**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





FORM
      10-QSB





[X]
      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934


For
      the
      quarterly period ended September 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 0-07418





**eLINEAR,
      INC.**


(Exact
      name of small business issuer as specified in its charter)








Delaware                                           
                                                               
76-0478045


(State
      or
      other jurisdiction of incorporation or
      organization)                            
(IRS Employer Identification No.)





2901
      West
      Sam Houston Parkway North, Suite E-300, Houston, Texas 77043


(Address
      of principal executive offices)





(713)
      896-0500


(Issuer's
      telephone number)





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





As
      of
      April 24, 2006, there were outstanding 34,823,687 shares of common stock,
      $.02 par value per share.





Transitional
      Small Business Disclosure Format (Check one): Yes [ ] No [X]





**eLINEAR,
      INC.**


**AND
      SUBSIDIARIES**


**INDEX
      TO FORM 10-QSB**


**September 30,
      2005**








**Page
                No.****Part
                I**
            **Financial
                Information**Item
                1.
            Financial
                StatementsConsolidated
                Balance Sheet September 30, 2005 (unaudited)
            3Consolidated
                Statements of Operations (unaudited) Three and Nine Months Ended
                September
                30, 2005 and 2004
            4Consolidated
                Statements of Cash Flows
                (unaudited) Nine Months Ended September 30, 2005 and
                2004
            5Notes
                to Unaudited Consolidated Financial
                Statements
            6Item
                2.
            Management's
                Discussion and Analysis of Results of
                Operations and Financial Condition
            20Item
                3.
            Controls
                and Procedures
            26**Part
                II**
            **Other
                Information**Item
                1.
            Legal
                Proceedings
            27Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            28Item
                3.
            Defaults
                Upon Senior
                Securities
            28Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            28Item
                5.
            Other
                Information
            28Item
                6.
            Exhibits
            29





**PART
      I. FINANCIAL INFORMATION**





Item
      1.
      FINANCIAL STATEMENTS





**eLINEAR,
      INC.**


**CONSOLIDATED
      BALANCE SHEET**





September
                  30,2005(Unaudited)**ASSETS**Current
                assets:Cash
            
            $
            406,010Certificate of depositCash in restricted accounts
            
            
            763,278Accounts receivable, net of allowance of $394,282
            
            
            4,679,321Inventory
            
            
            1,448,985Other current assets
            
            
            105,088Total current assets
            
            
            7,402,682Property
                and equipment, net
            
            
            696,663Other
                assets:Goodwill
            
            
            1,100,000Contract rights
            
            
            166,596Deposits
            
            
            45,721Total other assets
            
            
            1,312,317Total
                assets
            
            $
            9,411,662**LIABILITIES
                AND SHAREHOLDERS’ DEFICIT**Current
                liabilities:Accounts
                payable, trade
            
            $
            2,396,269Revolver
            
            
            3,511,020Accrued
                building lease
            
            
            22,741Accrued
                liabilities
            
            
            868,684Notes
                payable
            
            
            4,728,469Unamortized
                debt discount
            
            
            (2,642,782
            )Compound
                embedded derivative liabilities
            
            
            332,011Total current liabilities
            
            
            9,216,412Long-term
                debt (less unamortized discount of $217,709)
            
            
            282,270Warrant
                liabilities - non-current
            
            
            1,594,125Total liabilities
            
            
            11,092,807Shareholders’
                deficit:Preferred
                stock, $.02 par value, 10,000,000 shares authorized, none
                issued
            
            
            --Common
                stock, $.02 par value, 100,000,000 shares authorized,25,728,301
                issued and outstanding
            
            
            514,566Additional
                paid-in capital
            
            
            8,724,394Accumulated
                deficit
            
            
            (10,920,105
            )Total
                shareholders’ deficit
            
            
            (1,681,145
            )Total
                liabilities and shareholders’ deficit
            
            $
            9,411,662





See
      accompanying notes to unaudited consolidated financial
      statements.


3


**eLINEAR,
      INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**FOR
      THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND
      2004**


**(UNAUDITED)**





For
                the Three Months EndedSeptember
                30,
            
            For
                the Nine months EndedSeptember
                30,2005
            
            2004
            
            2005
            
            2004Revenue:Products
            
            $
            5,453,779
            
            $
            6,710,474
            
            $
            17,930,259
            
            $
            15,528,563Services
            
            
            1,297,749
            
            
            689,054
            
            
            3,507,602
            
            
            1,377,052Other
            
            
            29,699
            
            
            54,760
            
            
            94,849
            
            
            54,760Total revenue
            
            
            6,781,227
            
            
            7,454,288
            
            
            21,532,710
            
            
            16,960,375Cost
                of revenue:Products
            
            
            4,989,194
            
            
            6,125,210
            
            
            15,942,862
            
            
            13,602,289Services
            
            
            924,265
            
            
            274,789
            
            
            2,089,453
            
            
            1,045,384Total cost of revenue
            
            
            5,913,459
            
            
            6,399,999
            
            
            18,032,315
            
            
            14,647,673Gross
                profit
            
            
            867,768
            
            
            1,054,289
            
            
            3,500,395
            
            
            2,312,702Operating
                expenses:Selling,
                general and administrative expenses:Payroll and related expenses
            
            
            2,007,841
            
            
            1,438,460
            
            
            6,005,094
            
            
            3,021,572Office administration
            
            
            578,881
            
            
            602,427
            
            
            1,717,002
            
            
            1,322,672Professional services
            
            
            852,538
            
            
            275,153
            
            
            3,133,765
            
            
            666,357Impairment of goodwill
            
            
            --
            
            
            391,114
            
            
            --
            
            
            843,039Other
            
            
            76,840
            
            
            398,545
            
            
            243,086
            
            
            1,498,173Depreciation
            
            
            107,515
            
            
            40,487
            
            
            313,385
            
            
            71,171Total operating expenses
            
            
            3,623,615
            
            
            3,146,186
            
            
            11,412,332
            
            
            7,422,984Loss
                from operations
            
            
            (2,755,847
            )
            
            (2,091,897
            )
            
            (7,911,937
            )
            
            (5,110,282
            )Other
                income (expense):Interest,
                net
            
            
            (273,900
            )
            
            (136,199
            )
            
            (847,534
            )
            
            (756,763
            )Change
                in fair value of derivatives
            
            
            2,036,011
            
            
            2,451,666
            
            
            3,073,851
            
            
            5,492,874Other
            
            
            (69,712
            )
            
            14,968
            
            
            8,600
            
            
            25,603Total other income (expense)
            
            
            1,692,399
            
            
            2,330,435
            
            
            2,234,917
            
            
            4,761,714Net
                income (loss)
            
            $
            (1,063,448
            )
            $
            238,538
            
            $
            (5,677,020
            )
            $
            (348,568
            )Net
                income (loss) per share:
              Basic
            
            $
            (
                0.04
            )
            $
            0.01
            
            $
            (0.25
            )
            $
            (0.02
            )Diluted
            
            $
            (0.04
            )
            $
            0.01
            
            $
            (0.25
            )
            $
            (0.03
            )Weighted
                average number of common shares outstanding:Basic
            
            
            24,705,805
            
            
            20,608,067
            
            
            22,735,207
            
            
            20,013,588Diluted
            
            
            24,705,805
            
            
            22,190,584
            
            
            22,735,207
            
            
            20,815,421





See
      accompanying notes to unaudited consolidated financial
      statements.


