --     162,269       --            --        33,437(6)    385,706
  and President
Bob van Leyen,                2006    134,377(7)  30,000(8)    --      18,750       --            --        17,983(9)    201,110
Chief Financial Officer       2007    150,000(7)  10,000(4)    --       8,403       --            --        22,608(10)   191,011
</TABLE>
--------------------

                                      -37-



<PAGE>

(1)   This column represents the dollar amount recognized for financial
      statement reporting purposes with respect to the fiscal year specified in
      the table 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 our "Outstanding Equity
      Awards at December 31, 2007" 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 a $10,000 cash performance bonus in September 2007.
(5)   Consists of $23,730 in reimbursement of living expenses for an apartment
      in Southern California and $6,883 in health and life insurance premiums.
(6)   Consists of $24,000 in reimbursement of living expenses for an apartment
      in Southern California and $9,437 in health and life insurance premiums.
(7)   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.
(8)   Consists of a $30,000 cash performance bonus in August 2006.
(9)   Consists of $17,983 in health and life insurance premiums.
(10)  Consists of $22,608 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, 2007.

<TABLE>
                 OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2007

                                                                                             STOCK AWARDS
                                                                                -----------------------------------------
                                                                                                                 EQUITY
                                                                                                     EQUITY     INCENTIVE
                                        OPTION AWARDS                                              INCENTIVE      PLAN
                  -----------------------------------------------------------                         PLAN       AWARDS:
                                                EQUITY                           NUMBER              AWARDS:    MARKET OR
                                               INCENTIVE                           OF     MARKET     NUMBER      PAYOUT
                                                  PLAN                           SHARES  VALUE OF      OF       VALUE OF
                                                 AWARDS:                           OR     SHARES    UNEARNED    UNEARNED
                     NUMBER         NUMBER       NUMBER                          UNITS      OR       SHARES,     SHARES,
                       OF             OF           OF                              OF    UNITS OF    UNITS      UNITS OR
                   SECURITIES     SECURITIES   SECURITIES                        STOCK    STOCK     OR OTHER     OTHER
                   UNDERLYING     UNDERLYING   UNDERLYING                         THAT     THAT      RIGHTS      RIGHTS
                   UNEXERCISED    UNEXERCISED  UNEXERCISE  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    (#)       ($)       DATE        (#)      ($)        (#)         ($)
-----------------  -----------   ------------- ---------- -------- ----------    ------   ------     ------      ------
<S>                <C>           <C>           <C>        <C>      <C>           <C>      <C>        <C>         <C>
Thomas M.
 Wittenschlaeger      350,000         --          --        1.00    07/15/2012     --       --         --          --
Bob van Leyen         300,000         --          --        1.00    09/29/2011     --       --         --          --
</TABLE>
--------------------


                                      -38-



<PAGE>

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, 2007.

<TABLE>

                              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                 ($)         ($)        ($)(1)        ($)            ($)            ($)          ($)
-------------------------  -----------   --------   ----------  ------------   ------------  ------------   ---------
<S>                        <C>           <C>        <C>         <C>            <C>           <C>            <C>
Larry L. Enterline           15,000         --       28,356(2)       --             --             --         43,356
Ken Bramlett                 15,000         --       33,104(3)       --             --             --         48,104
Albert Wong                   3,750(4)      --           --          --             --             --          3,750
</TABLE>
--------------------
(1)   This column represents the dollar amount recognized for financial
      statement reporting purposes with respect to the year ended December 31,
      2007 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, 2007, 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 91,666 options were vested at December 31, 2007. The remaining
      8,334 options vested on February 15, 2008.
(3)   At December 31, 2007, 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 all 100,000 options were vested at December 31, 2007.
(4)   On February 28, 2007, Albert Wong announced his intention to resign as our
      director effective April 30, 2007, the date of our 2007 annual meeting of
      shareholders.

STOCK OPTION PLAN

    GENERAL

      Our 2005 Stock Plan was approved by our Board of Directors on April 7,
2005, approved by our shareholders on June 9, 2005, and amended and restated as
the First Amended and Restated 2005 Stock Plan ("2005 Plan") by our Board of
Directors on June, 29, 2007. We filed a registration statement on Form S-8 with
the SEC in May 2007 to cover the issuance of up to 3,000,000 shares of common
stock underlying options and stock purchase rights authorized for issuance under
the 2005 Plan and qualified for issuance the underlying securities with the
California Department of Corporations in July, 2007.

      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 27, 2008, options to purchase a total of 1,175,000 shares of common stock
were outstanding under Non-Plan Options. As of March 27, 2008, there were
1,320,500 outstanding options to purchase common stock under the 2005 Plan.
Excluding these 1,320,500 outstanding options 1,679,500 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.


                                      -39-



<PAGE>

    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.

    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.


                                      -40-



<PAGE>

    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.

      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.


                                      -41-



<PAGE>

      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 SEC 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 27, 2008, 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
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 65,042,374 shares of common stock outstanding
as of March 27, 2008.

<TABLE>

                                         NUMBER OF SHARES OF COMMON STOCK          PERCENT OF COMMON STOCK
NAME OF BENEFICIAL OWNER(1)                     BENEFICIALLY OWNED                    BENEFICIALLY OWNED
---------------------------                     ------------------                    ------------------
<S>                                              <C>                                      <C>
Thomas M. Wittenschlaeger                          3,350,000 (2)                             5.12%
Bob van Leyen                                        700,000 (3)                             1.07%
Ken Bramlett                                         100,000 (4)                                 *
Larry L. Enterline                                   100,000 (5)                                 *
All executive officers and directors
  as a group (4 persons)                           4,250,000 (6)                             6.45%
Castlerigg Master Investments Ltd.
40 West 57th St
26th Floor                                         7,218,901 (7)                             9.99%
New York, NY 10019

* Less than 1%.
</TABLE>
--------------------

                                      -42-



<PAGE>

(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 350,000 shares of common stock issuable
      upon the exercise of options which were exercisable as of March 27, 2008
      or exercisable within 60 days after March 27, 2008.
(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 27, 2008 or exercisable within 60 days after
      March 27, 2008.
(4)   Ken Bramlett is one of our directors. Represents 100,000 shares of common
      stock issuable upon the exercise of options which were exercisable as of
      March 27, 2008 or exercisable within 60 days after March 27, 2008.
(5)   Larry L. Enterline is one of our directors. Represents 100,000 shares of
      common stock issuable upon the exercise of options which were exercisable
      as of March 27, 2008 or exercisable within 60 days after March 27, 2008.
(6)   Represents 3,000,000 shares of common stock and 350,000 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 Ken Bramlett; and 100,000 shares issuable upon the
      exercise of options held by Larry L. Enterline.
(7)   Represents 7,218,901 shares of common stock underlying convertible notes
      and warrants held by Castlerigg Master Investments Ltd. ("Master"), which
      represents a portion of the number of shares of common stock that are
      issuable upon the conversion of principal and/or interest, and the payment
      of principal and/or interest in shares of common stock, under convertible
      notes and the exercise of warrants held by Master. The number of shares
      beneficially owned by Master is capped by a contractual 9.99% beneficial
      ownership limitation set forth in the convertible notes and warrants held
      by Master. If the 9.99% beneficial ownership limitation is disregarded,
      Master would beneficially own approximately 11,682,623 shares underlying
      the convertible notes and 28,985,584 shares underlying the warrants held
      by it. The actual number of shares of common stock issuable upon
      conversion of the convertible notes is subject to adjustment and could be
      materially more than 11,682,623 shares depending on a number of factors
      including, among other factors, the future market price of our common
      stock. Sandell Asset Management Corp. ("SAMC") is the investment manager
      of Master. Thomas Sandell is the sole shareholder of SAMC and may be
      deemed to have voting and dispositive power over the shares beneficially
      owned by Master. No other natural person has voting or dispositive power
      over the shares owned by Master. Castlerigg International Ltd.
      ("Castlerigg International") is the controlling shareholder of Castlerigg
      International Holdings Limited ("Holdings"). Holdings is the controlling
      shareholder of Master. Each of Holdings and Castlerigg International may
      be deemed to share beneficial ownership of the shares beneficially owned
      by Master. SAMC, Mr. Sandell, Holdings and Castlerigg International each
      disclaims beneficial ownership of the securities with respect to which
      indirect beneficial ownership is described.

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, 2007.

<TABLE>
                                        Number of Shares to be      Weighted Average       Number of Securities
Plan Category                            Issued Upon Exercise        Exercise Price       Available for Issuance
------------------------------------    ----------------------      ----------------      ----------------------
<S>                                            <C>                       <C>                     <C>
PLANS APPROVED BY STOCKHOLDERS
   2005 Stock Plan(1)                           626,000                  $1.03                   2,374,000
PLANS NOT APPROVED BY STOCKHOLDERS
   Non-Plan Stock Options(2)
   Warrants for Services(3)                   1,175,000                  $1.00                      N/A
                                              1,191,350                  $0.88                      N/A
TOTAL                                         2,992,350                  $0.96                   2,374,000
</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,
      2007, there were 626,000 outstanding options to purchase common stock.
(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.


