**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





**WASHINGTON,
      D.C. 20549**





FORM
          10-QSB/A (THIRD AMENDMENT)


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





For
      the
      quarterly period ended March 31, 2005





[
                ]
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
                for the transition period from





_________________
      to _______________





Commission
      File Number 0-27418





eLINEAR,
                INC.(Exact
                name of small business issuer as specified in its
                charter)Delaware
            
            76-0478045(State
                or other jurisdiction of incorporation or organization)
            
            (IRS
                Employer Identification No.)2901
                West Sam Houston Parkway North, Suite E-300, Houston, Texas
                77043(Address
                of principal executive offices)(713)
                896-0500(Issuer's
                telephone number)





Check
      whether the issuer has (1) filed all reports required to be filed by Section
      13
      or 15(d) of the Exchange Act during the past 12 months (or for such shorter
      period that the registrant was required to file such reports) and (2) has been
      subject to such filing requirements for the past 90 days. Yes   
      x         
No ྑ





As
      of
      August 5, 2005, there were outstanding 24,566,002 shares of common stock, $.02
      par value per share.





Transitional
      Small Business Disclosure Format (Check one): Yes࿠ No x










Page
      No.


**Explanatory
                Note****Part
                I**
            **Financial
                Information**Item
                1.
            Financial
                Statements
            4Consolidated
                Balance Sheets March 31, 2005 (unaudited) and December 31,
                2004
            4Consolidated
                Statements of Operations (unaudited) Three Months Ended March 31,
                2005 and
                2004
            5Consolidated
                Statements of Cash Flows (unaudited) Three Months Ended March 31,
                2005 and
                2004
            6Notes
                to Unaudited Consolidated Financial Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Results of Operations and Financial
                Condition
            16Item
                3.
            Controls
                and Procedures
            21**Part
                II**
            **Other
                Information**Item
                1.
            Legal
                Proceedings
            21Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            21Item
                3.
            Defaults
                Upon Senior Securities
            21Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            21Item
                5.
            Other
                Information
            21Item
                6.
            Exhibits
            22





2


**EXPLANATORY
          NOTE**
 
 **This
          Amendment No. 3 on Form 10-QSB/A amends eLinear’s quarterly report on Form,
          10-QSB/A (Second Amendment) for the quarter ended March 31, 2005, which
          was
          originally filed with SEC on August 12, 2005. The purpose of this Amendment
          No.
          3 is to revise the items set forth below based on comments received from
          the SEC
          staff on September 21, 2005.  Except as otherwise expressly stated, this
          Amendment No. 3 does not reflect any events occurring after the filing
          of the
          original Form 10-QSB/A (Second Amendment) filing, nor does it modify or
          update
          in any way the disclosures contained in the original Form 10-QSB/A (Second
          Amendment) filing. This Amendment No. 3 continues to speak as of the date
          of the
          original Form 10-QSB/A (Second Amendment) filing, except that eLinear has
          included as exhibits updated certifications from the Company’s chief executive
          officer and principal accounting officer as Exhibits 31.1, 31.2, 32.1 and
          32.2,
          respectively. This Amendment No. 3 should be read in conjunction with the
          Company’s filings made with the SEC subsequent to the date of the original Form
          10-QSB filing, including any amendments to those
          filings.**
  3





**PART
      I. FINANCIAL INFORMATION**


Item
      1. FINANCIAL STATEMENTS




**eLINEAR,
      INC.**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





March
                  31,2005(Unaudited)(Restated)**ASSETS**Current
                  assets:Cash
              
              $
              1,768,022Cash in restricted account
              
              
              504,580Accounts receivable, net of allowance of $353,897
              
              
              4,100,621Inventory
              
              
              708,070Other current assets
              
              
              130,073Total current assets
              
              
              7,211,366Property
                  and equipment, net
              
              
              776,542Other
                  assets:Goodwill
              
              
              1,100,000Contract rights
              
              
              237,994Deposits
              
              
              45,221Total other assets
              
              
              1,383,215Total
                  assets
              
              $
              9,371,123**LIABILITIES
                  AND SHAREHOLDERS' DEFICIT**Current
                  liabilities:Accounts payable, trade
              
              $
              1,454,522Line of credit - revolver
              
              
              1,949,504Accrued liabilities
              
              
              1,985,628Notes payable and rescission liability
              
              
              2,736,000Unamortized debt discounts
              
              
              (1,952,644)Compound embedded derivative liabilities
              
              
              503,090Warrant liability - current
              
              
              93,525Total current liabilities
              
              
              6,769,625Long-term
                  debt  (net of unamortized discount of $292,616)
              
              
              1,432,384Warrant
                  liability - non current
              
              
              2,118,995Total liabilities
              
              
              10,321,004Shareholders'
                  deficit:Preferred stock, $.02 par value, 10,000,000 shares authorized,
                  none
                  issued
              
              
              --Common stock, $.02 par value, 100,000,000 shares authorized,
                  22,638,212 shares issued and outstanding
              
              
              452,764Additional paid-in capital
              
              
              5,643,394Accumulated deficit
              
              
              (7,046,039)Total shareholders' deficit
              
              
              (949,881)Total
                  liabilities and shareholders' deficit
              
              $
              9,371,123








See
      accompanying notes to unaudited consolidated financial
      statements.


4


**eLINEAR,
      INC.**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004**


**(Unaudited)**





2005
              
              2004(Restated)
              
              (Restated)Revenue:Products
              
              $
              4,860,442
              
              $
              3,956,625Services
              
              
              625,580
              
              
              218,453Other
              
              
              26,253
              
              
              --Total revenue
              
              
              5,512,275
              
              
              4,175,078Cost
                  of revenue:Products
              
              
              4,270,339
              
              
              3,514,148Services
              
              
              329,418
              
              
              200,614Total cost of revenue
              
              
              4,599,757
              
              
              3,714,762Gross
                  profit
              
              
              912,518
              
              
              460,316Operating
                  expenses:Selling, general and administrative expenses:Payroll and related expenses
              
              
              1,806,743
              
              
              534,998Office administration
              
              
              370,742
              
              
              229,094Professional services
              
              
              410,764
              
              
              300,991Impairment of goodwill
              
              
              --
              
              
              451,925Other
              
              
              1,394,906
              
              
              372,181Total selling, general and administrative
              
              
              3,983,155
              
              
              1,889,189Depreciation and amortization
              
              
              133,051
              
              
              8,505Total
                  operating expenses
              
              
              4,116,206
              
              
              1,897,694Loss
                  from operations
              
              
              (3,203,688
              )
              
              (1,437,378
              )Other
                  income (expense):Interest, net
              
              
              (129,827
              )
              
              (16,252
              )Change in fair value of derivatives
              
              
              1,511,805
              
              
              (1,926,279
              )Other
              
              
              18,756
              
              
              --Total
                  other income (expense)
              
              
              1,400,734
              
              
              (1,942,531
              )Net
                  loss
              
              $
              (1,802,954
              )
              $
              (3,379,909
              )Net
                  loss per share:Basic and diluted
              
              $
              (0.08
              )
              $
              (0.20
              )Weighted
                  average number of common shares outstanding:Basic and diluted
              
              
              22,178,405
              
              
              16,917,987








See
      accompanying notes to unaudited consolidated financial
      statements.


5


**eLINEAR,
      INC.**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004**


**(Unaudited)**





2005
              
              2004(Restated)
              
              (Restated)Cash
                  flows from operating activities:Net loss
              
              $
              (1,802,954
              )
              $
              (3,379,909
              )Adjustments to reconcile net loss to cash used in operating
                  activities:Depreciation and amortization
              
              
              133,044
              
              
              8,505Impairment of goodwill
              
              
              --
              
              
              451,920Bad debt expense
              
              
              42,328
              
              
              --Amortization of debt discounts
              
              
              57,967
              
              
              27,024Change fair value in derivatives
              
              
              (1,511,805
              )
              
              1,926,279Stock and stock option based compensation
              
              
              807,327
              
              
              239,474Extension of warrant expiration date
              
              
              27,871
              
              
              --Changes in assets and liabilities:Accounts receivable
              
              
              867,784
              
              
              (915,881
              )Inventory
              
              
              (261,624
              )
              
              (117,600
              )Other current assets
              
              
              (3,757
              )
              
              (17,173
              )Accounts payable
              
              
              187,784
              
              
              (449,032
              )Payable to officers
              
              
              --
              
              
              (31,336
              )Accrued liabilities
              
              
              935,654
              
              
              53,820Net
                  cash used in operating activities
              
              
              (520,381
              )
              
              (2,203,909
              )Cash
                  flows from investing activities:Purchase of property and equipment
              
              
              (68,089
              )
              
              (50,800
              )Certificate of deposit
              
              
              --
              
              
              (500,000
              )Cash in restricted account
              
              
              --
              
              
              (500,000
              )Deposits
              
              
              (10,605
              )
              
              (13,159
              )Net
                  cash used in investing activities
              
              
              (78,694
              )
              
              (1,063,959
              )Cash
                  flows from financing activities:Repayment on notes payable due to officers
              
              
              --
              
              
              (215,703
              )Proceeds from financing agreement
              
              
              2,736,000
              
              
              2,539,515Payment of up-front financing costs
              
              
              (449,484
              )
              
              --Repayment of financing agreement
              
              
              (835,039
              )
              
              --Proceeds from exercise of stock options
              
              
              16,750
              
              
              338,150Proceeds from sale of common stock, net
              
              
              --
              
              
              4,584,591Net
                  cash provided by financing activities
              
              
              1,468,227
              
              
              7,246,553Net
                  increase in cash
              
              
              869,153
              
              
              3,978,685Cash
                  and cash equivalents, beginning of period
              
              
              898,869
              
              
              554,483Cash
                  and cash equivalents, end of period
              
              $
              1,768,022
              
              $
              4,533,168Supplemental
                  cash flow disclosures:Interest paid
              
              $
              71,859
              
              $
              6,342Supplemental
                  non-cash disclosures:Debt converted into equity
              
              $
              275,000
              
              $
              --








See
      accompanying notes to unaudited consolidated financial
      statements.


6


**eLINEAR,
      INC.**


**AND
      SUBSIDIARIES**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


**March
      31, 2005**








Note
      1.
      Organization and Nature of Business





*Statement
      of Information Furnished*





The
      accompanying unaudited consolidated financial statements of eLinear, Inc. and
      Subsidiaries (the “Company” or “eLinear”) have been prepared pursuant to the
      rules and regulations for interim financial information and the instructions
      to
      Form 10-QSB and Regulation S-B. Accordingly, certain information and footnote
      disclosures normally included in financial statements prepared in accordance
      with generally accepted accounting principles in the United States have been
      omitted. In the opinion of management, the unaudited consolidated financial
      statements contain all adjustments (consisting of only normal recurring
      accruals) necessary to present fairly the financial position as of March 31,
      2005, and the results of operations and cash flows for the three months ended
      March 31, 2005 and 2004.





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
      reported amounts of revenue, and expenses during the reporting period. Operating
      results for interim periods are not necessarily indicative of the results that
      may be expected for the complete fiscal year. The accompanying unaudited
      consolidated financial statements should be read in conjunction with the audited
      consolidated financial statements and notes thereto included in the Company's
      Annual Report on Form 10-KSB for the year ended December 31, 2004, filed with
      the Securities and Exchange Commission.





Note
        2.
        Restatement of Previously Issued Unaudited Consolidated Financial
        Statements





In
        order
        to correct the financial statements so that they comply with U.S. generally
        accepted accounting principles (in particular, EITF 00-19, *Accounting
        for derivative Financial Instruments Indexed to, and Potentially Settle In,
        a
        Company’s Own Stock),* the
        Company’s Unaudited Consolidated Balance Sheet, Unaudited Consolidated Statement
        of Operations and Unaudited Consolidated Statement of Cash Flow as of and
        for
        the three months ended March 31, 2005 and 2004, have been restated to reflect
        a
        reclassification from equity to liabilities of the warrants and compound
        embedded derivative that the Company issued in January and February
        2004, to reflect the change in fair value of the warrants and compound
        embedded derivative since issuance, and to reflect the loss on early
        extinguishment of debt at December 31, 2004, as described in Note 6 “Credit
        Facilities” and Note 7 “Common Stock”. As a result of this correction, the
        Company’s net loss for the three months ended March 31, 2005 decreased from
        $3,417,367 to $1,766,790 and the Company’s net loss per share decreased from
        $0.15 to $0.08 for this period and the Company’s net loss for the three months
        ended March 31, 2004 increased from $1,480,630 to $3,379,909 and the Company’s
        net loss per share increased from $0.09 to $0.20, basic and
        diluted.





The
        following tables set forth the effects of the restatements described in Note
        6
“Credit Facilities” and Note 7 “Common Stock”.





