**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





**WASHINGTON,
      D.C. 20549**





FORM
        10-QSB/A (SECOND AMENDMENT)




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





For
      the
      quarterly period ended June 30, 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.**







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 
o





As
      of
      August 5, 2005, there were outstanding 24,566,022 shares of common stock, $.02
      par value per share.




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











**eLINEAR,
      INC.**


**AND
      SUBSIDIARIES**


**INDEX
      TO FORM 10-QSB/A**


**June
      30, 2005**





Page
      No.


**Explanatory
                Note**
            3**Part
                I**
            **Financial
                Information**Item
                1.
            Financial
                StatementsConsolidated
                Balance Sheets June 30, 2005 (unaudited)
            4Consolidated
                Statements of Operations (unaudited) Three and Six Months Ended June
                30,
                2005 and 2004
            5Consolidated
                Statements of Cash Flows (unaudited) Six Months Ended June 30, 2005
                and
                2004
            6Notes
                to Unaudited Consolidated Financial Statements
            7Item
                2.
            Management's
                Discussion and Analysis of Results of Operations and Financial
                Condition
            18Item
                3.
            Controls
                and Procedures
            23**Part
                II**
            **Other
                Information**Item
                1.
            Legal
                Proceedings
            23Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            23Item
                3.
            Defaults
                Upon Senior Securities
            23Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            23Item
                5.
            Other
                Information
            23Item
                6.
            Exhibits
            24





2





**EXPLANATORY
        NOTE**





**This
        amendment No. 2 Form 10-QBS/A amends eLinear’s quarterly report on Form 10-QSB/A
        (First Amendment) for the quarter ended June 30, 2005, which was originally
        filed with the SEC on September 2, 2005. The purpose of this Amendment No.
        2 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. 2 does not reflect any events occurring after the filing of
        the
        original Form 10-QSB/A (First Amendment) filing, nor does it modify or update
        in
        any way the disclosures contained in the original Form 10-QSB/A (First
        Amendment) filing. This Amendment No. 2 continues to speak as of the date
        of the
        original Form 10-QSB/A (First 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. 2 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**




June
                  30,2005(Unaudited)(Restated)**ASSETS**Current
                  assets:Cash
              
              $
              361,751Cash in restricted account
              
              
              504,580Accounts receivable, net of allowance of $355,303
              
              
              5,977,203Inventory
              
              
              812,222Other current assets
              
              
              143,741Total current assets
              
              
              7,799,497Property
                  and equipment, net
              
              
              741,460Other
                  assets:Goodwill
              
              
              1,100,000Contract rights, net
              
              
              202,295Deposits
              
              
              45,220Total other assets
              
              
              1,347,515Total
                  assets
              
              $
              9,888,472**LIABILITIES
                  AND SHAREHOLDERS' DEFICIT**Current
                  liabilities:Accounts payable, trade
              
              $
              1,880,215Line of credit - revolver
              
              
              3,700,219Accrued liabilities
              
              
              2,117,675Notes payable and rescission liability
              
              
              2,736,000Unamortized debt discount
              
              
              (1,880,838)Compound embedded derivative liability
              
              
              733,801Warrant liability - current
              
              
              111,522Total current liabilities
              
              
              9,398,594Long-term
                  debt (net of unamortized discount of $255,599)
              
              
              594,380Warrant
                  liabilities - non-current
              
              
              2,344,253Total liabilities
              
              
              12,337,227Shareholders'
                  deficit:Preferred stock, $.02 par value, 10,000,000 shares authorized,
                  none
                  issued
              
              
              --Common stock, $.02 par value, 100,000,000 shares authorized,
                  23,913,281 shares issued and outstanding
              
              
              478,266Additional paid-in capital
              
              
              6,929,636Accumulated deficit
              
              
              (9,856,657)Total shareholders' deficit
              
              
              (2,448,755)Total
                  liabilities and shareholders' deficit
              
              $
              9,888,472








See
      accompanying notes to unaudited consolidated financial statements.





4





**eLINEAR,
      INC.**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**FOR
      THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004**


**(Unaudited)**





For
                  the Three Months Ended
              
              For
                  the Six Months EndedJune
                  30,
              
              June
                  30,2005
              
              2004
              
              2005
              
              2004(Restated)
              
              (Restated)
              
              (Restated)
              
              (Restated)Revenue:Products
              
              $
              7,616,038
              
              $
              4,861,464
              
              $
              12,476,480
              
              $
              8,818,089Services
              
              
              1,584,273
              
              
              469,545
              
              
              2,209,853
              
              
              687,998Other
              
              
              38,897
              
              
              --
              
              
              65,150
              
              
              --Total revenue
              
              
              9,239,208
              
              
              5,331,009
              
              
              14,751,483
              
              
              9,506,087Cost
                  of revenue:Products
              
              
              6,683,329
              
              
              3,962,931
              
              
              10,953,668
              
              
              7,477,079Services
              
              
              835,771
              
              
              569,981
              
              
              1,165,189
              
              
              770,595Cost of revenue
              
              
              7,519,100
              
              
              4,532,912
              
              
              12,118,857
              
              
              8,247,674Gross profit
              
              
              1,720,108
              
              
              798,097
              
              
              2,632,626
              
              
              1,258,413Operating
                  expenses:Selling, general and administrative expenses:Payroll and related expenses
              