                                      -43-



<PAGE>

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      There were no related party transactions in 2007 that require disclosure.

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)
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     Articles of Amendment to Articles of Incorporation (Profit) of Raptor
        Networks Technology, Inc. as filed with the Colorado Secretary of State
        on April 30, 2007 (incorporated herein by reference to Exhibit 3.1 to
        the Company's Form 8-K filed May 4, 2007)
3.5     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)
3.6     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)
3.7     Action with Respect to Bylaws certified by the Secretary of Raptor
        Networks Technology, Inc. on May 2, 2007 (incorporated herein by
        reference to Exhibit 3.2 to the Company's Form 8-K filed May 4, 2007)
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).
10.2x   First Amendment to Full Service Lease dated May 3, 2007 between PS
        Business Parks, L.P., and Raptor Networks Technology, Inc., a California
        corporation
10.3    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)
10.4**  First Amended and Restated 2005 Stock Plan (incorporated herein by
        reference to Exhibit 10.1 to the Company's 10-QSB for fiscal quarter
        ended June 30, 2007, filed with the SEC on August 21, 2007)
10.5**  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)


                                      -44-



<PAGE>

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

10.6    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)
10.7    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)
10.8    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)
10.9    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)
10.10   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)
10.11   Securities Purchase Agreement dated July 31, 2007 (incorporated herein
        by reference to Exhibit 10.1 to the Company's Form 8-K filed August 2,
        2007)
10.12   Registration Rights Agreement dated July 31, 2007 (incorporated herein
        by reference to Exhibit 10.2 to the Company's Form 8-K filed August 2,
        2007)
10.13   Form of Senior Secured Convertible Note issued August 1, 2007
        (incorporated herein by reference to Exhibit 10.3 to the Company's Form
        8-K filed August 2, 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.


                                      -45-



<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, 2006 and December 31, 2007 by our auditors,
Comiskey & Company, P.C. ("Comiskey & Company"), Stonefield Josephson, Inc. and
Mendoza Berger & Company, LLP.

                                        FISCAL 2006             FISCAL 2007
                                        -----------             -----------

        Audit Fees(1)                   $    29,027             $   137,266

        Audit-Related Fees(2)           $         -             $         -

        Tax Fees(3)                     $     2,200             $     2,883

        All Other Fees(4)               $       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 our accountants 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.


                                      -46-



<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 31, 2008                   RAPTOR NETWORKS TECHNOLOGY, INC.


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


Dated: March 31, 2008                   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 31, 2008
-------------------------------
    Thomas M. Wittenschlaeger

/s/ Ken Bramlett                       Director            March 31, 2008
-------------------------------
    Ken Bramlett

/s/ Larry L. Enterline                 Director            March 31, 2008
-------------------------------
    Larry L. Enterline


                                      -47-



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.

                          INDEX TO FINANCIAL STATEMENTS



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

Financial Statements

     Consolidated Balance Sheets.............................................F-4

     Consolidated Statements of Operations...................................F-5

     Consolidated Statements of Stockholders' Equity (Deficit)...............F-6

     Consolidated Statements of Cash Flows...................................F-7

     Notes to Consolidated Financial Statements..............................F-8




                                      F-1



<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders'
of Raptor Networks Technology, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheet of Raptor Networks
Technology, Inc. (a Colorado corporation) as of December 31, 2007, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The consolidated
financial statements of Raptor Networks Technology, Inc. for the year ended
December 31 2006, were audited by other auditors whose report dated March 17,
2007, except Note 12, which is August 14, 2007, expressed an unqualified opinion
on those statements (the March 17, 2007, which is August 14, 2007, except Note
12, report was modified related to the uncertainty of the Company's ability as a
going concern), have been furnished to us.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Raptor Networks
Technology, Inc. as of December 31, 2007, and the results of its operations and
its cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying consolidated financial statements are presented assuming the
company will continue as a going concern. As more fully described in Note 1 to
the consolidated financial statements, the Company has sustained accumulated
losses from operations totaling $70,200,000 at December 31, 2007. 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 consolidated financial statements. The accompanying
consolidated financial statements do not include any adjustments which might be
necessary if the Company is unable to continue.


/s/ MENDOZA BERGER & COMPANY, LLP



Irvine, California
March 26, 2008


                                      F-2



<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors
Raptor Networks Technology, Inc.


We have audited the consolidated balance sheets of Raptor Networks Technology,
Inc. as of December 31, 2005 (not presented) and 2006, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years ended December 31, 2005 and 2006. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

As more fully described in paragraph 7 of Note 1 to the financial statements,
the Company has restated its 2006 financial statements to account for a change
in its method of accounting for value assigned to a beneficial conversion
feature of senior convertible notes and warrants.

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

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



Denver, Colorado
March 17, 2007, except paragraph 7 of Note 1
which is August 14, 2007

                                                          /S/ COMISKEY & COMPANY
                                                        PROFESSIONAL CORPORATION


                                      F-3



<PAGE>
<TABLE>

                                         RAPTOR NETWORKS TECHNOLOGY, INC.
                                            CONSOLIDATED BALANCE SHEETS


                                                                                                     DECEMBER 31,
                                                                                   DECEMBER 31,          2006
                                                                                       2007          (AS RESTATED)
                                                                                   ------------      ------------
<S>                                                                                <C>               <C>
                                                      ASSETS

CURRENT ASSETS
    Cash and cash equivalents                                                      $    952,828      $    821,388
    Accounts Receivable (net of allowance for doubtful accounts of
      $30,075 and 0 at December 31, 2007 and December 31, 2006,
      respectively)                                                                     462,555           319,764
    Inventory, net                                                                      940,988           951,618
    License fees - current                                                              226,690           297,520
    Prepaid expenses and other current assets                                           232,346           240,826
                                                                                   ------------      ------------
      Total current assets                                                            2,815,407         2,631,116

PROPERTY AND EQUIPMENT, NET                                                             153,541           282,560

OTHER ASSETS
    Debt issue cost                                                                     126,171            97,176
    Deposits                                                                             48,996           102,362
                                                                                   ------------      ------------

TOTAL ASSETS                                                                       $  3,144,115      $  3,113,214
                                                                                   ============      ============

                                       LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
    Accounts payable                                                               $    184,757      $     87,488
    Deferred revenues                                                                    12,980            36,376
    Accrued liabilities                                                                 498,761           205,619
    Warrant liability                                                                 8,911,086         9,773,967
    Conversion option liability                                                       4,079,890         6,806,620
    Senior convertible notes payable                                                  3,251,947         1,041,666
    Short-term convertible notes                                                              -         1,214,290
    Accrued interest payable                                                             34,717           265,055
                                                                                   ------------      ------------
      Total current liabilities                                                      16,974,138        19,431,081

STOCKHOLDERS' DEFICIT
    Preferred stock, no par value; 5,000,000 shares authorized                                -                 -
    Common stock, $.001 par; 200,000,000 and 110,000,000
    Shares authorized 65,042,374 and 54,360,096 shares
    issued and outstanding at December 31, 2007 and December 31,
    2006, respectively                                                                   65,043            54,360
    Additional paid-in capital                                                       56,303,256        44,316,848
    Accumulated deficit                                                             (70,198,322)      (60,689,075)
                                                                                   ------------      ------------
      Total stockholders' deficit                                                   (13,830,023)      (16,317,867)
                                                                                   ------------      ------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                        $  3,144,115      $  3,113,214
                                                                                   ============      ============

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


                                                       F-4



<PAGE>

                                         RAPTOR NETWORKS TECHNOLOGY, INC.
                                       CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                                                     DECEMBER 31,
                                                                                   DECEMBER 31,          2006
                                                                                       2007          (AS RESTATED)
                                                                                   ------------      ------------

REVENUE, NET                                                                       $  1,035,108      $    849,285
COST OF SALES                                                                           385,111           320,073
                                                                                   ------------      ------------

GROSS PROFIT                                                                            649,997           529,212
                                                                                   ------------      ------------

OPERATING EXPENSES
 Salary expense and salary related costs                                              2,596,537         2,099,946
 Marketing                                                                               97,237           229,381
 Research and development                                                             1,356,326         1,336,518
 Selling, general and administrative                                                  2,998,641         2,975,251
                                                                                   ------------      ------------

    Total operating expenses                                                          7,048,741         6,641,096
                                                                                   ------------      ------------

Loss from operations                                                                 (6,398,744)       (6,111,884)
                                                                                   ------------      ------------

OTHER INCOME (EXPENSE)
 Interest income                                                                         23,298             1,609
 Change in fair value of warrant liability and convertible debt                      18,956,186        (9,080,794)
 Senior convertible note restructuring charges                                       (2,089,284)                -
 Extinguishment of debt                                                              11,571,860                 -
 Cost of financing senior convertible note                                          (24,557,055)       (2,499,794)
 Debt financing amortization - warrant liability and
    conversion feature                                                               (6,073,669)       (1,041,666)
 Interest expense                                                                      (941,839)         (346,049)
                                                                                   ------------      ------------

