<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

MARK ONE:

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

         [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
             EXCHANGE ACT OF 1934

                        COMMISSION FILE NUMBER: 0-22055

                              AMEDIA NETWORKS, INC.
                 (Name of Small Business Issuer in its chapter)

            Delaware                                      11-3223672
  (State or Other Jurisdiction                 (IRS Employer Identification No.)
       of Incorporation)

                   2 CORBETT WAY, EATONTOWN, NEW JERSEY 07724
                    (Address of Principal Executive Offices)

                                 (732) 440-1992
         (Small Business Issuer's Telephone Number, including Area Code)

      SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT:
                                      None

      SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
                          $0.001 PAR VALUE COMMON STOCK

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934. | |

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|

Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The issuer's revenues for the year ended December 31, 2006: $32,723

As of May 16, 2007, there were 30,759,747 shares of the issuer's common stock
outstanding. The aggregate market value of the shares of the issuer's common
stock held by non-affiliates was approximately $13.2 million based on the last
reported sale price of $0.45 per share on May 16, 2007 as quoted on the OTC
Bulletin Board.

Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|

<PAGE>


                              AMEDIA NETWORKS, INC.

                         2006 FORM 10-KSB ANNUAL REPORT

                                TABLE OF CONTENTS

                                     PART I

  ITEM 1.    DESCRIPTION OF BUSINESS..........................................1

  ITEM 2.    DESCRIPTION OF PROPERTY..........................................23

  ITEM 3.    LEGAL PROCEEDINGS................................................24

  ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............24

              PART II

  ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.........24

  ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........24

  ITEM 7.    FINANCIAL STATEMENTS.............................................29

  ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE.........................................29

  ITEM 8A.   CONTROLS AND PROCEDURES..........................................29

  ITEM 8B.   OTHER INFORMATION................................................30

             PART III

  ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
             COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT................30

  ITEM 10.   EXECUTIVE COMPENSATION...........................................32

  ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
             AND RELATED STOCKHOLDER MATTERS..................................34

  ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................36

  ITEM 13.   EXHIBITS.........................................................36

  ITEM 14.   PRINCIPAL ACCOUNTANT FEES & SERVICES.............................39


                                       i
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                           FORWARD LOOKING STATEMENTS

CERTAIN STATEMENTS MADE IN THIS ANNUAL REPORT ON FORM 10-KSB ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY
TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS",
"ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE
NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY. BECAUSE FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED
BY THESE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT
EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT
CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER
THE COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND
COMPLETENESS OF THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY
TO UPDATE ANY FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO
CONFORM SUCH STATEMENTS TO ACTUAL RESULTS.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

Amedia Networks, Inc. is a development stage company that designs, develops and
markets Ethernet-based solutions that can be deployed with optical fibers or
copper wires to offer voice, video and data broadband services. Our products
enable service providers to offer voice, video and high-speed Internet access,
or "triple-play" services, to their subscribers. In recent years, the volume,
variety and complexity of communications traffic have increased significantly.
An increasing proportion of today's communications traffic consists of digital
media, including voice, video and data content, placing new demands on
communications networks. A variety of service providers now seek to offer
subscribers a broadband connection through which they can deliver triple-play
services. Traditional telephone service providers, in particular, have faced
significant challenges in delivering triple-play services over their traditional
copper-based access networks.

Our initial QoStream(TM) product line solution comprised of premises gateways,
aggregation switches and a network management systems are designed to implement
Fiber to the Premises (FTTP), Fiber to the Node (FTTN) and other broadband
access solutions that many networking companies are currently undertaking in
order to offer triple play services to their subscribers. Our initial QoStream
FTTP products include technologies licensed from Lucent Technologies, Inc.
("Lucent") as well as technologies developed jointly with Lucent. Under our
Development and Licensing Agreement with Lucent (the "Development and Licensing
Agreement"), Lucent provided a significant amount of the development required to
commercialize those initial products. Under the Development and Licensing
Agreement, Lucent granted us a worldwide and perpetual non-exclusive license to
manufacture, develop and sell products designed to deliver broadband access
solutions that use Lucent's technologies and related patents. Recently, we
developed a stand-alone triple play home gateway product that is designed to
inter-operate with other standards-based devices deployed in the central offices
of carriers or in the field.

We have been engaged in the broadband access solutions business only since March
2004. From our inception in August 1994 through October 2002, we were engaged
solely in the business of designing and developing digital security technologies
that provide copyright protection for electronic content distributed on optical
media and the Internet (the "Copy Protection Business") under the name of "TTR
Technologies, Inc." We sold the Copy Protection Business in May 2003. In May
2004, we changed our name to "Amedia Networks, Inc."

We currently market our broadband access products directly and indirectly to
telecommunications carriers, cable and video providers, governments, public
utilities, and municipalities around the globe. In April 2006, we entered into
an agreement with Motorola Wireline Networks, Inc., a subsidiary of Motorola
Inc., pursuant to which, among other things, we granted Motorola the exclusive
right to distribute certain of our products to certain specified major
telecommunications carriers in the United States and Canada. Our products enable
our customers to economically provision bundles of voice, data, and video
related services to their subscribers by providing and managing the quantities
and quality of necessary associated bandwidth. They also accommodate the
multiple network architecture and deployment alternatives to which our customers
may adhere.

We need to raise additional working capital on an immediate basis in order to
continue our operations. As of January 2007, we have substantially reduced our
personnel and have been required to delay payments to vendors and defer salaries
for management. If we are unable to raise working capital we may be forced to
cease operations entirely. See "Risk Factors".




<PAGE>

INDUSTRY BACKGROUND

DEMAND FOR TRIPLE PLAY SERVICES

In recent years, the volume, variety and complexity of communications traffic
have increased significantly. In the past, the traffic of telephone companies
consisted primarily of traditional voice communications and simple data traffic,
such as facsimile and Internet email. An increasing proportion of today's
communications traffic consists of digital media, including voice, video and
data content. The continued growth of digital media traffic has placed new
demands on communications networks, including the need for higher bandwidth
capacity and increased quality of service.

A variety of service providers, including telephone, cable and, increasingly,
wireless operators, now seek to offer a broadband connection that permits end
users to receive diverse digital media applications simultaneously within their
homes, including voice, video and high-speed Internet access. This bundle of
services is commonly referred to as "triple-play" services, and the ability of
service providers to offer triple-play services to customers has become an
increasingly important competitive factor. Service providers can achieve
competitive and financial benefits by offering triple-play services, including
retaining existing customers, acquiring new customers and maximizing revenue per
customer.

In order to deliver triple-play services to subscribers, service providers are
required to make investments in their communications infrastructure and must
weigh the cost of these investments against the potential loss of customers if
they are unable to offer triple-play services, as well as the potential new
service revenues they may gain from their existing and new customers. In
addition, service providers need to carefully consider whether any new
infrastructure they implement is scalable, or capable of meeting future
bandwidth requirements for emerging applications, cost-effectively. As the
deployment costs of new and advanced broadband technologies decline, service
providers can invest in new infrastructure cost-effectively to offer triple-play
services to a broader customer base today and to provide more advanced digital
media applications to end users in the future.

Traditional telephone service providers, in particular, have faced significant
challenges in delivering triple-play services because the copper-based networks
infrastructure is inherently bandwidth constrained and thus may not be fully
capable of supporting next-generation digital media applications. In addition,
telephone service providers have lost revenue from their traditional voice
business as consumers are increasingly relying on mobile phone and Voice over
Internet Protocol (VoIP) services instead of fixed line services. The continued
loss of fixed line voice revenue is driving telephone service providers to focus
on making investments necessary to provide triple-play services.

BANDWIDTH BOTTLENECK

The current communications infrastructure consists of a variety of networks,
including principally (i) core networks that include international and,
inter-city, (ii) metro networks that include major intra-city links and (ii)
access networks, also known as the "first mile."

The "first mile" is the neighborhood communications infrastructure that connects
subscribers to a telephone service provider's central office or a remote node.
The central office (as well as the node) is where concentrations of
communications equipment are located. Access nodes are sometimes used for more
economical operations when the distance between a central office and subscribers
exceed certain distances. Subscribers are located at the other end of the first
mile, where they use devices (including VoIP phones, personal computers with
Internet access, residential gateways and HDTVs) that connect to the access
network.

The first mile continues to be the key bandwidth bottleneck in today's
communications infrastructure. Currently, the bandwidth available to subscribers
in the first mile is significantly less than the bandwidth available in the core
networks. Core networks are capable of supporting gigabits-per-second(Gbps) of
bandwidth. However, in the first mile existing broadband access technologies
only deliver speeds ranging from 128 kilobits-per-second (Kbps) to a few
megabits-per-second (Mbps). These speeds are insufficient for next-generation
digital media applications. Several individuals in a single home accessing a
variety of applications, including web surfing, video on demand, video
conferencing, interactive gaming and HDTV, may in the aggregate require
somewhere between 20Mbps to 100Mbps of bandwidth.