**As
                  of and For the Quarter Ended March 31, 2005****As
                  Previously**
                **Restated**
              
              **Adjustments**
              
              **As
                  Restated****Balance
                  Sheet**Deferred financing costs
              
              $
              117,073
              
              $
              (117,073
              )
              $
              --Unamortized
                  debt discounts
              
              
              (2,659,980
              )
              
              707,336
              
              
              (1,952,644
              )Compound
                  embedded derivatives liabilities
              
              
              --
              
              
              503,091
              
              
              503,091Total
                  current liabilities
              
              
              5,465,674
              
              
              1,303,951
              
              
              6,769,625Long-term
                  debt, net
              
              
              1,193,696
              
              
              202,524
              
              
              1,396,220Warrant
                  liability - current
              
              
              --
              
              
              93,525
              
              
              93,525Warrant
                  liability - non-current
              
              
              --
              
              
              2,118,995
              
              
              2,118,995Additional
                  paid in capital
              
              
              15,621,880
              
              
              (9,978,486
              )
              
              5,643,394Accumulated
                  deficit
              
              
              (13,245,818
              )
              
              6,199,779
              
              
              (7,046,039
              )Total
                  stock holders' equity (deficit)
              
              
              2,828,826
              
              
              (3,742,543
              )
              
              (913,717
              )**Statement
                  of Operations**Change
                  in fair value of derivatives
              
              $
              --
              
              $
              1,511,805
              
              $
              1,511,805Interest,
                  net
              
              
              (232,435
              )
              
              102,608
              
              
              (129,827
              )Total
                  other income (expense)
              
              
              (213,679
              )
              
              1,614,413
              
              
              1,400,734Net
                  loss
              
              
              (3,417,367
              )
              
              1,611,413
              
              
              (1,802,954
              )Net
                  loss per share - Basic and diluted
              
              
              ($0.15
              )
              
              
              
              
              ($0.08
              )**Statement
                  of cash flows**Net
                  loss
              
              $
              (3,417,367
              )
              $
              1,611,413
              
              $
              (1,802,954
              )Depreciation and amortization
              
              
              148,317
              
              
              (15,273
              )
              
              133,044Amortization
                  of debt discounts
              
              
              145,302
              
              
              (123,499
              )
              
              21,803Change
                  in fair value of derivatives
              
              
              --
              
              
              (1,511,805
              )
              
              (1,511,805
              )There
                  were no changes in net operating, investing or financing cash flows
                  as a
                  result of this restatement





**As
                  of and For the Quarter Ended March 31, 2004****As
                  Previously**
                **Restated**
              
              
              **Adjustments**
              
              
              **As
                  Restated****Statement
                  of Operations**Change
                  in fair value of derivatives
              
              $
              --
              
              $
              (1,926,279
              )
              $
              (1,926,279
              )Interest,
                  net
              
              
              (43,272
              )
              
              27,020
              
              
              (16,252
              )Net
                  loss
              
              
              (1,480,650
              )
              
              (1,899,259
              )
              
              (3,379,909
              )Net
                  loss per share - Basic and diluted
              
              
              ($0.09
              )
              
              
              
              
              ($0.20
              )**Statement
                  of cash flows**Net
                  loss
              
              $
              (1,480,650
              )
              $
              (1,899,259
              )
              $
              (3,379,909
              )Amortization
                  of discounts
              
              
              54,044
              
              
              (27,020
              )
              
              27,024Change
                  in fair value of derivatives
              
              
              --
              
              
              1,926,729
              
              
              1,926,729There
                  were no changes in net operating, investing or financing cash flows
                  as a
                  result of this restatement










Note
      3.
      Stock Options





At
      March
      31, 2005, the Company had stock-based compensation plans, which are more fully
      described in Note 9 in the Company's Annual Report on Form 10-KSB. In addition,
      on December 21, 2004, the Board of Directors adopted the 2005 Stock Option
      Plan
      (the “2005 Plan”), which allows for the issuance of up to 4,000,000 stock
      options to directors, executive officers, employees and consultants of the
      Company who are contributing to the Company's success. The 2005 Plan must be
      approved by the Company's shareholders before any stock options may be issued
      pursuant to the 2005 Plan. As of March 31, 2005, there were no options
      outstanding under the 2005 Plan. The Company did not grant any options to
      employees, directors or consultants under any of its stock option plans during
      the three months ended March 31, 2005.





The
      Company applies and intends to continue to apply the recognition and intrinsic
      value measurement principles of Accounting Principles Board (APB) Opinion No.
      25, “Accounting for Stock Issued to Employees,” and related Interpretations in
      accounting for those plans. The Company recorded $50,015 of stock-based
      compensation expense for stock options issued to employees which is reflected
      in
      the net loss for the three month period ended March 31, 2005, because certain
      options granted had exercise prices less than the market value of the underlying
      common stock on the date of the grant. In addition, the Company recorded stock
      based compensation expense totaling $28,925 related to options issued to a
      director which vested during the period. The director options were expensed
      based on the fair value calculated using the Black Scholes pricing model using
      the following assumptions: 88% volatility, four year life, 1.5% discount rate
      and 0% dividend yield.





The
      following table illustrates the effect on net income and earnings per share
      if
      eLinear had applied the fair value recognition provisions of FASB Statement
      No.
      123, Accounting for Stock-Based Compensation, to stock-based employee
      compensation.





Three
                  Months Ended
                March
                  31,2005
              
              2004(Restated)
              
              (Restated)Net
                  loss, as reported
              
              $
              (1,802,944
              )
              $
              (3,379,909
              )Add: Stock-based employee compensation included in reported net
                  loss
              
              
              50,015
              
              
              --Stock based compensation under fair value method
              
              
              (415,190
              )
              
              --Pro
                  forma net loss
              
              $
              (2,168,119
              )
              $
              (3,379,909
              )Net
                  loss per share:Basic and diluted - as reported
              
              $
              (0.08
              )
              $
              (0.20
              )Stock based compensation under fair value method
              
              
              (0.02
              )
              
              --Basic
                  and diluted - pro forma
              
              $
              (0.10
              )
              $
              (0.20
              )





The
      fair
      value of each option granted is estimated on the date of grant using the
      Black-Scholes option-pricing model with the following weighted average
      assumptions: dividend yield 0.0%, expected volatility of 88%, risk-free interest
      rate of 1.5%, and expected life of 48 months.





Note
        4.
        Derivative Financial Instruments





The
        Company accounts for all derivative financial instruments in accordance with SFAS No. 133. Derivative financial instruments
        are recorded as liabilities in the consolidated balance sheet, measured at
        fair
        value. When available, quoted market prices are used in determining fair
        value.
        However, if quoted market prices are not available, the Company estimates
        fair
        value using either quoted market prices of financial instruments with similar
        characteristics or other valuation techniques.





The
        value
        of the derivative liabilities relating to the Notes in the quarterly
        financial statements are subject to the changes in the trading value of the
        Company’s common stock and other assumptions. As a result the Company’s
        quarterly financial statements may fluctuate from quarter to quarter based
        on
        factors such as trading value of the Company’s Common Stock, the amount of
        shares converted in connection with the Notes and exercised in
        connection with the Warrants outstanding. Consequently, the Comapny's
        consolidated financial position and results of operations may vary from quarter
        to quarter based on conditions other than the Company’s operating revenue and
        expenses.  See Notes 6 and 7 regarding valuation methods used for
        derivative liabilities.





Derivative
        financial instruments that are not designated as hedges or that do not meet
        the
        criteria for hedge accounting under SFAS No. 133 are recorded at fair value,
        with gains or losses reported currently in earnings. All derivative financial
        instruments held by the Company as of March 31, 2005 were not designated
        hedges.





Note
      5.
      Impairment





As
      of
      March 31, 2005, the Company had $1,100,000 of goodwill resulting from the
      acquisition of NewBridge. Goodwill represents the excess of cost over the fair
      value of the net tangible assets acquired and is not amortized. However,
      goodwill is subject to an impairment assessment at least annually which may
      result in a charge to operations if the fair value of the reporting segment
      in
      which the goodwill is reported declines. In March 2004, the Company recorded
      impairment expense totaling $451,925 related to 100% of the goodwill recorded
      with the 2003 NetView acquisition. In March 2004, the consulting services
      business segment lost its largest consulting contract and the other operations
      that had been acquired in the acquisition had declined due to the loss of a
      key
      employee after the acquisition. Based on projected estimated future cash flows
      from that business segment, management determined a full impairment charge
      was
      required. In September 2004, the Company performed a valuation analysis of
      the
      discounted projected estimated future cash flows of NewBridge and the Company
      elected to write down a portion of the goodwill related to NewBridge of
      $391,114. Due to the large amount of goodwill presently on the Company's
      financial reports, if an impairment is required, the Company's financial
      condition and results of operations would be negatively affected.





Note
      6.
      Credit Facilities





*February
      2004 Funding*





In
      February 2004, the Company obtained a secured revolving note with Laurus Master
      Fund, Ltd. (“Laurus”). Under the terms of the agreement, the Company can borrow
      up to $5,000,000 at an annual interest rate of prime plus .75% (with a minimum
      rate of 4.75%). The agreement contains two notes: a minimum secured note
      totaling $2,000,000 (“term note”) and a revolving credit facility totaling
      $3,000,000 (“revolver”) based on eligible accounts receivable.





The
      Contract Rate shall be adjusted as follows: if (i) eLinear shall have registered
      the shares of its Common Stock underlying the conversion of all currently issued
      and outstanding Minimum Borrowing Notes and the Warrant on a registration
      statement declared effective by the Securities and Exchange Commission and
      (ii)
      the volume weighted average price of the Common Stock as reported by Bloomberg
      L.P. on the principal market for any of the ten (10) trading days immediately
      preceding any applicable date upon which interest is payable under Section
      5
      hereof exceeds 125% of the applicable Fixed Conversion Price (as defined in
      the
      applicable Minimum Borrowing Note) (the “Specified Percentage”); then Contract
      Rate for the succeeding calendar month shall automatically be reduced by one
      hundred basis points (100 b.p.) for such month; provided that for each
      subsequent incremental twenty-five percent increase above the Specified
      Percentage, the Contract Rate shall be reduced by an additional two hundred
      basis pints (200 b.p.) for the succeeding calendar month, but in no event shall
      the Contract Rate be less than zero percent (0%)





The
      Company has a redemption option in regard to the Convertible Notes and if
      exercised, will pay 115% on the principal amount outstanding at the time of
      such
      pre-payment.










As
      part
      of the above credit facility, the Company agreed to file a registration
      statement with the SEC in order to register the resale of any shares issuable
      upon conversion of up to $2 million of the credit facility and upon the exercise
      of the warrants. The terms of its agreement with Laurus required it to file
      the
      registration statement and have the registration statement declared effective
      by
      a definitive period of time, not to exceed 150 days from February 23, 2004,
      or
      within 15 days of the Company's previous registration statement being declared
      effective by the SEC, whichever is earlier. The Company's previous registration
      statement was declared effective on September 10, 2004. The Company failed
      to
      meet this deadline and as compensation to Laurus, the Company agreed to reduce
      the conversion price of the credit facility from $2.91 per share to $1.00 per
      share. In consideration for the issuance of seven-year warrants to purchase
      150,000 shares of the Company's common stock at $1.90 per share, Laurus forgave
      approximately $153,000 in penalties. Laurus is limited to owning or beneficially
      owning a maximum of 4.99% of the Company's outstanding shares of common stock.
      In addition, each time the Company borrows $2 million under the credit facility,
      the Company will be required to file an additional registration statement
      covering the possible conversion of that amount of the note. The Company's
      registration statement filed with the SEC to register the conversion shares
      and
      shares underlying the warrants was declared effective by the SEC on December
      30,
      2004. The Company is not obligated at any time to repurchase any portion of
      the
      Laurus conversion shares nor the shares underlying the warrants.





Events
      of
      default under the agreements include failure to pay principal, interest or
      other
      fees; breach of covenant; breach of representations and warranties, stop trade;
      default under related agreements; and failure to deliver common stock or
      replacement notes. In the event of default, Laurus may require the Company
      to
      pay the principal balance and interest on the notes shall automatically be
      increased by 5%.





*Line
      of Credit - Revolver*





The
      Laurus revolver provides for borrowings of up to the lesser of; (i) $3 million
      or (ii) 90% of the Company's eligible accounts receivable. The Company borrowed
      $1,000,000 under the revolving facility on the date of the agreement. The
      revolving credit facility has a term of three years and accrues interest on
      outstanding balances at the rate of prime (5.50% as of March 31, 2005) plus
      0.75% (with a minimum rate of 4.75%). The Company is permitted to go over its
      borrowing limit, which is referred to as getting an “overadvance,” if the
      Company gets the approval of Laurus. These overadvances typically accrue
      interest at a rate of 1.5% per month, but until August 2004, the Company was
      not
      required to pay this interest amount on any overadvances. In October 2004,
      Laurus agreed to fund an additional $500,000, which loan was not deemed an
      overadvance. This credit facility is secured by all of the Company's assets.
      In
      consideration for the issuance of seven-year warrants to purchase 150,000 shares
      of the Company's common stock at $1.90 per share and the forgiveness of
      penalties owed to Laurus in the approximate amount of $153,000 as of October
      31,
      2004, the Company agreed in October 2004 to reduce the conversion price of
      the
      credit facility from $2.91 to $1.00 per share. At the option of the holder,
      the
      outstanding balance on the credit facility can be converted into shares of
      Company common stock at a conversion price of $1.00 per share. The Company
      has
      the ability to prepay any amounts owed under this credit facility at 115% of
      the
      principal amount. All stock conversion prices and exercise prices are subject
      to
      adjustment for stock splits, stock dividends and share issuance. The Company
      paid back the $1,000,000 revolver during the quarter ended June 30, 2004. As
      of
      March 31, 2005, the Company had $1,949,504 outstanding under the
      revolver.





*Term
      Note*





The
      term
      note has a term of three years. The Company has the option of paying scheduled
      interest and principal, or prepaying all or a portion of the term note with
      shares of its common stock at the fixed conversion price of $1.00 per share,
      provided that the shares are registered with the Securities and Exchange
      Commission or with cash at 115% of the outstanding balance. Laurus also has
      the
      option to convert all or a portion of the term note into shares of the Company's
      common stock at any time, subject to certain limitations, at a fixed conversion
      price of $1.00 per share. The fixed conversion price is subject to adjustment
      for stock splits, stock dividends, and share issuances. During the three months
      ended March 31, 2005, Laurus was issued 275,000 shares for this conversion
      feature and reduced the principal amount of the note by $275,000. The term
      note
      is secured by a blanket lien on all of the Company's assets. As of March 31,
      2005, the Company had $1,725,000 outstanding under the term note.





In
      conjunction with the Laurus credit facility, Laurus was paid a fee of $219,500
      and received a seven-year warrant to purchase up to a total of 440,000 shares
      of
      the Company's common stock at prices ranging from $1.90 to $3.22 per share.
      The
      warrants, which are exercisable immediately, were valued at $653,807 using
      a
      modified Black-Scholes option pricing model. The value of these warrants and
      the
      fees paid to Laurus were recorded as a discount to the term note and are being
      amortized over the term of the loan using the effective interest
      method.


In
          order
          to correct the financial statements so that they comply with U.S. generally
          accepted accounting principles, the Company has restated the Consolidated
          Financial Statements and the amendment to the note was accounted for as
          an
          extinguishment of debt in accordance with EITF 96-19 *"Debtor's Accounting
          for a Modification or Exchange of Debt Instruments."*  Accordingly, the
          unamortized discounts aggregating $1,538,924 and the fair value of the
          additional 150,000 warrants issued in connection with the amendment, amounting
          to $115,545, were included in the Company's determination of the debt
          extinguishment recorded in the fourth quarter of fiscal year 2004.  The
          $1,555,347 aggregate loss from these transactions accounted for as an
          extinguishment of debt is included in other expenses for the year ended
          December
          31, 2004.