              
              1,792,084
              
              
              1,048,114
              
              
              3,598,827
              
              
              1,583,112Office administration
              
              
              368,005
              
              
              491,151
              
              
              738,747
              
              
              720,245Professional services
              
              
              538,077
              
              
              90,213
              
              
              948,841
              
              
              391,204Impairment of goodwill
              
              
              --
              
              
              --
              
              
              --
              
              
              451,925Other
              
              
              830,127
              
              
              727,447
              
              
              2,225,033
              
              
              1,099,628Total selling, general and administrative
              
              
              3,528,293
              
              
              2,356,925
              
              
              7,511,448
              
              
              4,246,114Depreciation and amortization
              
              
              144,217
              
              
              22,179
              
              
              277,268
              
              
              30,684Total operating expenses
              
              
              3,672,510
              
              
              2,379,104
              
              
              7,788,716
              
              
              4,276,798Loss
                  from operations
              
              
              (1,952,402
              )
              
              (1,581,007
              )
              
              (5,156,090
              )
              
              (3,018,385
              )Other
                  income (expense):Interest expense
              
              
              (443,807
              )
              
              (604,312
              )
              
              (573,634
              )
              
              (620,564
              )Change in fair value of derivatives
              
              
              (473,965
              )
              
              4,967,487
              
              
              1,037,840
              
              
              3,041,208Interest income and other
              
              
              59,556
              
              
              10,635
              
              
              78,312
              
              
              10,635Total other income (expense)
              
              
              (858,216
              )
              
              4,373,810
              
              
              542,518
              
              
              2,431,279Net
                  loss
              
              $
              (2,810,618
              )
              $
              2,792,803
              
              $
              (4,613,572
              )
              $
              (587,106
              )Net
                  loss per share:Basic
              
              $
              (0.12)
              
              $
              0.14
              
              $
              (0.20)
              
              $
              (0.03)Diluted
              
              $
              (0.12)
              
              $
              0.12
              
              $
              (0.20)
              
              $
              (0.04)Weighted
                  average number of common sharesoutstanding:Basic
              
              
              22,999,600
              
              
              20,546,234
              
              
              22,591,271
              
              
              18,736,127Diluted
              
              
              22,999,600
              
              
              23,026,569
              
              
              22,591,271
              
              
              19,423,412








See
      accompanying notes to unaudited consolidated financial statements.





5


e **LINEAR,
      INC.**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004**


**(Unaudited)**




2005
              
              2004(Restated)
              
              (Restated)Cash
                  flows from operating activities:Net loss
              
              $
              (4,613,572
              )
              $
              (587,106
              )Adjustments to reconcile net loss to cash used in operating
                  activities:Depreciation and amortization
              
              
              277,261
              
              
              30,684Impairment of goodwill
              
              
              --
              
              
              451,920Bad debt expense
              
              
              43,734
              
              
              46,000Amortization of debt discounts
              
              
              166,792
              
              
              534,198Change in fair value of derivatives
              
              
              (1,037,840
              )
              
              (3,041,208
              )Stock and stock option based compensation
              
              
              1,148,070
              
              
              603,608Extension of warrant expiration date
              
              
              27,871
              
              
              --Changes in assets and liabilities:Accounts receivable
              
              
              (1,010,204
              )
              
              (2,634,347
              )Inventory
              
              
              (365,776
              )
              
              (85,800
              )Other current assets
              
              
              (17,425
              )
              
              --Accounts payable
              
              
              613,477
              
              
              (405,383
              )Payable to officers
              
              
              --
              
              
              (36,336
              )Accrued liabilities
              
              
              1,067,701
              
              
              405,244Other
              
              
              --
              
              
              1,980Net
                  cash used in operating activities
              
              
              (3,699,911
              )
              
              (4,716,546
              )Cash
                  flows from investing activities:Purchase of property and equipment
              
              
              (141,525
              )
              
              (310,794
              )Certificate of deposit
              
              
              --
              
              
              (506,032
              )Cash in restricted account
              
              
              --
              
              
              (500,000
              )Deposits
              
              
              (10,604
              )
              
              (15,435
              )Net
                  cash used in investing activities
              
              
              (152,129
              )
              
              (1,332,261
              )Cash
                  flows from financing activities:Repayment of notes payable due to officers
              
              
              --
              
              
              (215,703
              )Proceeds from financing agreement
              
              
              2,736,000
              
              
              2,780,500Payment of up-front financing costs
              
              
              (449,484
              )
              
              (273,000
              )Borrowings (repayment) of financing agreement
              
              
              915,656
              
              
              (444,759
              )Proceeds from exercise of stock options
              
              
              112,750
              
              
              345,594Proceeds from sale of common stock, net
              
              
              --
              
              
              4,586,103Net
                  cash provided by financing activities
              
              
              3,314,922
              
              
              6,778,735Net
                  increase (decrease) in cash
              
              
              (537,118
              )
              
              729,928Cash
                  and cash equivalents, beginning of period
              
              
              898,869
              
              
              554,483Cash
                  and cash equivalents, end of period
              
              $
              361,751
              
              $
              1,284,411Supplemental
                  cash flow disclosures:Interest paid
              
              $
              185,116
              
              $
              110,569Supplemental
                  non-cash disclosures:Debt converted into equity
              
              $
              1,150,000
              
              $
              --








See
      accompanying notes to unaudited consolidated financial statements.





6


**eLINEAR,
      INC.**


**AND
      SUBSIDIARIES**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 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 June 30,
      2005, and the results of operations and cash flows for the three and six months
      ended June 30, 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 Previoulsy 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 Settled
        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 six and three months ended June 30, 2005 and 2004, have been restated
        to
        reflect a reclassification from equity to liabilities of the warrants and
        compound embedded derivatives the Company issued in January and February
        2004
        and February 2005, 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 six months ended June 30, 2005 decreased from
        $5,957,816 to $4,613,572.  The Company’s net loss per share decreased from
        $0.26 to $0.20 for this period.  The Company's net loss for the three
        months ended June 30, 2005 increased from $2,540,450 to $2,810,618 and the
        Company's net loss per share increased from $0.11 to $0.12 for this
        period.  The Company’s net loss for the six months ended June, 2004,
        decreased from $3,720,240 to $587,106 and the Company’s net loss per share
        decreased from $0.20 to $0.03, basic and diluted.  The Company recorded net
        income of $2,792,803 rather than previously recorded net loss of $2,239,590
        and
        net income of  $0.14 and $0.12, basic and diluted, respectively, 
rather than previously recorded net loss per sshare of $0.11, basic and
        diluted.