4


**eLINEAR,
      INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004**


**(UNAUDITED)**





2005
            
            2004Cash
                flows used in operating activities:Net
                loss
            
            $
            (5,677,020
            )
            $
            (348,568
            )Depreciation
            
            
            313,385
            
            
            71,171Impairment
                of goodwill
            
            
            --
            
            
            843,039Bad
                debt expense
            
            
            82,713
            
            
            65,560Amortization
                of debt discounts
            
            
            347,404
            
            
            505,618Change
                in fair value of derivatives
            
            
            (3,073,851
            )
            
            (5,492,874
            )Stock
                and stock option based compensation
            
            
            3,608,072
            
            
            952,607Changes
                in assets and liabilities:Accounts
                receivable
            
            
            312,700
            
            
            (4,464,476
            )Inventory
            
            
            (1,002,539
            )
            
            (50,057
            )Other
                current assets
            
            
            (50,960
            )
            
            (152,070
            )Accounts
                payable
            
            
            1,129,531
            
            
            795,786Payable
                to officers
            
            
            --
            
            
            (36,336
            )Accrued
                liabilities
            
            
            (158,549
            )
            
            321,259Accrued
                penalties
            
            
            --
            
            
            473,528Net
                cash used in operating activities
            
            
            (4,169,114
            )
            
            (6,515,813
            )Cash
                flows from investing activities:Purchase of property and equipment
            
            
            (204,250
            )
            
            (623,302
            )Restricted cash
            
            
            --
            
            
            (500,000
            )Purchase of certificate of deposit
            
            
            (258,698
            )
            
            (512,643
            )Deposits
            
            
            (131,980
            )
            
            (13,159
            )Net
                cash used in investing activities
            
            
            (594,928
            )
            
            (1,649,104
            )Cash
                flows from financing activities:Repayment of notes payable due to officers
            
            
            --
            
            
            (215,703
            )Proceeds from revolver, net
            
            
            726,476
            
            
            1,596,758Proceeds from long-term debt
            
            
            3,512,516
            
            
            2,000,000Payment of upfront financing costs
            
            
            --
            
            
            (273,000
            )Proceeds from exercise of stock options
            
            
            208,693
            
            
            345,594Proceeds from sale of common stock, net
            
            
            82,114
            
            
            4,586,103Net
                cash provided by financing activities
            
            
            8,529,799
            
            
            8,039,752Net
                decrease in cash
            
            
            (234,243
            )
            
            (125,165
            )Cash
                and cash equivalents, beginning of period
            
            
            1,403,449
            
            
            554,483Cash
                and cash equivalents, end of period
            
            $
            1,169,289
            
            $
            429,318





See
      accompanying notes to unaudited consolidated financial
      statements.


5


**ELINEAR,
      INC.**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


**September
      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 September
      30,
      2005, and the results of operations and cash flows for the three and nine months
      ended September 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/A (First Amendment) for the year ended December
      31,
      2004, filed with the Securities and Exchange Commission.





Note
      2.  Stock
      Options





At
      September 30, 2005, the Company had stock-based compensation plans, which are
      more fully described in Note 10 in the Company's Annual Report on Form 10-KSB/A
      (First Amendment). 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 September 30, 2005, there were 770,000 incentive stock options
      outstanding under the 2005 Plan at exercise prices ranging from $0.70 to $1.19
      per share, vesting over a four year period and expiring five years from the
      date
      of grant and 100,000 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 nine months ended September 30, 2005,
      the
      Company recorded $141,701 stock-based compensation expense for stock options
      issued to employees which is reflected in the net loss for the nine month period
      ended September 30, 2005, because certain options granted under the 2005 Plan
      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 $135,566 related to the options issued to
      non-employees and two of its directors. The non-employee options vested
      immediately and 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.





Nine
                  Months EndedSeptember 30,2005
            2004(Restated)Net
                loss, as reported
            $
                (5,667,020)
            $
                (348,568)Stock
                based compensation under fair value method
            (622,249)
            (199,000)Pro
                forma net income (loss)
            $
                (6,329,269)
            $
                (547,568)Net loss
                per share:Basic loss per common share - as reported
            $
                (0.25)
            $
                (0.02)Basic loss per common share - pro forma
            $
                (0.28)
            $
                (0.03)Diluted loss per common share - as reported
            $
                (0.25)
            $
                (0.03)Diluted loss per common share - pro forma
            $
                (0.28)
            $
                (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 of1.5%, and expected life of 48 months.





Note
      3.  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 credit facilities 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 by Laurus in connection with the Laurus credit facilities
      and
      exercised in connection with the warrants outstanding. Consequently, the
      Company’s consolidated financial position and results of operations may vary
      from quarter to quarter based on conditions other than the Company’s operating
      revenue and expenses. See Notes 6 and 7 regarding valuation methods used for
      derivative liabilities.





Derivative
      financial instruments that are not designated as hedges or that do not meet
      the
      criteria for hedge accounting under SFAS No. 133 are recorded at fair value,
      with gains or losses reported currently in earnings. All derivative financial
      instruments held by the Company as of September 30, 2005 were not designated
      as
      hedges.





Note
      4.  Impairment





In
      March
      2004, the Company recorded impairment expense totaling $451,925 related to
      100%
      of the goodwill related to the 2003 eLinear acquisition. In March 2004, the
      consulting services reporting unit lost its largest consulting contract and
      the
      other operations that had been acquired in the eLinear purchase had declined
      due
      to the loss of key employees after the acquisition. During the nine months
      ended
      September 30, 2005, the Company recognized only $59,285 of revenue from the
      consulting services reporting segment. Based on projected estimated future
      cash
      flows from the reporting unit purchased in 2003, management determined a full
      impairment charge was required.





In
      September 2004, the Company recorded impairment expense totaling $391,114
      related to a portion of the goodwill related to the NewBridge Technologies,
      Inc.
      acquisition in July 2003. The Company performed a valuation analysis of the
      discounted projected estimated future cash flows from the reporting unit. Based
      on the valuation analysis, the Company elected to write down the goodwill for
      NewBridge to $1,100,000 resulting in the impairment charge.










Note
      5.  Credit
      Facilities





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 revolving
      note totaling $2,000,000 ("term note") and a revolving credit facility totaling
      $3,000,000 ("revolver") based on eligible accounts receivable.





The
      Contract Rate shall be adjusted as follows: if (i) eLinear shall have registered
      the shares of its Common Stock underlying the conversion of all currently issued
      and outstanding Minimum Borrowing Notes and the Warrant on a registration
      statement declared effective by the Securities and Exchange Commission, and
      (ii)
      the volume weighted average price of the Common Stock as reported by Bloomberg,
      L.P. on the principal market for any of the ten (10) trading days immediately
      preceding any applicable date upon which interest is payable under Section
      5
      hereof exceeds 125% of the applicable Fixed Conversion Price (as defined in
      the
      applicable Minimum Borrowing Note) (the “Specified Percentage”); then Contract
      Rate for the succeeding calendar month shall automatically be reduced by one
      hundred basis points (100 b.p.) for such month; provided that for each
      subsequent incremental twenty-five percent increase above the Specified
      Percentage, the Contract Rate shall be reduced by an additional two hundred
      basis points (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 term of its agreement with Laurus require 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 current registration statement being declared
      effective by the SEC, whichever is earlier. The Company’s current statement was
      declared effective 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%.