In
        order
        to correct the financial statements so that they comply with U.S. generally
        accepted accounting principles, the Company has restated the Unaudited
        Consolidated financial statements for the quarters ended March 31, 2005 and
        2004, to reclassify the Laurus warrants from additional paid in capital to
        liabilities and to adjust changes in the fair value of derivatives for
        March 31, 2005 and 2004, to reflect the fact that the registration rights
        agreement into which the Company entered in connection with its issuance
        of the
        warrants requires the Company to pay liquidated damages, which in some cases
        could exceed a reasonable discount for delivering unregistered shares and
        thus
        would require the warrants to be classified as a liability until the earlier
        of
        the date the warrants are exercised or expire. In accordance with EITF 00-19, *Accounting
        for Derivative Financial Instruments Indexed to, and Potentially Settled
        In, a
        Company’s Own Stock,* the
        Company has allocated a portion of the offering proceeds to the warrants
        based
        on their fair value. EITF 00-19 also requires that the Company revalue the
        warrants as a derivative instrument periodically to compute the value in
        connection with changes in the underlying stock price and other assumptions,
        with the change in value recorded as change in fair value of derivatives.
        The
        Company determined the fair value of the warrants as follows as of the issuance
        dates:





*February
          23, 2004*


·
                The
                    Company used the Black Scholes option-pricing model with the
                    following
                    assumptions: an expected life equal to the contractual term of
                    the
                    warrants (seven years); no dividends; a risk free rate of 3.5%,
                    which
                    equals the five-year yield on Treasury bonds at constant (or
                    fixed)
                    maturity; and volatility of 102%. Under the assumptions, the
                    Black-Scholes
                    option-pricing model yielded a value of $2.26 for the $3.05 warrants,
                    $2.25 for $3.19 warrants and $2.24 for the $3.32 warrants for
                    an aggregate
                    value of $653,807.
 
 *October
          20, 2004*
 
 ·
                The
                    Company used the Black Scholes pricing model with the following
                    assumptions: an expected life equal to the contractual term of
                    the
                    warrants (seven years); no dividends; a risk free rate of 2.7%,
                    volatility
                    of 117%. Under the assumptions, the Black-Scholes option pricing
                    model
                    yielded a value of $0.77 for the $1.90 warrants for an aggregate
                    value of
                    $114,934.
 
 The
          Company performed the same calculations as of March 31, 2004, to revalue
          the
          warrants as of that date. In using the Black Scholes option-pricing model,
          the
          Company used an underlying stock price of $2.99 per share and a risk free
          rate
          of 3.5% with all other input assumptions remaining substantially the same
          as at
          February 23, 2004. The resulting aggregate allocated value of the warrants
          as of
          March 31, 2004, equaled $728,530. The increase in fair value of $74,723
          was
          recorded as change in fair value of derivatives for the three months ended
          March
          31, 2004. For the quarter ended March 31, 2005, the Company used an underlying
          stock price of $0.84 per share; no dividends; a risk free rate of 3.96%;
          and
          volatility of 88%. The resulting aggregate value of the warrants as of
          March 31,
          2005 equaled $211,938. The decrease in fair value from December 31, 2004
          to
          March 31, 2005 was $161,295.
 
 Upon
          earlier of the warrant exercise or the expiration date, the warrant liability
          will be reclassified into shareholders’ equity. Until that time, the warrant
          liability will be recorded at fair value based on the methodology described
          above. Changes in the fair value during each period will be recorded each
          reporting period. Liquidated damages under the registration rights agreement
          will be expense as incurred and will be included in operating
          expenses.
 
 The
          Company is also restating the unaudited Consolidated Financial Statements
          to
          record embedded derivatives rather than a beneficial conversion feature
          previously recorded.
 
 The
          Notes
          are hybrid instruments which contain both freestanding derivative financial
          instruments and more than one embedded derivative feature which would
          individually warrant separate accounting as derivative instruments under
          SFAS
          133. The freestanding derivative financial instruments include the Laurus
          Warrants, which were valued individually, and totaled $653,807. The various
          embedded derivative features have been bundled together as a single, compound
          embedded derivative instrument that has been bifurcated from the debt host
          contract, referred to as the “Compound Embedded Derivative Liability”. The
          single compound embedded derivative features included the conversion feature
          within the Notes, the early redemption option, the Contract Rate adjustment
          and
          default provision. The value of the single compound embedded liability
          was
          bifurcated from the debt-host contract and recorded as a derivative liability,
          which resulted in a reduction of the initial carrying amount (as amortized
          discount) of the Notes. The unamortized discount is amortized to interest
          expense using the effective interest method over the life of the Notes,
          or 36
          months.
 
 
 Compound
          Embedded Derivative Liability
 
 Using
          a
          layered discounted probability-weighted expected cash flow methodology,
          the fair
          value of the Derivative Liability with Compound Embedded Derivatives was
          computed at $998,425, $815,281 and $234,347 as of February 23, 2004, March
          31,
          2004 and March 31, 2005, respectively. The model replicated the economics
          of the
          Notes and applied different events based on various conditions likely to
          occur
          over the life of the Note. Multiple scenarios were used in the model and
          the
          underlying assumptions below were applied. The value of this single compound
          embedded derivative instrument was bifurcated from the debt host contract
          and
          recorded as a derivative liability which resulted in a reduction of the
          initial
          carrying amount (as unamortized discount) to the notional amount of the
          Notes.
 
 Probability-Weighted
          Expected Cash Flow Methodology
 
 Compound
                    Embedded Derivative LiabilityFebruary
                    23,
                  2004
                
                March
                    31,
                  2004
                
                March
                    31,
                  2005Assumptions
                
                (Inception)Risk
                    Free interest rate
                
                
                2.21
                %
                
                1.99
                %
                
                3.96
                %Prime
                    RateIncreasing .25% each quarter of first year
                
                
                4
                %
                
                4.
                %
                
                5.75
                %Timely
                    registrationIncreasing by 1% monthly up to 99%
                
                
                95
                %
                
                95
                %
                
                95
                %Default
                    statusIncreasing by .1% monthly
                
                
                5
                %
                
                5
                %
                
                5
                %Alternative
                    financing available and exercisedIncreasing 2.5% monthly up to 25%
                
                
                0
                %
                
                0
                %
                
                0
                %Trading
                    volume, gross monthly dollarsMonthly increase
                
                
                2
                %
                
                2
                %
                
                5
                %Annual
                    growth rate of stock price
                
                
                31.8
                %
                
                31.7
                %
                
                31.8
                %Future
                    projected volatility
                
                
                102
                %
                
                102
                %
                
                88
                %Ownership
                    limitationMonthly increase
                
                
                1
                %
                
                1
                %
                
                1
                %Reset
                    ProvisionIncreasing 5% monthly up to 25%
                
                
                0
                %
                
                0
                %
                
                0
                %
 
 The
          decrease in the fair value of the compound embedded derivative liability
          of
          $183,144 and $105,405 was recorded as other income for the periods ended
          March
          31, 2004 and March 31, 2005, respectively.
 
 During
          the quarter ended June 30, 2004, the Company paid back the original $1,000,000
          it had drawn under the revolver during the quarter ended March 31, 2004.
          Therefore, the Company expensed a portion of the discounts recorded in
          connection with the credit facility on the date the funds were repaid resulting
          in additional non-cash interest expense of approximately $330,000 during
          the
          quarter ended June 30, 2004.
 
 As
          a
          result of these contract provisions, the Notes at inception (February 23,
          2004)
          and March 31, 2004 and March 31, 2005 was adjusted as follows:
 
 February
                    23, 2004
                
                March
                    31, 2004
                
                March
                    31, 2005Notional
                    balance
                
                $
                3,000,000
                
                $
                3,000,000
                
                $
                3,674,504Adjustments:Discount for compound embedded derivatives
                
                
                (998,425
                )
                
                (984,010
                )
                
                (292,616
                )Discount for Laurus warrants
                
                
                (653,907
                )
                
                (644,467
                )
                
                --Discount for loan costs paid to Laurus
                
                
                (219,500
                )
                
                (216,331
                )
                
                --Balance, net of unamortized discount
                
                
                1,128,168
                
                
                1,155,192
                
                
                3,345,724Less current portion (revolver)
                
                
                --
                
                
                --
                
                
                (1,949,504
                )Balance,
                    net of unamortized discount
                
                $
                1,128,168
                
                $
                1,155,902
                
                $
                1,396,220


In
        addition to the $219,500 fee paid to Laurus, the Company paid $273,300 in
        finder’s fees to vSource Capital. The $273,000 was capitalized as deferred
        financing costs and will be amortized using the effective interest method
        over
        the term of the loan agreement.  The consolidated financial statements as
        of March 31, 2005 have been restated to reflect the early extinguishment
        of the
        debt and expense the remaining portion of the deferred finaning costs at
        December 31, 2004.  The Company recorded an adjustment of approximately
        $117,000 to reflect this restatement.




*Textron
      Financial Corporation Credit Facility*





During
      February 2004, the Company retired its $1,000,000 line of credit with Textron
      Financial Corporation with the proceeds from the Laurus credit facility and
      entered into a new $500,000 credit facility with Textron collateralized with
      a
      $500,000 letter of credit.





*February
      2005 Funding*





On
      February 28, 2005, the Company entered into financing arrangements to receive
      up
      to a total principal amount of $12 million with Laurus, Iroquois Capital LP
      (“Iroquois”), RHP Master Fund (“RHP”), Basso Private Opportunity Holding Fund
      Ltd. (“Basso Private”), and Basso Multi-Strategy Holding Fund Ltd. (“Basso
      Multi”), (collectively, the “Investors”) in which it initially received
      $2,736,000 in cash and the ability upon certain conditions to receive the
      remaining amount of the total financing of $9,264,000, such financing as been
      subsequently amended. The $9,264,000 is held in restricted accounts at the
      sole
      dominion and control of each respective Investor. The Company may only receive
      the amounts (less applicable accrued interest) held in the restricted account
      after (i) the initial amount received, plus interest, is paid in full, (ii)
      the
      shares of the Company common stock underlying the notes are registered; and
      (iii) either the Company or the Investor converts any amounts held in the
      Restricted Accounts into shares of the Company's common stock.  If the
      Company converts the amounts held in the restricted account, the amounts shall
      be converted at either (i) a price equal to 85% of the average of the five
      lowest closing prices of the Company common stock during the 22 trading days
      immediately prior to the date of a respective repayment notice if the average
      closing price of the Company common stock is less than 110% of the Fixed
      Conversion Price, but in no instance may such shares by converted for less
      than
      $1.00; or (ii) at the Fixed Conversion Price if the average closing price of
      the
      Company common stock for the five consecutive trading days immediately preceding
      the respective repayment notice is greater than or equal to 115% of the Fixed
      Conversion Price.





Under
      the
      terms of these notes and related documents, the is Company is obligated to
      make
      monthly interest payments for interest accrued on the initial $2,736,000, the
      interest begins accruing on April 1, 2005. The Company is obligated to make
      monthly payments, either in cash or stock as determined by the terms of the
      notes, beginning on June 1, 2005 for the initial $2,736,000, plus applicable
      interest (the “Monthly Payment”). The Monthly Payment will be made (i)
      automatically by a conversion in stock at $1.00, (ii) at the discretion of
      the
      Company at a reduced conversion price, or (iii) in cash paid by the Company
      at
      101% of the Monthly Payment.





The
      interest rate shall be subject to adjustment on the last business day of each
      month hereafter until the maturity date. If on any maturity date (i) the Company
      shall have registered under the Securities Act of 1933, the shares of the Common
      Stock underlying the conversion of the notes and the exercise of the warrants
      issued on a registration statement declared effective by the Securities and
      Exchange Commission, and (ii) the market price of the Common Stock as reported
      by Bloomberg, LP on the principal market for the five (5) consecutive trading
      days immediately preceding such maturity date exceeds the then applicable Fixed
      Conversion Price by at least twenty five percent (25%), the interest rate for
      the succeeding calendar month shall automatically be reduced by 200 basis points
      (200 b.p.) (2.0%) for each incremental twenty five percent (25%) increase in
      the
      market price of the common stock above the then applicable Fixed Conversion
      Price. In no event shall the interest rate be less than zero percent
      (0%).





10




The
      Company has a redemption option in regard to the Notes and if exercised, will
      pay 115% on the principal amount outstanding at the time of such pre-payment.





As
      part
      of the above note, the Company agreed to file a registration statement with
      the
      SEC in order to register the resale of any shares issuable upon conversion
      or
      exercise of the note and warrants. The terms of its agreement with the Investors
      require it to file the registration statement and have the registration
      statement declared effective by a definitive period of time, not to exceed
      105
      days from February 28, 2005. If the Company fails to meet this deadline, if
      the
      registration statement is not declared effective prior to the 105th day after
      filing the registration statement, if the registration statement ceases to
      remain effective, or certain other events occur, the Company has agreed to
      pay
      the Investors liquated damages of 1.25% of the principal amount of the
      convertible portion of the note per month.





Events
      of
      default under the agreements include failure to pay principal, interest or
      other
      fees; breach of covenant; breach of representations and warranties, receiver
      or
      trustee; judgments; bankruptcy; stop trade; default under related agreements;
      and failure to deliver common stock or replacement notes and change in control.
      In the event of default, the Investors may require the Company to pay the
      principal balance at 115% and interest on the notes shall automatically be
      increased by 1.5%





In
      addition to the notes the Company issued 1,800,000 warrants to the Investors.
      The warrants are exercisable by the Investors until February 28, 2012, at $1.25
      per share of Company common stock. All of the warrants are immediately
      exercisable with no requirement to return to the Company should the initial
      $2,736,000 not be paid in full.





These
      notes are secured by all of the Company and its subsidiaries'
      assets.





In
      conjunction with the notes, the Investors were paid a fee of $449,484. The
      warrants, which are exercisable immediately, were valued at $1,213,345 using
      a
      Black-Scholes option pricing model. The value of these warrants and the fees
      paid to the Investors were recorded as a discount to the notes and are being
      amortized over the term of the loan using the effective interest
      method.





In
        order
        to correct the financial statements so that they comply with U.S. generally
        accepted accounting principles, the Company has restated the Unaudited
        Consolidated Financial Statements as of March 31, 2005 to reclassify the
        1,800,000 Investor warrants from additional paid-in capital to liabilities
        and
        to reflect the changes in fair value of derivatives effective March 31, 2005,
        to
        reflect the fact that the registration rights agreement into which the Company
        entered in connection with its issuance of the warrants requires the Company
        to
        pay liquidated damages, which in come cases could exceed a reasonable discount
        for delivering unregistered shares and thus would require the warrants to
        be
        classified as a liability until the earlier of the date the warrants are
        exercised or expire. In accordance with EITF 00-19, *Accounting
        for derivative Financial Instruments Indexed To, and Potentially Settled
        In, a
        Company’s Own Stock,* the
        Company has allocated a portion of the offering proceeds to the warrants
        based
        on their fair value. EITF 00-19 also requires that the Company revalue the
        warrants as a derivative instrument periodically to compute the value in
        connection with changes in the underlying stock price and other assumptions,
        with the change in value recorded as interest expense or interest income.
        The
        Company determined the fair value of the warrants as follows as of February
        28,
        2005 (the issuance date):





The
        Company used the Black Scholes option-pricing model with the following
        assumptions: an expected life equal to the contractual term of the warrants
        (seven years), underlying stock price of $0.90, no dividends ; a risk free
        rate
        of 3.96%, which equals the five-year yield on Treasure bonds at constant
        (or
        fixed) maturity; and volatility of 88%. Under the assumptions, the Black-Scholes
        option-pricing model yielded a value of approximately $0.67 for an aggregate
        value of $1,213,345.