7




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 June 30,
        2005




**Three
                  months**
              
              **Six
                  months****As
                  Previously**
              
              
              
              
              
              **As
                  Previously****Reported**
              
              **Adjustments**
              
              **As
                  Restated**
              
              **Reported**
              
              **Adjustments**
              
              **As
                  Restated**Balance
                  sheet:Deferred
                financing costs
              
              
              101,800
              
              
              (101,800
              )
              
              --
              
              101,800
              
              (101,800
              )
              
              --Unamortized debt discount
              
              
              (2,431,955
              )
              
              551,117
              
              
              (1,880,838
              )
              (2,431,955)
              
              551,117
              
              
              (1,880,838
              )Compound embedded derivative liabilities
              
              
              -
              
              
              733,801
              
              
              733,801
              
              -
              
              733,801
              
              
              733,801Warrant liability - current
              
              
              -
              
              
              111,522
              
              
              111,522
              
              -
              
              111,522
              
              
              111,522Total current liabilities
              
              
              8,002,154
              
              
              1,396,395
              
              
              9,398,594
              
              8,002,154
              
              1,396,395
              
              
              9,398,594Long-term debt, net
              
              
              387,997
              
              
              461,982
              
              
              849,979
              
              387,997
              
              461,982
              
              
              849,979Warrant liability - non-current
              
              
              -
              
              
              2,344,253
              
              
              2,344,253
              
              -
              
              2,344,253
              
              
              2,344,253Total liabilities
              
              
              8,390,151
              
              
              3,947,076
              
              
              12,337,227
              
              8,390,151
              
              3,947,076
              
              
              12,337,227Additional paid-in capital
              
              
              16,908,122
              
              
              (9,978,486
              )
              
              6,929,636
              
              16,908,122
              
              (9,978,486
              )
              
              6,929,636Accumulated deficit
              
              
              (15,786,267
              )
              
              5,929,610
              
              
              (9,856,657
              )
              (15,786,267)
              
              5,929,610
              
              
              (9,856,657
              )Total stockholders' equity (deficit)
              
              
              1,600,121
              
              
              (4,048,876
              )
              
              (2,448,755
              )
              1,600,121
              
              (4,048,876
              )
              
              (2,448,755
              )Statement
                  of operations:Interest, net
              
              
              (647,604
              )
              
              203,797
              
              
              (443,807
              )
              (880,038)
              
              306,404
              
              
              (573,634
              )Change in fair value of derivatives
              
              
              -
              
              
              (473,965
              )
              
              (473,965
              )
              -
              
              1,037,840
              
              
              1,037,840Total other income (expense)
              
              
              (588,048
              )
              
              (270,168
              )
              
              (858,216
              )
              (801,726)
              
              1,344,244
              
              
              542,518Net
                  income (loss)
              
              
              (2,540,450
              )
              
              (270,168
              )
              
              (2,810,618
              )
              (5,957,816)
              
              1,344,244
              
              
              (4,613,572
              )Net income (loss) per
                share:Basic and diluted
              
              
              (0.11
              )
              
              
              
              
              (0.12
              )
              (0.26)
              
              
              
              
              (0.20
              )Statement
                  of cash flows:
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Net loss
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              (5,957,816)
              
              1,344,244
              
              
              (4,613,572
              )Depreciation
                and amortization
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              307,807
              
              (30,546
              )
              
              277,261Amortization of debt discounts
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              371,688
              
              (204,896
              )
              
              166,792Change in fair value of derivatives
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              -
              
              (1,037,840
              )
              
              (1,037,840
              )**As of and for
                the
                Quarter Ended June 30, 2004**********
              
              
              **As
                Previously**
              
              
              
              
              
              
              **As
                  Previously****Restated**
              
              
              **Adjustments**
              
              **As
                  Restated**
              
              **Restated**
              
              **Adjustments**
              
              **As
                  Restated**Balance
                  sheet:Warrant liability - current
              
              
              -
              
              
              827,420
              
              827,420
              
              -
              
              827,420
              
              827,420Total current liabilities
              
              
              1,250,211
              
              
              827,420
              
              2,077,631
              
              1,250,211
              
              827,420
              
              2,077,631Long-term debt, net
              
              
              1,814,560
              
              
              (704,538
              )
              1,110,022
              
              1,814,560
              
              (704,538)
              
              1,110,022Compound embedded derivatives- non-current
              
              
              -
              
              
              148,158
              
              148,158
              
              -
              
              148,158
              
              148,158Warrant liability - non-current
              
              
              -
              
              
              3,725,139
              
              3,725,139
              
              -
              
              3,725,139
              
              3,725,139Total liabilities
              
              
              3,064,771
              
              
              3,996,179
              
              7,060,950
              
              3,064,771
              
              3,996,179
              
              7,060,950Additional paid-in capital
              
              
              10,486,885
              
              
              (7,129,313
              )
              3,357,572
              
              10,486,885
              
              (7,129,313)
              
              3,357,572Accumulated deficit
              
              
              (5,115,979
              )
              
              3,133,134
              
              (1,982,845)
              