The
      Company retired its $1,000,000 credit facility with Textron Financial
      Corporation with the proceeds from the Laurus credit facility and entered into
      a
      new $500,000 credit facility with Textron secured by a $500,000 letter 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 (6.75% as of September 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 advances typically accrue interest
      at
      a rate of 1.5% per month, but until August 2004, the Company is 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. In connection with the execution of this
      credit facility, and in connection with the October 2004 amendment, the Company
      issued Laurus seven-year warrants to purchase a total of 440,000 shares of
      Company common stock at exercise prices ranging from $1.90 to $3.32 per share.
      The Company has the ability to prepay any amounts owed under this credit
      facility at 115% of the principal amount. The revolving credit facility is
      secured by all of the assets of the Company. All stock conversion prices and
      exercise prices are subject to adjustment for stock splits, stock dividends
      or
      similar events. The Company paid back the $1,000,000 revolver during the quarter
      ended June 30, 2004. As of September 30, 2005, the Company had $3,511,020
      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 conversion price
      of $1.00 per share. The term note is secured by a blanket lien on all of the
      Company’s assets. As of September 30, 2005, the Company had $500,000 outstanding
      under the term note, the maximum amount available.





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 440,000 shares of the
      Company’s common stock at prices ranging from $1.90 to $3.32 per share. The
      warrants, which are exercisable immediately, were valued at $653,807 using
      a
      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 will be
      amortized over the term of the loan using the effective interest
      method.





The
      October 2004 amendment to the note was accounted for as an extinguishment of
      debt in accordance with EITF 96-19 “ *Debtors
      Accounting for a Modification Exchange of Debt Instruments.”* Accordingly, the unamortized discounts aggregating $1,538,924 and the fair
      value
      of the additional warrants issued in conjunction with the amendment amounting
      to
      $115,545 were included in the Company’s determination of the debt extinguishment
      recorded in the fourth quarter 2004. The $1,555,347 aggregate loss from these
      transactions was recorded for the year ended December 31, 2004.





Since
      the
      liquidated damages under the registration rights agreement could in some cases
      exceed a reasonable discount for delivering unregistered shares the warrants
      have been 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 other expense or other income. The Company
      determined the fair value of the warrants as follows as of the following
      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 return of 3.5%, which equals
      the five-year yield on Treasury bonds at constant (or fixed) maturity; and
      volatility of 102%. Under the assumptions, the Black Scholes option-pricing
      model yielded a value of $2.26 for the $3.05 warrants, $2.25 for the $3.19
      warrants and $2.24 for the $3.32 warrants for an aggregate value of
      $653,807.





*September
      30, 2004*





The
      Company performed the same calculations as of September 30, 2004, to revalue
      the
      warrants as of that date. In using the Black Scholes option-pricing model,
      the
      Company used an expected life of 6.4 years; an underlying stock price of $1.04
      per share; no dividends; a risk free rate of 3.5%; and volatility of 117%.
      The
      resulting aggregate allocated value of the warrants as of September 30, 2004,
      equaled $238,839. The change in fair value of $179,440 and $414,968 for the
      three and nine months ended September 30, 2004, is primarily due to the fair
      value of the underlying common stock which price decreased from $2.71 per share
      to $1.04 per share from February 23 to September 30, 2004.





*October
      20, 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 2.7%; and 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.










*September
      30, 2005*





For
      the
      nine months ended September 30, 2005, the Company used an underlying stock
      price
      of $0.70 per share; no dividends; a risk free rate of 3.67%; and volatility
      of
      72%. The resulting aggregate value of the warrants as of September 30, 2005
      equaled $119,580.





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. 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.





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 a derivative instrument 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 include the conversion feature
      within the Notes, the early redemption option, the Contract Rate adjustment
      and
      default provision. 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 carrying
      amount (as amortized discount) of the Notes. The unamortized discount is
      amortized to interest expense using the effective interest method over the
      life
      of the Notes, or 36 months.





Compound
      Embedded Derivative Liability





Using
      a
      layered discounted probability-weighted expected cash flow methodology, the
      fair
      value of the Derivative Liability with Compound Embedded Derivatives was
      computed at $998,425 and $102,064 at February 23, 2004 and September 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 Notes. 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 amounts of the
      Notes.





Probability-Weighted
      Expected Cash Flow Methodology





Compound
                Embedded Derivative LiabilityFebruary
                23,2004
            
            September
                30,2004
            
            September
                30,2005Assumptions
            
            (Inception)Risk
                Free interest rate
            
            
            2.21
            %
            
            2.89
            %
            
            4.18
            %Prime
                RateIncreasing .25% each quarter of first year
            
            
            4
            %
            
            4.75
            %
            
            6.75
            %Timely
                registrationIncreasing by 1% monthly up to 99%
            
            
            95
            %
            
            99
            %
            
            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
            %
            
            2
            %
            
            2
            %Annual
                growth rate of stock price
            
            
            31
            %
            
            31.8
            %
            
            31.5
            %Future
                projected volatility
            
            
            102
            %
            
            117
            %
            
            86
            %Ownership
                limitationMonthly increase
            
            
            1
            %
            
            1
            %
            
            1
            %Reset
                ProvisionIncreasing 5% monthly up to 25%
            
            
            --
            %
            
            --
            %
            
            --
            %




The
      decrease in the fair value of the compound embedded derivative liability of
      $118,832 and $969,099 was recorded for the three and nine months ended September
      30, 2004. The decrease in the fair value of compound embedded derivative
      liability of $352,032 and $337,752 was recorded for the three and nine months
      ended September 30, 2005.










During
      the quarter ended June 30, 2004, the Company paid back the original $1,000,000
      it had drawn under the revolver during the quarter ended March 31, 2004.
      Therefore, the Company expensed a portion of the discount recorded in connection
      with the credit facility 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 September 30, 2005 were adjusted as follows:





February
                23, 2004
            
            September
                30, 2005Notional
                balance
            
            $
            3,000,000
            
            $
            4,010,999Adjustments:Discount for compound embedded derivatives
            
            
            (998,425
            )
            
            (217,709
            )Discount for Laurus warrants
            
            
            (653,807
            )
            
            --Discount for loan costs paid to Laurus
            
            
            (219,500
            )
            
            --Balance,
                net of unamortized discount
            
            
            1,128,268
            
            
            3,793,290Less
                current portion (revolver)
            
            
            --
            
            
            (3,511,020
            )Balance,
                net of current portion and unamortized discount
            
            $
            1,128,268
            
            $
            282,270





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 to be amortized using the effective interest method over
      the
      term of the loan agreement. However, the Company recorded an adjustment of
      approximately $102,000 to expense the remaining portion of the deferred
      financing costs at December 31, 2004 due to the modification of the debt at
      October 20, 2004.