A variety of broadband access technologies using copper based wire systems exist
in the first mile today, most of which use the traditional telephone
infrastructure. The most common of these are digital subscriber line (DSL)
technologies, the most advanced of which are approaching the physical limits of
copper-based networks that extend over the typical range of distances found in
access networks.

To overcome the inherent limitations of existing copper-based networks within
the first mile, service providers are increasingly turning to optical fiber to
deliver triple-play services and enhanced performance. In some cases, the fibers
will be connected directly to the premises, while in other cases, they will be
connected to a node that in turn, will connect to the premises over existing
copper wires using more advanced DSL protocols such as very high rate DSL or
VDSL. Today's VDSL, called VDSL2, can transmit 24Mbps of bandwidth to premises
located 5,000 feet from a node and up to 100Mbps of bandwidth when the node is
500 feet from the premises. A connection that is all optical, will deliver
100Mbps of bandwidth or more for far greater distances.

Optical technology involves the transmission of data over fiber optic cables via
digital pulses of light. Communication by means of light waves guided through
glass fibers offers a number of advantages over conventional means of
transmitting information through metallic conductors. Glass fibers carry
significantly more information (bandwidth) over longer distances than metallic
conductors but, unlike metallic conductors, they are not subject to
electromagnetic or radio frequency interference.

Fiber optics are well-suited to accommodate the transmission signal requirements
of triple play services. These requirements refer to signal attributes such as
the amount of bandwidth that can be delivered to each network endpoint, the
level of delay in delivering that bandwidth (latency), the variation in the
occurrences of those delays (jitter), and the service guarantees (Quality of
Service) that apply differentially to each type of service.

These and other characteristics of fiber optical strands render it an excellent
match for transporting large amounts of data, and they have long been used in
the core of a network. In this use, a single fiber cable would carry signals
from thousands and thousands of individuals, operating at data transmission
rates up to 40 gigabits per second (Gbps), and has generally been used rather
than other media based on copper cables or microwave radio frequencies for both
technological and economical reasons. There has also been an increased use of
fiber in metro networks, where transmission rates range from 155Mbps to 10Gbps.
However, the use of fiber optics in the infrastructure closer to a single
subscriber at the first mile has not been economically viable until recently.


                                       2
<PAGE>

As a result, most telephone carriers have deployed Digital Subscriber Loop
Access Multiplexers (DSLAM) in their access networks to address near-term
service requirements that often include both voice and data services. These
devices manage traffic emanating from a subscriber traditionally using a Digital
Subscriber Line (DSL) modem which has combined voice and data traffic together.
The DSLAM interfaces the voice traffic to the existing "voice" network, and the
data traffic to a separate "data" network. Since the data bandwidth available
from a DSL service is significantly affected by the lengths of the copper cables
over which it is transmitted, DSLAMs are often deployed at a node between the
central office and the subscriber. In this case, fiber is extended from the
Central Office deeper into the access network to the site or node where the
DSLAM is located.

Cable companies have implemented fiber in a similar manner. Generally, they have
deployed fiber in the core of their networks, but have not yet been able to
justify deploying fiber at the very edge of their networks closest to their
subscribers. Cable networks, which were deployed far more recently than most
telephone company networks, and which were designed to accommodate video
services that are far more demanding in the kinds of signal attributes they
require, were implemented with a different medium in the access plant: coaxial
cables. This copper medium is designed to accommodate significantly more
bandwidth over longer distances than the kind of copper wire used by telephone
companies, although their capabilities fall far short of fiber optical strands.

In addition to the medium of transport, networks are changing in terms of
architecture and protocols that are used. Traditionally, carriers that provided
voice and data services deployed them over separate networks, an approach called
"overlay networks." Data traffic could be separated from voice traffic soon
after it left a subscriber's interface with the network, and they were each
transported and managed very differently from each other. Different provisioning
software, maintenance procedures, and craft skills would be used for each of
these networks. However, in response to the increased consumer demand for higher
speed, less expensive, and more advanced services, some carriers, in addition to
adding greater capacities for faster access networking, are starting to converge
their separate voice and data services onto single integrated networks. This
convergence of voice and broadband services onto a single network allows
carriers to lower operating costs by eliminating much of the duplication. These
developments impact both operating expenses as well as capital requirements.
Today, many carriers are considering or beginning to deploy Voice over Internet
protocol VoIP systems, which transmits voice services on networks designed for
data.

EVOLUTION OF THE NETWORK INFRASTRUCTURE

The movement of all voice and data traffic throughout the telecommunications
network requires the use of software communications protocols that govern how
information is passed within the network infrastructure. These protocols
generally fall into two different categories. In one, the traffic between two
points is treated as a "whole" and allocated to a dedicated circuit. In the
other, the information is broken into packets and those packets travel multiple
paths to get to the same destination. Circuit switching, the most common
technique for transporting and switching ordinary telephone calls through
telecommunications networks, was used because of its reliability; packet data in
past decades was unable to offer the same assurances for delivering traffic when
it was needed. The appeal of packet data - its efficient use of a network's
capacity - was not able to compensate for its uncertain performance levels for
voice, video, and certain data applications, especially under oversubscribed
congestion situations. But that has been ameliorated in recent years with
advances in many of the packet-oriented protocols.

The first of these improved protocols adopted by telephone carriers was called
Asynchronous Transport Mode Protocol (ATM). ATM provided a means of associating
different levels of priorities to different kinds of cells associated with
different kinds of services. While this technology paved the way for using cells
to deliver services, it had associated costs - both the costs of the additional
equipment required as well as the costs associated with transmitting the
additional data (packet header overhead) that had to be added to the original
content data in order to implement ATM. Another packet oriented protocol,
Ethernet, had been widely used for data networks, but was considered lacking in
terms of its ability to assure that packets would be appropriately prioritized
and transmitted in a way required by a particular service. Recently, however,
Ethernet has evolved from its original design so that it could now also provide
a superior level of quality and performance assurance as ATM. Since Ethernet was
already widely used in business and (increasingly) home networks, and would be
less costly to implement, it has been embraced by many carriers as a means to
further reduce the costs associated with providing their services.

As voice traffic could be appropriately managed on packet networks, the cost
advantages of deploying VoIP services become very compelling when compared to
traditional circuit-based implementations and the need to maintain overlay
networks. Most cable companies have adopted VoIP for their voice services.
Telephone companies are migrating to VoIP as well, given its far lower cost to
maintain and operate, although their timing in adopting VoIP will be determined
by their strategy for dealing with their very large embedded base of voice
circuit infrastructure.

The emergence of systems to provision Ethernet networks with sufficient
bandwidth and high levels of quality and performance assurance also enables an
option to deliver video services in packets - or IPTV. This evolving trend holds
significant promise, particularly for telephone companies seeking to deploy
video services over their networks to compete with cable companies and/or to
capture more revenue. Most video subscribers today receive their video from a
coaxial cable that simultaneously carries all possible TV channels from which a
subscriber may select one for viewing (assuming they have subscribed to those
channels). When video streams are packetized, only those TV channels that are
being consumed are transported from the carrier. The practical implication of
this is that the total set of TV channels available for consumption are no
longer limited by the capacity of the cable passing each subscriber. For
services such as Video-on-Demand (VOD) and high definition (HDTV), this is a
very significant factor.

                                       3
<PAGE>

Recently, the economics associated with optical transport have improved to a
point sufficient to enable their increased use in access networks. Telephony
carriers are finding it increasingly advantageous to either transport signals to
a node in the access plant over fiber (to obtain the benefits discussed above)
and then use copper wires to finally reach the home or small office, or to use
fiber all the way to the premises. In the case of newly constructed residential
or business structures, most carriers find that they can economically justify
deploying fiber all the way to the premises. However, for existing buildings,
the expense for carriers becomes far more pronounced in the final segment - the
so-called "last mile" where digging up the flower beds and cement pavements of
existing homes can become very costly. But this is also beginning to change.
Fiber-based systems are continuing to decline in price, and the advantages that
they offer in both reduced operating expenses and new revenue opportunities is
significant. In the next few years, most carriers that have not yet done so will
seriously consider or actually adopt one of these two different last mile
(sometimes called "deep fiber") strategies.

FTTP-BASED ACCESS NETWORKS

One deep fiber strategy is to implement a full fiber to the premises (FTTP)
system. Initial deployments of FTTP systems have occurred in rural communities,
which have typically been frustrated by being under-served by their incumbent
telephone and cable carriers. Several U.S. municipalities and public utility
authorities in states that do not prohibit such actions, have established access
services through which they sell voice, data, and / or video based services to
their community constitutes. This same trend has occurred in communities in the
Scandinavian region of Europe. In several Asian countries, FTTP deployments have
been more "main stream" owing to a more activist position by their governments
who see the resulting benefits as directly related to economic policy.