              (5,115,979
              )
              3,133,134
              
              (1,982,845
              )Total stockholders' equity
              
              
              5,781,992
              
              
              (3,996,179
              )
              1,785,813
              
              5,781,992
              
              (3,996,179)
              
              1,785,813Statement
                  of operations:Change in fair value of derivatives
              
              
              -
              
              
              4,967,487
              
              4,967,487
              
              -
              
              3,041,208
              
              3,041,208Interest, net
              
              
              (669,218
              )
              
              64,906
              
              (604,312)
              
              (712,490
              )
              91,926
              
              (620,564
              )Total other income (expense)
              
              
              (658,583
              )
              
              5,032,393
              
              4,373,810
              
              (701,855
              )
              3,133,134
              
              2,431,279Net
                  income (loss)
              
              
              (2,239,590
              )
              
              5,032,393
              
              2,792,803
              
              (3,720,240
              )
              3,133,134
              
              (587,106
              )Net income (loss) per
                share:Basic and diluted
              
              
              (0.11)
              
              
              
              
              0.14
              
              (0.20)
              
              
              
              (0.03)Diluted
              
              
              (0.11)
              
              
              
              
              0.12
              
              (0.20)
              
              
              
              (0.04)Statement
                  of cash flows:Net loss
              
              
              N/A
              
              
              N/A
              
              N/A
              
              (3,720,240
              )
              3,133,134
              
              (587,106
              )Amortization of debt discounts
              
              
              N/A
              
              
              N/A
              
              N/A
              
              626,124
              
              (91,926)
              
              534,198Change in fair value of derivatives
              
              
              N/A
              
              
              N/A
              
              N/A
              
              -
              
              (3,041,208)
              
              (3,041,208
              )







8




Note
      3.
      Stock Options





At
      June 30,
      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 was
      approved by the Company's shareholders on June 2, 2005. As of June 30, 2005,
      there were 520,000 incentive stock options outstanding under the 2005 Plan
      at
      exercise prices ranging from $0.73 to $1.10 per share, vesting over a four
      year
      period and expiring five years from the date of grant and 150,000 non-qualified
      stock options outstanding issued to the Company's CEO at an exercise price
      of
      $0.10 per share, immediately exercisable and expiring in December
      2009.





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. During the six months ended June 30, 2005, 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 six month period
      ended June 30, 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
      $176,618 related to options issued to non-employees and its CEO which vested
      during the period. The options were expensed based on the fair value calculated
      using the Black Scholes pricing model using the following assumptions: 86%
      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.




Six
                  Months Ended
                June
                  30,2005
              
              2004(Restated)
              
              (Restated)Net
                  loss, as reported
              
              $
              (4,613,572
              )
              $
              (587,106
              )Add: Stock-based employee compensation included in reported net
                  loss
              
              
              50,015
              
              
              3,246Stock based compensation under fair value method
              
              
              (642,818
              )
              
              (121,246
              )Pro
                  forma net loss
              
              $
              (5,206,375
              )
              $
              (705,106
              )Net
                  loss per share:Basic loss per common share - as reported
              
              $
              (0.20
              )
              $
              (0.03
              )Basic loss per common share - pro forma
              
              $
              (0.23
              )
              
              (0.04
              )Diluted loss per common share - as reported
              
              $
              (0.20
              )
              $
              (0.04
              )Diluted
                loss per common share - pro
                forma
              
              $
              (0.23
              )
              $
              (0.04
              )








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 86%, 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 Convertible Notes and exercised in connection with
        the Warrants outstanding. Consequently, our consolidated financial position
        and
        result 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 June 30, 2005 were not designated
        hedges





9




Note
      5.
      Impairment





As
      of June
      30, 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 $451,920 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 follow: 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 (6.00% as of June 30, 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 issuances. The Company
      paid back the $1,000,000 revolver during the quarter ended June 30, 2004. As
      of
      June 30, 2005, the Company had $3,700,219 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 issuance. In May 2005, the Company
      allowed Laurus to convert $200,000 principal amount at $0.59 per share into
      340,020 shares of common stock. In June 2005, the Company allowed Laurus to
      convert $125,000 principal amount at $0.90 per share into 138,889 shares of
      common stock. During the six months ended June 30, 2005, Laurus was issued
      1,303,909 shares for this conversion feature and reduced the principal amount
      of
      the note by $1,150,000. The term note is secured by a blanket lien on all of
      the
      Company's assets. As of June 30, 2005, the Company had $850,000 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.




10





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 June 30, 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 and interest expense
        for
        June 30, 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 Treasure 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 June 30, 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 $1.71 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 June
        30,
        2004, equaled $418,279. The decrease in fair value of $235,528 was recorded
        as
        change in fair value of derivatives for the six months ended June 30, 2004.
        For
        the quarter ended June 30, 2005, the Company used an underlying stock price
        of
        $0.95 per share; no dividends; a risk free rate of 3.67%; and volatility
        of 86%.
        The resulting aggregate value of the warrants as of June 30, 2005 equaled
        $233,932. The decrease in fair value from December 31, 2004 to June 30, 2005
        was
        $139,301.





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 Compound Embedded Derivative Liability was computed at
        $998,425, $148,158 and $352,032 as of February 23, 2004 and June 30, 2004
        and
        June 30, 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.