Total other income (loss)                                                            (3,110,503)      (12,966,694)
                                                                                   ------------      ------------

Loss before income taxes                                                             (9,509,247)      (19,078,578)
                                                                                   ------------      ------------

Provision for income taxes                                                                    -                 -

NET LOSS                                                                           $ (9,509,247)     $(19,078,578)
                                                                                   ============      ============

Basic and diluted net loss per share                                               $      (0.16)     $      (0.35)
                                                                                   ============      ============

Basic and diluted weighted average number of shares outstanding                      60,096,402        54,213,443
                                                                                   ============      ============

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


                                                       F-5



<PAGE>

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


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

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
  exercise of Warrants                   46,979            47          23,442          (23,489)               -                 -
Common stock issued for cash upon
  exercise of Warrants                  108,750           109          54,266                 -               -            54,375
Stock Based Compensation                      -             -         168,214                 -               -           168,214
Beneficial Conversion Privilege               -             -         122,751                 -               -           122,751
Net loss for the year ended
December 31, 2006                             -             -               -                 -     (19,078,578)      (19,078,578)
                                    ----------- ------------- --------------- ----------------- --------------- -----------------

Balance, December 31, 2006           54,360,096        54,360      38,135,343         6,181,505     (60,689,075)      (16,317,867)
                                    ----------- ------------- --------------- ----------------- --------------- -----------------
Common stock issued upon cashless     1,643,760         1,644       1,651,919       (1,653,563)               -                 -
  exercise of Warrants
Common stock issued for cash upon
  exercise of Warrants                2,332,647         2,333       1,089,302                 -               -         1,091,635
Stock Based Compensation                      -             -         360,058                 -               -           360,058
Common stock issued upon
  conversion of February 2005 note      397,748           398       1,391,722                 -               -         1,392,120
Common stock issued upon
  conversions of senior
  convertible notes                   6,208,123         6,208       8,801,580                 -               -         8,807,788
Common stock issued upon
  conversion of common stock
  options                               100,000           100          99,900                 -               -           100,000
Beneficial Conversion Feature                 -             -               -            78,930               -            78,930
Valuation conversion related to
  issuance of warrants                        -             -               -           166,560               -           166,560
Net income for the year ended
  December 31, 2007                           -             -               -                 -      (9,509,247)       (9,509,247)
                                    ----------- ------------- --------------- ----------------- --------------- -----------------

Balance, December 31, 2007           65,042,374      $ 65,043    $ 51,529,824       $ 4,773,432    $(70,198,322)     $(13,830,023)
                                    ----------- ------------- --------------- ----------------- --------------- -----------------

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


                                                               F-6



<PAGE>

                                         RAPTOR NETWORKS TECHNOLOGY, INC.
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                                     DECEMBER 31,
                                                                                   DECEMBER 31,         2006
                                                                                       2007           (RESTATED)
                                                                                   ------------      ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                                      $ (9,509,247)     $(19,078,578)
     Adjustments to reconcile net loss to net cash flows from
       operating activities:
         Depreciation                                                                   174,179           311,563
         Amortization                                                                 6,192,910         1,080,077
         Change in fair value of warrants and conversion option liability           (18,956,185)        9,080,794
         Gain on extinguishment of debt                                             (11,571,859)                -
         Senior convertible note restructuring charges                                2,204,909                 -
         Stock based compensation expense                                               360,058           168,214
         Warrants Issued                                                                166,560                 -
     Cost of financing senior convertible note                                       24,557,054         2,499,794
         Change in inventory reserve                                                    101,468                 -
     Changes in assets and liabilities:
         Accounts receivable                                                           (142,791)         (141,124)
         Prepaid expenses and Other current assets                                        8,480           (20,320)
         License fees                                                                    70,830             7,800
         Debt issuance costs                                                            (69,307)                -
         Deposits                                                                        53,366                 -
         Inventory                                                                      (90,838)          180,704
         Accounts payable                                                               390,411           (67,924)
         Accrued interest payable                                                       (31,637)          212,591
         Other accrued liabilities                                                            -            61,380
         Deferred Revenue                                                               (23,396)           36,376
                                                                                   ------------      ------------
     Net cash flows used for operating activities                                    (6,115,035)       (5,668,653)
                                                                                   ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
         Property and equipment purchases                                               (45,160)           (6,464)
                                                                                   ------------      ------------
     Net cash flows used for investing activities                                       (45,160)           (6,464)
                                                                                   ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
         Issuance of common stock                                                     1,091,635            54,375
         Proceeds from issuance of convertible note payable                           5,100,000         5,000,000
         Payments on short-term debt                                                          -          (689,410)
         Proceeds from convertible Debt                                                       -           689,410
         Issuance of common stock for the exercise of stock options                     100,000                 -
                                                                                   ------------      ------------
     Net cash flows provided by financing activities                                  6,291,635         5,054,375
                                                                                   ------------      ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                               131,440          (620,742)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                        821,388         1,442,130
                                                                                   ------------      ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         $    952,828      $    821,388
                                                                                   ============      ============

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
---------------------------------------------------------------------
     Conversion of debt to equity                                                    10,199,908                 -
     Warrants issued for financing services                                             166,560                 -
     Fair market value change of the beneficial conversion feature                    6,079,443                 -
     Warrants issue for convertible debt                                                 78,929                 -
     Issuance of common stock from cashless exercise of warrants                      1,653,563                 -
     Interest paid                                                                            -            95,043

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

                                                        F-7
</TABLE>



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


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.

RESTATEMENT OF PRIOR PERIODS
----------------------------

Restatement of December 2006
----------------------------

The Company has restated its prior period financial results because of an error
in our interpretation of accounting treatment for derivatives issued in the
private placement transactions in July 2006 and January 2007. These restatements
are included in the year to date numbers of this 10-KSB. The restatements were
required because the Company capitalized as deferred debt costs the fair value
of the conversion features and warrants in excess of the face value of the debt
host instrument whereas this cost of financing should have been expensed at the
time of closing the financing.


                                      F-8



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


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

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

Statement of Operations
-----------------------
  Debt financing amortization                    $   1,562,456     $  (520,790)     $   1,041,666
                                                 =============     ===========      =============
  Cost of financing senior convertible note      $           0     $ 2,499,794      $   2,499,794
                                                 =============     ===========      =============
  Other expense                                  $  10,987,690     $ 1,979,004      $  12,966,694
                                                 =============     ===========      =============
  Net Loss                                       $ (17,099,574)    $(1,979,004)     $ (19,078,578)
                                                 =============     ===========      =============
  Basic and diluted net loss per share           $      (0.32)     $     (0.03)     $       (0.35)
                                                 =============     ===========      =============
</TABLE>

Third quarter 2007 Restatement
------------------------------------

On July 30, 2007, we effected a mandatory conversion in the amount of $2,707,475
entitling the holders to 4,387,798 shares of Raptor common stock. The amount of
the conversion carried a corresponding conversion feature, valued at $3,607,648.
This amount was recognized in our statement of operations as a gain to "other
income/loss". As this transaction related to a conversion of a portion of the
senior convertible note, the valuation amount of $3,607,648 should have instead
been properly accounted for as an increase to our "Additional paid-in capital"
(APIC) account on our balance sheet. As such, our September 30, 2007 Net
income/loss and Additional paid-in capital were understated by $3,607,648.

This accounting restatement was addressed in the fourth quarter of 2007
and appropriate corrections were made such that the financial data for the 2007
fiscal year as included in this 10-KSB are consistent with our
restatement. The adjustments are cash neutral and did not affect the
Company's cash position.

The affect of the restatement to Additional paid-in capital, Change in fair
value of warrant liability and convertible liability, Net loss and Basic and
diluted earnings per share for the nine months ended September 30, 2007, are as
follows:

<TABLE>
                                                 AS ORIGINALLY  RESTATEMENT          AS
                                                   REPORTED        ADJUSTMENTS       RESTATED
                                                 -------------     -----------      -------------
<S>                                              <C>               <C>              <C>
Balance Sheet
-------------
  Additional paid-in capital                     $ (52,015,168)    $(3,607,648)     $ (55,622,816)
                                                 =============     ===========      =============

Statement of Operations Other Income/(Loss)
--------------------------------------------
  Change in fair value of warrant liability
    and convertible debt                         $  (5,198,576)    $(3,607,648)     $  (8,806,224)
                                                 =============     ===========      =============
  Net Income/(Loss)                              $ (30,241,246)    $(3,607,648)     $ (33,848,894)
                                                 =============     ===========      =============
  Basic and diluted net (loss) per share         $       (0.52)    $     (0.06)     $       (0.58)
                                                 =============     ===========      =============
</TABLE>

The affect of the restatement to Additional paid-in capital, Change in fair
value of warrant liability and convertible liability, Net loss and Basic and
diluted earnings per share for the three months ended September 30, 2007, are as
follows:


                                      F-9



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007

<TABLE>
                                                 AS ORIGINALLY  RESTATEMENT        AS
                                                   REPORTED        ADJUSTMENTS      RESTATED
                                                 -------------     -----------      -------------
<S>                                              <C>               <C>              <C>
Balance Sheet
-------------
  Additional paid-in capital                     $ (52,015,168)    $(3,607,648)     $ (55,622,816)
                                                 =============     ===========      =============

Statement of Operations Other Income/(Loss)
--------------------------------------------
  Change in fair value of warrant liability
    and convertible debt                         $  19,127,702    $ (3,607,648)     $  15,520,054
                                                 =============     ===========      =============
  Net Income/(Loss)                              $   9,485,164    $ (3,607,648)     $   5,877,516
                                                 =============     ===========      =============
  Basic and diluted net income/(loss) per share  $        0.15     $     (0.06)     $        0.09
                                                 =============     ===========      =============
</TABLE>

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.