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





*February
      2005 Funding*





On
      February 28, 2005, the Company entered into financing arrangements to receive
      up
      to a total principal amount of $12 million with Laurus, Iroquois Capital LP
      (“Iroquois”), RHP Master Fund (“RHP”), Basso Private Opportunity Holding Fund
      Ltd. (“Basso Private”), and Basso Multi-Strategy Holding Fund Ltd. (“Basso
      Multi”), (collectively, the “Investors”) in which it initially received
      $2,736,000 in cash and the ability upon certain conditions to receive the
      remaining amount of the total financing of $9,264,000. Such financing has been
      subsequently amended. The $9,264,000 was 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 Company is obligated to make
      monthly interest payments for interest accrued on the initial $2,736,000, the
      interest begins accruing on April 1, 2005. The Company is obligated to make
      monthly payments, either in cash or stock as determined by the terms of the
      notes, beginning on June 1, 2005 for the initial $2,736,000, plus applicable
      interest (the “Monthly Payment”). The Monthly Payment will be made (i)
      automatically by a conversion in stock at $1.00 per share, (ii) at the
      discretion of the Company at a reduced conversion price, or (iii) in cash paid
      by the Company at 101% of the Monthly Payment.









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 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.




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 the warrants have been 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 other expense or other 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 Treasury 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 September 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 September 30, 2005,
      equaled $738,657. The change in fair value of $474,688 was recorded for the
      nine
      months ended September 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.





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
      amended 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 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 of the principal amounts of their respective
      amended 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 limitations
      that the number of aggregate shares of common stock issued to each Investor
      shall not exceed 25% of the aggregate dollar trading volume of 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 per share and 525,000 are exercisable
      at
      $1.75 per share. The warrants were valued at $677,514 using a 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.





In
      accordance with EITF 00-19, the Company recorded the warrants issued as
      derivative liabilities. The Company used the following assumptions in using
      the
      Black Scholes option-pricing model at July 14, 2005; an expected life equal
      to
      the contractual life of the warrants (seven years); underlying stock price
      of
      $0.93, no dividends; a risk free rate of 3.98%; and volatility of 87%. The
      Company preformed the same calculations at September 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 $0.70 per share, no dividends; a
      risk
      free rate of 4.74%; and volatility of 72%. The resulting aggregate value of
      the
      warrants as of September 30, 2005 equaled $403,860. The change in the fair
      value
      of $273,653 was recorded for the nine months ended September 30,
      2005 .




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. 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 include the conversion feature within the Notes, the early
      redemption option, the Contract Rate adjustment, the premium for cash payment,
      and default provisions. The value of the single compound embedded derivative
      liability was bifurcated from the debt host contract and recorded as a
      derivative liability, which resulted in a reduction of the initial carry amount
      (as amortized discount) of the Notes. The unamortized discount is amortized
      to
      interest expense using the effective interest method over the life of the Notes,
      or 36 months.





Compound
      Embedded Derivative liability





Using
      a
      layered discounted probability-weighted expected cash flow methodology, the
      fair
      value of the Compound Embedded Derivative Liability was computed at $311,620,
      $493,733 and $229,947 as of February 28, 2005, July 14, 2005 (amended) and
      September 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 Notes. 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
            
            September
                30,
              2005Assumptions
            
            (Inception)Risk
                Free interest rate
            
            
            3.75
            %
            
            4.18
            %Prime
                RateIncreasing .25% each quarter of first year
            
            
            5.5
            %
            
            6.75
            %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%
            
            
            --
            %
            
            --
            %Trading
                volume, gross monthly dollarsMonthly increase
            
            
            5
            %
            
            5
            %Annual
                growth rate of stock price
            
            
            31.70
            %
            
            31.5
            %Future
                projected volatility
            
            
            88
            %
            
            72
            %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 $308,790 was recorded
      for the period ended September 30, 2005.











As
      a result
      of these contract provisions, the Notes at inception (February 28, 2005),
      amended (July 14, 2005), and September 30, 2005 were adjusted as
      follows:





February
                28, 2005
            
            July
                14,2005
            
            September
                30, 2005Notional
                balance
            
            $
            2,736,000
            
            $
            5,054,567
            
            $
            4,728,466Adjustments:Discount for compound embedded derivatives
            
            
            (311,620
            )
            
            (523,963
            )
            
            (495,823
            )Discount for warrants
            
            
            (1,213,345
            )
            
            (1,833,332
            )
            
            (1,737,566
            )Discount for loan costs paid to Laurus
            
            
            (449,484
            )
            
            (428,173
            )
            
            (409,393
            )Total
                discounts
            
            $
            (1,974,449
            )
            $
            (2,785,468
            )
            $
            (2,642,782
            )





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.





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.





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
      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










Note
      6.  Common
      Stock





During
      the three months ended September 30, 2004, the Company issued 338,558 shares
      of
      common stock for services valued at $349,000 using the stock price on the date
      issued.





In
      February 2004, the Company sold 1,230,000 shares of its common stock at a price
      of $2.00 per share, together with five-year warrants to purchase an aggregate
      of
      615,000 shares of common stock at an exercise price of $3.00 per share (the
      "Class A Warrants"), and warrants to purchase 615,000 shares of common stock
      at
      an exercise 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 costs of $202,200. In addition the Company
      issued 61,500 class A Warrants and 61,500 Class B Warrants to vSource as a
      finders fee.





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 exercise 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 a registration statement registering the resale of the shares underlying
      the warrants and the shares becomes 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. In addition the Company
      issued 117,854 Class A Warrants and 109,015 Class B Warrants to vSource as
      a
      finder's fee.





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.





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 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 Company determined the fair value of the warrants
      as follows as of January 12 and February 4, 2004 (the issuance
      dates):





The
      Company used the Black Scholes option-pricing model with the following
      assumptions: and expected life equal to the contractual term of the warrants;
      no
      dividends; a risk free rate of return 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 September 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 $1.04 per share; a risk free rate
      of
      3.5%; an expected life equal to the remaining contractual term of the warrants;
      no dividends; and volatility of 117%. The resulting aggregate allocated value
      of
      the warrants as of September 30, 2004 equaled $1,980,886. For the nine months
      ended September 30, 2005, the Company used an underlying stock price of $0.70
      per share; no dividends; a risk free rate of 3.67%; and volatility of 72%.
      The
      resulting aggregate value of the warrants equaled $331,534.





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 120th 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.





Note
      7.  Common
      Stock Warrants





In
      connection with the equity (Note 6) and debt (Note 5) fundings, the Company
      issued warrants to acquire common stock at various prices. The following table
      summarizes the warrants outstanding as of September 30, 2005:





Exercise
                Price
            
            FinancingDate
            
            OutstandingWarrants
            
            Expiration
                Date0.70
            
            
            December
                2003
            
            
            26,611
            
            
            December
                20051.89
            
            
            January
                2004
            
            
            1,296,388
            
            
            January
                20092.50
            
            
            February
                2004
            
            
            386,500
            
            
            February
                20063.00
            
            
            February
                2004
            
            
            676,500
            
            
            February
                20091.90
            
            
            October
                2004
            
            
            150,000
            
            
            October
                20113.50
            
            
            February
                2004
            
            
            200,000
            
            
            February
                20113.19
            
            
            February
                2004
            
            
            50,000
            
            
            February
                20113.22
            
            
            February
                2004
            
            
            40,000
            
            
            February
                20111.25
            
            
            February
                2005
            
            
            1,800,000
            
            
            February
                20121.75
            
            
            July
                14, 2005
            
            
            525,000
            
            
            July
                20121.50
            
            
            July
                14, 2005
            
            
            466,667
            
            
            July
                2012Total
            
            
            
            
            
            5,617,666





All
      warrants are exercisable at September 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.