The
        Company performed the same calculations as of March 31, 2005, to revalue
        the
        warrants as of that date. In using the Black Scholes option-pricing model,
        the
        Company used an underlying stock price of $0.84 per share with all other
        input
        assumptions remaining substantially the same as at February 28, 2005. The
        resulting aggregate allocated value of the warrants as of March 31, 2005,
        equaled $1,114,216. The change in fair value of  $99,129 was recorded for
        the three months ended March 31, 2005.





Upon
        the
        earlier of the warrant exercise or the expiration date, the warrant liability
        will be reclassified into shareholders’ equity. Until that time, the warrant
        liability will be recorded at fair value based on the methodology described
        above. Liquidated damages under the registration rights agreement will be
        expensed as incurred and will be included in operating
        expenses.





The
        Company is also restating the unaudited Consolidated Financial Statements
        to
        record embedded derivatives rather than a beneficial conversion feature
        previously recorded of $1,003,201.





The
        Notes
        are hybrid instruments which contain both freestanding derivative financial
        instruments and more than one embedded derivative feature which would
        individually warrant separate accounting as derivative instruments under
        SFAS
        133. The freestanding derivative financial instruments include the Investor
        Warrants, which were valued individually, and totaled $1,213,345. The various
        embedded derivate features have been bundled together as a single, compound
        embedded derivative instrument that has been bifurcated from the debt host
        contract, referred to as the “Compound Embedded Derivative Liability”. The
        single compound embedded derivative features include the conversion feature
        within the Notes, the early redemption option, the Contract Rate adjustment,
        the
        premium for cash payment, and default provisions. The value of the single
        compound embedded derivative liability was bifurcated from the debt host
        contract and recorded as a derivative liability, which resulted in a reduction
        of the initial carry amount (as amortized discount) of the Notes. The
        unamortized discount is amortized to interest expense using the effective
        interest method over the life of the Notes, or 36 months.





Compound
        Embedded Derivative liability





Using
        a
        layered discounted probability-weighted expected cash flow methodology, the
        fair
        value of the Compound Embedded Derivative Liability was computed at $311,620
        and
        $268,744 as of February 28, 2005 and March 31, 2005 respectively. The model
        replicated the economics of the Notes and applied different events based
        on
        various conditions likely to occur over the life of the Note. Multiple scenarios
        were used in the model and the underlying assumptions below were applied.
        The
        value of this single, compound embedded derivative instrument was bifurcated
        from the debt host contract and recorded as a derivative liability which
        resulted in a reduction of the initial carrying amount (as unamortized discount)
        to the notional amount of the Notes.










Probability-Weighted
        Expected Cash Flow Methodology





Compound
                  Embedded Derivative LiabilityFebruary
                  28,
                2005
              
              March
                  31,
                2005Assumptions
              
              (Inception)Risk
                  Free interest rate
              
              
              3.75
              %
              
              3.96
              %Prime
                  RateIncreasing .25% each quarter of first year
              
              
              5.5
              %
              
              5.75
              %Timely
                  registrationIncreasing by 1% monthly up to 99%
              
              
              95
              %
              
              95
              %Default
                  statusIncreasing by .1% monthly
              
              
              5
              %
              
              5
              %Alternative
                  financing available and exercisedIncreasing 2.5% monthly up to 10%
              
              
              0
              %
              
              0
              %Trading
                  volume, gross monthly dollarsMonthly increase
              
              
              5
              %
              
              5
              %Annual
                  growth rate of stock price
              
              
              31.70
              %
              
              31.8
              %Future
                  projected volatility
              
              
              88
              %
              
              88
              %Ownership
                  limitationMonthly increase
              
              
              1
              %
              
              1
              %Reset
                  ProvisionIncreasing 5% monthly up to 25%
              
              
              0
              %
              
              0
              %




The
        decrease in the fair value of the derivative liability of $42,876 was recorded
        for the period ended March 31, 2005.





As
        a
        result of these contract provisions, the Notes at inception (February 28,
        2005)
        and March 31, 2005 was adjusted as follows:





February
                  28, 2005
              
              March
                  31, 2005Notional
                  balance
              
              $
              2,736,000
              
              $
              2,736,000Adjustments:Discount for compound embedded derivatives
              
              
              (311,620
              )
              
              (308,179
              )Discount
                  for Laurus warrants
              
              
              (1,213,345
              )
              
              (1,199,945
              )Discount for loan costs paid to Laurus
              
              
              (449,484
              )
              
              (444,520
              )Total
                  discounts
              
              
              1,974,449
              
              
              1,952,644Balance,
                  net of unamortized discount
              
              $
              761,551
              
              $
              783,356





The
      Company filed a registration statement with the Securities and Exchange
      Commission to register the resale of the shares of common stock underlying
      the
      notes and the shares issuable upon exercise of the Warrants. During June 2005,
      the Securities and Exchange Commission notified the Company that it believed
      the
      filing of this registration statement violated Section 5 of the Securities
      Act.
      If a violation of Section 5 occurred, the Investors related to the February
      2005
      funding have obtained the right to require the Company to repay to the Investors
      the original amount of the notes of $2,736,000 plus interest from the initial
      date of funding for a period of one year following the date of the violation.
      The Company has recorded $2,736,000 as a current liability identified as “Notes
      payable and rescission liability” on its balance sheet as of March 31, 2005, as
      such amount was funded to the Company in immediately available funds and is
      recorded as a current liability.





See
“Note
      12. ‘Subsequent Events” for a discussion of the July 14, 2005 amendment to the
      February 28, 2005 financing.





Note
      7.
      Common Stock





The
      Company issued 275,000 shares of common stock to Laurus during the three months
      ended March 31, 2005 for conversion of $275,000 principal amount of Laurus'
      long-term debt.





The
      Company issued 25,000 shares of common stock for stock options exercised during
      the three months ended March 31, 2005 resulting in proceeds totaling
      $16,750.





The
      Company issued 715,616 shares of its common stock valued at $728,387 to third
      parties for consulting services during the three months ended March 31, 2005.
      The Company measured the transactions at the date of issuance at the quoted
      market price. There are no performance commitments or penalties for
      non-performance, therefore, the Company recorded the services at the date of
      issuance.





In
      February 2004, the Company sold 1,230,000 of its common stock at a price of
      $2.00 per share, together with five-year warrants to purchase an aggregate
      of
      676,500 shares of common stock at an exercise price of $3.00 per share (the
      “Class A Warrants”), and warrants to purchase 676,500 shares of common stock at
      an exercised price of $2.50 per share (the “Class B Warrants”) expiring on the
      earlier of two years from the closing date or one year from the date a
      registration statement registering the resale of the shares underlying the
      warrants and the shares becomes effective for an aggregate purchase price of
      $2,460,000, in a private placement transaction. The Company received proceeds
      totaling $2,257,800, net of offering cost of $202,200.





All
      of
      the warrants are exercisable immediately. Subject to certain exceptions, in
      the
      event that on or before the date on which the warrants are exercised, the
      Company issues or sells, or is deemed to have issued or sold in accordance
      with
      the terms of the warrants, any shares of common stock for consideration per
      share less than the exercise price of the warrants as then in effect, then
      the
      exercise price of the warrants will be adjusted in accordance with a weighted
      average formula contained in the warrants.





In
      January 2004, the Company sold 1,964,223 shares of its common stock at a price
      of $1.29 per share, together with five-year warrants to purchase an aggregate
      of
      1,178,535 shares of common stock at an exercised price of $1.89 per share (the
      “Class A Warrants”), and warrants to purchase 1,090,145 shares of common stock
      at an exercise price of $1.55 per share (the “Class B Warrants”), expiring on
      the earlier of fourteen months from the closing date or eight months from the
      date of a registration statement registering the resale of the shares underlying
      the warrants and the shares become effective for an aggregate purchase price
      of
      $2,533,850 in a private placement transaction. The Company received proceeds
      totaling $2,326,481, net of offering costs of $207,369.





All
      of
      the warrants are exercisable immediately. Subject to certain exceptions, in
      the
      event that on or before the date on which the warrants are exercised, the
      Company issues or sells, or is deemed to have issued or sold in accordance
      with
      the terms of the warrants, any shares of common stock for consideration per
      share less than the exercise price of the warrants as then in effect, then
      the
      exercise price of the warrants will be adjusted to equal the consideration
      per
      share of common stock issued or sold or deemed to have been issued and sold
      in
      such dilutive issuance, provided that if such exercise price is adjusted to
      a
      $1.00 per share of common stock , any additional issuances shall only further
      reduce the exercise price of the warrants in accordance with a weighted average
      formula contained in the warrants.


12




In
        order
        to correct the financial statements so that they comply with U.S. generally
        accepted accounting principles, the Company has restated the Unaudited
        Consolidated Financial Statements as of March 31, 2005 and 2004, to record
        the
        warrants as liabilities effective as of January 12 and February 4, 2004,
        to
        reflect the fact that the registration rights agreement into which the Company
        entered in connection with its issuance of the warrants requires the Company
        to
        pay liquidated damages, which in some cases could exceed a reasonable discount
        for delivering unregistered shares and thus would require the warrants to
        be
        classified as a liability until earlier of the date the warrants are exercised
        or expire. In
        accordance with EITF 00-19, *Accounting
        for Derivative Financial Instruments Indexed To, and Potentially Settled
        In, a
        Company’s Own Stock,* the
        Company has allocated a portion of the offering proceeds to the warrants
        based
        on their fair value. EITF 00-19 also requires that the Company revalue the
        warrants as a derivative instrument periodically to compute the value in
        connection with changes in the underlying stock price and other assumptions,
        with the change in value recorded as other expense or other income. The
        restatement reduced paid-in capital as of March 31, 2005 and 2004, by
        $6,089,693, increased common stock warrant liability as of March 31, 2004
        by
        $8,124,393 and increased other expense and the net loss for the three months
        ended March 31, 2004 by $2,034,700. The Company determined the fair value
        of the
        warrants as follows as of January 12 and February 4, 2004 (the issuance
        date):





·
              The
                  Company used the Black Scholes option-pricing model with the following
                  assumptions; an expected life equal to the contractual term of
                  the
                  warrants; no dividends; a risk free rate of 3.5% which equals the
                  five-year yield on Treasury bonds at constant (or fixed) maturity;
                  and
                  volatility of 102%. Under these assumptions, the Black Scholes
                  option-pricing model yielded a value of $1.57 for the $1.89 warrants,
                  $1.02 for the $1.55 warrants, $2.36 for the $3.00 warrants and
                  $1.82 for
                  the $2.50 warrants for an aggregate value of
                  $6,089,693.





·
              The
                  Company performed the same calculations as of March 31, 2004 to
                  revalue
                  the warrants as of that date. In using the Black Scholes option-pricing
                  model, the Company used an underlying stock price of $2.99 per
                  share and
                  risk free rate of 3.5% with all other input assumptions remaining
                  substantially the same as at January 12 and February 4, 2004. The
                  resulting aggregate allocated value of the warrants as of March
                  31, 2004
                  equaled $8,124,393. The change in fair value of $2,034,700 was
                  recorded
                  for the three months ended March 31, 2004, and is primarily due
                  to the
                  fair value of the underlying common stock from $2.02 per share
                  to $2.99
                  per share from January 12 to March 31,
                  2004.





For
        the
        quarter ended March 31, 2005, the company used an underlying stock price
        of
        $0.84, an expected life equal to the contractual term of the warrants; no
        dividends; risk free rate of 3.96%; and volatility of 88%. The resulting
        aggregate value of the warrants as of March 31, 2005 equaled $885,973. The
        decrease in fair value from December 31, 2004 to March 31, 2005 was
        $1,103,100.





Upon
        the
        earlier of the warrant exercise or expiration date, the warrant liability
        will
        be reclassified into shareholders’ equity. Until that time, the warrant
        liability will be recorded at fair value based on the methodology described
        above. Changes in the fair value during each period will be recorded as other
        income or other expense. Liquidated damages under the registration rights
        agreement will be expensed as incurred and will be included in operating
        expenses.





As
        part
        of the above financings, the Company agreed to file a registration statement
        with the SEC in order to register the resale of the shares purchased and
        the
        shares issuable upon exercise of the warrants. If (i) the registration statement
        is not declared effective prior to the 120 th day
        after the closing date of each financing (ii) the Company fails to respond
        to
        the comments provided by the SEC to its registration statement within ten
        days
        of receipt of comments; or (iii) the registration statement has been declared
        effective by the SEC and it ceases to remain continuously effective until
        all
        the registered securities are resold, the Company has agreed to pay the
        investors 1.5% of the aggregate purchase price for the first month, and if
        the
        event continues to occur, 2.0% of the purchase price per month thereafter. 
The Company's registration statement was declared effective by the SEC on
        September 10, 2004.  As settlement for the penalties, the Company issued
        319,248 shares of its common stock valued at $354,224 and lowered its exercise
        price on certain warrants to $1.00 per share and extended the expiration
        dates.










Note
      8.
      Common Stock Warrants





In
      connection with its debt and equity fundings, the Company has issued warrants
      to
      acquire common stock at various prices with various expiration dates. The
      following table summarizes the warrants outstanding as of March 31,
      2005:





Exercise
                Price
            
            Financing
              Date
            
            Outstanding
              Warrants
            
            Expiration
              Date$0.70
            
            
            December
                2003
            
            
            26,611
            
            
            December
                2005$1.00
            
            
            January
                2004
            
            
            666,859
            
            
            June
                2005$1.00
            
            
            February
                2004
            
            
            240,000
            
            
            June
                2005$1.55
            
            
            January
                2004
            
            
            381,719
            
            
            June
                2005$1.89
            
            
            January
                2004
            
            
            1,296,388
            
            
            January
                2009$2.50
            
            
            February
                2004
            
            
            386,500
            
            
            February
                2006$3.00
            
            
            February
                2004
            
            
            676,500
            
            
            February
                2009$3.05
            
            
            February
                2004
            
            
            200,000
            
            
            February
                2011$3.19
            
            
            February
                2004
            
            
            50,000
            
            
            February
                2011$3.22
            
            
            February
                2004
            
            
            40,000
            
            
            February
                2011$1.90
            
            
            October
                2004
            
            
            150,000
            
            
            October
                2011$1.25
            
            
            February
                2005
            
            
            1,800,000
            
            
            February
                2012Total
            
            
            
            
            
            5,914,577





All
      warrants are exercisable at March 31, 2005. The Company has not filed and is
      not
      required to file a registration statement for the warrants issued for its
      December 2003 financing, which warrants expire in December 2005.