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
-------------------------------------------------------
Accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Company's best estimate of
the amount of probable credit losses in the Company's existing accounts
receivable. The Company establishes provisions for losses on accounts receivable
when it is probable that all or part of the outstanding balance will not be
collected. The Company regularly reviews collectability and establishes or
adjusts the allowance as necessary using the specific identification method.

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, 2007 consists of raw materials, work
in process and finished goods.

LICENSE FEES
------------
The Company capitalizes software license fees of 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. Amortization of the license fees included in cost of sales
for the years ended December 31, 2007 and 2006 totaled $20,824 and $7,800
respectively.

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

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.


                                      F-10



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


DEBT ISSUANCE COSTS
--------------------
Debt issuance costs reflect fees incurred to obtain financing. Debt issuance
costs are amortized (included in interest expense using the straight-line method
over the life of the related debt. Amortization expense for the years ended
December 31, 2007 and 2006 was $119,240 and $38,413 respectively.

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

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
---------------
Marketing costs are expensed as incurred. For the years ended December 31, 2007
and 2006, marketing costs were $97,237 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: labor,
product design cost including rental of design tools, consumables, and costs of
prototypes.

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, 2007 and 2006 the balance
owed for compensated absences was $120,108 and $108,752 respectively.

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, 2007 and
2006.

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.

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.

During the year ended December 31, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48), which supplements SFAS No. 109,
"Accounting for Income Taxes," by defining the confidence level that a tax
position must meet in order to be recognized in the financial statements. The
Interpretation requires that the tax effects of a position be recognized only if
it is "more-likely-than-not" to be sustained based solely on its technical
merits as of the reporting date. The more-likely-than-not threshold represents a
positive assertion by management that a company is entitled to the economic
benefits of a tax position, If a tax position is not considered


                                      F-11



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


more-likely-than-not to be sustained based solely on its technical merits. No
benefits of the tax position are to be recognized. Moreover, the
more-likely-than-not threshold must continue to be met in each reporting period
to support continued recognition of a benefit. With the adoption of FIN 48,
companies are required to adjust their financial statements to reflect only
those tax positions that are more-likely-than-not to be sustained. Any necessary
adjustment would be recorded directly to retained earnings and reported as a
change in accounting principle.

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
------------------------
The Company accounts for stock-based compensation using the fair value
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123 (revised 2004), "Shared Based Payment" ("SFAS No. 123(R)") using the
Black-Scholes Option pricing model. Under SFAS No. 123(R), all stock-based
compensation cost is measured at the grant date, based on the fair value of the
award, and is recognized as an expense over the requisite service period.

For the year ended December 31, 2007 and December 31, 2006, the Company
recognized $360,058 and $168,214 respectively, in stock based compensation costs
related to the issuance of options to employees. These costs were calculated in
accordance with SFAS No. 123(R) and are reflected in operating expenses. The
total stock options for the 2005 Plan and non-plan options in the amounts of
626,000 and 1,175,000, respectively, results in a total of 1,801,000 options
outstanding at December 31, 2007.

2005 Stock Plan
---------------

The Company's 2005 Stock Plan was approved by the Company's Board of Directors
on April 7, 2005, approved by the Company's shareholders on June 9, 2005, and
amended and restated as the First Amended and Restated 2005 Stock Plan ("2005
Plan") by the Company's Board of Directors on June, 29, 2007. The Company filed
a registration statement on Form S-8 with the Securities and Exchange Commission
("SEC") in May 2007 to cover the issuance of up to 3,000,000 shares of common
stock underlying options and stock purchase rights authorized for issuance under
the 2005 Plan and qualified for issuance the underlying securities with the
California Department of Corporations in July, 2007. Prior to that time, the
Company issued only non-plan stock options. The 2005 Plan is now the Company's
only formal plan for providing stock-based incentive compensation to the
Company's eligible employees, non-employee directors and certain consultants.
The Board of Directors or committee of the Board of Directors administering the
2005 Plan has discretion to set vesting, expiration and other terms of awards
under the 2005 Plan. As of December 31, 2007, the 2005 Plan had a total of
626,000 options outstanding and 2,374,000 shares reserved for future grants.

Non-Plan Options
----------------

Prior to approval of our 2005 Plan, the Company granted stock options
out-of-plan. These non-plan options provided for the periodic issuance of stock
options to our employees and non-employee board of directors. The vesting period
for the non-plan stock options is three equal annual installments commencing on
the first anniversary of the date of grant. The maximum contractual term of
stock options granted under these out-of-plan options was eight years. As of
December 31, 2007, there were 1,175,000 non-plan options outstanding.


                                      F-12



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


Information with respect to stock option activity is as follows:

<TABLE>

                                                      Weighted       Weighted Average
                                                       Average      Remaining Contract    Aggregate
Options                                Shares       Exercise Price         Term         Intrinsic Value
-------                                ------       --------------         ----         ---------------
<S>                                   <C>           <C>                    <C>               <C>
Outstanding, December 31, 2006        1,645,500     $         1.00
Granted                                 661,500               1.03
Forfeited / Expired                    (406,000)              1.00

Exercised                              (100,000)              1.00
                                      ---------     --------------
Outstanding, December 31, 2007        1,801,000     $         1.01         5.41                 -
                                      =========     ==============         ====              ====
Exercisable, December 31, 2007        1,181,833     $         1.00         4.51                 -
                                      =========     ==============         ====              ====
</TABLE>

A summary of the status of the Company's unvested shares as of December 31, 2007
is presented below:

                                                              Weighted Average
                                       Number of Shares    Grant-Date Fair Value
                                       ----------------    ---------------------
Non-vested at January 1, 2007                   663,836
Granted                                         661,500                     0.66
Vested                                         (316,836)                    1.08
Non-vested shares forfeited                    (389,333)   $                0.66
                                             ----------    ---------------------
Non-vested at December 31, 2007                 619,167    $                0.66


                                                       December 31, 2007
                                                       -----------------

Dividend Yield......................                        0.0%
Risk-Free Interest Rate.............                        4.49%
Expected Life.......................                        3.00 years
Expected Volatility.................                        114.82%

As of December 31, 2007 total unrecognized stock-based compensation cost related
to unvested stock options was approximately $119,817 which is expected to be
recognized over a weighted average period of approximately 2.12 years.

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, 2007 and the year ended December 31, 2006, 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, 2007 was approximately
$834,600.

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.


                                      F-13



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108 ("SAB 108"), FINANCIAL STATEMENTS - CONSIDERING THE
EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT
YEAR FINANCIAL STATEMENTS." SAB 108 provides guidance on how prior year
misstatements should be taken into consideration when quantifying misstatements
in current year financial statements for purposes of determining whether the
current year's financial statements are materially misstated. SAB 108 provides
that once a current year misstatement has been quantified, the guidance in SAB
No. 99, FINANCIAL STATEMENTS - MATERIALITY, should be applied to determine
whether the misstatement is material and should result in an adjustment to the
financial statements. Under certain circumstances, prior year financial
statements will not have to be restated and the effects of initially applying
SAB 108 on prior years will be recorded as a cumulative effect adjustment to
beginning Retained Earnings on January 1, 2006, with disclosure of the items
included in the cumulative effect. The Company applied the provisions of SAB 108
with the preparation of the Company's annual financial statements for the
calendar year ended December 31, 2006. The application of the provisions of SAB
108 did not have a material impact on the Company's financial statements for the
year ended December 31, 2007.

In November 2006, the FASB ratified EITF Issue No. 06-7, "Issuer's Accounting
for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument
When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities"
("EITF No. 06-7"). At the time of issuance, an embedded conversion option in a
convertible debt instrument may be required to be bifurcated from the debt
instrument and accounted for separately by the issuer as a derivative under SFAS
No. 133, based on the application of EITF No. 00-19. Subsequent to the issuance
of the convertible debt, facts may change and cause the embedded conversion
option to no longer meet the conditions for separate accounting as a derivative
instrument, such as when the bifurcated instrument meets the conditions of EITF
No. 00-19 to be classified in stockholders' equity. Under EITF No. 06-7, when an
embedded conversion option previously accounted for as a derivative under
Statement of Financial Accounting Standards ("SFAS") No. 133 no longer meets the
bifurcation criteria under that standard, an issuer shall disclose a description
of the principal changes causing the embedded conversion option to no longer
require bifurcation under SFAS No. 133 and the amount of the liability for the
conversion option reclassified to stockholders' equity. EITF No. 06-7 should be
applied to all previously bifurcated conversion options in convertible debt
instruments that no longer meet the bifurcation criteria in SFAS No. 133 in
interim or annual periods beginning after December 15, 2006, regardless of
whether the debt instrument was entered into prior or subsequent to the
effective date of EITF No. 06-7. The adoption of EITF 06-7 did not have a
material impact on our financial position, results of operations or cash flows.