11




Probability-Weighted
        Expected Cash Flow Methodology





Compound
                  Embedded Derivative LiabilityFebruary
                  23,
                2004
              
              June
                  30,
                2004
              
              June
                  30,
                2005Assumptions
              
              (Inception)Risk
                  Free interest rate
              
              
              2.21
              %
              
              3.16
              %
              
              4.18
              %Prime
                  RateIncreasing .25% each quarter of first year
              
              
              4
              %
              
              4.25
              %
              
              6.25
              %Timely
                  registrationIncreasing by 1% monthly up to 99%
              
              
              95
              %
              
              95
              %
              
              85
              %Default
                  statusIncreasing by .1% monthly
              
              
              5
              %
              
              5
              %
              
              10
              %Alternative
                  financing available and exercisedIncreasing 2.5% monthly up to 25%
              
              
              --
              %
              
              --
              %
              
              --
              %Trading
                  volume, gross monthly dollarsMonthly
                  increase
              
              
              2
              %
              
              5
              %
              
              1
              %Annual
                  growth rate of stock price
              
              
              31.8
              %
              
              32.2
              %
              
              31.2
              %Future
                  projected volatility
              
              
              102
              %
              
              117
              %
              
              86
              %Ownership
                  limitationMonthly increase
              
              
              1
              %
              
              1
              %
              
              1
              %Reset
                  ProvisionIncreasing 5% monthly up to 25%
              
              
              --
              %
              
              --
              %
              
              --
              %




The
        increase/(decrease) in the fair value of the compound embedded derivative
        liability of $(850,267) and $12,280 was recorded as other income for the
        periods
        ended June 30, 2004 and June 30, 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 June 30, 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 June 30, 2005 was adjusted as follows:





February
                  23, 2004
              
              
              June
                  30, 2005Notional
                  balance
              
              $
              3,000,000
              
              $
              4,550,198Adjustments:Discount for compound embedded derivatives
              
              
              (998,425
              )
              
              (255,599
              )Discount for Laurus warrants
              
              
              (653,907
              )
              
              --Discount for loan costs paid to Laurus
              
              
              (219,500
              )
              
              --Balance,
                  net of unamortized discount
              
              
              1,128,168
              
              
              4,294,599Less:
                  Current portion (revolver)
              
              
              (1,000,000
              )
              
              (3,700,219
              )Balance,
                net of unamortized discount
              
              $
              128,168
              
              $
              594,380





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 June 30, 2005, have been restated to reflect the early extinguishment
        of the
        debt and expensed the remaining portion of deferred financing costs at December
        31, 2004.  The Company recorded an adjustment of approximately $102,000 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.





12




*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 a $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.





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%).





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
      45
      days from February 28, 2005. If the Company fails to meet this deadline, if
      the
      registration statement is not declared effective prior to the 105 days 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, Laurus 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
      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
      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 June 30, 2005 to reclassify the
        1,800,000 Investor warrants from additional paid-in capital to liabilities
        and
        adjust changes in fair value of derivatives and interest expense
        effective June 30, 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 June 30, 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 $0.95 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 June 30, 2004, equaled
        $1,246,289. The change in fair value of $32,944 was recorded for the six
        months
        ended June 30, 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.





13




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
        $381,769 as of February 28, 2005 and June 30, 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
              
              June
                  30,
                2005Assumptions
              
              (Inception)Risk
                  Free interest rate
              
              
              3.75
              %
              
              3.67
              %Prime
                  RateIncreasing .25% each quarter of first year
              
              
              5.5
              %
              
              6.25
              %Timely
                  registrationIncreasing by 1% monthly up to 99%
              
              
              95
              %
              
              85
              %Default
                  statusIncreasing by .1% monthly
              
              
              5
              %
              
              10
              %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
              %
              
              31.2
              %Future
                  projected volatility
              
              
              88
              %
              
              86
              %Ownership
                  limitationMonthly increase
              
              
              1
              %
              
              1
              %Reset
                  ProvisionIncreasing 5% monthly up to 25%
              
              
              0.85
              %
              
              0.85
              %




The
        increase
        in the fair value of the derivative liability of $70,149 was recorded for
        the
        period ended June 30, 2005





As
        a result
        of these contract provisions, the Notes at inception (February 28, 2005)
        and
        June 30, 2005 was adjusted as follows:





February
                  28, 2005
              
              June
                  30, 2005Notional
                  balance
              
              $
              2,736,000
              
              $
              2,736,000Adjustments:Discount for compound embedded derivatives
              
              
              (311,620
              )
              
              (296,846
              )Discount for Laurus warrants
              
              
              (1,213,345
              )
              
              (1,155,819
              )Discount for loan costs paid to Laurus
              
              
              (449,484
              )
              
              (428,173
              )Total
                  discounts
              
              $
              (1,974,449
              )
              $
              (1,880,838
              )








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.





14




Note
      7.
      Common Stock





The
      Company
      issued 1,303,909 shares of common stock to Laurus during the six months ended
      June 30, 2005 for conversion of $1,150,000 principal amount of Laurus' long-term
      debt.





The
      Company
      issued 105,000 shares of common stock for stock options exercised during the
      six
      months ended June 30, 2005 resulting in proceeds totaling $112,750.





The
      Company
      issued 881,776 shares of its common stock valued at $921,437 to third parties
      for consulting services during the six months ended June 30, 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.





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 June 30, 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 June 30, 2005 and 2004, by $9,978,486
        and $7,129,313, respectively, increased common stock warrant liability as
        of
        June 30, 2005 and 2004 by $2,455,164 and $4,552,559, respectively and
        decreased the net loss for the six months ended June 30, 2005 and 2004 by
        $1,146,560 and $3,133,134, respectively. 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 June 30, 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 $1.71 per share,
                  volatility
                  of 117% 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 June
                  30,
                  2004 equaled $4,134,280. The change in fair value of $1,955,413
                  was
                  recorded for the six months ended June 30, 2004, and is primarily
                  due to
                  the fair value of the underlying common stock from $2.02 per share
                  to
                  $1.71 per share from January 12 to June 30,
                  2004.