Note
      9.
      Industry Segments





The
      Company has adopted the provisions of Statements of Financial Accounting
      Standards No. 131, “Disclosures about Segments of an Enterprise and Related
      Information” (“SFAS 131”). At March 31, 2005, the Company's four business units,
      NetView, NewBridge, eLinear and TanSeco, have separate management teams and
      infrastructures that offer different products and services.





**For
      the Three Months Ended March 31, 2005**


**(Restated)**





Dollars
                  ($)
              Consulting
                Services
              Network
                  and
                Storage
                Solutions
              Communications
                Deployment
              Security
                Solutions
              ConsolidatedRevenue
              
              5,212
              4,378,381
              
              319,452
              
              809,230
              
              5,512,275Segment
                  loss
              
              (998,836)
              (495,870)
              
              (29,037)
              
              (279,211)
              
              (1,802,954)Total
                  assets
              
              2,493,097
              3,747,578
              
              1,540,012
              
              1,707,509
              
              9,488,196Capital
                  expenditures
              
              27,729
              24,473
              
              --
              
              15,887
              
              68,089Depreciation
                  and amortization
              
              24,932
              32,918
              
              1,476
              
              73,725
              
              133,051





**For
      the Three Months Ended March 31, 2004**


**(Restated)**





Dollars
                  ($)
              Consulting
                Services
              Network
                  and
                Storage
                Solutions
              Communications
                Deployment
              Security
                Solutions
              ConsolidatedRevenue
              46,945
              3,956,625
              171,508
              --
              4,175,078Segment
                  profit (loss)
              (3,361,578)
              94,503
              (112,834)
              --
              (3,379,909)Total
                  assets
              4,653,444
              3,929,364
              1,739,373
              --
              10,322,181Capital
                  expenditures
              15,375
              34,860
              565
              --
              50,800Depreciation
              2,721
              4,159
              1,626
              --
              8,505





The
      accounting policies of the reportable segments are the same. The Company
      evaluates the performance of its operating segments based on income before
      net
      interest expense, income taxes, depreciation expense, accounting changes and
      non-recurring items.





Note
      10.
      Significant Concentration





One
      customer accounted for approximately 12 % of sales for the three months ended
      March 31, 2005. No other customers represented more than 10% of sales of the
      Company for the three months ended March 31, 2005. The Company did not have
      any
      customers which had in excess of 10% of the Company's accounts receivable
      balance at March 31, 2005.





Note
      11.
      Restricted Cash





In
      conjunction with the Company's credit facility with Textron Financial
      Corporation, the Company was required to deposit $500,000 in a restricted cash
      account and issue Textron a $500,000 letter of credit.










Note
      12.
      Subsequent Event




On
      July
      14, 2005, the Company amended that 2005 financing arrangement, entered into
      on
      February 28, 2005, for a total principal amount of $12 million with the
      Investors. The supplement modifies the February 2005 financing arrangement
      by
      (i) releasing all the funds held in the restricted account, of which $7,200,000
      was paid to the respective Investors without penalty and the remaining amount,
      approximately $2,138,921, held in the restricted account was funded to the
      Company; (ii) amending and restating the notes issued pursuant to the February
      2005 financing arrangement with the new total principal amount of $5,054,567
      that included (x) the twenty percent (20%) (including applicable fees) of the
      February 2005 financing funded to the Company in February 2005; (y) the funds
      released from the restricted accounts to the Company pursuant to the supplement;
      and (z) the interest accrued on the funds held in the restricted account from
      March 2005 until July 14, 2005; (iii) granting the Investors a right to
      participate in their *pro
      rata* portion
      of 60% of any future financing of the Company for one year; and (iv) issuing
      warrants exercisable after January 14, 2006 at exercise prices ranging from
      $1.50 to $1.75 per share into an aggregate of 991,667 shares of common stock
      to
      Iroquois, RHP, Basso Private and Basso Multi. The terms between the Company
      and
      each of the respective Investors are substantially similar.





The
      new
      notes are secured by all of the Company and its subsidiaries' assets. The
      payment of interest and principal, under certain circumstances, may be made
      with
      shares of the Company common stock at a conversion price of no less than $1.00
      per share. The new notes will accrue interest at a rate per annum equal to
      the
“prime rate” published in the Wall Street Journal plus seventy five basis
      points, as may be adjusted. The Company has the ability to prepay any amounts
      owed under these new notes at 115% of the principal amount. The Company is
      obligated to make monthly payments, either in cash or stock as determined by
      the
      new notes, beginning on August 1, 2005 for the total principal of the new notes,
      plus applicable interest (the “Monthly Payment”). The Monthly Payment will be
      made (i) automatically by a conversion in stock at a “Fixed Conversion Price”,
      (ii) at the discretion of the Company at a reduced conversion price, but no
      less
      than $1.00, or (iii) in cash paid by the Company at 101% of the Monthly Payment.
      The Monthly Payments shall be automatically made, subject to volume limitation,
      in Company common stock at the Fixed Conversion Price if (i) the shares of
      the
      Company common stock underlying the shares of the notes are registered; and
      (ii)
      the average trading price of the Company common stock for the five days
      preceding the Monthly Payment is greater than 110% of the Fixed Conversion
      Price. If the Monthly Payment is not automatically converted into shares of
      Company common stock because the average trading price of the Company common
      stock for the five trading days prior to the due date of the Monthly Payment
      is
      less than 110% of the Fixed Conversion Price, the Company may, at its
      discretion, make the Monthly Payment in Company common stock at a conversion
      price equal to 85% of the average trading price of the Company common stock
      for
      the five lowest closing days for the 22 trading days prior to the Company's
      notice, but in no case shall the conversion price be less than $1.00. The Fixed
      Conversion Price is $1.00, subject to adjustment, but in no case reduced to
      less
      than $1.00.





The
      Investors may convert all or any portion of the principal amounts of their
      respective new notes, including any accrued interest or fees thereon at the
      Fixed Conversion Price.





Notwithstanding
      the foregoing, the Company's right to issue shares of its common stock in
      payment of obligations under the new notes shall be subject to the limitation
      that the number of aggregate shares of common stock issued to each Investor
      shall not exceed 25% of the aggregate dollar trading volume of the Company
      common stock for the 22 trading days immediately preceding the date on which
      the
      conversion is to occur.





The
      Investors may not exercise the warrants issued pursuant to the Supplement until
      January 14, 2006 and are exercisable until January 14, 2013, of which 466,667
      of
      the warrants are exercisable at $1.50 and 525,000 are exercisable at $1.75.
      The
      warrants were valued at $632,707 using a modified Black-Scholes option pricing
      model. The value of these warrants will be recorded as a discount to the new
      notes and will be amortized over the remaining term of the loan (31 months)
      using the effective interest method.





The
      Company has agreed to file a registration statement with the Securities and
      Exchange Commission by August 13, 2005 in order to register the resale of the
      shares of common stock underlying the new notes, the shares issuable upon
      exercise of the warrants issued in February 2005, and the warrants issued in
      connection with the Supplement. If the Company fails to meet this deadline,
      if
      the registration statement is not declared effective prior to October 27, 2005,
      if the registration statement ceases to remain effective, or certain other
      events occur, the Company has agreed to pay the Investors liquidated damages
      of
      1.25% of the principal amount of the new notes per month; except that the
      Company will only have to pay 50% of the liquidated damages if the registration
      statement is not declared effective by the Securities and Exchange Commission
      under certain circumstances.





Item
      2.
      MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
      CONDITION





*The
      following discussion and analysis of the Company's financial condition as of
      March 31, 2005, and its results of operations for the three-month periods ended
      March 31, 2005 and 2004, should be read in conjunction with the audited
      consolidated financial statements and notes included in eLinear's Form 10-KSB/A
      for the year ended December 31, 2004, filed with the Securities and Exchange
      Commission.*





**Overview**





The
      Company currently consists of four operating segments:





ཙ
            Consulting
                services. The Company offers consulting services, creative web site
                design, web site content management software and technical project
                management and development
                services.








ཙ
            Product
                fulfillment and network and storage solutions. Through NetView the
                Company
                offers a complete solution to its customers for the acquisition,
                management and configuration of complex storage and network server
                installations.





ཙ
            Communications
                deployment. Through NewBridge the Company provides structured cabling,
                which is a set of cabling and connectivity products that integrate
                voice,
                data, video and various management systems, cabling infrastructure
                design
                and implementation, which is the design and implementation of the
                structured cabling systems, security installation and monitoring
                and
                digital services of voice, data and video over fiber optic networks
                to its
                residential and commercial
                customers.





ཉ
            Security
                solutions. Through TanSeco the Company has business centered on premise
                security solutions which includes a three-year contract with RadioShack
                Corporation to install kiosks throughout the United States, 24X7
                security
                monitoring contracts with a variety of commercial customers and project
                work installing security devices and fiber/cable in client locations
                across the US.





The
      Company operated as a technology consulting business from December 1999 until
      its acquisition of NetView in April 2003. It acquired its Internet consulting
      business as a result of a reverse merger with Imagenuity, Inc. (“Imagenuity”) in
      1999. Since 1999 to date, its Internet consulting business consisted of Internet
      consulting services, creative web site design, web site content management
      and
      software and technical project management and development services. For the
      fiscal year ended December 31, 2004, the consulting segment contributed less
      than 1% of its revenue. Immediately prior to acquiring the business of
      Imagenuity, eLinear, which at the time was named Kinetiks.com, Inc.
      (“Kinetiks.com”) did not engage in any business activities except for
      negotiating and compromising debt and searching for merger candidates. While
      Kinetics.com was the survivor in the merger, from an accounting standpoint
      the
      transaction was accounted for as though it was a recapitalization of Imagenuity
      and a sale of shares by Imagenuity in exchange for the net assets of
      Kinetics.com. On July 31, 2000, the Company changed its name to eLinear,
      Inc.





The
      Company completed the acquisitions of NetView and NewBridge during 2003. In
      April 2003, the Company issued 12,961,979 shares of common stock for all of
      the
      outstanding common stock of NetView. After the merger the stockholders of
      NetView owned approximately 90% of eLinear.





Although
      NetView became a wholly-owned subsidiary, for accounting purposes this
      transaction was treated as an acquisition of eLinear and a recapitalization
      of
      NetView using the purchase method of accounting. The acquisition resulted in
      goodwill of $451,920. Since NetView is deemed to be the acquiring company for
      accounting purposes, the financial information for the year ended December
      31,
      2003 is information derived from the financial statements of
      NetView.





In
      July
      2003, the Company completed the acquisition of all the outstanding shares of
      NewBridge. Pursuant to the transaction, eLinear issued 850,000 shares of its
      common stock valued at $935,000, using the market price on July 31, 2003, and
      options to purchase 300,000 shares of common stock valued at $274,000 using
      the
      Black-Scholes option pricing model, to the shareholders of NewBridge. The
      acquisition was accounted for using the purchase method of accounting resulting
      in goodwill of $1,491,102, as restated.





In
      November 2004, the Company acquired all of the outstanding and issued stock
      of
      TanSeco from RadioShack. As a result, TanSeco became a wholly-owned subsidiary
      of eLinear. The Company purchased the stock with cash and acquired inventory,
      fixed assets and security monitoring contracts. Concurrent with this
      transaction, TanSeco entered into a three-year services agreement with
      RadioShack whereby TanSeco will provide the installation, service, repair and
      inspection of security, closed circuit television and fire systems used by
      RadioShack for the security of its more than 5,000 company-owned stores, kiosks
      and other physical locations.





**Recent
      Developments**





On
      February 28, 2005, the Company entered into financing arrangements to receive
      up
      to a total principal amount of $12 million with Laurus, Iroquois Capital LP
      (“Iroquois”), RHP Master Fund (“RHP”), Basso Private Opportunity Holding Fund
      Ltd. (“Basso Private”), and Basso Multi-Strategy Holding Fund Ltd. (“Basso
      Multi”), (collectively, the “Investors”) in which it initially received
      $2,736,000 in cash and the ability upon certain conditions to receive the
      remaining amount of the total financing of $9,264,000. The $9,264,000 is held
      in
      restricted accounts at the sole dominion and control of each respective
      Investor. The Company may only receive the amounts (less applicable accrued
      interest) held in the restricted account after (i) the initial amount received,
      plus interest, is paid in full, (ii) the shares of the Company common stock
      underlying the notes are registered; and (iii) either the Company or the
      Investor converts any amounts held in the Restricted Accounts into shares of
      the
      Company's common stock.  If the Company converts the amounts held in the
      restricted account, the amounts shall be converted at either (i) a price equal
      to 85% of the average of the five lowest closing prices of the Company common
      stock during the 22 trading days immediately prior to the date of a respective
      repayment notice if the average closing price of the Company common stock is
      less than 110% of the Fixed Conversion Price, but in no instance may such shares
      by converted for less than $1.00; or (ii) at the Fixed Conversion Price if
      the
      average closing price of the Company common stock for the five consecutive
      trading days immediately preceding the respective repayment notice is greater
      than or equal to 115% of the Fixed Conversion Price.





Under
      the
      terms of these notes and related documents, the is Company is obligated to
      make
      monthly interest payments for interest accrued on the initial $2,736,000, the
      interest begins accruing on April 1, 2005. The Company is obligated to make
      monthly payments, either in cash or stock as determined by the terms of the
      notes, beginning on June 1, 2005 for the initial $2,736,000, plus applicable
      interest (the “Monthly Payment”). The Monthly Payment will be made (i)
      automatically by a conversion in stock at $1.00 per share, (ii) at the
      discretion of the Company at a reduced conversion price, or (iii) in cash paid
      by the Company at 101% of the Monthly Payment.





In
      addition to the notes the Company issued 1,800,000 warrants to the Investors.
      The warrants are exercisable by the Investors until February 28, 2012, at $1.25
      per share of Company common stock. All of the warrants are immediately
      exercisable with no requirement to return to the Company should the initial
      $2,736,000 is not be paid in full.





These
      notes are secured by all of the Company and its subsidiaries'
      assets.