In November 2006, the FASB ratified EITF Issue No. 06-6, Application of EITF
Issue No. 05-7, `Accounting for Modifications to Conversion Options Embedded in
Debt Instruments and Related Issues ' ("EITF 06-6"). EITF 06-6 addresses the
modification of a convertible debt instrument that changes the fair value of an
embedded conversion option and the subsequent recognition of interest expense
for the associated debt instrument when the modification does not result in a
debt extinguishment pursuant to EITF 96-19. The Company does not expect the
adoption of EITF 06-6 to have a material impact on its consolidated financial
position, results of operations or cash flows.

In December 2006, FASB Staff Position No. EITF 00-19-2 was issued. This FASB
Staff Position (FSP) addresses an issuer's accounting for registration payment
arrangements. This FSP specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, should be separately recognized
and measured in accordance with FASB Statement No. 5, Accounting for
Contingencies. The guidance in this FSP amends FASB Statements No. 133,
Accounting for Derivative Instruments and Hedging Activities, and No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, and FASB Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, to include scope exceptions for registration payment
arrangements. This FSP further clarifies that a financial instrument subject to
a registration payment arrangement should be accounted for in accordance with
other applicable generally accepted accounting principles (GAAP) without regard
to the contingent obligation to transfer consideration pursuant to the
registration payment arrangement. The Company follows the guidance in FSP
00-19-2 in assessing its liabilities related to the liquidated damages arising
from the Company's default position on the convertible financing arrangements.


                                      F-14



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


In February 2007, the FASB issued Statement No. 159 ("FAS 159") which expanded
FAS No. 157, "FAIR VALUE MEASUREMENTS ," which defines fair value, establishes
guidelines for measuring fair value and expands disclosures regarding fair value
measurements. FAS 159 does not require any new fair value measurements but
rather eliminates inconsistencies in guidance found in various prior accounting
pronouncements. FAS 159 is effective for fiscal years beginning after November
15, 2007. Earlier adoption is permitted, provided the company has not yet issued
financial statements, including for interim periods, for that fiscal year. The
Company is currently evaluating the impact of FAS 159, but does not expect the
adoption of FAS 159 to have a material impact on our financial statements.

In June 2007, the FASB ratified the consensus on Emerging Issues Task Force
(EITF) Issue No. 06-11, "Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards" ("EITF 06-11"). EITF 06-11 requires companies to
recognize the income tax benefit realized from dividends or dividend equivalents
that are charged to retained earnings and paid to employees for non-vested
equity-classified employee share-based payment awards as an increase to
additional paid-in capital. EITF 06-11 is effective for fiscal years beginning
after September 15, 2007. While the Company is currently evaluating the
provisions of EITF 06-11, the adoption is not expected to have any significant
effect on the Company's consolidated financial position or results of
operations.

In July 2006, the FASB issued Interpretation No. 48, " ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES, AN INTERPRETATION OF FAS 109 "("FIN 48") which
clarifies the accounting for uncertainty in income taxes recognized in
accordance with FAS 109, " ACCOUNTING FOR INCOME TAXES." FIN 48 is a
comprehensive model for how a company should recognize, measure, present, and
disclose in its financial statements uncertain tax positions that the company
has taken or expects to take on a tax return. If an income tax position exceeds
a more likely than not (greater than 50%) probability of success upon tax audit,
the company will recognize an income tax benefit in its financial statements.
Additionally, companies are required to accrue interest and related penalties,
if applicable, on all tax exposures consistent with jurisdictional tax laws.
This interpretation is effective as of January 1, 2007. The adoption of this
statement does not have a material impact on our 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.

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 accompanying condensed consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America, which contemplate continuation of the Company as a going concern.
The company has sustained net losses of $9,509,247 and $19,078,578 for the years
ended December 31, 2007 and December 31, 2006, respectively. Net cash used in
operations for the year ended December 31, 2007 was $6,214,835. The Company also
has an accumulated deficit of $70,198,322 and a working capital deficit of
$14,158,731 at December 31, 2007, of which $12,990,976 relates to the fair value
of derivative financial instruments.


                                      F-15



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


The items discussed above raise substantial doubts about the Company's ability
to continue as a going concern. If the Company's financial resources are
insufficient, the Company may require additional financing in order to execute
its operating plan and continue as a going concern. The Company cannot predict
whether this additional financing will be in the form of equity, debt, or
another form. The Company may not be able to obtain the necessary additional
capital on a timely basis, on acceptable terms, or at all. In any of these
events, the Company may be unable to implement its current plans for expansion,
repay its debt obligations as they become due or respond to competitive
pressures, any of which circumstances would have a material adverse effect on
its business, prospects, financial condition and results of operations. The
financial statements do not include any adjustments relating to the
recoverability and reclassification of recorded asset amounts or amounts and
reclassification of liabilities that might be necessary, should the Company be
unable to continue as a going concern.

Should financing sources fail to materialize, management would seek alternate
funding sources such as the sale of common and/or preferred stock, the issuance
of debt, or other means.

The Company plans to attempt to address its working capital deficiency by
increasing its sales, maintaining strict expense controls and seeking strategic
alliances.

In the event that these financing sources do not materialize, or the Company is
unsuccessful in increasing its revenues and profits, the Company will be forced
to further reduce its costs, may be unable to repay its debt obligations as they
become due, or respond to competitive pressures, any of which circumstances
would have a material adverse effect on its business, prospects, financial
condition and results of operations. Additionally, if these funding sources or
increased revenues and profits do not materialize, and the Company is unable to
secure additional financing, the Company could be forced to reduce or curtail
its business operations unless it is able to engage in a merger or other
corporate finance transaction with a better capitalized entity.

2.    PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

                                                December 31,      December 31,
                                                    2007              2006
                                                ------------      ------------
        Furniture and Office equipment          $    203,280      $    194,944
        Computer equipment                           214,773           193,701
        Testing equipment                            620,445           606,738
        Leasehold Improvements                       113,317           113,317
                                                ------------      ------------
                                                   1,151,815         1,108,700
        Less: Accumulated depreciation              (998,274)         (826,140)
                                                ------------      ------------
                                                $    153,541      $    282,560
                                                ============      ============

Depreciation and amortization expense related to property and equipment for the
years ended December 31, 2007 and 2006 was $174,181 and $311,562, respectively.

3.    INVENTORY

                                                December 31,      December 31,
                                                    2007              2006
                                                ------------      ------------

        Raw materials                           $    628,386      $    706,381
        Work In Process                               59,522                 -
        Finished goods                               457,838           348,527
                                                ------------      ------------
                                                   1,145,746         1,054,908
        Less: Allowance for obsolescence             204,758           103,290
                                                ------------      ------------
        Inventory, net                          $    940,988      $    951,618
                                                ============      ============


                                      F-16



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


4.    SHORT-TERM CONVERTIBLE NOTES

During the period from December 2003 to April 2004, the Company issued
convertible notes for a total amount of $1,214,290. Interest on these loans
accrues at an annual rate of 8%. Pursuant to the terms of the notes, upon the
third anniversary of the issuance of the notes, the total outstanding principal
balance in the amount of $1,214,290 and all accrued and unpaid interest in the
amount of $177,827 converted into 397,748 shares of our common stock on April
15, 2007, based on a conversion price of $3.50 per share.