For
        the
        quarter ended June 30, 2005, the company used an underlying stock price of
        $0.95, and expected life equal to the contractual term of the warrants; no
        dividends; risk free rate of 3.67% and volatility of 86% the resulting aggregate
        value of the warrants as of June 30, 2005 equaled $975,161. The decrease
        in fair
        value from December 31, 2004 to June 30, 2005 was $1,013,912.





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 the exercise
      price on certain warrants to $1.00 per share and extended the expiration
      dates.





15


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 June 30,
      2005:





Exercise
                Price
            
            Financing
              Date
            
            Outstanding
                Warrants
            
            Expiration
                Date$0.70
            
            
            December
                2003
            
            
            26,611
            
            
            December
                2005$1.00
            
            
            January
                2004
            
            
            666,859
            
            
            August
                2005$1.00
            
            
            February
                2004
            
            
            240,000
            
            
            August
                2005$1.55
            
            
            January
                2004
            
            
            381,719
            
            
            August
                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 June 30, 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 June 30, 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 June 30, 2005**
                **(Restated)**Dollars
                  ($)
              
              Consulting
                  Services
              
              Network
                  and Storage Solutions
              
              Communications
                  Deployment
              
              Security
                Solutions
              
              ConsolidatedRevenue
              
              
              
              
              
              27,861
              
              
              6,347,098
              
              
              1,642,925
              
              
              1,221,324
              
              
              9,239,208Segment
                  profit (loss)
              
              
              
              
              
              (2,967,422
              )
              
              387,923
              
              
              100,030
              
              
              (331,149
              )
              
              (2,810,618
              )Total
                  assets
              
              
              
              
              
              10,841,087
              
              
              4,570,493
              
              
              1,711,689
              
              
              2,201,925
              
              
              19,325,194Capital
                  expenditures
              
              
              
              
              
              9,448
              
              
              23,833
              
              
              --
              
              
              40,155
              
              
              73,436Depreciation
                  and amortization
              
              
              
              
              
              30,589
              
              
              34,603
              
              
              1,476
              
              
              77,549
              
              
              144,217











**For
                  the Six Months Ended June 30, 2005**
                **(Restated)**Dollars
                  ($)
              
              Consulting
                  Services
              
              Network
                  and Storage Solutions
              
              Communications
                  Deployment
              
              Security
                Solutions
              
              ConsolidatedRevenue
              
              
              
              
              
              33,073
              
              
              10,725,479
              
              
              1,962,377
              
              
              2,030,554
              
              
              14,751,483Segment
                  profit (loss)
              
              
              
              
              
              (3,966,257
              )
              
              (107,947
              )
              
              70,994
              
              
              (610,362
              )
              
              (4,613,572
              )Total
                  assets
              
              
              
              
              
              10,841,087
              
              
              4,570,493
              
              
              1,711,689
              
              
              2,201,925
              
              
              19,325,194Capital
                  expenditures
              
              
              
              
              
              37,177
              
              
              48,306
              
              
              --
              
              
              56,042
              
              
              141,525Depreciation
                  and amortization
              
              
              
              
              
              55,521
              
              
              67,521
              
              
              2,952
              
              
              151,274
              
              
              277,268







**For
                  the Three Months Ended June 30, 2004**
                **(Restated)**Dollars
                  ($)
              
              Consulting
                  Services
              
              Network
                  and Storage Solutions
              
              Communications
                  Deployment
              
              Security
                Solutions
              
              ConsolidatedRevenue
              
              
              
              
              
              220
              
              
              4,773,855
              
              
              556,934
              
              
              --
              
              
              5,331,009Segment
                  profit (loss)
              
              
              
              
              
              3,162,845
              
              
              (352,527
              )
              
              (17,515
              )
              
              --
              
              
              2,792,803Total
                  assets
              
              
              
              
              
              3,469,416
              
              
              4,848,968
              
              
              528,379
              
              
              --
              
              
              8,846,763Capital
                  expenditures
              
              
              
              
              
              136,844
              
              
              122,598
              
              
              552
              
              
              --
              
              
              259,994Depreciation
                  and amortization
              
              
              
              
              
              8,676
              
              
              13,310
              
              
              193
              
              
              --
              
              
              22,179








**For
                  the Six Months Ended June 30, 2004**
                **(Restated)**Dollars
                  ($)
              
              Consulting
                  Services
              
              Network
                  and Storage Solutions
              
              Communications
                  Deployment
              
              Security
                Solutions
              
              ConsolidatedRevenue
              
              
              
              
              
              47,165
              
              
              8,730,480
              
              
              728,442
              
              
              --
              
              
              9,506,087Segment
                  loss
              
              
              
              
              
              (9,727
              )
              
              (447,030
              )
              
              (130,349
              )
              
              --
              
              
              (587,106
              )Total
                  assets
              
              
              
              
              
              3,469,416
              
              
              4,848,968
              
              
              528,379
              
              
              --
              
              
              8,846,763Capital
                  expenditures
              
              
              
              
              
              152,219
              
              
              157,458
              
              
              1,117
              
              
              --
              
              
              310,794Depreciation
                  and amortization
              
              
              
              
              
              11,397
              
              
              17,469
              
              
              1,818
              
              
              --
              
              
              30,684




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.


16




Note
      10.
      Significant Concentration





One
      customer
      accounted for approximately 17.8% of sales for the six months ended June 30,
      2005. No other customers represented more than 10% of sales of the Company
      for
      the six months ended June 30, 2005. The Company did not have any customers
      which
      had in excess of 10% of the Company's accounts receivable balance at June 30,
      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.