In
        conjunction with the notes, the Investors were paid a fee of $449,484. The
        warrants, which are exercisable immediately, were valued at $1,213,345
        using Black-Scholes option pricing model. The value of these warrants and
        the fees paid to the Investors were recorded as a discount to the notes and
        are
        being amortized over the term of the loan using the effective interest
        method.








The
      Company filed a registration statement with the Securities and Exchange
      Commission to register the resale of the shares of common stock underlying
      the
      notes and the shares issuable upon exercise of the Warrants. During June 2005,
      the Securities and Exchange Commission notified the Company that it believed
      the
      filing of this registration statement violated Section 5 of the Securities
      Act.
      If a violation of Section 5 occurred, the Investors related to the February
      2005
      funding have obtained the right to require the Company to repay to the Investors
      the original amount of the notes of $2,736,000 plus interest from the initial
      date of funding for a period of one year following the date of the violation.
      The Company has recorded $2,736,000 as a current liability identified as “Notes
      payable and rescission liability” on its balance sheet as of March 31, 2005, as
      such amount was funded to the Company in immediately available funds and is
      recorded as a current liability.





On
      July
      14, 2005, the Company amended the 2005 financing arrangement, entered into
      on
      February 28, 2005. The supplement modifies the February 2005 financing
      arrangement by (i) releasing all the funds held in the restricted account,
      of
      which $7,200,000 was paid to the respective Investors without penalty and the
      remaining amount, approximately $2,138,921, held in the restricted account
      was
      funded to the Company; (ii) amending and restating the notes issued pursuant
      to
      the February 2005 financing arrangement with the new total principal amount
      of
      $5,054,567 that included (x) the twenty percent (20%) (including applicable
      fees) of the February 2005 financing funded to the Company in February 2005;
      (y)
      the funds released from the restricted accounts to the Company pursuant to
      the
      supplement; and (z) the interest accrued on the funds held in the restricted
      account from March 2005 until July 14, 2005; (iii) granting the Investors a
      right to participate in their *pro
      rata* portion
      of 60% of any future financing of the Company for one year; and (iv) issuing
      warrants exercisable after January 14, 2006 at exercise prices ranging from
      $1.50 to $1.75 per share into an aggregate of 991,667 shares of common stock
      to
      Iroquois, RHP, Basso Private and Basso Multi. The terms between the Company
      and
      each of the respective Investors are substantially similar.





The
      new
      notes are secured by all of the Company and its subsidiaries' assets. The
      payment of interest and principal, under certain circumstances, may be made
      with
      shares of the Company common stock at a conversion price of no less than $1.00
      per share. The new notes will accrue interest at a rate per annum equal to
      the
“prime rate” published in the Wall Street Journal plus seventy five basis
      points, as may be adjusted. The Company has the ability to prepay any amounts
      owed under these new notes at 115% of the principal amount. The Company is
      obligated to make monthly payments, either in cash or stock as determined by
      the
      new notes, beginning on August 1, 2005 for the total principal of the new notes,
      plus applicable interest (the “Monthly Payment”). The Monthly Payment will be
      made (i) automatically by a conversion in stock at a “Fixed Conversion Price”,
      (ii) at the discretion of the Company at a reduced conversion price, but no
      less
      than $1.00, or (iii) in cash paid by the Company at 101% of the Monthly Payment.
      The Monthly Payments shall be automatically made, subject to volume limitation,
      in Company common stock at the Fixed Conversion Price if (i) the shares of
      the
      Company common stock underlying the shares of the notes are registered; and
      (ii)
      the average trading price of the Company common stock for the five days
      preceding the Monthly Payment is greater than 110% of the Fixed Conversion
      Price. If the Monthly Payment is not automatically converted into shares of
      Company common stock because the average trading price of the Company common
      stock for the five trading days prior to the due date of the Monthly Payment
      is
      less than 110% of the Fixed Conversion Price, the Company may, at its
      discretion, make the Monthly Payment in Company common stock at a conversion
      price equal to 85% of the average trading price of the Company common stock
      for
      the five lowest closing days for the 22 trading days prior to the Company's
      notice, but in no case shall the conversion price be less than $1.00. The Fixed
      Conversion Price is $1.00, subject to adjustment, but in no case reduced to
      less
      than $1.00.





The
      Investors may convert all or any portion of the principal amounts of their
      respective new notes, including any accrued interest or fees thereon at the
      Fixed Conversion Price.





Notwithstanding
      the foregoing, the Company's right to issue shares of its common stock in
      payment of obligations under the new notes shall be subject to the limitation
      that the number of aggregate shares of common stock issued to each Investor
      shall not exceed 25% of the aggregate dollar trading volume of the Company
      common stock for the 22 trading days immediately preceding the date on which
      the
      conversion is to occur.





The
      Investors may not exercise the warrants issued pursuant to the Supplement until
      January 14, 2006 and are exercisable until January 14, 2013, of which 466,667
      of
      the warrants are exercisable at $1.50 and 525,000 are exercisable at $1.75.
      The
      warrants were valued at $632,707 using a modified Black-Scholes option pricing
      model. The value of these warrants will be recorded as a discount to the new
      notes and will be amortized over the remaining term of the loan (31 months)
      using the effective interest method.





The
      Company has agreed to file a registration statement with the Securities and
      Exchange Commission by August 13, 2005 in order to register the resale of the
      shares of common stock underlying the new notes, the shares issuable upon
      exercise of the warrants issued in February 2005, and the warrants issued in
      connection with the Supplement. If the Company fails to meet this deadline,
      if
      the registration statement is not declared effective prior to October 27, 2005,
      if the registration statement ceases to remain effective, or certain other
      events occur, the Company has agreed to pay the Investors liquidated damages
      of
      1.25% of the principal amount of the new notes per month; except that the
      Company will only have to pay 50% of the liquidated damages if the registration
      statement is not declared effective by the Securities and Exchange Commission
      under certain circumstances.





**Critical
      Accounting Policies**





*General*





The
      Consolidated Financial Statements and Notes to Consolidated Financial Statements
      contain information that is pertinent to this management's discussion and
      analysis. The preparation of financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of any contingent assets and liabilities.
      Management believes these accounting policies involve judgment due to the
      sensitivity of the methods, assumptions and estimates necessary in determining
      the related asset and liability amounts. Management believes it has exercised
      proper judgment in determining these estimates based on the facts and
      circumstances available to its management at the time the estimates were made.
      The significant accounting policies are described in the Company's audited
      consolidated financial statements included with its Form 10-KSB for the year
      ended December 31, 2004.





*Revenue
      Recognition*





The
      Company's revenue recognition policy is objective in that it recognizes revenue
      when products are shipped or services are delivered. Accordingly, there are
      no
      estimates or assumptions that have caused deviation from its revenue recognition
      policy. Additionally, the Company has a limited amount of sales returns which
      would affect its revenue earned.





The
      Company accounts for arrangements that contain multiple elements in accordance
      with EITF 00-21, "Revenue Arrangements with Multiple Deliverables". When
      elements such as hardware, software and consulting services are contained in
      a
      single arrangement, or in related arrangements with the same customer, the
      Company allocates revenue to each element based on its relative fair value,
      provided that such element meets the criteria for treatment as a separate unit
      of accounting. The price charged when the element is sold separately generally
      determines fair value. In the absence of fair value for a delivered element,
      the
      Company allocates revenue first to the fair value of the undelivered elements
      and allocates the residual revenue to the delivered elements. In the absence
      of
      fair value for an undelivered element, the arrangement is accounted for as
      a
      single unit of accounting, resulting in a delay of revenue recognition for
      the
      delivered elements until the undelivered elements are fulfilled. The Company
      limits the amount of revenue recognition for delivered elements to the amount
      that is not contingent on the future delivery of products or services or subject
      to customer-specified return or refund privileges.





The
      Company recognizes revenue from the sale of manufacturer's maintenance and
      extended warranty contracts in accordance with EITF 99-19 net of its costs
      of
      purchasing the related contracts.





*Allowance
      for Doubtful Accounts*





The
      Company maintains an allowance for doubtful accounts, which reflects the
      estimate of losses that may result from the inability of some of the Company's
      customers to make required payments. The estimate for the allowance for doubtful
      accounts is based on known circumstances regarding collectability of customer
      accounts and historical collections experience. If the financial condition
      of
      one or more of the Company's customers were to deteriorate, resulting in an
      impairment of their ability to make payments, additional allowances may be
      required. Material differences between the historical trends used to estimate
      the allowance for doubtful accounts and actual collection experience could
      result in a material change to the Company's consolidated results of operations
      or financial position.





*Goodwill*





As
      of
      March 31, 2005, the Company had $1,100,000 of goodwill resulting from the
      acquisition of NewBridge. Goodwill represents the excess of cost over the fair
      value of the net tangible assets acquired and is not amortized. However,
      goodwill is subject to an impairment assessment at least annually which may
      result in a charge to operations if the fair value of the reporting segment
      in
      which the goodwill is reported declines. In September 2004, the Company
      performed a valuation analysis of the discounted projected estimated future
      cash
      flows of NewBridge and the Company elected to write down a portion of the
      goodwill related to NewBridge. Due to the large amount of goodwill presently
      on
      the Company's financial reports, if an impairment is required, the Company's
      financial condition and results of operations would be negatively affected.
      During March 2004, the Company recorded an impairment charge of approximately
      $451,000 related to the goodwill associated with the NetView
      acquisition.







*Accounting
      for Stock-Based Compensation*





The
      Company accounts for stock-based compensation based on the provisions of
      Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees,” as amended by the Financial Accounting Standards Board
      Interpretation No. 44, “Accounting for Certain Transactions Involving Stock
      Compensation.” Accounting Principles Board Opinion No. 25 and Financial
      Accounting Standards Board Interpretation No. 44 state that no compensation
      expense is recorded for stock options or other stock-based awards to employees
      that are granted with an exercise price equal to or above the estimated fair
      value per share of the company's common stock on the grant date. The Company
      adopted the disclosure requirements of Statement of Financial Accounting
      Standards No. 123, “Accounting for Stock-Based Compensation,” which requires
      compensation expense to be disclosed based on the fair value of the options
      granted at the date of the grant.





In
      December 2002, the Financial Accounting Standards Board issued its Statement
      No.
      148, “Accounting for Stock-Based Compensation -- Transition and Disclosure--an
      amendment of Financial Accounting Standards Board Statement No. 123.” This
      Statement amends Statement of Financial Accounting Standards No. 123, to provide
      alternative methods of transition for an entity that voluntarily changes to
      the
      fair value based method of accounting for stock-based employee compensation.
      It
      also amends the disclosure provisions of Statement of Financial Accounting
      Standards No. 123 to require prominent disclosure about the effects on reported
      net income of an entity's accounting policy decisions with respect to
      stock-based employee compensation. The transition and annual disclosure
      provisions of Statement of Financial Accounting Standards No. 148 are effective
      for fiscal years ending after December 15, 2002, and the interim disclosure
      provisions were effective for the first interim period beginning after December
      15, 2002. The Company did not voluntarily change to the fair value based method
      of accounting for stock-based employee compensation, therefore, the adoption
      of
      Statement of Financial Accounting Standards No. 148 did not have a material
      impact on its operations and/or financial position.





*Derivative
        Financial Instruments*





The
          Company accounts for all derivative financial instruments in accordance with SFAS No. 133. Derivative financial instruments
          are recorded as liabilities in the consolidated balance sheet, measured
          at fair
          value. When available, quoted market prices are used in determining fair
          value.
          However, if quoted market prices are not available, the Company estimates
          fair
          value using either quoted market prices of financial instruments with similar
          characteristics or other valuation techniques.
 
 The
          value
          of the derivative liabilities relating to the Notes in the quarterly
          financial statements are subject to the changes in the trading value of
          the
          Company’s common stock and other assumptions. As a result the Company’s
          quarterly financial statements may fluctuate from quarter to quarter based
          on
          factors such as trading value of the Company’s Common Stock, the amount of
          shares converted in connection with the Notes and exercised in
          connection with the Warrants outstanding. Consequently, the Company's
          consolidated financial position and results of operations may vary from
          quarter
          to quarter based on conditions other than the Company’s operating revenue and
          expenses. See Note 6 and 7 regarding valuation methods used for derivative
          liabilities.
 
 Derivative
          financial instruments that are not designated as hedges or that do not
          meet the
          criteria for hedge accounting under SFAS No. 133 are recorded at fair value,
          with gains or losses reported currently in earnings. All derivative financial
          instruments held by the Company as of March 31, 2005 were not designated
          hedges.
 
 **Results
      of Operations and Financial Condition**





**Three
      Months Ended March 31, 2005 to Three Months Ended March 31,
      2004**





The
      following table sets forth certain operating information regarding the Company
      for the three months ended March 31, 2005 and 2004:





Three
                  Months EndedMarch
                  31,2005
              
              2004Revenue
              
              
              
              $
              5,512,275
              
              $
              4,175,078Cost
                  of revenue
              
              
              
              
              4,599,757
              
              
              3,714,762Gross
                  profit
              
              
              
              
              912,518
              
              
              460,316Selling,
                  general and administrative expenses
              
              
              
              
              3,983,155
              
              
              1,889,189Depreciation
                  and amortization
              
              
              
              
              133,051
              
              
              8,505Loss
                  from operations
              
              
              
              
              (3,203,688
              )
              
              (1,437,378
              )Other
                  income (expense)
              
              
              
              
              1,400,734
              
              
              (1,942,531
              )Net
                  loss
              
              
              
              $
              (1,802,954
              )
              $
              (3,379,909
              )Net
                  loss per share - basic and diluted
              
              
              
              $
              (0.
                  08
              )
              $
              (0.20
              )





*Revenue.* Total
      revenue for the three months ended March 31, 2005 was $5,512,275 which was
      an
      increase of 32% over the prior year period of $4,175,078. Revenue from the
      consulting services business segment for the 2005 period was $5,212, which
      was
      less than 1 % of total revenue. The consulting services business segment has
      seen a significant decline in customer utilization during 2004 and
      2005.





Revenue
      generated from the network and storage solutions business segment for the 2005
      period was $4,378,381, which was an increase of $421,756, or 11 %, over the
      2004
      period. The network and storage solutions business segment contributed 79 %
      of
      total revenue for the 2005 period. The Company was able to increase its revenue
      over the 2004 period primarily by the addition of sales personnel who had
      previous customer relationships and during 2004 the Company opened a sales
      office in Dallas, Texas with satellite offices in Austin, Texas and Oklahoma
      City, Oklahoma. The increase in revenue was due to an increase in the amount
      of
      product sold and was not affected by an increase in pricing. eLinear intends
      to
      focus on adding additional customers and personnel to service these
      customers.