Two general approaches are generally being used to provide FTTP access-based
solutions. The first approach uses a passive optical network or PON
architecture. In a PON system, digital signals are converted into light pulses
and sent down a fiber which is then split into as many as 32 fibers - each
carrying the same signals, and terminating at different premises. Traffic from
each premises can then be sent back up those fibers onto the common fiber and
back into the network. The second approach uses Ethernet, the most common
protocol for managing digital packets over a network, and employs a direct
oversight role as to who gets what information. In an Ethernet switched optical
networking, or ESON, traffic is sent via light pulses to an Ethernet switch that
can be located either in a communications office, outside in an enclosure, or in
a building where the subscribers reside or work. At the Ethernet switch,
subscriber-specific traffic travels down a dedicated fiber as light pulses to a
specific home, apartment, or office. The standard for ESON-like networks was
recently approved, although Ethernet itself has been a standard for network
transport for over two decades.

The initial deployments of PON were called APON, followed by BPON, and more
recently, EPON and GPON. These newer versions of PON provide increased bandwidth
and other improvements over the earlier varieties, although their basic
architecture remains the same. The original APON and BPON systems were
relatively more compelling than ESON since they adhered to an existing standard
and used less fiber and less of what were then relatively more expensive optical
components. This resulted in most of the earlier FTTP deployments being
BPON-based. Several of the largest United States carriers issued requirements
for their FTTP deployments that specified a PON architecture. However, optical
components have since become far less expensive - particularly the lasers and
receivers of the kind used in ESON networks. More important, optical fiber has
undergone orders of magnitude reductions in costs. (Actually, both PON systems
and ESON use about the same amount of cabling - but PON systems have fewer
fibers within each cable.) PON-based systems share all of the capacity of the
fiber with multiple users. A one gigabit per second link shared among 32
subscribers can yield as little as 31Mbps per subscriber. While GPON has
increased the overall bandwidth available to each subscriber, it remains a
shared medium which can constrain the total 1.2Gbps or 2.4Gbps of available
bandwidth to 38Mbps or 75Mbps for each of 32 users. While a deployment based on
fewer subscribers can drive-up the available bandwidth for each, the resulting
increased costs to provision that bandwidth to all subscribers will generally
preclude that option. As a reference point, ESONs can provide 100Mbps of
bandwidth per subscriber in either the upstream or downstream direction.

PON systems have greater restrictions with regards to reach. Current PON systems
typically advertise that they can economically extend up to 25 km from the
central office, although the actual experiences of carriers that have
implemented such systems suggest that the distance is far shorter. (This is
principally the result of economics: to achieve the longer reach, optics that
are far more costly must be used to compensate for all of the optical power lost
due to the greater distances covered and the multiple splits to distribute the
common signal out to multiple fibers.) With PON systems, carriers cannot
precisely isolate information related to users or faults. This means that when
there is a problem with the PON network, the operator may not be able to
identify the location and will need to send a technician out into the field
(called a "truck roll") to search for the problem. This can drive up maintenance
costs.

ESON systems can economically extend up to 90 km from the central office, can
completely isolate information streams, and remotely isolate and locate faults.
Its basic architecture never allows "contact" with the content that was not
intended for a given subscriber. In addition, ESON systems are inherently less
complex to install and manage. They contain none of the complex engineering
restrictions that PON systems have as to tolerable distances between subscribers
on a PON cluster, or the distances between nearest and furthest subscribers from
a Central Office of a telephone company.

FTTN-BASED ACCESS NETWORKS

The second "deep fiber" strategy is the deployment of fiber to a node in the
access network, and then use of the existing copper telephone cables to complete
the transmission link to the subscriber. The node can be as close to a few
hundred feet from the subscriber (generally called Fiber to the Curb, or FTTC)
to five or ten thousand feet or more. The difference between this network design
and the use of a traditional remote DSLAM (see above) is the availability of new
DSL technologies that can provide sufficient bandwidth to offer high bandwidth
data services as well as IPTV service.


                                       4
<PAGE>

Most recent DSL services have been implemented using a technology called
Asymmetric Digital Subscriber Line (ADSL) providing a total bandwidth of roughly
1.5Mbps to 7Mbps downstream, and between 16Kbps to 800Kbps upstream over several
thousand feet of copper cable. Recently, there has been considerable improvement
with respect to increasing that bandwidth, and new versions of DSL, such as
ADSL2+, can offer 2 Mb/s (long loops) to 24Mbps downstream (very short loops)
and 1Mbps upstream.

Currently, the most promising DSL technology is VDSL2 (Very High Speed DSL)
which can transmit at 100Mbps in both downstream and upstream directions over
600 feet, and up to 24Mbps downstream over 5,000 feet. In addition, VDSL2 is
ideally designed to accommodate Ethernet traffic. (ADSL has generally been
optimized for ATM traffic.) The term IP-DSLAM has recently been introduced to
describe a DSLAM that terminates Ethernet-based DSL traffic.

FTTN networks can be positioned as an interim deployment, ultimately leading to
FTTP as the fiber lengths grow and the node progresses closer and closer to the
subscriber - evolving into a FTTC implementation, and finally, to a direct fiber
connection to the subscriber. FTTN access networks are less expensive to deploy
than FTTP networks, and can offer a similar set of services for many
subscribers. However, it is generally agreed that FTTN networks will not offer
the same efficiencies with respect to operating expenses as FTTP networks. In
addition, FTTN networks may not provide sufficient bandwidth for all services
that could be offered to subscribers, and may not be able to reach some
subscribers with the same services that are offered to other subscribers
residing in closer proximity to the Node. Nevertheless, two of the three largest
domestic telephone carriers, AT&T Corporation (formerly SBC Communications and
BellSouth Corporation), and Qwest Communications have all announced their
intention to implement services based on variations of FTTN.

In addition to deploying FTTN systems based on the new DSL protocols to support
higher performance for Triple Play services, some carriers are evaluating
another approach called pair bonding.

Traditional voice service requires only two insulated copper wires twisted
around each other (a "twisted pair"), but most subscribers have access to
multiple pairs passing by their premises. These additional pairs can be used for
second or third telephone lines, fax lines, etc to which the consumer may
subscribe. Pair bonding is a technology that allows transmission of more data
over longer distances by dividing the DSL signal over multiple unused pairs with
a lower bit rate on any of them. While this technology has promise, there are
several barriers that prevent its more widespread implementation. First, pair
bonding assumes that those extra pairs are in place, available, and with similar
characteristics (gauge, length, unterminated stubs, condition, etc). Second,
telephone companies often have extremely deficient records of their copper
access plant, and so locating any candidate pairs for Pair Bonding is often
difficult. Thirdly, provisioning systems must be modified to permit more than
one pair to be associated with the same telephone number. Because of these
factors, several vendors that offer Pair Bonding solutions often position them
for business applications in areas where, due to zoning and other
considerations, the carriers will have likely deployed far more pairs than they
would have in more residential areas.

Generally, the provisioning of services over VDSL2-based FTTN networks is far
simpler than other FTTN options. VDSL2 has the ability to train itself on the
condition and characteristics of the loop such that it optimizes the performance
of transmission (bit rate, error performance, etc.) given any impacts from
impairments in the existing copper plant.

MARKET FACTORS

Given the current nature of the information networking market, we believe that
it is likely that almost all carriers will adopt at least one of the two
strategies for deeper fiber penetration. Specifically, service carriers must be
able to provide a competitive service package which in turn requires that their
access infrastructure can accommodate the associated higher bandwidth and other
signal attributes in the manner previously discussed. The urgency in providing
these services is the result of the intense competition between what had
historically been the relatively separate operational spheres of cable,
satellite, telephone, and wireless carriers. Over the last several years,
satellite companies providing digital video services were able to aggressively
compete against cable companies by offering a larger choice of TV channels and
often higher quality products. Cable companies responded by not only introducing
digital services themselves, but also by seeking new revenue sources by
providing cable modem data service, and then voice services. Telephone
companies, who have seen their access lines in service decline in recent years
due to the impact of cellular service replacing second or even primary access
lines, now experienced an additional source of market erosion from cable
companies offering voice, video and data services. Service bundling by cable
companies also provided a one-stop shopping appeal to consumers, introducing
additional revenue erosion to telephone companies.

Telephone companies have pursued several different approaches to launch triple
play services. Some have continued to provide voice and data over their existing
DSL networks, and have contracted with a satellite video provider to resell
their video - often on a co-branded basis. Others have deployed a FTTP access
network, and have allocated some of the downstream capacity for delivering the
same kind of RF video that a cable company would deliver - broadcasting all TV
channels to every subscriber. These are generally near-term measures that will
likely be replaced for reasons that will soon be discussed.