Note
      8.  Significant
      Concentration





One
      customer accounted for approximately 21% of sales for the nine months ended
      September 30, 2005. No other customers represented more than 10% of sales of
      the
      Company for that period. The Company had one customer which had in excess of
      10%
      of the Company’s accounts receivable balance at September 30, 2005. This
      customer had 13% of the Company’s accounts receivable balance.








Note
        9. ** Net
        Income (Loss) Per Share
 
 Basic
        and
        diluted net income (loss) per share is presented in accordance with SFAS
        No.128 *Earnings
        Per Share* .
        Basic
        net income (loss) per share has been computed using the weighted-average
        number
        of shares of common stock outstanding during the period. Diluted net income
        (loss) per share has been computed using the weighted-average number of shares
        of common stock and dilutive potential common shares from options and warrants
        (under the treasury stock method) and convertible notes (on an as-if-converted
        basis) outstanding during the period. For the three and nine months ended
        September 30, 2004, shares of 6,900,130 resulting from the assumed exercise
        of
        outstanding options and warrants were excluded from the computation of earnings
        per common share, because the inclusion thereof would be anti-dilutive. The
        corresponding three and six months ended September 30, 2005 have been excluded
        as the potential dilutive effects including all outstanding options and warrants
        would be anti-dilutive.
 
 The
        following table presents the calculation of basic and diluted net income
        (loss)
        per share for the three and six months ended September 30, 2004:
  Three
                  Months Ended
              
              
              Nine
                  Months EndedSeptember
                  30, 2004
              
              
              September
                  30, 2004Numerator:Net
                income (loss)
              
              $
              238,538
              
              $
              (348,568
              )Adjustments:Interest
                expense, including
                amortization of debt discout and debt issuance costs
              
              
              136,199
              
              
              756,763Change
                in fair value of derivatives
                embedded within convertible debt
              
              
              (111,832
              )
              
              (969,099
              )$
              262,905
              
              $
              (560,904
              )Denominator
                for basic net income per share:Weighted
                average shares outstanding -
                basic
              
              
              20,608,067
              
              
              20,013,588Effect
                of dilutive securities:Stock
                options
              
              
              551,589
              
              
              --Convertible
                note
              
              
              1,030,928
              
              
              801,833Weighted
                average shares outstanding - diluted
              
              
              22,190,584
              
              
              20,815,421Basic
                net income (loss) per share
              
              $
              0.01
              
              $
              (0.02
              )Diluted
                net income (loss) per share
              
              $
              0.01
              
              $
              (0.03
              )




Note
      10.  Restricted
      Cash





In
      conjunction with the Company’s credit facility with Textron Financial
      Corporation (“Textron”), the Company was required to deposit $500,000 in a
      restrictive cash account and issue Textron a $500,000 letter of
      credit.





Note
      11.  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 September 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 SEPTEMBER 30, 2005





Dollars
                $
            
            Consulting
                Services
            
            Network
                and Storage Solutions
            
            Communications
                Deployment
            
            SecuritySolutions
            
            ConsolidatedRevenue
            
            
            26,212
            
            
            4,375,730
            
            
            1,108,935
            
            
            1,270,350
            
            
            6,781,227Segment
                loss
            
            
            (2,380,221
            )
            
            (227,104
            )
            
            (57,487
            )
            
            (566,615
            )
            
            (3,231,427
            )Total
                assets
            
            
            1,712,515
            
            
            3,887,495
            
            
            1,576,207
            
            
            2,321,971
            
            
            9,498,188Capital
                expenditures
            
            
            17,531
            
            
            43,577
            
            
            --
            
            
            1,617
            
            
            62,725Depreciation
            
            
            29,721
            
            
            36,496
            
            
            1,476
            
            
            75,521
            
            
            143,214





FOR
      THE
      NINE MONTHS ENDED SEPTEMBER 30, 2005




Dollars
                $
            
            Consulting
                Services
            
            Network
                and Storage Solutions
            
            Communications
                Deployment
            
            Security
              Solutions
            
            ConsolidatedRevenue
            
            
            59,285
            
            
            15,101,210
            
            
            3,071,311
            
            
            3,300,904
            
            
            21,532,710Segment
                profit/(loss)
            
            
            (7,690,722
            )
            
            (335,051
            )
            
            13,507
            
            
            (1,176,977
            )
            
            (9,189,243
            )Total
                assets
            
            
            1,712,515
            
            
            3,887,494
            
            
            1,576,207
            
            
            2,321,972
            
            
            9,498,188Capital
                expenditures
            
            
            54,708
            
            
            91,883
            
            
            --
            
            
            57,651
            
            
            204,242Depreciation
            
            
            85,242
            
            
            104,017
            
            
            4,429
            
            
            226,794
            
            
            420,482




FOR
      THE
      THREE MONTHS ENDED SEPTEMBER 30, 2004





Dollars
                $
            
            Consulting
                Services
            
            Network
                and Storage Solutions
            
            Communications
                Deployment
            
            ConsolidatedRevenue
            
            
            41,825
            
            
            6,685,880
            
            
            726,583
            
            
            7,454,288Segment
                profit/(loss)
            
            
            1,119,096
            
            
            (322,970
            )
            
            (557,588
            )
            
            238,538Total
                assets
            
            
            3,115,915
            
            
            5,752,326
            
            
            919,846
            
            
            9,788,087Capital
                expenditures
            
            
            196,386
            
            
            105,953
            
            
            10,169
            
            
            312,508Depreciation
            
            
            18,530
            
            
            20,548
            
            
            1,409
            
            
            40,487




FOR
      THE
      NINE MONTHS ENDED SEPTEMBER 30, 2004





Dollars
                $
            
            Consulting
                Services
            
            Network
                and Storage Solutions
            
            Communications
                Deployment
            
            ConsolidatedRevenue
            
            
            88,990
            
            
            15,416,359
            
            
            1,455,026
            
            
            16,960,375Segment
                loss
            
            
            (1,109,369
            )
            
            (770,000
            )
            
            (683,937
            )
            
            (348,568
            )Total
                assets
            
            
            3,115,915
            
            
            5,752,326
            
            
            919,846
            
            
            9,788,087Capital
                expenditures
            
            
            348,605
            
            
            263,411
            
            
            11,286
            
            
            623,302Depreciation
            
            
            29,927
            
            
            38,017
            
            
            3,227
            
            
            71,171





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.