5.    SENIOR CONVERTIBLE NOTE PAYABLE

Senior convertible notes consisting of $5 million notes issued on July 31, 2006
and a January 18, 2007 restructuring resulting in notes of $8,804,909

<TABLE>
                                                     Senior                        Detachable        Conversion
                                                  Convertible    Note payable       Warrants           Option
                                                  note payable   Debt Discount      Liability         Liability
                                                  ------------   -------------    -------------     -------------
<S>                                               <C>            <C>              <C>                <C>
      Balance at December 31, 2005                $          -   $           -    $           -      $          -
                                                  ============   =============    =============     =============

      July 31, 2006 Senior convertible notes        (5,000,000)      5,000,000       (4,431,011)       (3,068,783)
      Change in fair value of warrants                       -               -       (5,342,956)                -
      Change in fair value of conversion
        feature                                              -               -                -        (3,737,837)
      Amortization of debt discount                          -      (1,041,666)               -                 -
                                                  ------------   -------------    -------------     -------------

      Balance at December 31, 2006 as restated    $ (5,000,000)  $   3,958,334    $  (9,773,967)    $  (6,806,620)
                                                  ============   =============    =============     =============
      Amortization and change in fair values
        from January 1 to January 18, 2007                            (114,247)         524,400           640,241
      To record gain on extinguishment of debt               -      (3,844,087)       9,249,567         6,166,379
      January 18 Senior convertible notes
        amended                                     (3,804,909)              -                -                 -
      Detachable L Warrant and Conversion
        feature January 18, 2007                             -       8,804,909      (16,279,237)      (10,858,880)
      Recognition of detachable M warrant
        feature, July 30, 2007                               -               -       (4,144,328)                -
      Reduction upon conversion of note              2,707,475               -                -         6,079,443
      Change in fair value of L Warrants                     -               -        9,752,888                 -
      Change in fair value of M Warrants                     -               -        1,974,487                 -
      Change in fair value of conversion
        feature                                              -               -                -           849,975
      Amortization of debt discount                          -      (5,473,312)               -                 -
                                                  ------------   -------------    -------------     -------------

      Balance at December 31, 2007                $ (6,097,434)  $   3,331,597    $  (8,696,190)    $  (3,929,462)
                                                  ============   =============    =============     =============
</TABLE>

On July 30, 2006, the Company entered into a Securities Purchase Agreement with
three institutional 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-1 Warrants to purchase up
to an aggregate of 17,065,623 shares of our common stock and Series M-1 Warrants
to purchase up to an aggregate of 7,395,103 shares of our common stock. The
Series L-1 Warrants are immediately exercisable. The Series M-1 Warrants become
exercisable only upon a mandatory conversion of the notes at the option of the
Company. The Company received aggregate gross proceeds of $5 million from the
investors for our issuance of these notes and warrants.


                                      F-17



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


In November 2006, the Company determined that it would not be able to obtain an
effective registration statement by the contractually required date of December
1, 2006 and the Company and investors agreed to restructure the financing.

In connection with the restructuring the Company 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-1 Warrants,
Series M-1 Warrants and registration rights agreement. These amendments include,
but are not limited to, a waiver of all fees, penalties and defaults as of
January 19, 2007 which related to registration statement filing failures and/or
effectiveness failures, as described in the July 30, 2006 agreements, an
increase in the principal amount of the notes from an aggregate of $5 million to
an aggregate of approximately $7.2 million, a 5,688,540 increase in the
aggregate number of shares of common stock issuable upon exercise of the Series
L-1 Warrants 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-1
Warrants and the Series M-1 Warrants from $0.5054 per share to $0.43948 per
share. The Company did not receive any additional cash consideration for these
amendments.

Additionally, on January 18, 2007, the Company entered into a Securities
Purchase Agreement with one of the existing institutional 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 $1.6 million, Series L-2 Warrants to purchase up to an aggregate of
7,281,332 shares of our common stock and Series M-2 Warrants to purchase up to
an aggregate of 2,366,433 shares of our common stock. The Series L-2 Warrants
are immediately exercisable. The Series M-2 warrants become exercisable only
upon a mandatory conversion of the notes at the option of the Company. The
Company received aggregate gross proceeds of $1.6 million from the investors for
our issuance of these notes and warrants. Both the Series L-2 Warrants and
Series M-2 Warrants have an initial exercise price of $0.43948 per share and
expire on July 31, 2011.

The Company may elect to make monthly installment payments in cash or in shares
of the Company's common stock.

All 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 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.

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 all of the convertible
notes, Series L-1 and L-2 Warrants (together the "Series L Warrants") and Series
M-1 and M-2 Warrants (together the "Series M Warrants").

Some important events of default follow:

      o  The failure of any registration statement required by the Amended
         Registration Rights Agreement to be declared effective by the SEC
         within 60 days after the date required by the Amended 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).


                                      F-18



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


      o  The suspension from trading or failure of the 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  The failure to issue shares upon conversion of a Note for more than 10
         business days after the relevant conversion date or a notice of the
         Company's intention not to comply with a request for conversion.

If there is an event of default, then the investors have the right to redeem all
or any portion of the 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 the Company's Common Stock on the date immediately preceding the event of
default, (2) the closing sale price for the Company's Common Stock on the date
immediately after the event of default and (3) the closing sale price for the
Company's 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 notes (including all principal, interest and late fees) may be
converted.

Subject to certain conditions, the Company may require the investors to convert
up to 50%, of the notes after the SEC has declared effective the initial
registration statement at any time when the shares of the Company's Common Stock
are trading at or above 150% of the initial Conversion Price or convert up to
100%, of the notes after the SEC has declared effective the initial registration
statement at any time when the shares of the Company's Common Stock are trading
at or above 175% of the initial Conversion Price. The 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 would own in excess of 4.99% of the Company's outstanding shares of
Common Stock. This percentage may, however, be increased up to 9.99% at the
option of the investor upon 61-days prior notice to the Company.

The terms of the Amendment and Exchange Agreement, dated January 18, 2007 and
amended and restated on January 22, 2007, with the investors from the July 30,
2006 private placement including the financing of $1.6 million result in the
following accounting treatment:

The restructuring of our July 30, 2006 debt which took place in January 2007
constitutes, as per SFAS No. 15, non-troubled debt and therefore is subject to
the accounting treatment as provided in Emerging Issues Task Force ("EITF")
96-19. In SFAS No. 15 it is stated "a debt constitutes a troubled debt
restructuring if the creditor grants a concession to the debtor". As no
concessions were granted in our January 2007 debt restructuring, troubled debt
accounting rules do not apply. In accordance with EITF 96-19 we determined that
the amended agreements differ substantially from the original July 31, 2006
financing agreements and therefore the restructuring of our original senior
convertible notes should be accounted for as an extinguishment of debt. This
treatment resulted in the recognition, on January 18, 2007, of an $11,571,860
gain after eliminating all liabilities related to the July 31, 2006 financing.

The terms of the amended 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 required number of shares to be
issued upon conversion that is greater than the currently authorized number of
shares 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 January
18, 2007 was valued at $10,858,880. SFAS No. 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 at December
31, 2007 after applying the Black-Scholes option pricing model was determined to
be $3,929,462 and was recognized by recording a gain of $849,975 to Other
Expenses for the year ended December 31, 2007. During the year ended December
31, 2007, the carrying value of the conversion feature was also decreased by
$6,079,443. This amount represents the fair value associated with the reduction
of 6,160,638 shares in connection with the conversion of a portion of the notes
totaling $2,707,475. In connection with this conversion the Company also issued
a total of 13,665 shares of common stock as payment for accrued interest due on
the converted amounts. The Note holders have elected to make certain deferrals
for their June 1, 2007 through December 1, 2007 standard conversions.


                                      F-19



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


The key assumptions used in applying the Black-Scholes option pricing model to
determine the fair value at December 31, 2007 are as follows:

Stock price of $0.67
Exercise price of $0.44
Volatility of 79.2 %
Expected life 0.60 years
Interest rate of 3.46%

The combined fair value of the conversion feature and the detachable L warrants
at January 18, 2007 was $27,138,117. The face value of the related senior
convertible note was $8,804,909. Therefore, the Company has recognized the
excess of $18,333,208 as a charge to the Cost of Financing in January 2007.
Amortization of the $8,804,909 debt discount liability equals $5,473,312 for the
year ended December 31, 2007.

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 required
number of shares to be issued upon conversion that is greater than the currently
authorized number of shares. This condition, which is outside of the Company's
control, could impact the Company's ability to maintain the appropriate level of
reserved shares in place required for the Series L Warrants and the Series M
Warrants. This could result in the need for the Company to obtain approval from
its shareholders to increase its authorized share capital to accommodate
appropriate reserves for shares issuable upon exercise of the Series L Warrants
and Series M Warrants. Since shareholder approval for this increase of
authorized share capital cannot be guaranteed, the Series L Warrants and Series
M Warrants, in accordance with EITF 00-19, need to be classified as a liability
on the Company balance sheet, measured at fair value using the Black-Scholes
option pricing model.

The initial amount of the detachable L Warrants on January 18, 2007 was valued
at $16,279,237. SFAS No. 133 and EITF 00-19, further require the Company to
account for the detachable warrant 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 L warrants at
December 31, 2007 after applying the Black-Scholes option pricing model was
determined to be $6,526,349 and was recognized by recording a $9,752,888 gain to
Other Expenses during the year ended December 31, 2007. The key assumptions used
in applying the Black-Scholes option pricing model to determine the fair value
are as follows:

Stock price of $0.67
Exercise price of $0.44
Volatility of 79.2 %
Expected life 0.60 years
Interest rate of 3.46%


                                      F-20



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


The holders' right to exercise the 9,761,536 Series M Warrants was contingent on
a mandatory conversion of the notes at the option of the Company. A mandatory
conversion for a portion of the notes took place on July 30, 2007 entitling
investors to exercise up to 7,646,361 M warrant shares. The fair value of these
7,646,361 Series M warrant shares, measured at January 18, 2007 using the
Black-Scholes option pricing model is $4,144,328. As prescribed by paragraph 13
of EITF 98-5, this $4,144,328 has been recognized as a charge to the Cost of
Financing in the third quarter of 2007. SFAS No. 133 and EITF 00-19, further
requires the Company to account for the now exercisable 7,646,361 Series M
warrant shares 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 at December 31, 2007 of the M Warrants after applying the Black-Scholes
option pricing model was determined to be $2,169,841 and was recognized by
recording a $1,974,487 gain to Other Expenses during the year ended December 31,
2007. At December 31, 2007, an amount of 2,115,175 Series M Warrants remain
contingent until there is a further mandatory conversion of the notes. The value
of these remaining warrants measured at fair value on January 18, 2007 using the
Black-Scholes option pricing model is $1,146,425 and will be recognized upon a
mandatory conversion at the option of the Company, if any.