Meanwhile, cable companies, seeking additional revenue sources, have begun
focusing on small and medium size business customers - a market primarily
addressed by telephone companies and resellers. Their first initiative in the
business market was based on a cable modem service. However, given the nature of
business data and information technology requirements, cable companies have
begun to implement point-to-point Ethernet services for businesses - a service
that requires a network design very different from the existing cable networks.

As carriers weigh their options for network strategies in this more competitive
market, they must also accommodate several emerging trends related to how
subscribers view video. HDTV sets have recently achieved a cost level that has
ignited a surge of consumer demand. As such, there is an increased demand for
video in HD format to be viewed on newly purchased HDTV sets. However, HD video
consumes three to four times the bandwidth than Standard Definition (SD) video.
Consequently, for cable companies, there is less capacity for more channels, and
for telephone companies implementing Internet protocol TV (IPTV) over certain
FTTN network architectures, there may be inadequate bandwidth on the copper
loop.


                                       5
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The market demand for upstream bandwidth is also beginning to increase, and will
likely continue to do so. File sharing, exchange of large sized digital
photographs, and gaming applications are often touted as reasons. However, the
availability of consumer targeted HD video cameras, currently selling for close
to $1,000, hold the prospect of increasing that demand to a far larger extent
than previously thought. The level of detail, the enhanced viewing experience,
and the increased sense of presence enabled by the wider aspect ratio of HDTV
all have the potential to make video conferencing a far more compelling option
than did earlier more limited video conferencing technologies.

OUR ULTRA-BROADBAND ACCESS SOLUTIONS AND PRODUCTS

The term "ultra-broadband" is used to characterize the amount of bandwidth
required to provide a full-featured triple play service bundle consisting of
voice, data, and video applications. Generally, this would be an access network
capable of delivering greater than 50Mbps downstream to, and at least 25Mbps
upstream from a subscriber at any given time, assuming that video is delivered
by means of IP-TV.

We have introduced two product families for providing ultra-broadband access.
The first of these consists of hardware and software products that are designed
to be deployed together to offer a comprehensive access solution for a
particular application. For example, customers seeking to provide a FTTN access
network could purchase our solution that consists of equipment that would reside
at a Central Office or node, equipment that would reside at each premises, as
well as a comprehensive access network management system. These products have
been designed to interoperate with each other so as to optimize their total
resources. This is our QoStream(TM) family of products which can be configured
for use to support the following applications:

ESON FIBER TO THE PREMISES (FTTP)

Our solution provides 100Mbps of bandwidth both downstream and upstream
(symmetrically) to support full triple play services over up to 40Km of fiber
from a central office with no intervening electronics ("actives.") With an
intervening node, it can support full triple play services over up to 90Km of
fiber from a central office. In this point-to-point switched Ethernet solution,
each subscriber accesses its own dedicated (unshared) fiber. Sophisticated
algorithms provide the quality of service (QoS) performance for each of the
triple play services, and allow service providers to market a wide set of
different service combinations based on performance and bandwidth.

VDSL2-BASED FIBER TO THE NODE (FTTN)

The Amedia AS5000 layer 2 Ethernet aggregation switch can serve up to 48
subscribers per chassis located over 5,000 feet away from a node over copper
twisted pairs through the use of VDSL2. At that distance, subscribers can
receive approximately 24Mbps of bandwidth. Multiple AS5000s can also be "daisy
chained" at that node to serve far more than 48 subscribers. The QoStream AS5000
aggregation switch can also simultaneously support connections via CAT5 cables,
as well as fiber-based connections using ESON. Thus, the same equipment can be
reused as subscribers require more bandwidth over longer distances than is
achievable with VDSL2 - just by replacing a line card and deploying the fiber
subscriber connection. The QoStream PG1000 Premises Gateway terminates the
copper twisted-pair VDSL2 link, and enables a wide array of triple play
services, wireless routing, and support for analog phones.

FIBER TO THE BUILDING (FTTB)

Approximately 25% of U.S. Households reside in Multiple Dwelling Units (MDUs),
most of which do not have fiber in the internal risers and lateral conduits.
Telephone companies seeking to provide triple play services with a FTTP solution
find that they often cannot gain access to buildings to install fiber, or that
those undertakings would be too costly or disruptive to tenants. And while some
FTTP systems can distribute video over coaxial cables that may be in these
buildings, telephone companies find they often cannot access or use that
infrastructure. However, by terminating a fiber from the central office onto an
AS5000 located in the building basement or rooftop, 100Mbps can be economically
made available for triple play services to each apartment, with VDSL2 running
over the internal copper wires to a VDSL2 Premises Gateway located in each unit.

METRO ETHERNET SMALL BUSINESS NODES

Many of the larger telephone companies have deployed a separate network for
delivering Ethernet services over fiber to businesses. These Metro Ethernet
services require high bandwidth rates as well as performance that can be
guaranteed by means of service level agreements with subscribers. Many smaller
businesses could be served from this same network, but are not currently
connected by fiber. An Aggregation Switch with VDSL2 line cards located at the
central office where the serving Ethernet Core Switch resides could serve those
smaller businesses with the performance and bandwidth necessary for a business
service. A variation on this application is the use of the Aggregation Switch to
serve shopping malls and small office buildings (Multiple Tenant Units or MTUs)
by locating that switch on-site and transmitting over the existing telephone
cables to the individual tenants. Services would be terminated on a VDSL2
Premises Gateway configured for business needs in terms of the number and types
of ports.

The following are our QoStream family of products that are used to build our
solutions for each of the above applications:

QOSTREAM(TM) PG1000: a Premises Gateway product that resides at the subscriber
premises and that performs data, telephony, gaming, video and local Ethernet
switching functions. The PG1000 is designed to connect to the line cards of a
QoStream AS5000 (below) via a fiber ESON interface, a copper twisted pair VDSL2
interface, or CAT5 cables. Subscribers connect their devices (standard analog
telephones, IP telephones, HDTVs, SDTVs, computers, gaming consoles, video
cameras, etc.) to the Premises Gateway via simple telephone (RJ-12) or data
(RJ-45) cables, or via an optional wireless 802.11b/g (WiFi) access point and
router.

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<PAGE>

A Premises Gateway should not be confused with a modem. Gateways must manage
each service independently using different bandwidth parameters, offer
substantial remote monitoring, fully support IPTV, include advanced security
capabilities, and integrate several functions including routing, support of
VoIP, Network Interface, as well as those functions associated with a
traditional modem, and often in a single integrated unit. Gateways also directly
connect to primary home communication appliances, such as computers, telephones,
and TV set top boxes without requiring intervening boxes that modems require,
such as routers, splitters, hubs, and devices to introduce service guarantees
for required triple play quality of service.

QOSTREAM(TM) PG1000H: a Premises Gateway with the same capabilities as the
PG1000, but designed for outside deployment. It can operate within more extreme
temperature (-40(degree)C to +65(degree)C) and humidity ranges and other outside
plant conditions, has more secure and separate physical access for the
subscriber as well as for telephone company craft, and is equipped with alarms
that trigger various temperature or access conditions to a remote monitoring
station.

QOSTREAM(TM) AS5000: a distributed Ethernet aggregation switch designed to route
data to and from the premises gateways. Each chassis can accommodate up to six
line cards - each with eight ports, for a total of 48 ports. Multiple AS5000
chasses can be linked together. This switch is very compact, and can be located
inside a central office or data network center, an MDU, or outside in a cabinet
or on a telephone pole in a hardened configuration without the need for
expensive air conditioning to compensate for external or temperature or
internally generated heat. (Not only are operational costs reduced due to less
power consumption and no power backup for air-conditioning, but the probability
of system failure (due to failure in the air conditioning unit) is significantly
decreased.) The product is highly modular, and can accommodate multiple types of
connections to the subscriber, while also providing connectivity and it connects
those subscribers to a Core Ethernet Switch via from one to five 1GbE fiber
connections, depending on bandwidth needs and degree of desired over
subscription.

QOSTREAM(TM) DIRECTOR: a graphical and point-and-click network management system
that provides complete capability for remotely managing and operating the
QoStream product line from a remote Network Operations Center (NOC). The
QoStream Director employs the industry standard Simple Network Management
Protocol (SNMPv3) for communicating with the PG1000 and the AS5000 network
elements and uses standard Management Information Base (MIBs) as well as
enterprise-specific MIBs for managing the various capabilities of the system.
The QoStream Director provides a complete suite of management capabilities that
consists of Fault, Configuration, Accounting, Performance and Security (FCAPS)
management as well as topology and resource management. The Director features a
Graphical User Interface (GUI) with equipment front panel views, topology views
and alarm summaries. The GUI enables NOC personnel to provision bandwidth and
Virtual Local Area Network (VLAN) circuits for service providers as well as
individual customers with simple point-and-click mechanisms. The QoStream
Director is supported in both a small network platform that can manage thousands
of network elements, for larger as well as in a large network deployments, in a
distributed platform that can support tens of thousands of network elements. The
Director also features a northbound interface that supports industry standards
for interoperating with higher level network management systems as well as
service management systems for service provisioning and billing functions.