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





*The
      following discussion and analysis of the Company's financial condition as of
      September 30, 2005, and its results of operations for the nine month periods
      ended September 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 (First Amendment) filed with the Securities and Exchange
      Commission.*





**OVERVIEW**





The
      Company's business currently consists of four operating segments:





·
            Product
                fulfillment and network and storage solutions. Through its wholly
                owned
                subsidiary, NetView Technologies, Inc.("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 its wholly owned subsidiary, NewBridge Technologies,
                Inc. ("NewBridge"), the Company provides: (a) structured cabling,
                which is
                a set of cabling and connectivity products that integrate the voice,
                data,
                video and various management systems of a structure,(b)cabling
                infrastructure design and implementation, which is the design and
                implementation of the structured cabling systems,(c)security installation
                and monitoring, and (d) digital services of voice, data and video
                over
                fiber optic networks to residential and commercial
                customers.





·
            Consulting
                services. The Company offers: (a) consulting services,(b)creative
                web site
                design,(c)web site content management software, and (d) technical
                project
                management and development
                services.





·
            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 has operated as a technology consulting business since December 1999.
      It
      acquired its Internet consulting business as a result of a reverse merger with
      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 nine months ended September 30, 2005, the consulting segment
      contributed less than 1% of the Company’s revenue. From 1995, its inception, the
      Company, which at the time was named Kinetics.com, was engaged in marketing
      proprietary software programs for use on the world wide web of the Internet.
      Kinetics.com marketed two software programs designed for use on the Web in
      1995
      and 1996. During 1996, several creditors of Kinetics.com obtained court
      judgments against it as a result of non-payment of financial obligations and
      in
      1997, Kinetics.com transferred all of its assets to an unaffiliated third party.
      Subsequent to the asset transfer, the only activities of Kinetics.com consisted
      of negotiating settlements with its creditors and attempting to identify a
      suitable acquisition or merger candidate. 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,
      it
      changed its name to eLinear, Inc.





The
      Company completed the acquisitions of NetView and NewBridge during 2003. In
      April 2003, eLinear 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 its 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. In March 2004, the Company recorded impairment expense
      totaling $451,920 related to 100% of the goodwill related to the 2003 eLinear
      acquisition. In March 2004, the consulting services reporting unit lost its
      largest consulting contract and the other operations that had been acquired
      in
      the eLinear purchase had declined due to the loss of key employees after the
      acquisition. During the three months ended June 30, 2004, the Company recognized
      only $220 of revenue from the consulting services business segment. Based on
      projected estimated future cash flows from the reporting unit purchased in
      2003,
      management determined a full impairment charge was required. NetView contributed
      70% of eLinear’s revenue for the nine months ended September 30,
      2005.










In
      July
      2003, eLinear completed the acquisition of all the outstanding shares of
      NewBridge. Pursuant to the transaction, eLinear issued 850,000 shares of common
      stock valued at $1,062,500, using the average of the bid and asked prices on
      July 31, 2003, and options to purchase 300,000 shares of common stock valued
      at
      $274,000, using Black Scholes, 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 September 2004, the Company recorded impairment
      expense totaling $391,114 related to a portion of the goodwill related to the
      NewBridge acquisition. The Company performed a valuation analysis of the
      discounted projected estimated future cash flows from the reporting unit. Based
      on the valuation analysis, the Company elected to write down the goodwill for
      NewBridge to $1,100,000 resulting in the impairment charge. NewBridge
      contributed 14% of eLinear's revenue for nine months ended September 30,
      2005.





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’s 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 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.





In
      January 2004, the Company completed a private offering in which it raised gross
      proceeds of $2,533,850. In February 2004, the Company completed a private
      offering in which it raised gross proceeds of $2,460,000. Both of these
      agreements included warrants, which if exercised would bring in an additional
      $8,029,621. In each of these offerings the Company issued its common stock
      at
      prices below the then market price.





The
      Company has filed a registration statement with the Securities and Exchange
      Commission which is registering the resale of 3,194,225 shares of the Company’s
      common stock and 3,944,737 shares of the Company’s common stock underlying the
      warrants pursuant to the above listed financings. The registration statement
      was
      declared effective on September 10, 2004.





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 revolving
      note totaling $2,000,000 and a revolving credit facility totaling $3,000,000
      based on eligible accounts receivable. See Note 3 to the unaudited financial
      statements included herein.





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. 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 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. In
      connection with the execution of this credit facility, and in connection with
      the October 2004 amendment, the Company issued Laurus seven-year warrants to
      purchase a total of 440,000 shares of Company common stock at exercise prices
      ranging from $1.90 to $3.32 per share. Laurus is limited to owing 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 nor. The
      Company is not obligated at any time to repurchase any portion of the Laurus
      conversion shares nor the shares underlying the warrants. The Company filed
      a
      registration statement to register the aforementioned shares and shares
      underlying the warrants with the SEC on November 5, 2004










**CRITICAL
      ACCOUNTING POLICIES**





*General*





The
      consolidated financial statements and notes included in this Form10-QSB 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 the Company to
      make
      estimates and assumptions that affect the reported amounts of its assets and
      liabilities, and affect the disclosure of any contingent assets and liabilities.
      The Company 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. The significant accounting policies
      are
      described in its financial statements and notes included in its Form 10-KSB/A
      (First Amendment) filed with the Securities and Exchange
      Commission.





*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 underlying 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 future delivery of products or services or subject
      to
      customer-specified return of 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.





*Goodwill*





As
      of
      September 30, 2005, the Company had $1,100,000 of goodwill resulting from the
      acquisition of NewBridge Technologies, Inc. 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 recorded impairment expense totaling $391,114 related to a portion
      of the goodwill related to the NewBridge Technologies, Inc. acquisition in
      July
      2003. The Company performed a valuation analysis of the discounted projected
      estimated future cash flows from the reporting unit. Based on the valuation
      analysis, the Company elected to write down the goodwill for NewBridge to
      $1,100,000 resulting in the impairment charge. Due to the large amount of
      goodwill presently included in its financial reports, if impairment is required,
      its financial condition and results would be negatively affected.





*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." These rules 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 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 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 financial position. The Company recorded
      $141,701 of stock-based compensation expense for employee stock options which
      was reflected in the net loss for the nine-month period ended September 30,
      2005.










*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 its 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 its 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 its consolidated results of operations or financial position. As
      of
      September 30, 2005, the Company maintained an allowance for doubtful accounts
      of
      $394,282, which allowance was 6% of total accounts receivable as of that
      date.





*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 credit facilities 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 by Laurus in connection with the Laurus credit facilities
      and
      exercised in connection with the Warrant outstanding. Consequently, the
      Company’s consolidated financial position and results of operations may vary
      from quarter to quarter based on conditions other than the Company’s operating
      revenue and expenses. See Notes 6 and 7 regarding valuation methods used for
      derivative liabilities.





Derivative
      financial instruments that are not designated as hedges or that do not meet
      the
      criteria for hedge accounting under SFAS No. 133 are recorded at fair value,
      with gains or losses reported currently in earnings. All derivative financial
      instruments held by the Company as September 30, 2005 were not
      designated.