17





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 June 30,
      2005, and its results of operations for the six-month periods ended June 30,
      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:





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








§
            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.








§
            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.








§
            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
      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.





18





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 June
      30, 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.





19




*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, our consolidated financial position
        and result 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 June 30, 2005 were not designated
        hedges.





**Results
      of Operations and Financial Condition**





**Six
      Months Ended June 30, 2005 to Six Months Ended June 30,
      2004**





The
      following table sets forth certain operating information regarding the Company
      for the three months ended June 30, 2005 and 2004:





Six
                  Months Ended
                June
                  30,2005
              
              2004Revenue
              
              $
              14,751,483
              
              $
              9,506,087Cost
                  of revenue
              
              
              12,118,857
              
              
              8,247,674Gross
                  profit
              
              
              2,632,626
              
              
              1,258,413Selling,
                  general and administrative expenses
              
              
              7,511,448
              
              
              4,246,114Depreciation
                  and amortization
              
              
              277,268
              
              
              30,684Loss
                  from operations
              
              
              (5,156,090
              )
              
              (3,018,385
              )Other
                  income (expense)
              
              
              542,518
              
              
              2,431,279Net
                  loss
              
              $
              (4,613,572
              )
              $
              (587,106
              )Net loss per share:Basic
              
              $
              (0.20
              )
              $
              (0.03
              )Diluted
              
              $
              (0.20
              )
              $
              (0.04
              )








*Revenue.* Total
      revenue for the six months ended June 30, 2005 was $14,751,483 which was an
      increase of 55% over the prior year period of $9,506,087. Revenue from the
      consulting services business segment for the 2005 period was $33,073, which
      was
      less than one percent of total revenue for the 2005 period.





Revenue
      generated from the network and storage solutions business segment for the 2005
      period was $10,725,479, which was an increase of $1,994,999, or 23%, over the
      2004 period. The network and storage solutions business segment contributed
      73%
      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
      $1,962,377, which was 13% of total revenue. This was an increase of $1,223,935,
      or 169%, 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 $2,030,554 for the six months ended
      June 30, 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 six months ended June 30, 2005, one customer provided
      in excess of 10% of the Company's revenue. This customer provided 17.8% 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 six months ended June 30, 2005 was $12,118,857, an
      increase of $3,871,183, or 47%, over the 2004 period of $8,247,674. 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 increased from 85% for 2004 period to
      88%
      for fiscal 2005. 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 $10,953,668 for the 2005 period. The Company anticipates that cost
      of revenue will increase as revenue increases.





*Gross
      profit.* Total
      gross profit increased from $1,258,413 for the six months ended June 30, 2004,
      to $2,632,626 for the six months ended June 30, 2005. The increase in gross
      profit was a result of an increase in revenue from all business segments. Total
      gross profit as a percentage of revenue increased from 13% for the 2004 period
      to 18% for the 2005 period. The Company has experienced a better profit margin
      from all its business segments during the 2005 period.





20


**


*Operating
      expenses.* Total
      operating expenses for the six months ended June 30, 2005, were $7,788,716,
      an
      increase of $3,511,918, or 82%, over the 2004 period of $4,276,798. The various
      components of this increase are as follows




l
            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
                June 30, 2004, the Company had 46 employees which had increased to
                127 as
                of June 30, 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 $2,015,715, which costs are composed of payroll,
                payroll
                taxes, sales commissions and employee
                benefits.





l
            Office
                administration expenses increased from $720,245 for the 2004 period
                to
                $738,747 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.





l
            Professional
                services, which is comprised of legal, accounting, consulting and
                directors' fees, increased from $391,204 for the previous year period
                to
                $948,841 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
                litigation.





l
            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.





l
            Other
                expenses increased from $1,099,628 for the prior year period to $2,225,033
                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 six months ended June 30, 2005 approximated $1,434,633. Other
                components include employee stock option expense of $50,015, non-cash
                stock compensation expense of $251,762, travel and entertainment
                of
                approximately $265,251 and bad debt expense of approximately
                $75,523.




l
            Depreciation
                and amortization increased from $30,684 for the 2004 period to $277,268
                for the 2005 period and is comprised of depreciation of fixed assets
                acquired during the 2004 period and amortization of deferred financing
                costs and contract rights which were not incurred during the 2004
                period.








*Interest
        Expense.* Interest
        expense for the six months ended June 30, 2005, decreased to $573,634 from
        $620,564 for the prior year. Interest expense is primarily comprised of
        amortization of debt discounts and interest charges associated with the
        Company's 2004 and 2005 fundings and the accrual and payment of interest
        on its
        February 2005 financing, of which the Company received 2,736,000 and paid
        total
        fees for the total possible financing of up to $12,000,000.





*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 $1,037,840 for the six months ended
        June
        30, 2005 and income of $3,041,208 for the six months ended June 30,
        2004.





*Net
        Loss* .
        The net
        loss for the six months ended June 30, 2005 was $4,613,572, or $0.20 per
        share
        basic and diluted, compared to a net loss of $587,106 or $0.03 per share
        basic
        and $0.04 per share diluted, for the previous period.