In connection with the $8,804,909 private placement, the Company issued to the
placement agent warrants with a term of five years to purchase 600,710 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, 2007 was
$66,490. During the year ended December 31, 2007, the Company amortized $109,615
to interest expense.

These senior convertible notes are classified as short-term because investors
have the right to accelerate conversion of their notes up to an amount equal to
20% of the aggregate dollar trading volume of the Company's common stock over
the prior 20 trading day period. In addition, the Company has the right to call
a forced conversion under certain conditions. Therefore, the Company believes
the conversion of the notes will take place within a year. This accelerated
conversion also applies to the deferred conversions by the note holders.

$3,500,000 July 2007 Senior Secured Convertible Note Financing
--------------------------------------------------------------

<TABLE>
                                                     Senior                        Detachable        Conversion
                                                  Convertible    Note payable       Warrants           Option
                                                  note payable   Debt Discount      Liability         Liability
                                                  ------------   -------------    -------------     -------------
<S>                                               <C>            <C>              <C>                <C>
  Balance at December 31, 2006                    $          -   $           -    $           -     $           -

  July 2007 Senior  convertible notes               (3,500,000)              -                -                 -
  Detachable warrant and Conversion
  feature July 2007                                          -       3,500,000       (3,282,069)       (2,297,449)
  Change in fair value of warrants                           -               -        3,067,173                 -
  Change in fair value of conversion feature                 -               -                -         2,147,021
  Amortization of debt discount to other expense             -        (486,110)               -                 -
                                                  ------------   -------------    -------------     -------------

  Balance at December 31, 2007                    $ (3,500,000)  $   3,013,890    $    (214,896)    $    (150,428)
                                                  ============   =============    =============     =============
</TABLE>

On July 31, 2007, we entered into a securities purchase agreement with our
investors involved in the July 2006 and January 2007 transactions for total
gross proceeds of $3.5 million, which agreement provides for the issuance on
August 1, 2007 of Senior Secured Convertible Notes in the aggregate principal
amount of $3.5 million ("Secured Notes"), Series N Warrants, Series O Warrants
and Series P Warrants in a private placement transaction. The agreement also
requires the Company to enter into a security agreement granting the investors a
first priority perfected security interest in all of the Company's assets and
requires the Company's subsidiary to guaranty the Company's obligations under
the Secured Notes. The Secured Notes and accompanying warrants are or may become
convertible into or exercisable for the following number of shares of the
Company's common stock:


                                      F-21



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


                    Notes:                        2,909,636
                    N Warrants:                   2,909,636
                    O Warrants:                   1,891,263
                    P Warrants:                   1,246,987
                    ----------------------------------------------------
                    Total:                        8,957,522

The Secured Notes carry an interest rate of 9.25% per annum, which rate may be
increased to 15% upon the occurrence of an event of default, and mature on
August 1, 2010. This date may be extended, at the option of the investors, by up
to two years. Interest will be payable quarterly, starting October 1, 2007. The
Secured Notes are immediately convertible at a conversion price of $1.2029 per
share. The entire outstanding principal balance and any outstanding fees or
interest shall be due and payable in full on the maturity date. Under certain
conditions, the Company may require investors to convert up to either 50% or
100% of the outstanding balances of the Secured Notes at any time the Company
shares are trading at or above $1.80435 or $2.105075, respectively.

The N Warrants carry a strike price of $1.2029 for each share and are
immediately exercisable. The N warrants expire on the earlier of August 1, 2016
or seven years after the date all of the shares issuable upon conversion of the
Secured Notes have been included on an effective registration statement.

The O Warrants also carry a strike price of $1.2029 for each share. The O
Warrants will only become exercisable by an investor if the Company conducts
mandatory conversions, and then only to the extent of 65% of the number of
shares issued to such investor upon each mandatory conversion. The O Warrants
expire on the earlier of August 1, 2016 or seven years after the date all of the
shares issuable upon conversion of the Secured Notes have been included on an
effective registration statement.

The P Warrants carry a strike price of $1.2029 for each share and are
immediately exercisable. The P Warrants expire on the earlier of the maturity
date of the Secured Notes of August 1, 2010, which date may be extended by up to
two years at the option of the investors, and the date the Company has satisfied
its payment obligations under the warrant holder's Secured Note.

In the event of a default or upon the occurrence of certain fundamental
transactions as defined in the Secured Notes, the investors will have the right
to require the Company to redeem the Secured Notes at a premium. In addition, at
any time on or after August 1, 2010, the investors may accelerate the partial
payment of the Secured Notes by requiring that the Company convert at the lower
of the then conversion price or a 7.5% or 10.0% discount to the recent volume
weighted average price of the Company's common stock, or at the option of the
Company, redeem in cash, up to an amount equal to 20% of the aggregate dollar
trading volume of the Company's common stock over the prior 20-trading day
period.

The conversion price of the Secured Notes and the exercise price of the N
Warrants, O Warrants and P Warrants are subject to customary anti-dilution
provisions for stock splits and the like, and are also subject to full-ratchet
anti-dilution protection such that if the Company issues or is deemed to have
issued certain securities at a price lower than the then applicable conversion
or exercise price, then the conversion or exercise price will immediately be
reduced to such lower price.

The Secured Notes and the N Warrants, O Warrants and P Warrants contain certain
limitations on conversion or exercise, including that a holders of those
securities cannot convert or exercise those securities to the extent that upon
such conversion or exercise, that holder, together with the holder's affiliates,
would own in excess of 4.99% of the Company's outstanding shares of common stock
(subject to an increase or decrease, upon at least 61-days' notice, by the
investor to the Company, of up to 9.99%).

The Company has agreed to register the shares of common stock underlying the
Secured Notes, N Warrants, O Warrants and P Warrants, If the Company fails to
meet the filing or effectiveness requirements, subject to certain grace periods,
the Company may be required to pay liquidated damages of $70,000 on the date of
such failure and on every 30th day thereafter until such failure is cured. The
total liquidated damages payable by the Company for failure to meet the filing
and effectiveness requirements are capped at $437,500.


                                      F-22



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


The terms of the Secured 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 Secured Notes do 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 30, 2007 was valued at $2,297,449. SFAS No. 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 at December 31, 2007 after applying the Black-Scholes option pricing
model was determined to be $150,428 and was recognized by recording a gain of
$2,147,021 to Other Expenses for the year ended December 31, 2007. The key
assumptions used in applying the Black-Scholes option pricing model to determine
the fair value at December 31, 2007 are as follows:

Stock price of $0.67
Exercise price of $1.2029
Volatility of 79.2%
Expected life 0.60 years
Interest rate of 3.46%

The combined fair value of the conversion feature and the detachable N warrants
and P warrant at July 30, 2007 was $5,579,518. The face value of the related
Secured Notes was $3,500,000. Therefore, the Company has recognized the excess
of $2,079,518 as a charge to the Cost of Financing in July 2007. Amortization of
the $3,500,000 debt discount liability equals $486,110 for the year ended
December 31, 2007.

With respect to the Series N Warrants and the Series P Warrants, it is noted
that the conversion feature 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 N Warrants and the Series P
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 N Warrants
and Series P Warrants. Since shareholder approval for this increase of
authorized share capital cannot be guaranteed, the Series N Warrants and Series
P Warrants, in accordance with EITF 00-19, need to be classified as a liability
on the Company balance sheet, measured at fair value using the Black-Scholes
option pricing model. On July 30, 2007 the initial amount of the detachable N
Warrants and P Warrants combined was valued at $3,282,069. SFAS No. 133 and EITF
00-19, further require the Company to account for the detachable warrant
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 at December 31, 2007 after applying the
Black-Scholes option pricing model was determined to be $214,896 and was
recognized by recording a $3,067,173 gain to Other Expenses during the year
ended December 31, 2007. The key assumptions used in applying the Black-Scholes
option pricing model to determine the fair value are as follows:

Stock price of $0.67
Exercise price of $1.2029
Volatility of 79.2%
Expected life 0.60 years
Interest rate of 3.46%

Since conversion of the Series O Warrants is contingent on a mandatory
conversion of the Secured Notes at the option of the Company 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 O
Warrants measured at fair value on July 30, 2007 using the Black-Scholes option
pricing model is $1,493,341.