Ongoing development of these QOSTREAM (TM) products, which include changes
required for these products to remain competitive in the marketplace such as
cost reduction design changes, additions of PON WAN interfaces and feature
additions, have been suspended until such time as the Company can raise the
appropriate amounts of capital to pursue these activities. The Company believes
there continues to be a market, particularly in the PON market, for these
products.

Our other product family consists of stand-alone products that are intended to
interface with equipment from other vendors rather than other QoStream devices.
These products are administered from an external network management system, are
fully standards-compliant, and are designed to be more self-contained. In
addition, the Company is developing a new Broadband Entertainment Center
platform that will combine the collective functionality of a broadband gateway,
as well as multiple home entertainment and networking equipment, with a software
operating system and built-in storage - all in a single, compact solution. The
platform is designed to enable telecommunications carriers to increase revenue
opportunities and better manage triple-play services, while also offering more
convenience, quality assurance, and other value-added benefits to subscribers.
This platform will operate in conjunction with the Company's HG product family.

HG-V100: A Home Gateway designed to interface with a VDSL2 IPDSLAM. It is
similar to the PG1000, but managed via the TR-069 industry standard for DSL
device management. As is the case with the PG1000, the HG-V100 supports voice,
video, wired data and wireless data. Subscribers connect their devices (standard
analog telephones, VoIP telephones, HDTVs, SDTVs, computers, gaming consoles,
video cameras, etc.) to the HG-V100 via simple telephone (RJ-12) or data (RJ-45)
cables, or via an optional wireless 802.11b/g (WiFi) access point and router. We
believe that most of the world's traditional DSL Modems, of which there are
about 140 million (according to the market research firm Point Topic) will be
replaced with Home Gateways similar to the HG-V100 as subscribers transition to
or newly adopt Ultra-broadband services. Furthermore, the transition towards
VDSL2 as the interface of choice will continue, according to market research
firm Infonetics, growing to 41% of all deployments of DSL infrastructure by
2008.

HG-V100 (OUTDOOR): The HG-V100 is also available with the same extended range
capabilities as the Outdoor QoStream PG1000, and enables a carrier to mount the
unit on the exterior of a building in order to more easily gain maintenance
access to it.

HG-G1000: GPON (Gigabit Passive Optical Network) gateway. The HG-G1000 is being
designed to provide the integrated functionality of an in-home Broadband Home
Router (BHR) and an outdoor Optical Network Terminal (ONT). Simply put,
telecommunications companies can offer the HG-G1000 as a single, "in-home"
gateway appliance for subscribers - with no required outdoor, hardened optical
or electrical components. This significantly minimizes installation costs,
relative to the dual equipment (ONT plus BHR) solution, by eliminating outdoor
installation and media required to interconnect two products, while also
providing means to utilize existing home television and telephone wiring within
the connected home.

                                       7
<PAGE>

BROADBAND ENTERTAINMENT CENTER: The Broadband Entertainment Center is designed
to replace the computer as the media hub and central point of networking within
the connected home. It allows users to store, organize, and search all types of
multimedia content -- from movies, to home videos, to music, to games -- within
a personal media library storage device connected to their residential gateway,
and then play that content on virtually any television, monitor, or networked
device.

In addition to offering a home media portal, the Broadband Entertainment Center
also streamlines home networks, combining the collective functionality of a
modem, router, wireless access point, VoIP adapter, and more within a lone,
compact device. More unique features include wireless HDTV transmission via
ultra wideband (UWB) to various home entertainment and media devices throughout
the home, as well as a Quality-of-Service (QoS) console, allowing subscribers to
prioritize their entertainment and communications services to avoid disruption
of quality or speed.

DEMONSTRATIONS AND FIELD TESTING / COMMERCIAL AVAILABILITY

Our initial QoStream products were first introduced to the public in their
pre-release configurations in June 2004 at the industry's leading trade show and
exposition event. The QoStream PG1000, QoStream AS5000, and the QoStream
Director were configured so as to interconnect two virtual homes with HDTV, live
video, online interactive gaming, Voice over IP, and broadband data via both
wired and wireless means. The demonstration successfully showed the capabilities
of these systems, including the ability to manage the bandwidth according to the
parameters required for each of these applications. Hardened versions of these
products for outdoor deployments were demonstrated in October 2004 at another
major industry event. On the anniversary of the first demonstration, we
introduced our initial VDSL capabilities at the same industry show in June of
2005, and our VDSL2 products in October 2005. In the latter event, we
demonstrated three HDTVs, one SDTV, four analog phone lines, and a broadband
data service all being transported over 500 feet of copper twisted pair via our
PG1000 and AS5000 configured for a FTTB (MDU) application.

We began to implement plans for the outsourced manufacturing of our products at
the close of 2004 with contract manufacturers with operations in the U.S., and
had some limited production capabilities by the middle of the second quarter of
2005 for selected products for international field trials. By the beginning of
the third quarter of 2005, we had sufficient production capabilities to support
additional customer laboratory and field trials in the U.S.

With production of products underway, we were able to initiate 10 product pilots
in 2005 with prospective customers operating in the United States and
internationally. Laboratory and field trials such as these are vital for the
commercialization process, not only as a prelude to revenue, but also as a means
of validating our solutions that can be referenced to other prospective
customers.

Commencing June 2005, we entered into our first sales agreement for our QoStream
product line with Tai Long Communications in China. Tai Long is licensed by the
Chinese Government to operate broadband customer premise networks (CPN) and ISP
networks. In addition, it is licensed as an Internet content provider. Ongoing
field trials of our equipment have thus far been successful, and Tai Long is
evaluating how to best market these services.

In October 2005, the Company received an order from CSM Telecom, a Brazilian
Telecommunications Service Provider, for QoStream PG1000 Premises Gateways,
QoStream AS5000 Aggregation Switches, and the QoStream Director Network
Management System, to be deployed in 100 buildings in Florianopolis, Brazil.

Additionally in October 2005, Hans Communications, a Korean-based CATV and
High-Speed Internet Service Provider operating in Mongolia, and Sejong Network
Technologies, a Korean distributor and systems integrator of the Company's
products announced plans to initially install 100 QoStream PG1000 Premises
Gateways in Mongolia.

In December 2005, Salsgiver Inc., an ISP, agreed to purchase our PG1000 Premises
Gateways and AS5000 Aggregation Switches to support their service build-out in
the Allegheny Valley Region of Western Pennsylvania. We shipped our first units
under this purchase order in March 2006. This was our first sale in the U.S.
market.

MOTOROLA STRATEGIC ALLIANCE AGREEMENT

On April 5, 2006, we entered into a Strategic Alliance Agreement with Motorola,
a subsidiary of Motorola, Inc., pursuant to which we and Motorola will jointly
develop a family of three IP Home gateways (the "Gateway Products") that will
provide expanded support for data, IPTV, High Definition TV, and Digital Video
Recorders using Motorola's existing Multi-Service Access Platform for exclusive
distribution by Motorola under the Motorola brand. Under the Strategic Alliance
Agreement, we have also granted Motorola certain rights with respect to the
resale of our products as described below.

The Strategic Alliance Agreement provides that Motorola will pay to us $1.9
million for engineering costs associated with the development of the Gateway
Products, of which as of April 12, 2007 approximately $1.56 million has been
received and the remainder of which is payable in installments on the
achievement of certain agreed upon project milestones. Motorola is entitled to
terminate the development program at any time prior to the completion of the
development of the Gateway Products and, in the event that it does so, we will
be entitled to retain any of the engineering costs paid or due and owing by
Motorola as of the date of termination. Upon successful completion of all
necessary testing, the Gateway Products will be manufactured by us for exclusive
sale to Motorola. In addition, we have to date received from Motorola purchase
orders for gateway lab test units, Alpha and Beta test units and prototypes in
the aggregate purchase amount of approximately $475,000. These purchase orders
are independent of and unrelated to the payments referred to above to which we
are entitled upon the achievement of specified milestones.