21




**Liquidity
      and Capital Resources**





The
      following summary table presents comparative cash flows of the Company for
      the
      six months ended June 30, 2005 and 2004:





Six
                Months Ended
              June
                30,2005
            
            2004Net
                cash used in operating activities
            
            $
            (3,699,911
            )
            $
            (4,716,546
            )Net
                cash used in investing activities
            
            $
            (152,129
            )
            $
            (1,332,261
            )Net
                cash provided by financing activities
            
            $
            3,314,922
            
            $
            6,778,735








*Changes
        in
        cash flow.* Net cash
        used in operating activities for the six months ended June 30, 2005, was
        $3,699,911 compared to net cash used in operating activities of $4,716,546
        for
        the prior year period. This was an decrease of $1,016,635 over the prior
        year
        period. The Company reported a net loss of $4,613,572 and an increase in
        accounts receivable and inventory associated with increased sales of $1,010,204
        and $365,776, respectively and an increase in other current assets of $17,425
        and net non-cash items totaling $625,888 and increases in accounts payable
        and
        accrued liabilities of $613,477 and $1,067,701, respectively. Cash used in
        investing activities decreased to $152,129 for the current year period compared
        to $1,332,261 for the prior year period. The Company purchased property and
        equipment of $141,525 during the current year period and paid deposits of
        $10,604. Cash provided by financing activities increased from approximately
        $6,778,735 during the 2004 period to approximately $3,314,922 for the current
        year period. The Company obtained $2,736,000 in funding during the 2005 period
        and was required to pay up-front financing fees to the lender of $449,484.
        The
        Company also borrowed $915,656 principal amount on its Laurus credit facility
        and received cash of $112,750 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 financing agreement with for up to $12,000,000 certain investors
      and
      received gross proceeds of $2,736,000, the remaining $9,264,000 is held by
      the
      Investors in a restricted account. 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
      June 30, 2005, the Company had cash balances in non-restricted accounts of
      $361,751 and negative working capital of approximately $202,657. Included in
      the
      negative working capital balance at June 30, 2005 is cash held in restricted
      accounts of approximately $504,580, which if excluded from the working capital
      balance, the Company would have negative working capital of $707,237. Also
      included in the negative working capital balance is $2,736,000 classified as
      “Notes payable and rescission liability” from its February 2005 funding. On July
      14, 2005, the Company supplemented its February 2005 financing agreement and
      will transfer $2,736,000 classified as “Notes payable and rescission liability”
to long-term debt on its financial statements as of July 31, 2005. 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 the Company entered
      into a supplement agreement with the investors on July 14, 2005. See “Note 12.
      Subsequent Event” for a discussion of the supplemented financing
      agreement.





The
      Company
      believes it has sufficient capital to fund operations through the end of
      September 2005. Thereafter, the Company will be required to obtain access to
      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. As such, there is no assurance that
      we
      can raise additional capital from external sources, the failure of which could
      cause us to sell assets or curtail operations.






**Off-Balance
      Sheet Arrangements**





As
      more fully
      described in “Recent Developments”, pursuant to the February 28, 2005 financing,
      the $9,264,000 portion of the total financing of $12,000,000 was held in a
      restricted account and the ability of the Company to obtain the funds was
      contingent on several factors. As of July 14, 2005, the Company entered into
      a
      supplement agreement and as a result of which, the Company does not have any
      off-balance sheet arrangements. See “Note 12. Subsequent Event” for a discussion
      of the supplemented financing agreement.







**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.




22









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
      June
      30, 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 and six months ended June 30, 2005,
          to
          reflect a reclassification from equity to liabilities of the warrants and
          compound 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 June 30, 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**








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
      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. The arbitration
      hearing is set for November 8 and 9, 2005.




Item
      2.  Recent Sales of Unregistered Securities




There
      were no sales of unregistered securities made by the Company during the quarter
      ended June 30, 2005.




Item
      3.  Defaults Upon Senior Securities - None




Item
      4.  Submission of Matters to a Vote of Security Holders





On
      June 2,
      2004, with a written consent to action without a meeting of the majority of
      the
      shareholders of eLinear, Inc., the following resolutions were deemed to be
      adopted to the same extent and to have the same force and effect as if adopted
      by a formal meeting of shareholders of the Company duly called and held for
      the
      purpose of adopting and acting upon such resolutions:





**RESOLVED,** that the
      Majority Shareholders hereby elect Kevan M. Casey, Tommy Allen, Michael Lewis,
      J. Leonard Ivins, Carl A. Chase and Ryan Cravey as directors to serve until
      their successors are elected, appointed and duly qualified; and that the
      Majority Shareholders direct the officers to implement this
      resolution.





**RESOLVED** ,
      that
      the Majority Shareholders hereby adopt the 2005 Employee Stock Purchase Plan,
      and that the Majority Shareholders direct the officers to implement this
      resolution.





**RESOLVED** ,
      that
      the Majority Shareholders hereby adopt the 2005 Stock Option Plan and accept
      the
      recommendation of the audit committee to appoint and retain Lopez, Blevins,
      Bork
& Associates LLP as the Company's independent auditors for its current
      fiscal year; and that the Majority Shareholders direct the officers to implement
      this resolution.




Item
      5.  Other Information - None






23











Exhibit
                No.
            
            Description2.1
            
            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)10.36
            
            2005
                Employee Stock Purchase Plan (incorporated by reference to Exhibit
                A to
                Registrant's Definitive Information Statement, dated May 6, 2005)
                *10.37
            
            2005
                Stock Option Plan (incorporated by reference to Exhibit A to Registrant's
                Definitive Information Statement, dated May 6, 2005) *31.1
            
            Certification
                of Michael J. Lewis31.2
            
            Certification
                of Phillip Michael
                Hardy32.1
            
            Certification
                for Sarbanes-Oxley Act of Michael J. Lewis32.2
            
            Certification
                for Sarbanes-Oxley Act of Phillip Michael
                Hardy




24





**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.





Signature
            Title
            Date/s/
                Michael Lewis
            Chief
                Executive Officer
            April
                11, 2006Michael
                Lewis
            and
                Director/s/
                Phillip Michael Hardy
            Principal
                Financial and Accounting Officer
            April
                11, 2006Phillip
                Michael Hardy
            and
                Director













25