                                      F-23



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


6.    STOCKHOLDERS' EQUITY

The Company's authorized capital consisted of 200,000,000 and 110,000,000 shares
of common stock, par value $0.001 per share at December 31, 2007 and December
31, 2006, respectively, and 5,000,000 shares of preferred stock, no par value
per share as of both dates. The additional 90,000,000 authorized shares issued
in 2007 were approved by the Shareholders on April 30, 2007 during the Company's
Annual Meeting of Shareholders.

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

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.

During 2007, in connection with the Company's senior convertible notes, the
Company issued 6,208,123 shares upon conversions of $2,707,475 in notes by the
investors.

During 2007, the Company issued a total of 3,976,428 shares of which 1,643,760
shares related to the exercise of warrants utilizing a cashless feature and the
remaining 2,332,668 shares related to the cash exercise of warrants issued for
total proceeds to the Company of $1,091,635.

In July of 2007, the Company issued 100,000 shares upon the exercise of employee
stock options for total proceeds of $100,000.

A total of 397,748 shares were issued on April 15, 2007 upon the conversion of
the $1,214,290 short term convertible notes as discussed in Note 4 above.


                                      F-24



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


7.    WARRANTS

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

                                                            Weighted Average
                                           Shares            Exercise Price
                                       --------------      -------------------
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

  Granted                                 21,729,817                     0.65
  Cancelled/Forfeited                       (34,500)                     0.47
  Exercised                              (6,083,747)                     0.84
                                       --------------      -------------------
Outstanding at December 31, 2007          55,604,444       $             0.76
                                       ==============      ===================

The following tables summarize warrants outstanding at December 31, 2007:

   Range         Number       Wtd. Ave. Life    Wtd. Ave. Price    Exercisable
   -----         ------       --------------    ---------------    -----------
 $.40-2.50     55,604,444          1.81              $0.76          53,713,181

<TABLE>
                        OUTSTANDING AT   EXERCISED/                  OUTSTANDING AT   EXERCISED/                 OUTSTANDING
 SERIES    ISSUE DATE      12/31/05      FORFEITED      GRANTED         12/31/06      FORFEITED    GRANTED       AT 12/31/07
---------- ----------   --------------  ------------ ------------- ----------------- ------------ ------------ ---------------
<S>        <C>               <C>          <C>            <C>               <C>          <C>          <C>             <C>
    A      April 2004                -             -             -                 -                         -               -
    B      April 2004        3,200,000             -             -         3,200,000   (1,249,999)           -       1,950,001
    C      June, 2004          972,223      (972,223)            -                 -            -            -               -
    D      June, 2004          972,223             -             -           972,223            -            -         972,223
    E       2004-2005        1,416,000             -             -         1,416,000   (1,275,000)           -         141,000
    F      April 2005          231,036             -             -           231,036     (216,651)           -          14,385
    G      April 2005        3,564,188             -             -         3,564,188            -            -       3,564,188
  G-BH     April 2005        1,505,989             -             -         1,505,989            -            -       1,505,989
    H      April 2005        2,138,513      (108,750)            -         2,029,763   (2,029,763)           -               -
            February
    I         2005             200,000             -             -           200,000     (190,000)           -          10,000
    J      August 2005         602,393       (97,050)            -           505,343     (489.088)           -          16,255
    K       Not Used                 -             -             -                 -            -            -               -
            July 2006
            & January
   L-1        2007                   -             -    17,065,623        17,065,623            -    5,688,540      22,754,163
             January
   L-2        2007                   -             -             -                 -            -    7,281,332       7,281,332
   M-1      July 2006                -             -     7,395,103         7,395,103            -            -       7,395,103
             January
   M-2        2007                   -             -             -                 -            -    2,366,433       2,366,433
    N       July 2007                -             -             -                 -            -    2,909,636       2,909,636
    O       July 2007                -             -             -                 -            -    1,891,263       1,891,263
    P       July 2007                -             -             -                 -            -    1,246,987       1,246,987
  MISC      2003-2007        1,452,522             -       455,084         1,907,606     (667,746)     345,626       1,585,486
                        --------------  ------------ ------------- ----------------- ------------ ------------ ---------------
TOTAL                       16,255,087   (1,178,023)    24,915,810        39,992,874   (6,118,247)  21,729,817      55,604,444
                        ==============  ============ ============= ================= ============ ============ ===============
</TABLE>


                                      F-25



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


2007 Warrants
-------------

In connection with securing the January 2007 Senior Convertible Notes (as
described in Note 5 above), the three convertible note investors were entitled
to Series L-1 Warrants to purchase up to an aggregate of 5,688,540 shares of the
Company's common stock Series L-2 Warrants to purchase up to an aggregate of
7,281,332 shares of the Company's common stock and Series M-2 Warrants to
purchase up to an aggregate of 2,366,433 shares of the Company's common stock.
Both the Series L-1 Warrants and Series M-2 Warrants have an original exercise
price of $.43948 per share and expire by August 1, 2016. The Series L-1 Warrants
are immediately exercisable. The Series M-2 Warrants become exercisable only
upon a "mandatory conversion" of the notes, which is callable by the Company.

In connection with securing the July 2007 $3,500,000 Senior Convertible Note (as
described in Note 5 above), the investor was entitled to Series N Warrants to
purchase up to an aggregate of 2,909,636 shares of the Company's common stock,
Series P Warrants to purchase up to an aggregate of 1,246,987 shares of the
Company's common stock and Series O Warrants to purchase up to an aggregate of
1,891,263 shares of the Company's common stock. These series of N, O, and P
warrants have an original exercise price of $1.2029 per share and expire by
August 1, 2016. The Series N and P Warrants are immediately exercisable. The
Series O Warrants become exercisable only upon a "mandatory conversion" of the
notes, which is callable by the Company.

During the second quarter of 2007, the Company issued warrants to a non-related
service provider for providing investment related services for the Company. The
warrants totaling 200,000 were issued in two separate transactions of 100,000
warrants each and have an exercise price of $0.50 and $1.00 per share of the
Company's common stock and expire during the second quarter of 2010. Investment
related costs of $166,500 were recognized for these warrants issued in 2007.

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
had 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 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.

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.


                                      F-26



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


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
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.

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 $1.22 per share as of
January 18, 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.


                                      F-27



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


8.    COMMITMENTS AND LEASES

As of December 31, 2007, the Company leases for its use office space and
workstations under a non-cancelable operating lease expiring in 2009. In
addition, the Company leases a copier through 2008 and has agreements related to
inventory purchase commitments requiring future payments through 2008.

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

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

                           2008               $  291,039
                           2009                  168,882
                           2010                        -
                                              ----------
                           Total              $  459,921
                                              ==========

Rent expense for the years ended December 31, 2007 and 2006 was $246,800 and
$209,574, respectively.

In addition, at December 31, 2007, the Company has $203,697 in purchase order
commitments.

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, 2007 and 2006 are as follows:

                                              December 31,      December 31,
                                                  2007              2006
                                              ------------      ------------
Deferred tax assets
  Non-cash compensation                       $    158,000      $     44,000

  Non-benefited  tax losses and credits         21,897,000        14,831,000
                                              ------------      ------------
     Total deferred tax assets                  22,055,000        14,875,000
Deferred tax liabilities
  Net book value of assets                         (45,000)           (5,000)
                                              ------------      ------------

     Total deferred tax liabilities                (45,000)           (5,000)
                                              ------------      ------------
     Total net deferred tax assets              22,010,000        14,870,000
  Valuation allowance                          (22,010,000)      (14,870,000)
                                              ------------      ------------
     Net deferred tax assets                  $          -      $          -
                                              ============      ============

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 $54,000,000 expiring between 2023 and 2027.

Upon adoption of FIN 48 as of January 1, 2007, the Company had no gross
unrecognized tax benefits that, if recognized, would favorably affect the
effective income tax rate in future periods. At December 31, 2007 the amount of
gross unrecognized tax benefits before valuation allowances and the amount that
would favorably affect the effective income tax rate in future periods after
valuation allowances were zero. These amounts consider the guidance in FIN 48-1,
"Definition of Settlement in FASB Interpretation No. 48". The Company has not
accrued any additional interest or penalties as a result of the adoption of FIN
48.


                                      F-28



<PAGE>

                        RAPTOR NETWORKS TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2006 and 2007


10.   SUBSEQUENT EVENTS

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

Subsequent to December 31, 2007, the Company awarded a total of 727,000 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 $0.67 per share of the Company's common stock. These 727,000 options to
purchase common stock have been approved to by the Company's Board, subject to
the 2005 Plan. Also, subsequent to December 31, 2007, the Company cancelled
32,500 options granted in previous years.

NEW LEASE AGREEMENT
-------------------

On February 15, 2008, the Company entered into an agreement with an agency to
occupy certain space in their facilities located in the Washington D.C. area for
the purpose of conducting sales activities. The agreement is for a period of one
year and requires the Company to pay monthly occupancy fees of $750.



                                      F-29



<PAGE>

<PAGE>

                    INDEX TO EXHIBITS FILED WITH THIS REPORT


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

10.2       First Amendment to Full Service Lease dated May 3, 2007 between PS
           Business Parks, L.P., and Raptor Networks Technology, Inc., a
           California corporation
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