**RESULTS
      OF OPERATIONS AND FINANCIAL CONDITION**




**Nine
      Months Ended September 30,2005 and Nine Months Ended September 30,
      2004**





*Revenue* Total
      revenue for the nine months ended September 30, 2005 was $21,532,710 which
      was
      an increase of 27% over the prior year period of $16,960,375. Revenue from
      the
      consulting services business segment for the nine months ended September 30,
      2005 was $59,285 which was less than 1% of total revenue. During February 2004,
      the Company hired experienced consulting and engineering personnel and the
      Company intends to concentrate its efforts on building expertise in the areas
      of
      convergence of communications with information technology and in sophisticated
      information security and physical security technologies. Revenue generated
      from
      the network and storage solutions business segment for the nine months ended
      September 30, 2005 was $15,101,210, which was relatively flat compared to
      $15,416,359 for the first nine months of 2004. The network and storage solutions
      business segment contributed 70% of total revenue for the current nine month
      period, down from 91% in 2004. . The Company intends to focus on adding
      additional customers and personnel to service these customers. Revenue from
      communications solutions more than doubled for the nine months of 2005 to
      $3,071,311 and represented 14% of total revenue. Security solutions began to
      bring in new revenue that totaled $3,300,904 in the first nine months of
      2005.





Of
      the
      revenue generated for the three and nine month periods ended September 30,
      2005,
      one customer in the medical vertical market provided in excess of 10% of the
      Company's revenue contributing 16% of the revenue. No other customer provided
      more than 10% of the Company’s revenue for the 2005 period.










*Cost
      of sales* .
      Total
      cost of sales for the and nine months ended September 30, 2005 was $18,032,315
      an increase of $3,384,642 or 23%, over the prior year period of $14,647,673
      ..
      Trends in cost of goods sold for the company is influenced by how the mix of
      services versus products changes. Lower margin, but high volumes of products
      are
      reflected in higher cost of goods sold.  Cost of srvices as a percent of
      revenue increased to 12% in 2005 versus 7% in the same nine month period of
      2004.


For
      the
      network and storage solutions business segment, cost of sales is comprised
      of
      the costs associated with acquiring hardware and software to fill customer
      orders. For the consulting services business segment, cost of sales consists
      of
      full-time personnel and contract employee costs associated with projects eLinear
      provides to its customers for a fee. For the communications deployment business
      segment, cost of sales consists of materials and personnel to build the customer
      infrastructure. The increase in cost of sales was due to the cost of procuring
      hardware and software to fill an expanded number of customer orders. The
      Company’s principal suppliers of hardware and software products are Hewlett
      Packard and Cisco Systems. The Company anticipates they will continue to be
      its
      principal suppliers in the future. Total hardware and software costs amounted
      to
      $15,942,862 for the nine months ended September 30, 2005.





*Gross
      profit.* Total
      gross profit increased from $2,312,702 for the nine months ended September
      30,
      2004, to $3,500,395 for the nine months ended September 30, 2005. Total gross
      profit as a percentage of revenue increased from 13.6% for the nine months
      and
      ended September 30, 2004 to 16.3% for the current year period. More emphasis
      on
      higher margin services relative to product sales resulted in higher gross profit
      percentages overall as the total volume of services grew from $1,377,052 for
      the
      first nine months of 2004 to $3,507,602 for the comparable period in 2005.





*Operating
      expenses.* Total
      operating expenses for the nine months ended September 30, 2005 were
      $11,412,332, an increase of $3,989,348, or 54%, over the prior year period
      of
      $7,422,984. The various components of this increase are as follows:





•  The
      Company spent $2,467,408 more for professional services for the first nine
      months of 2005 as compared to 2004. These services were for legal and accounting
      services related to new investor financing, a law suit against the Company’s
      former CEO and stock registration efforts in 2005. Payroll expense increased
      by
      99% for the nine months ended September 30, 2005 versus the comparable period
      in
      2004 to $6,005,094 from $3,021,572. The increase reflected the full period
      impact of hiring additional professional personnel in 2004 as the Company
      developed expertise in new solutions and a new office in Dallas and Fort Worth,
      Texas as a result of the TanSeco acquisition.





•  Office
      administration expenses increased from $1,322,672 for the 2004 period to
      $1,717,002 for the nine months ended September 30, 2005. The components of
      office administration are office rent expense, office expenses, staff
      development and dues and subscriptions. The Company incurs greater
      administrative expenses related to opening its sales office in Dallas, and
      Fort
      Worth as a result of the TanSeco acquisition and relocated its corporate
      headquarters in Houston, Texas.





•  In
      2004
      the Company lost its largest consulting contract and the other operations that
      had been acquired in a previous eLinear purchase. Additional writedowns were
      taken pursuant to a valuation analysis of the NewBridge Technologies subsidiary.
      Accordingly a write down of goodwill of $843,039 was taken. No additional
      writedowns were taken in the first nine months of 2005.










•  Other
      expenses decreased by 84% in the first nine months of 2005 or $1,255,087. The
      Company initiated an investor awareness/marketing program in 2004 which was
      not
      continued in 2005. The cost of this program during the nine months ended
      September 30, 2004 approximated $927,000. The Company incurred penalties in
      association with the Laurus Master Fund and its financings in January and
      February 2004 of $102,597 and $370,931, respectively, as a result in delays
      in
      its two registration statements filed with the SEC, which penalties are included
      in the other expenses category. A majority of the remaining expenses was the
      Company’s listing fee to the American Stock Exchange.





*Depreciation.* 
      Depreciation
      expense increased to $313,385 for the nine months ended September 30, 2005
      from
      $71,171 for the same period in 2004 due to the purchase of additional
      depreciable assets late in 2004 and early in 2005 particularly for the
      acquisition of the assets associated with the TanSeco
      acquisition.





*Interest
      expense* .
      Interest expense for the nine months ended September 30, 2005 increased to
      $847,534 from $756,763 consisting of expenses related to the revolving and
      term
      credit facilities.





*Change
      in fair value of derivative.* Derivative
      liabilities in connection with the Laurus credit facility and common stock
      warrants resulted in income of $3,073,851 for the nine months ended September
      30, 2005 compared to $5,492,874 for the same period of 2004. The changes in
      valuation of the derivatives is the result of changes in valuation variables
      such as interest rates, underlying common stock prices and volatility in
      addition to changes in the number of warrants issued in relation to the host
      debt.





*Net
      loss* .
      The net
      loss for the nine month ended September 30, 2005,was $5,677,020 or $0.25 per
      share basic and diluted, compared to net loss of $348,568 or $0.02 per share
      basic and $.03 per share diluted, for the previous year period.





**LIQUIDITY
      AND CAPITAL RESOURCES**





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





Nine
                Months EndedSeptember
                30,2005
            
            2004Net
                cash used in operating activities
            
            $
            (4,169,114
            )
            $
            (6,515,813
            )Net
                cash used in investing activities
            
            $
            (594,928
            )
            $
            (1,649,104
            )Net
                cash provided by financing activities
            
            $
            4,529,793
            
            $
            8,039,752





*Changes
      in cash flow* .
      Net
      cash used in operating activities for the nine months ended September 30, 2005,
      was $4,169,114 compared to net cash used in operating activities of $6,515,813
      for the prior year period. This was an decrease of $2,346,699 over the prior
      year period. The primary components of net cash used in
      operating activities for fiscal 2005 were a net loss of $5,677,020, an
      increase in inventory of $1,002,539 as a result of the TanSeco acquisition
      and
      increased sales to customers and a decrease in accrued liabilities as a result
      of settling penalties resulting from the various Company financings, which
      penalties were caused by delays in obtaining effectiveness of the
      Company's registration statements.  These decreases were partially offset
      by non-cash charges of $1,277,723, collections of accounts receivable of
      $312,700 and increases in accounts payable of $1,129,531.  Cash used in
      investing activities was $594,928 for the current fiscal period which was
      composed of purchases of property and equipment of $204,250, certificates of
      deposit of $258,698 and deposits of $131,980.   Cash provided by
      financing activities was $4,529,799 which was composed of proceeds from its
      revolver and term note of $4,238,992 and proceeds from the exercise of
      stock options and sale of common stock of $290,807.