                                       8
<PAGE>

Under the Strategic Alliance Agreement, we have granted Motorola the exclusive
right to resell the Company's PG1000 and the HG-V100 gateway products, and all
derivative or substantially similar products (the "Exclusive Products") to
certain specified leading telecommunications carriers and their affiliates (the
"Exclusive Customers") for a period of 24 months from the effective date of the
agreement as part of Motorola's portfolio of broadband wireline solutions. The
exclusivity may be terminated by us unless, among other things, at least one of
the Exclusive Customers shall have accepted one of the Exclusive Products for
lab testing within one year of the effective date of the Strategic Alliance
Agreement and signed a contract to purchase Exclusive Products (which is
reasonably expected to result in revenue to us in a specified minimum amount)
within 18 months of the effective date of the agreement; provided, however, that
if these conditions are satisfied with respect to an Exclusive Customer, then
Motorola's exclusivity period for such Exclusive Customer will be extended for
an additional 24 months. At all times we retain the right to sell the Exclusive
Products to customers other than the Exclusive Customers. In addition, we also
granted Motorola the non-exclusive right to resell all of our other existing
products worldwide.

The Strategic Alliance Agreement also provides that we will not, during the term
of the agreement and for a period of two years thereafter, directly or
indirectly sell to or solicit or accept any order for any of its products from
any customer to which Motorola has resold one of our products during the term of
the agreement. These provisions will not apply to customers to whom we made
sales of products in the twelve months preceding the effective date of the
Strategic Alliance Agreement or in the event of termination of the agreement by
us for cause or by Motorola for convenience. Notwithstanding the foregoing, if
Motorola sources, manufactures or resells a gateway which has substantially the
same functionality as our PG1000 or HG-V100 products, the exclusivity and the
non-solicitation provisions contained in the Strategic Alliance Agreement shall
immediately terminate. We have also agreed that the prices for our products that
we charge Motorola will be no higher than the prices that we charge any other
reseller, customer or entity.

The Strategic Alliance Agreement has an initial term of three years which will
automatically extend for successive additional one-year terms unless either
party gives notice of termination no less than 30 days prior to the expiration
date of the then-current term. The agreement may be terminated by Motorola at
any time on 30 days notice and by either party if the other ceases to do
business in the ordinary course or defaults on its material obligations,
representations or warranties under or otherwise materially breaches the
Agreement subject, except in the case of payment failures, to a 30-day cure
period.

In November 2006, Motorola announced that it is acquiring Netopia, Inc. for
approximately $208 million. The transaction is expected to close in the first
half of 2007. Netopia, a public company whose shares are listed on the Nasdaq
market, sells routers and modems used to provide broadband services over digital
subscriber lines, or DSL, to leading telephone companies, including AT&T,
Verizon Communications and Swisscom, and is one of our competitors. We cannot
assess what effect, if any, the transaction with Netopia will have on our
business or on our relationship with Motorola.

OUR STRATEGY

Our goal is to become a leading designer, developer and distributor of
ultra-broadband access equipment and solutions for the provisioning of triple
play services. Key elements of our strategy include the following initiatives:

INTER-OPERABILITY AND VALIDATION WITH KEY VENDOR PARTNERS: Our products do not
by themselves provide the complete capability for our customers to implement a
revenue generating service. For example, our QoStream AS5000 Aggregation Switch
is designed to connect to a large Ethernet Core Switch, which in turn connects
to network elements that provide video content, access to the internet, and
access to the existing voice network. Our QoStream PG1000 Premises Gateway
connects to set top boxes (STBs), telephones, computers and other devices in a
home or business. In order to confirm that our products will interoperate with
these other products to enable our customer to deploy a revenue generating
service, we create small versions of these end-to-end configurations and confirm
that services will perform as intended. In some cases where these other products
are themselves undergoing considerable changes, we initiate a more encompassing
relationship with the leading vendors of these products and directly engage
their development teams. We also initiate such relationships when a prospective
customer has indicated intent to deploy a particular vendor's products.

In November 2004, we entered into a formal agreement with Riverstone Networks in
which we each committed to undertake interoperability tests to assure that each
other's products work together to provide integrated, end-to-end service
capabilities. We have also extensively tested our products with equipment from
companies such as Adtec Digital, TUT Systems, Verso Technologies, Amino
Communications, RCA/Thompson, Cisco Networks, Extreme Networks, Infogate, and
Alcatel.

In April 2006, we entered into an agreement with Motorola Wireline Networks,
Inc. (a subsidiary of Motorola, Inc.) pursuant to which we granted Motorola the
exclusive right to distribute our PG 1000 and HG-V100 products to certain
specified major telecommunications carriers in the United States and Canada.

TIME TO MARKET: A founding principal of our company has been to optimize
operations for the rapid market evaluation of our products. For reasons that can
be discerned from the above characterization of the market there is a strong
advantage in being "first-to-market" with a commercial product. In addition,
given the highly dynamic nature of this market, it is essential that development
directions be acquired from "real-time" market interactions rather than from
more insular secondary market research. Accordingly, we have elected to employ
significant out-sourcing of non-core functions instead of relying on organic
development in order to expedite our ability to get products into the market.

                                       9
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For most of 2004 and part of 2005, we relied extensively on our initial contract
developer, Lucent, to commercialize our prototypes. This allowed us to build our
own research and development capacity while simultaneously having product in the
market. We also contracted with Wipro Limited in 2004 and 2005 to develop the
network management system that we had internally specified and architected.
Currently, we continue to outsource non-core development projects or purchase
third party hardware or software in order to optimize the use of our own
resources and to speed time to market.

COST REDUCTION INITIATIVES: Our initiative for reducing our variable costs
associated with our products has several components. We have modified our
engagements with contract manufacturers in order to reduce unit costs while
preserving responsiveness and quality. Feedback from customers and prospective
customers has allowed us to revise the desired features set and options for our
products which can help us, in some cases, to eliminate non-required elements
that would otherwise contribute to costs.

In some cases, we have outsourced development projects to less costly resources
in China and India. These options are invoked in only those cases not involving
our core technologies and under the assurance that current or prospective
critical intellectual property of Amedia is protected.

VDSL2 INITIATIVES: In 2004, the direction of our company was primarily focused
on products that could enable carriers to deploy an Ethernet-based FTTP network.
Our belief was that alternatives with more limited bandwidth would not
adequately allow carriers to provision triple play services, which we viewed as
critical to their future. However, as the VDSL standard evolved towards VDSL2,
we reassessed our initial assumptions and recognized that a VDSL2-based Ethernet
network using copper twisted pair could be viable for many carriers.
Accordingly, we initiated a rapid development effort aimed at being
first-to-market with VDSL2-based products.

o In February 2005, we announced our initial VDSL-based Fiber-to-the-Node / Curb
solution that was also designed for use in MDUs - the first of its kind in the
market.

o In October 2005, we announced a VDSL2-based Home Gateway, the HG-V100, that
was the first of its kind to be available in the market.

o In October 2005, we also announced that the HG-V100 would be available in a
carrier-grade / hardened version that could be mounted outdoors and reliably
operate in temperatures ranging from -40(degree)C to +60(degree)C. This was the
first such product announced and available to customers.

LEVERAGE LEADERSHIP ASSETS: The Amedia leadership team has a rich and lengthy
background in telecommunications. Each member of our management team has a long
record of interactions with senior executives of many of the major
telecommunications firms in the world. Our Board of Directors also has members
with considerable industry experience, including a former Chief Technology
Officer (CTO) of Bell Laboratories, and a former President of both Lucent's and
Nortel's North America Divisions. In addition, in November 2005, we created a
Corporate Advisory Board to advise the senior management team on strategic and
overall business development. The Advisory Board initially includes individuals
who have led major telecommunications companies as the CEO or as a key senior
executive, have authored ground-breaking papers and books related to the
evolving networking landscape, and have been at the forefront of the
implementation of pioneering technologies.

This level of experience enables us to more aggressively pursue international
opportunities, more effectively prepare for commercial deployments, gain
insights from senior level executives of major carriers, and implement
carrier-grade features at a level uncharacteristic of an enterprise that has
only been in operations for fewer than two years.

LEVERAGE COMPETITIVE ADVANTAGES RELATED TO SERVICE QUALITY: A key factor in the
success of any vendor in the ultra-broadband solutions market is their products'
ability to independently manage and maintain performance levels of each of the
services within a triple play offering. Many early VoIP services were plagued by
deteriorating data performance when a telephone was in use. Carriers will not
deploy products that result in their subscriber experiencing pixilation or
frozen frames on a newly-acquired HDTV every time a phone call is made or a
large download of data occurs - they will require more service guarantees for
all services. And while a high level of bandwidth and a standards-based
implementation are required, they are in and of themselves, not sufficient to
insure a satisfactory level of performance.

Our products have been designed with highly innovative approaches to insure that
the performance of each service can be uniquely managed based on service
priority and that optimal use of resources is obtained to eliminate dropped
packets for high priority services such as video and voice and to minimize
overall dropped packets and other factors impacting the quality of those
services. We believe our products have a leading position in the market in this
respect.

Our strategy discussed above is premised on our raising working capital on an
immediate basis. Since January, 2007, we have reduced operations substantially,
delayed payment to vendors and deferred salaries to management. Unless we raise
working capital on an immediate basis, we may be forced to cease operations
entirely.