Revenue
      from the communications deployment business segment for the 2005 period was
      $319,452, which was 6 % of total revenue. This was an increase of $147,944,
      or
      86 %, over the 2004 period. The Company continues to add new customers in this
      area and has increased its business from its existing customer
      base.





Revenue
      from the security solutions business segment was $809,230 for the three months
      ended March 31, 2005. The Company acquired TanSeco in November 2004 and,
      therefore, there was no revenue included for the 2004 period.





Of
      the
      revenue generated for the three months ended March 31, 2005, one customer
      provided in excess of 10% of the Company's revenue. This customer provided
      12%
      of the Company's revenue during the 2005 period. The loss of that customer
      may
      have an adverse financial effect on the Company.





*Cost
      of revenue.* Total
      cost of revenue for the three months ended March 31, 2005 was $4,599,757, an
      increase of $884,995, or 24%, over the 2004 period of $3,714,762. For the
      network and storage solutions business segment, cost of revenue is comprised
      primarily of the costs associated with acquiring hardware and software to fill
      customer orders. For the consulting services business segment, cost of revenue
      consists primarily of full-time personnel and contract employee costs associated
      with projects the Company provides to its customers for a fee. For the
      communications deployment and security solutions business segments, cost of
      revenue consists primarily of materials and personnel to build the customer
      infrastructure.





The
      primary component of the increase in cost of revenue was the cost of procuring
      hardware and software to fill an expanded number of customer orders. The cost
      of
      hardware and software as a percent of revenue decreased from 89% for 2004 period
      to 88% for fiscal 2004. The Company's principal suppliers of hardware and
      software products are Hewlett Packard and Cisco. The Company anticipates they
      will continue to be its principal suppliers in the future. Total cost of
      products amounted to $4,270,339 for the 2005 period. The Company anticipates
      that cost of revenue will increase as revenue increases.





*Gross
      profit.* Total
      gross profit increased from $460,316 for the three months ended March 31, 2004,
      to $912,518 for the three months ended March 31, 2005. The increase in gross
      profit was a result of an increase in revenue from all business segments, with
      the exception of the consulting services business segment. Total gross profit
      as
      a percentage of revenue increased from 11% for the 2004 period to 17% for the
      2005 period. The Company has experienced a better profit margin from all its
      business segments during the 2005 period..





18




*Operating
      expenses.* Total
      operating expenses for the three months ended March 31, 2005, were $4,116,206,
      an increase of $2,218,532, or 117%, over the 2004 period of $1,897,674. The
      various components of this increase are as follows





§
            The
                Company has added additional personnel in its network and storage
                solutions business segment to facilitate the rapid increase in customer
                orders, and it has reduced personnel in its consulting services business
                segment, reflecting an increase in the use of subcontractors to execute
                on
                projects as opposed to hiring full-time employees. The Company has
                also
                added approximately 35 employees through its acquisition of TanSeco.
                At
                March 31, 2004, the Company had 26 employees which had increased
                to 127 as
                of March 31, 2005. Additionally during 2004, the Company opened a
                sales
                office in Dallas, Texas and satellite offices in Austin, Texas and
                Oklahoma City, Oklahoma. The net effect was an increase in payroll
                and
                related costs of $1,271,745, which costs are composed of payroll,
                payroll
                taxes, sales commissions and employee
                benefits.








§
            Office
                administration expenses increased from $229,094 for the 2004 period
                to
                $370,742 for the 2005 period. The primary components of office
                administration are office rent, office administration, business insurance
                and dues and subscriptions. The Company incurred initial start-up
                costs
                when opening its sales offices in Dallas, Austin and Oklahoma City
                and
                relocating its corporate headquarters in Houston, Texas. The Company
                believes office administration expenses will remain at their current
                levels for the foreseeable future.








§
            Professional
                services, which is comprised of legal, accounting and consulting
                fees,
                increased from $300,991 for the previous year period to $410,764
                for the
                current year period. The Company has incurred additional legal, accounting
                and outside services fees during the current fiscal year in association
                with its financings and current litigation which was partially offset
                by a
                reduction in contract services. The Company incurred non-cash stock
                compensation expense of approximately $120,000 for common stock issued
                to
                consultants during the 2005 period.








§
            In
                March 2004 the consulting services reporting unit lost its largest
                consulting contract and the other operations that it had prior to
                the
                NetView acquisition with additional revenue declines due to the loss
                of a
                key consulting services employee after the acquisition. Based on
                projected
                future cash flows from the reporting unit, management determined
                a full
                impairment charge of $451,925 was required which was recorded in
                the 2004
                period. There was no impairment recorded during the 2005
                period.








§
            Other
                expenses increased from $372,161 for the prior year period to $1,394,906
                for the current year period. The Company is continuing an investor
                awareness/marketing program which it began during 2004 to reach out
                to
                current and potential investors and provide them with current news
                releases and information about eLinear as well as to establish nationwide
                name recognition to build the “eLinear” name brand for future business.
                This program consists of investor conferences, electronic media
                distribution, newspaper coverage, third party representation through
                introduction to institutional entities and radio coverage. The program
                was
                designed by in-house eLinear employees. The cost of this program
                during
                the three months ended March 31, 2005 approximated $1,048,000. Other
                components include employee stock option expense of $78,940, travel
                and
                entertainment of approximately $128,000 and bad debt expense of
                approximately $42,328.




§
            Depreciation
              and amortization increased from $8,505 for the 2004 period to $148,317
              for
              the 2005 period and is comprised of depreciation of fixed assets acquired
              during the 2004 period and amortization of deferred costs financing
              which
              were not incurred during the 2004 period.


*Interest
        Expense.* Interest
        expense for the three months ended March 31, 2005, increased to $129,827
        from
        $16,252 for the prior year. The increase was attributable to the amortization
        of
        debt discounts and interest charges associated with the Company's 2004 and
        2005
        fundings.




*Change
        in fair value of derivatives.* Derivative
        liabilities in connection with the 2005 and 2004 credit facilities and common
        stock warrants resulted in income of $1,511,805 for the quarter ended March
        31,
        2005 and expense of $1,926,279 for the quarter ended March 31, 2004. The
        significant difference is primarily due to the significant decrease in the
        Company’s stock price.





*Net
        Loss* .
        The net
        loss for the three months ended March 31, 2005 was $1,802,954 or $0.08 per
        share
        basic and diluted, compared to a net loss of $3,379,909, or $0.20 per share
        basic and diluted, for the previous year.





19




**Liquidity
      and Capital Resources**





The
      following summary table presents comparative cash flows of the Company for
      the
      three months ended March 31, 2005 and 2004:





Three
                Months EndedMarch
                31,2005
            
            2004Net
                cash used in operating activities
            
            $
            (520,381
            )
            $
            (2,203,909
            )Net
                cash used in investing activities
            
            $
            (78,694
            )
            $
            (1,063,959
            )Net
                cash provided by financing activities
            
            $
            1,468,227
            
            $
            7,246,553





*Changes
        in cash flow.* Net cash
        used in operating activities for the three months ended March 31, 2005, was
        $520,381 compared to net cash used in operating activities of $2,203,909
        for the
        prior year period. This was a decrease of $1,683,528 over the prior year
        period.
        The Company reported a net loss of $1,802,954 and an increase in inventory
        associated with increased sales of $261,624 and net non-cash items totaling
        $443,268, collections of accounts receivable of $867,784 and increases in
        accounts payable and accrued liabilities of $187,784 and $935,654,
        respectively.  Cash used in investing activities was $78,694 for the
        current year period compared to $1,063,959 for the prior year period. The
        Company purchased property and equipment of $68,089 during the current year
        period and incurred deposits of $10,605. Cash provided by financing activities
        decreased from approximately $7,246,553 during the 2004 period to approximately
        $1,468,227 for the current year period. The Company obtained the right to
        up to
        $12,000,000, of which $9,264,000 is held in restricted accounts which are
        in the
        sole dominion and control of the Investor, and was required to pay up-front
        financing fees to the lenders of $449,484. The Company also paid $835,039
        principal amount on its Laurus credit facility and received cash of $16,750
        through the exercise of stock options.





*Capital
      Resources* .
      The
      Company has funded its operations through the sale of common stock, the exercise
      of stock options and warrants, lines of credit, the Laurus financing agreement
      and the February 2005 financing agreement. During February 2005, the Company
      obtained a $12,000,000 financing agreement with certain investors and received
      gross proceeds of $2,400,000. This financing agreement is more fully described
      in Note 3 to the financial statements. The Company also has a financing
      agreement with Laurus Master Fund and a line of credit with Textron Financial
      Corporation.





*Liquidity.* As of
      March 31, 2005, the Company had cash balances in non-restricted accounts of
      $1,768,022 and positive working capital of approximately $1,745,692. At March
      31, 2005, the Company has $2,736,000 principal amount due investors in relation
      to its February 2005 funding. For accounting purposes, this amount has been
      reduced by the amount of fees paid for funding, the beneficial conversion amount
      of the note and the debt discount associated with the warrants issued pursuant
      to the funding, less the applicable amortization of these items. Also included
      in the working capital balance at March 31, 2005 is cash held in restricted
      accounts of approximately $504,580. If the restricted cash was excluded and
      the
      full $2,736,000 principal amount was included in the working capital balance,
      the Company would have negative working capital of approximately $1,082,870.
      The
      Company has completed two financings and two sales of stock during 2004 and
      2005, all of which included warrants. If all the warrants outstanding are
      exercised the Company could raise up to approximately $10,396,000.





On
      February 28, 2005, the Company entered into financing arrangements for a total
      principal amount of $12 million as described in - “Recent Developments”. Of this
      financing $2,736,000 gross proceeds has been funded to the Company and
      $9,264,000 may be funded upon satisfaction of certain conditions, of which
      there
      can be no assurance that this will occur. See Note 12. “Subsequent Event” for a
      discussion of the supplement to the February 2005 funding





The
      Company believes it has sufficient capital to fund operations through the end
      of
      June 2005. Thereafter, the Company will be required to obtain access to the
      restricted cash or other financing. If the Company is required to obtain
      additional financing, it will be required to do so on a best efforts basis,
      as
      it currently has no commitments for any further financing.





**Off-Balance
      Sheet Arrangements**





The
      Company does not have any off-balance sheet arrangements.





**New
      Accounting Pronouncements**





In
      December 2004, the Financial Accounting Standards Board, or FASB, issued
      Statement of Financial Accounting Standards No. 123R “Share-Based Payment” (SFAS
      123R). This statement revises SFAS No. 123, supersedes APB No. 25, and requires
      companies to recognize the cost of employee stock options and other awards
      of
      stock-based compensation based on the fair value of the award as of the grant
      date. The effective date of this pronouncement is as of the beginning of the
      first interim or annual period that begins after June 15, 2005. The adoption
      of
      FASB No. 123R will not have a material effect on the Company's consolidated
      financial position, results of operations or cash flows.





In
      December 2004, the FASB published the following two final FASB Staff Positions,
      effective immediately. FAS 109-1, "Application of FASB Statement No. 109,
      Accounting for Income Taxes, to the Tax Deduction on Qualified Production
      Activities Provided by the American Jobs Creation Act of 2004," giving guidance
      on applying FASB Statement No. 109, Accounting for Income Taxes, to the tax
      deduction on qualified production activities provided by the American Jobs
      Creation Act of 2004. FAS 109-2 "Accounting and Disclosure Guidance for that
      Foreign Earnings Repatriation Provision within the American Jobs Creation Act
      of
      2004" provides guidance on the Act's repatriation provision. The Company does
      not believe that the adoption of FAS 109-1 or FAS 109-2 will have a material
      impact on its consolidated financial position, results of operations or cash
      flows.





In
      November 2004, the FASB Emerging Issues Task Force, or EITF, reached a consensus
      in applying the conditions in Paragraph 42 of SFAS No. 144, "Accounting for
      the
      Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report
      Discontinued Operations" (EITF 03-13). Evaluation of whether operations and
      cash
      flows have been eliminated depends on whether (1) continuing operations and
      cash
      flows are expected to be generated, and (2) the cash flows, based on their
      nature and significance, are considered direct or indirect. This consensus
      should be applied to a component that is either disposed of or classified as
      held for sale in fiscal periods beginning after December 15, 2004. The Company
      does not believe that the adoption of EITF 03-13 will have a material impact
      on
      its consolidated financial position, results of operations or cash
      flows.





In
      November 2004, the FASB issued SFAS No. 151, "Inventory Costs--An Amendment
      of
      ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the guidance in
      ARB
      No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
      amounts of idle facility expense, freight, handling costs, and wasted material
      (spoilage). Among other provisions, the new rule requires that items such as
      idle facility expense, excessive spoilage, double freight, and rehandling costs
      be recognized as current-period charges regardless of whether they meet the
      criterion of "so abnormal" as stated in ARB No. 43. SFAS No. 151 is effective
      for fiscal years beginning after June 15, 2005 and is required to be adopted
      by
      the Company in the first quarter of fiscal 2006, beginning on January 1, 2006.
      The Company does not believe the adoption of SFAS No. 151 will have a material
      impact on the consolidated financial position, results of operations and cash
      flows.




20


Item
      3.  Controls and Procedures





In
      accordance with the Securities Exchange Act of 1934 (“Exchange Act”), the
      Company carried out an evaluation, under the supervision and with the
      participation of management, including its Chief Executive Officer and Principal
      Accounting Officer, of the effectiveness of its disclosure controls and
      procedures as of the end of the period covered by this report. Based on this
      evaluation, the Company's Chief Executive Officer and Principal Accounting
      Officer concluded that the Company's disclosure controls and procedures were
      effective as of March 31, 2005, to provide reasonable assurance that information
      required to be disclosed in its reports filed or submitted under the Exchange
      Act is recorded, processed, summarized and reported within the time periods
      specified in the Securities and Exchange Commission's rules and
      forms.




As
          explained in Note 2 to the financial statements included herein, in order
          to
          correct the financial statements so that they comply with U.S. generally
          accepted accounting principles, the Company has restated its unaudited
          consolidated financial statements as of and for the three ended March 31,
          2005, to reflect a reclassification from equity to liabilities of the warrants
          and compounded embedded derivatives that the Company issued in February
          2004 and
          2005, to reflect the related change in fair value of the derivatives,
          and  to reflect the loss on early extinguishment of debt at December 31,
          2004 as described further in Notes 2., 6., and 7. to the financial statements.
          Notwithstanding this restatement, the Company's management continues to
          believe
          that its disclosure controls and procedures were effective at a reasonable
          assurance level as of March 31, 2005. The Company believes the restatements
          are
          a one-time occurrence and are due to the high complexity of the financing
          transactions and related judgmental accounting issues. The Company does
          not
          anticipate entering into any additional complex financing transactions
          involving
          embedded derivatives in the future and has hired a Chief Financial
          Officer.