*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 certain investors for up to $12
      million and received gross proceeds of $2,736,000, the remaining $9,264,000
      was held by the Investors in a restricted account.  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.




*Liquidity.* As of
      September 30, 2005, the Company had cash balances in non-restricted accounts
      of
      $406,010 and negative working capital of approximately $1,813,730.  The
      Company has completed two financings and two sales of stock during 2004 and
      2005, all of which included warrants. Should all the warrants outstanding
      be exercised, the Company could raise up to approximately $10,396,000. 
However, based upon the exercise prices and the current price of the
      Company's common stock, the Company would receive no funding from the
      outstanding warrants.





The
      Company requires additional funding to fully implement its business plan and
      to
      satisfy its short-term obligations over the next twelve months.  The
      current price of its common stock is below the conversion price of its
      convertible notes entered into in February 2004 and 2005.  There can be no
      assurance that the Company's stock price will increase to a level in the future
      which would allow the Investors to convert there notes into Company common
      stock
      and provide additional funding to the Company.  Because of this, the
      Company can not rely on the existing convertible notes as a source of funding
      in
      the future.  The Company is currently seeking additional funding in order
      to provide funds to cover its working capital short-fall and fully
      implement its business plan. Based upon current projections, the Company
      believes it will begin to generate positive cash flow from operations during
      fiscal 2006 which will reduce its reliance on external financing. There can
      be no assurance that the Company will be able to obtain additional financing
      that would be on terms acceptable to it, if at all.  If the Company does
      obtain additional financing, it will be required to do so on a best efforts
      basis, as it currently has no commitments for any further
      financing.





OFF-BALANCE
      SHEET ARRANGEMENTS





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





NEW
      ACCOUNTING PRONOUNCEMENTS





During
      December 2002, the FASB issued SFAS No. 148. Statement 148 establishes standards
      for two alternative methods of transition to the fair value method of accounting
      for stock-based employee compensation of FASB SFAS No. 123 “Accounting for
      Stock-Based Compensation" ("SFAS 123"). SFAS 148 also amends and augments the
      disclosure provisions of SFAS 123 and Accounting Principles Board Opinion 28
      "Interim Financial Reporting" to require disclosure in the summary of
      significant accounting policies for all companies of the effects of an entity's
      accounting policy with respect to stock-based employee compensation on reported
      net income and earnings per share in annual and interim financial statements.
      The transition standards and disclosure requirements of SFAS 148 are effective
      for fiscal years and interim periods ending after December 15, 2002. The Company
      has adopted only the disclosure provisions of this statement.





SFAS
      No.
      150, “Accounting for Certain Financial Instruments with Characteristics of Both
      Liabilities and Equity," was issued in May 2003 and requires issuers to classify
      as liabilities (or assets under certain circumstances) three classes of
      freestanding financial instruments that represent obligations for the issuer.
      SFAS No. 150 is effective for financial instruments entered into or modified
      after May 31, 2003 and is otherwise effective at the beginning of the first
      interim period beginning after December 15, 2003. The adoption of this statement
      did not have a material effect on the Company’s financial position, results of
      operations or cash flows.





Item
      3.
      Controls and Procedures





In
      accordance with the Securities Exchange Act of 1934 (Exchange Act”) the Company
      carried out an evaluation, under 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
      September 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.





26


**PART
      II OTHER INFORMATION**





Item
      1.
      Legal Proceedings




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 our 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
      March
      27, 2003, the Company filed a motion to dismiss for failure to prosecute, since
      the plaintiff has failed to file any "record activity" in the case for a period
      of more than one year. On June 13, 2003, the motion to dismiss was denied and
      the case is moving forward. The Company intends to vigorously contest all claims
      in this case which is currently in the discovery phase.





On
      October 17, 2003, the Company filed a civil suit against Jon Ludwig, its former
      CEO, for the following causes of action: breach of fiduciary duty; negligent
      misrepresentation; theft of trade secrets; theft/conversion of property;
      wrongful interference with existing and prospective contracts; and civil
      conspiracy. This case is currently in the 127th Judicial District in the
      District Court of Harris County, Texas. As of June 30, 2004, the Company has
      not
      requested a specific damage amount. Discovery in this case is at the beginning
      stages. Ipath, a direct competitor of the Company and the current employer
      of
      defendant Ludwig, was added as an additional defendant. The Company has claimed
      against Ipath for its complicity with Ludwig in the latter's breach of fiduciary
      duty.








Item
      2.
      Changes in Securities and Use of Proceeds.





**RECENT
      SALES OF UNREGISTERED SECURITIES**





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




During July 2005, the Company issued 268,068 restricted shares of its common
      stock to one individual and two corporations for consulting services, which
      it
      valued at $243,500 ($0.91 per share).




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





During
      the quarter ended September 30, 2005, the Company did not make any repurchases
      of its common stock.





Item
      3.
      Defaults Upon Senior Securities - None





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





Item
      5. Other Information - None










Item
      6.  Exhibits




Exhibit
                No.
            
            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
            
            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)10.13
            
            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)10.14
            
            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)10.15
            
            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)10.16
            
            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)10.17
            
            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)10.18
            
            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)10.19
            
            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)10.20
            
            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)10.21
            
            eLinear,
                Inc. 2004 Stock Option Plan (incorporated by reference to Exhibit
                A to
                Registrant's Definitive Information Statement, dated October 15,
                2004)
                *10.22
            
            Employment
                Agreement with Michael Lewis dated December
                22, 2006 *10.23
            
            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)10.24
            
            Stock
                Purchase Agreement of TanSeco Systems, Inc. (incorporated by reference
                to
                Exhibit 10.25 to Registrant's Form SB-2 dated November 5,
                2004)10.25
            
            Service
                Agreement with RadioShack Corporation (incorporated by reference
                to
                Exhibit 10.26 to Registrant's Form SB-2 dated November 5,
                2004)10.26
            
            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)


10.27
            
            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)10.28
            
            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)10.29
            
            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)10.30
            
            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)10.31
            
            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)10.32
            
            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) *10.33
            
            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)10.34
            
            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 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)10.36
            
            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)10.37
            
            2005
                Employee Stock Purchase Plan (incorporated by reference to Exhibit
                A to
                Registrant's Definitive Information Statement, dated May 6, 2005)
                *10.38
            
            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











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


**eLINEAR,
                INC.**Date: April
                26, 2006
              By:
              /s/ Michael
                LewisMichael LewisChief
                Executive Officer




**eLINEAR,
              INC.**Date: April
              26, 2006
            By:
            /s/ Phillip
              Michael HardyPhillip Michael HardyPrincipal
              Financial and Accounting
              Officer