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THE LUCENT LICENSE

In January 2004, we entered our Development and Licensing Agreement with Lucent
pursuant to which Lucent developed and is licensing to us the first generation
versions of our premises gateway and our aggregation switch. In the course of
the development of these components, we concluded that in order for us to
compete more effectively in the broadband access market, these components
required significant upgrade. Accordingly, since April 2004, we entered into
supplementary development agreements with Lucent to upgrade the feature sets on
these initial products. Under the Development and Licensing Agreement, we have a
worldwide, perpetual and non-exclusive license to use certain specified related
Lucent technologies and solutions to develop, market and sell broadband access
products. Our initial QoStream products contain Lucent technologies, as well as
technologies jointly developed by us and Lucent in the course of the development
projects. Subject to certain standard restrictions, we are entitled to
sublicense to third parties the rights to manufacture and sell these products.
Lucent is not restricted from using pre-existing Lucent technologies or
information that is incorporated in these products.

All technologies and information, including the object or source code, that are
developed as direct result of the development efforts taken under the
development projects with Lucent are jointly owned by us and Lucent (each, a
"Joint Invention"). Lucent, however, is the sole owner of all pre-existing
Lucent technologies incorporated in the licensed products. Lucent has agreed not
to use, through January 2014, any new Joint Inventions for the purpose of
developing and selling any products that may directly compete with the QoStream
PG1000 or the QoStream AS5000.

Under the Development and Licensing Agreement, Lucent is entitled to 1.5% of
revenue sources from our Gateway and Switch products that include Lucent owned
technologies, provided that no royalties accrue or become payable until July 10,
2008.

Subject to timely payment of all amounts due under the Development and Licensing
Agreement (including the royalties and revenue fees), the licenses granted us
under the Development and Licensing Agreement continue in perpetuity
notwithstanding any termination of that agreement.

MARKETING PLAN

Our business plan calls for the leadership team to engage in executive level
selling with the top-tier global customers.

Market communications programs were implemented in 2006 to support the Company's
brand and value including our participation in key domestic trade shows and
expositions, print advertisements, and web-based initiatives. Thought leadership
programs included webinars, speaking engagements at several leading conferences,
and engagements with industry analysts.

Co-marketing programs have been instituted with several other equipment vendors
with whom we interoperate. For example, Amino and T-Zero have both represented
our products at trade shows, and we have reciprocated.

In April 2006, we entered into an agreement with Motorola Wireline Networks,
Inc. (a subsidiary of Motorola, Inc.) pursuant to which Motorola will distribute
under the Motorola brand a family of up to three IP Home Gateway products to be
jointly developed by us and Motorola. Additionally, we have granted Motorola the
exclusive right to distribute our PG 1000 and HG-V100 products to certain
specified major telecommunications carriers in the United States and Canada.

Our direct marketing activities have been severely curtailed pending the raise
of working capital. Except for our agreement with Motorola, any additional
marketing activities are premised on our raising additional operating capital.
Since January 2007, we have reduced operations substantially, delayed payment to
vendors and deferred salaries to management. Unless we raise working capital on
an immediate basis, we may be forced to case operations entirely.

RESEARCH AND DEVELOPMENT

The market in which we compete is characterized by the rapid introduction of new
technology which in turn has precipitated rapidly changing customer interests.
As such, we have built a highly responsive technical and research and
development group which, as of May 14, 2007, numbers 16 employees. These teams
perform hardware and software engineering, systems architecture design, quality
assurance, and systems testing.

However, our current and future research and development efforts are subject to
our raising funds needed to meet our liquidity needs and realize our business
plans. Since January 2007, we have reduced operations substantially, delayed
payment to vendors and deferred salaries to management. Unless we secure working
capital on an immediate basis, we may be forced to cease operations entirely.

COMPLIANCE WITH REGULATORY AND INDUSTRY STANDARDS

The market for Ultra-broadband access solutions and technologies is
characterized by a significant number of laws, regulations, and standards, both
domestic and international, some of which are evolving as new technologies are
deployed. As our intent is to insure that all of our products are standards
based, we seek to and for the most part do conform with all industry wide
standardization organizations, which include the DSL Forum, the Institute of
Electrical and Electronics Engineers (IEEE,) the American National Standards
Institute (ANSI), Telcordia, and the European Telecommunications Standards
Institute (ETSI). In addition, our products must meet product safety and
electromagnetic compatibility requirements specified by several regulatory
agencies, including the Federal Communications Commission (FCC), the
Underwriters Laboratories (UL) safety standards, and the European Union
Directive (Community CE mark). Any additional compliance testing, as required by
new customers, will take place in a timely fashion.

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MANUFACTURING

Like many other system vendors in our industry, our business plan contemplates
the outsourcing of our primary manufacturing operations. Our contract
manufacturers utilize processes and procedures that are generally ISO 9000
certified, and so are those of our component vendors. However, the outsourcing
of these operations means that some degree of risks related to delivery
schedules, yields, and other factors are external to our immediate control.

In the fourth quarter of 2004, we entered into an agreement with a leading
contract manufactures with facilities in the United States. In addition, we have
been evaluating lower cost alternatives and have entered into contract
manufacturing agreements with a high quality / lower cost manufacturer with
production facilities in China. Going forward, our sourcing strategy will
include a combination of manufacturing in the US as well as China depending on
volume and manufacturing technology needs.

COMPETITION

The market for ultra-broadband systems is highly competitive and relatively
young, and as such, there is as of yet no clear dominant set of players.

Our competitors fall into several categories. Among those that offer a similar
FTTP ESON-like solution are World Wide Packets, Telco Systems, PacketFront, and
Allied Telesyn. Other FTTP competitors who provide a PON solutions include
Alcatel, Wave7, Calix, Tellabs, AllOptic, and Motorola.

The competition associated with FTTN products includes companies that offer an
IP-DSLAM with VDSL2 such as Siemens and Alcatel, those with VDSL such as ECI
Telecom, and others who have not yet introduced a VDSL or VDSL2 capability such
as Adtran, Huawei, and Zhone. This market continues to evolve, and we anticipate
that additional entrants - particularly those currently offering DSLAM products-
will emerge.

With respect to Home Gateways, we believe that 2Wire and Netopia are the primary
competitors that we face in the market today. And while modems or home routers
do not address the same market needs, and their vendors are not currently viewed
as competitors, we anticipate that several of them will emerge in the future
with a Home Gateway product.

While it is generally believed that wireless-based systems will not provide the
functions or performance required by customers for our QoStream(TM) products,
there is a possibility that in the future, companies offering products based on
technologies such as WiMAX (802.16) systems or one of several fixed wireless
approaches could emerge as competitors.

Many of our competitors have longer operating histories, greater name
recognition and significantly greater financial, technical, sales and marketing
resources than we have. As a result, these competitors are able to devote
greater resources to the development, promotion, sale and support of their
products. In addition, these entities have large market capitalization or cash
reserves and are in a much better position to acquire other companies in order
to gain new technologies or products. Many of our competitors also have much
greater brand name recognition, more extensive customer bases, more developed
distribution channels and broader product offerings than we do. These companies
can use their broader customer bases and product offerings and adopt aggressive
pricing policies to gain market share.

We expect competitors to introduce new and improved products with lower prices,
and we will need to do the same to remain competitive. We may not be able to
compete successfully against either current or future competitors with respect
to new products.

GOVERNMENT REGULATIONS

The broadband communications industry in the United States is subject to
extensive regulation by federal and state agencies, including the Federal
Communications Commission (FCC), and various state and local public utility and
service commissions. Furthermore, several influential members of the United
States Congress have voiced their interest in revising the laws from which these
regulations are based in a comprehensive re-write of the associated
telecommunications law in the upcoming session of Congress. Meanwhile,
regulators struggle with issues related to fair competition, the rights of
public agencies to offer networking services, universal service, content, and a
host of other issues. Absent clear direction from the Congress, business
decisions on the part of carriers will continue to have higher risks associated
with them related to court challenges, re-regulation, and a lack of
harmonization among regulatory bodies. The overall impact of regulatory change
on our business is not readily discernable, although increased clarity that
removes some of the carriers' risks could be a net-positive.

PROPRIETARY RIGHTS

We own jointly with Lucent all Joint Inventions. We currently rely on a
combination of trade secret, patent, copyright and trademark laws, as well as
non-disclosure agreements and invention-assignment agreements, to protect our
products, the underlying technologies and other proprietary information.
However, such methods may not afford complete protection and there can be no
assurance that other competitors will not independently develop such processes,
concepts, ideas and documentations. We are the licensee of those technologies of
Lucent that are included in our QoStream Products. Lucent generally maintains,
at its expense, U.S. and foreign patent rights with respect to both the licensed
technology and its own technology and files and/or prosecutes the relevant
patent applications in the U.S. and foreign countries. We also rely upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop our competitive position. We intend to file patent
applications, when appropriate, and to take other actions necessary to protect
our technology, improvements to our technology and any specific products we
develop.