**PART
      II OTHER INFORMATION**


Item
      1.
      Legal Proceeding





From
      time
      to time, the Company may become involved in litigation arising in the ordinary
      course of its business. The Company is presently not subject to any material
      legal proceedings outside of the ordinary course of business except as set
      forth
      below:





On
      December 16, 1999, eLinear and Imagenuity were served with a complaint captioned
      Chris Sweeney v. Kinetics.com, Inc. and Imagenuity, Inc., Circuit Court, Duval
      County, Florida, Civil Case Number 1999-7252-CA. The complaint alleged a breach
      of an alleged oral modification of a written employment agreement between the
      plaintiff, Chris Sweeney, and Imagenuity and alleged breaches by eLinear and
      Imagenuity of fiduciary obligations which the plaintiff claims were owed to
      him.
      Plaintiff is seeking as damages 20% of the Company's common stock received
      by
      the sole shareholder of Imagenuity in connection with the merger of Imagenuity
      with and into eLinear's subsidiary. After the filing of the complaint, eLinear's
      subsidiary, eLinear Corporation, was added as a defendant. The Company intends
      to vigorously contest the case. While the Company believes the case to have
      no
      merit, at this stage it is impossible to predict the amount or range of
      potential loss, if any.





In
      December 1999, the Company counter-sued Chris Sweeney in a lawsuit captioned
      eLinear Corporation v. Chris Sweeney, United States District Court, District
      of
      Colorado, Case Number 99-WM-2434. The complaint sought a determination of the
      rights of the parties with respect to the termination of Chris Sweeney's
      employment agreement with Imagenuity. The lawsuit was indefinitely stayed
      pending resolution of the Florida litigation discussed above.





On
      October 17, 2003, the Company filed a civil suit against Jon Ludwig, its former
      CEO, for the following causes of action: breach of fiduciary duty; negligent
      misrepresentation; theft of trade secrets; theft/conversion of property;
      wrongful interference with existing and prospective contracts; and civil
      conspiracy. This case is currently in the 127th Judicial District in the
      District Court of Harris County, Texas. Ipath, a direct competitor of the
      Company and the current employer of defendant Ludwig, was added as an additional
      defendant. The Company is alleging that iPath conspiracy, wrongful interference
      with existing and prospective contracts, and fraud for its complicity with
      Ludwig in the latter's breach of fiduciary duty. The trial date has been set
      for
      April 18, 2005.





On
      November 11, 2004, the Company filed a demand for arbitration with the American
      Arbitration Association against McData Corporation for breach of contract
      relating to the termination of the contract in June 2004. Arbitrators are being
      appointed and discovery is in the early stage.




Item
      2.
      Recent Sales of Unregistered Securities





Set
      forth
      below is certain information concerning all issuances of securities by the
      Company during the fiscal quarter ended March 31, 2005, that were not registered
      under the Securities Act.





During
      January 2005, the Company issued 76,916 shares to two companies and one
      individual for consulting services valued at $90,000.





During
      February 2005, the Company issued 125,000 shares to a company for consulting
      services valued at $125,000.





During
      March 2005, the Company issued 300,000 shares to a company and an individual
      for
      consulting services valued at $297,000.





During
      the quarter ended March 31, 2005, the Company did not make any repurchases
      of
      its common stock.





All
      of
      the above transactions were completed pursuant to Section 4(2) of the Securities
      Act. With respect to issuances made pursuant to Section 4(2) of the Securities
      Act, the transactions did not involve any public offering and were sold to
      a
      limited group of persons. Each recipient either received adequate information
      about the Company or had access, through employment or other relationships,
      to
      such information, and the Company determined that each recipient had such
      knowledge and experience in financial and business matters that they were able
      to evaluate the merits and risks of an investment in the Company.





Except
      as
      otherwise noted, all sales of the Company's securities were made by officers
      of
      the Company who received no commission or other remuneration for the
      solicitation of any person in connection with the respective sales of securities
      described above. The recipients of securities represented their intention to
      acquire the securities for investment only and not with a view to or for sale
      in
      connection with any distribution thereof and appropriate legends were affixed
      to
      the share certificates and other instruments issued in such
      transactions.





Item
      3.
      Defaults Upon Senior Securities - None




Item
      4.
      Submission of Matters to a Vote of Security Holders - None





Item
      5. Other Information - None





Item
      6. Exhibits





Exhibit
      No.  Description





2.1
            Agreement
                and Plan of Merger, dated October 11, 1999, between Registrant, eLinear
                Corporation and Imagenuity, Inc. (incorporated by reference to Exhibit
                A-1
                to Registrant's Current Report on Form 8-K, dated October 25,
                1999)2.2
            Agreement
                and Plan of Merger, dated April 15, 2003, between Registrant, NetView
                Acquisition Corp. and NetView Technologies, Inc. (incorporated by
                reference to Exhibit 2.2 to Registrant's Annual Report on form 10-KSB,
                dated April 15, 2002)3.1
            Articles
                of Incorporation of Registrant (incorporated by reference to Registrant's
                Form 10-KSB for the period ended December 31, 1995)3.2
            Bylaws
                of Registrant (incorporated by reference to Registrant's Form 10-KSB
                for
                the period ended December 31, 1995)3.3
            Amended
                and Restated Certificate of Incorporation of Registrant (incorporated
                by
                reference to Registrant's Form 10-QSB for the period ended June 30,
                2000)4.1
            Specimen
                of Registrant's Common Stock Certificate (incorporated by reference
                to
                Registrant's Form 10-KSB for the period ended December 31,
                1995)10.1
            Employment
                Agreement with Tommy Allen (incorporated by reference to Exhibit
                10.3 to
                Registrant's Annual Report on Form 10-KSB, dated April 15, 2003)
                *10.2
            2000
                Stock Option Plan (incorporated by reference to Exhibit 4.1 to
                Registrant's Definitive Proxy Statement on Schedule 14A, dated June
                30,
                2000) *10.3
            Amendment
                No. 1 to Registrant's 2000 Stock Option Plan (incorporated by reference
                to
                Exhibit 4.2 to Registrant's Form S-8, dated July 31, 2001)
                *10.4
            Amended
                and Restated 2003 Stock Option Plan (incorporated by reference to
                Exhibit
                10.1 to Registrant's Form S-8, dated January 14, 2003)
                *10.5
            Form
                of Indemnification Agreement for all officers and directors of Registrant
                (incorporated by reference to Registrant's Form 10-QSB filed with
                the
                Commission on October 24, 2000)10.6
            Securities
                Purchase Agreement dated as of January 12, 2004 between eLinear,
                Inc. and
                the Investors named therein (incorporated by reference to Exhibit
                10.1 to
                Registrant's Form 8-K, dated January 28, 2004)10.7
            Form
                of Class A Warrant issued to each of the Investors in the Securities
                Purchase Agreements dated as of January 12, 2004 (incorporated by
                reference to Exhibit 10.2 to Registrant's Form 8-K, dated January
                28,
                2004)10.8
            Form
                of Class B Warrant issued to each of the Investors in the Securities
                Purchase Agreements dated as of January 12, 2004 (incorporated by
                reference to Exhibit 10.3 to Registrant's Form 8-K, dated January
                28,
                2004)10.9
            Registration
                Rights Agreement issued to each of the Investors in the Securities
                Purchase Agreements dated as of January 12, 2004 (incorporated by
                reference to Exhibit 10.4 to Registrant's Form 8-K, dated January
                28,
                2004)10.10
            Employment
                Agreement with Ramzi Milad Nassar (incorporated by reference to Exhibit
                10.12 to Registrant's Annual Report on Form 10-KSB, dated February
                13,
                2004) *10.11
            Securities
                Purchase Agreement dated as of February 4, 2004 between eLinear,
                Inc. and
                the Investors named therein (incorporated by reference to Exhibit
                10.13 to
                Registrant's Annual Report on Form 10-KSB, dated February 13,
                2004)10.12
            Form
                of Class A Warrant issued to each of the Investors in the Securities
                Purchase Agreements dated as of February 4, 2004 (incorporated by
                reference to Exhibit 10.14 to Registrant's Annual Report on Form
                10-KSB,
                dated February 13, 2004)10.13
            Form
                of Class B Warrant issued to each of the Investors in the Securities
                Purchase Agreements dated as of February 4, 2004 (incorporated by
                reference to Exhibit 10.15 to Registrant's Annual Report on Form
                10-KSB,
                dated February 13, 2004)10.14
            Registration
                Rights Agreement issued to each of the Investors in the Securities
                Purchase Agreements dated as of February 4, 2004 (incorporated by
                reference to Exhibit 10.16 to Registrant's Annual Report on Form
                10-KSB,
                dated February 13, 2004)10.15
            Common
                Stock Purchase Warrant Agreement dated as of February 23, 2004 by
                and
                between eLinear, Inc. and Laurus Master Fund, LLC (incorporated by
                reference to Exhibit 10.18 to Registrant's Form 8-K, dated February
                26,
                2004)10.16
            Secured
                Revolving Note Agreement dated as of February 23, 2004 by and between
                eLinear, Inc., NetView Technologies, Inc. and NewBridge Technologies,
                Inc.
                and Laurus Master Fund, LLC (incorporated by reference to Exhibit
                10.19 to
                Registrant's Form 8-K, dated February 26, 2004)10.17
            Secured
                Convertible Minimum Borrowing Note Agreement dated as of February
                23, 2004
                by and between eLinear, Inc., NetView Technologies, Inc. and NewBridge
                Technologies, Inc. and Laurus Master Fund, LLC (incorporated by reference
                to Exhibit 10.20 to Registrant's Form 8-K, dated February 26,
                2004)10.18
            Minimum
                Borrowing Note Registration Rights Agreement dated as of February
                23, 2004
                by and between eLinear, Inc. and Laurus Master Fund, LLC (incorporated
                by
                reference to Exhibit 10.21 to Registrant's Form 8-K, dated February
                26,
                2004)10.19
            Funds
                Escrow Agreement dated as of February 23, 2004 by and between eLinear,
                Inc., NetView Technologies, Inc. and NewBridge Technologies, Inc.
                and
                Laurus Master Fund, LLC (incorporated by reference to Exhibit 10.22
                to
                Registrant's Form 8-K, dated February 26, 2004)10.20
            eLinear,
                Inc. 2004 Stock Option Plan (incorporated by reference to Exhibit
                A to
                Registrant's Definitive Information Statement, dated October 15,
                2004)
                *10.21
            Employment
                Agreement dated January 15, 2005, with Michael Lewis (incorporated
                by
                reference to Exhibit 10.21 to Registrant's Annual Report on Form
                10-KSB,
                dated March 18, 2005) *10.22
            Amendment
                to the Security Agreement and Ancillary Agreement with Laurus Master
                Funs,
                LLC (incorporated by reference to Exhibit 10.24 to Registrant's Form
                SB-2
                dated November 5, 2004)10.23
            Stock
                Purchase Agreement of TanSeco Systems, Inc. (incorporated by reference
                to
                Exhibit 10.25 to Registrant's Form SB-2 dated November 5,
                2004)10.24
            Service
                Agreement with RadioShack Corporation (incorporated by reference
                to
                Exhibit 10.26 to Registrant's Form SB-2 dated November 5,
                2004)10.25
            Form
                of Master Security Agreement, dated as of February 28, 2005, by and
                between eLinear, Inc., NetView Technologies, Inc., NewBridge Technologies,
                Inc., TanSeco Systems, Inc. and Investor (incorporated by reference
                to
                Exhibit 10.1 to Registrant's Form 8-K dated March 3,
                2005)10.26
            Form
                of Common Stock Purchase Warrant Agreement, dated as of February
                28, 2005,
                by and between eLinear, Inc. and Investor (incorporated by reference
                to
                Exhibit 10.2 to Registrant's Form 8-K dated March 3,
                2005)10.27
            Form
                of Secured Convertible Term Note, dated as of February 28, 2005,
                by and
                between eLinear, Inc. and Investor (incorporated by reference to
                Exhibit
                10.3 to Registrant's Form 8-K dated March 3, 2005)10.28
            Form
                of Restricted Account Agreement, dated as of February 28, 2005, by
                and
                between eLinear, Inc., the bank and Investor (incorporated by reference
                to
                Exhibit 10.4 to Registrant's Form 8-K dated March 3,
                2005)10.29
            Form
                of Registration Rights Agreement, dated as of February 28, 2005,
                by and
                between eLinear, Inc. and Investor (incorporated by reference to
                Exhibit
                10.5 to Registrant's Form 8-K dated March 3, 2005)10.30
            Form
                of Stock Purchase Agreement, dated as of February 28, 2005, by and
                between
                eLinear, Inc. and Investor (incorporated by reference to Exhibit
                10.6 to
                Registrant's Form 8-K dated March 3, 2005)10.31
            Consulting
                Agreement dated December 22, 2005 with Kevan Casey (incorporated
                by
                reference to Exhibit 10.31 to Registrant's Annual Report on Form
                10-KSB,
                dated March 18, 2005) *10.32
            Form
                of Supplement, dated July 14, 2005, by and between Company and Investor.
                (incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K
                dated
                July 20, 2005).10.33
            Form
                of Warrant, dated as of July 14, 2005, by and between eLinear, Inc.
                and
                Investor. . (incorporated by reference to Exhibit 10.1 to Registrant's
                Form 8-K dated July 20, 2005).10.34
            Form
                of Warrant, dated as of July 14, 2005, by and between eLinear, Inc.
                and
                Investor. . (incorporated by reference to Exhibit 10.1 to Registrant's
                Form 8-K dated July 20, 2005).10.35
            Form
                of Amended and Restated Secured Convertible Term Note, dated as of
                July
                14, 2005, by and between the eLinear, Inc. and Investor. (incorporated
                by
                reference to Exhibit 10.1 to Registrant's Form 8-K dated July 20,
                2005).31.1
            Certification
              of
              Michael Lewis31.2
            Certification
              of
              Phillip Michael Hardy32.1
            Certification
              for Sarbanes-Oxley Act of Michael Lewis32.2
            Certification
              for Sarbanes-Oxley Act of Phillip Michael
              Hardy





*  Indicates
      management contract or compensatory plan or arrangement.








**SIGNATURES**





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




**eLINEAR,
              INC.**Date: April
              10, 2006
            By:
            /s/ Michael
              LewisMichael LewisChief
              Executive Officer




**eLINEAR,
              INC.**Date: April
              10, 2006
            By:
            /s/ Phillip
              Michael HardyPhillip Michael HardyPrincipal
              Financial and Accounting Officer