                                       12
<PAGE>

Our policy is to require our employees, consultants, other advisors and software
design collaborators to execute confidentiality agreements upon the commencement
of employment, consulting or advisory relationships. These agreements generally
provide that all confidential information developed or made known to the
individual by us during the course of the individual's relationship with us is
to be kept confidential and not to be disclosed to third parties except in
specific circumstances. In the case of employees and consultants, the agreements
provide that all inventions conceived by the individual in the course of their
employment or consulting relationship shall be our exclusive property. There can
be no assurance, however, that these agreements will provide meaningful
protection or adequate remedies for trade secrets in the event of unauthorized
use or disclosure of such information.

EMPLOYEES

As of May 8, 2007, 2007, we employed on a full time basis 16 employees. Of these
employees, 11 are engaged solely in research and development functions, one
employee is engaged in sales and marketing, two in manufacturing support and two
have primarily administrative functions.

Subject to raising additional funds to meet our liquidity needs and realize our
business plans, we anticipate that we will need to increase the number of our
employees, primarily in the research and development as well as in the sales,
marketing and operations areas. Our future performance will depend highly upon
our ability to attract and retain experienced personnel. The hiring of such
personnel is competitive and there can be no assurance that we will be able to
attract and retain qualified personnel for the development of our business.

SHORT TERM WORKING CAPITAL LOANS FROM HOLDERS OF OUR PREFERRED STOCK

On October 23, 2006 (the "Initial Closing Date"), pursuant to the terms of a
Bridge Loan Agreement, dated as of October 10, 2006 (the "Loan Agreement"), we
obtained a short-term working capital loan (hereinafter, the "Loan"; together
with any subsequent Loan, the "Loans") in the gross amount of $600,000.
Thereafter, in November and December 2006 we obtained additional Loans in the
amount of approximately $845,000 from other investors (before the payment of
fees and related expenses), for aggregate gross bridge loan proceeds of
approximately $1.45 million. The Loans were made in response to an offer (the
"Offer") that we made to the purchasers of the Series B Preferred Stock and the
Series A Preferred Stock to reinstate elements of the anti-dilution price
protection that was originally included in the agreements (such protection,
respectively, the "Price Protection Provisions") with the purchasers of these
securities in consideration of new Loans that these investors make to us. By
their terms, the relevant Price Protection Provisions expired in August 2005
with respect to the Series A Preferred Stock and in August 2006 with respect to
the Series B Preferred Stock. Under our Offer, each investor who advanced a Loan
to us will have the benefit of the relevant Price Protection Provisions with
respect to three times the amount that was advanced to us by that investor
(hereinafter, the "Protected Amount") in connection with a Loan. Under the terms
of the Offer, the Price Protection Provisions will be operative with respect to
Series B Preferred Stock and/or the Series A Preferred Stock, as well as the
warrants issued in connection therewith (the "Series A Warrants" or the "Series
B Warrants", as the case may be), held by such investor on the day on which the
Loan is advanced to us from that closing date through August 31, 2007 (the
"Current Protection Period"). The Offer expired on December 31, 2006.

Pursuant to the Loan Agreement, the Loan from each investor is evidenced by our
promissory note (each, a "Note" and collectively, "Notes") in the principal
amount equal to the amount advanced by such investor multiplied by the
Applicable Percentage. The "Applicable Percentage" is the percentage which is
equal to (x) one hundred percent (100%), plus (y) (1) the percent equal to
twenty-four percent (24%), multiplied by (2) the fraction, of which the
numerator is the number of days from the closing date of the Loan for the
relevant investor until February 20, 2007 (the "Stated Maturity Date"), which is
120 days after the Initial Closing Date, and the denominator is 360. Each of the
Notes, whether issued on the Initial Closing Date or on a subsequent closing
date, was scheduled to mature on the date (the "Maturity Date") which is the
earliest of (i) the Stated Maturity Date, (ii) the date on which we consummate a
subsequent financing that generates, on a cumulative basis with all other
financings after the Initial Closing Date (except for the proceeds of the Loans
and other limited exceptions specified in the Notes), gross proceeds to us of at
least $2 million (the "Subsequent Capital Financing") or (iii) the date on which
a holder of a Note accelerates payment of the Note while there is an Event of
Default existing under that Note. In February 2007, at our request, holders of
approximately $1.463 million in principal amount of the Notes agreed to extend
the maturity date of such notes until March 22, 2007 in consideration of our
payment of a portion of the principal of their respective Notes, and our
agreement that the interest on the unpaid balance of the outstanding principal
amount of these loans will accrue interest at a rate of 24% per annum. One of
the holders of the Notes did not agree to the extension and accordingly its note
in the principal amount of $71,020 was paid in full. Payments were made from the
proceeds of short-term loans that were advanced to the Company on February 27,
2007 discussed below. We have not been able to make the required payments on
March 22, 2007 and, accordingly, we are in default under these agreements. We
and these lenders are in discussions regarding an extension of the payment
period and/or a restructuring of the amounts owed. No assurance can be provided
that we can reach a mutually acceptable resolution.

Under the terms of the Notes, the holder may declare a Note immediately due and
payable upon the occurrence of any of the following events of default: (i)
failure to pay principal or any other amount due under the Note when due, (ii)
material breach of any of the representations or warranties made in the Loan
Agreement, the Note or the other transaction documents, (iii) failure to observe
any undertaking contained in the Note or the other transaction documents in a
material respect if such failure continues for 30 calendar days after notice,
(iv) our admission in writing as to our inability to pay our debts generally as
they mature, makes an assignment for the benefit of creditors or commences
proceedings for our dissolution, or apply for or consent to the appointment of a
trustee, liquidator or receiver for our or for a substantial part of our
property or business, (v) our insolvency or liquidation or a bankruptcy event,
(vi) the entry of money judgment or similar process in excess of $750,000 if
such judgment remains unvacated for 60 days, provided that, except for an event
of default relating to the payment of principal and interest, the holders of
66.67% of the principal amount of the Loan can waive the defaults.

                                       13
<PAGE>

In connection with the placement of the Notes, we paid to a registered broker
dealer which acted as placement agent (the "Placement Agent") a cash fee equal
to 10% of the aggregate amount advanced to us on account of the Notes. The
Placement Agent also acted as placement agent in the May 2006 private placement
of the Company's Senior Secured 8% Convertible Debentures as well as the
placement in April-May 2005 of the Series B Shares.

ADDITIONAL SHORT TERM FUNDING

(i) In January 2007, we received a short-term loan in the aggregate gross amount
of $356,000 from one of our institutional stockholder/investors (the "January
2007 Short-Term Loan"). The January 2007 Short-Term Loan is evidenced by our
promissory note in the principal amount of $384,000 (the "January 2007 Note")
and becomes due and payable on the earliest to occur of (i) the date on which we
consummate a subsequent financing that generates, on a cumulative basis with all
other financings, gross proceeds to us of at least $2 million or (ii) May 19,
2007.

Under the terms of the January 2007 Note, the holder may declare the Note
immediately due and payable upon the occurrence of any of the following events
of default: (i) failure to pay principal or any other amount due under the
January 2007 Note when due, (ii) material breach of any of the representations
or warranties made in such note, (iii) failure to observe any undertaking
contained in such note or the other transaction documents in a material respect
if such failure continues for 30 calendar days after notice, (iv) our admission
in writing as to our inability to pay our debts generally as they mature, makes
an assignment for the benefit of creditors or commences proceedings for our
dissolution, or apply for or consent to the appointment of a trustee, liquidator
or receiver for our or for a substantial part of our property or business, (v)
our insolvency or liquidation or a bankruptcy event, (vi) the entry of money
judgment or similar process in excess of $750,000 if such judgment remains
unvacated for 60 days.

(ii) On January 31, 2007, the Company obtained an additional short-term working
capital loan in the gross amount of $200,000 from an institutional investor. The
loan is evidenced by the Company's promissory note in the principal amount of
$216,000 and becomes due and payable on the earliest to occur of (i) the date on
which the Company consummates a subsequent financing that generates, on a
cumulative basis with all other financings, gross proceeds to the Company of at
least $2 million or (ii) May 31, 2007. Under the terms of the Note, the holder
may declare the Note immediately due and payable upon the occurrence of any of
the following events of default:
(i) failure to pay principal or any other amount due under the Note when due,
(ii) material breach of any of the representations or warranties made in the
Note, (iii) failure to observe any undertaking contained in the Note or the
other transaction documents in a material respect if such failure continues for
30 calendar days after notice, (iv) the Company's admits in writing as to its
inability to pay its debts generally as they mature, makes an assignment for the
benefit of creditors or commences proceedings for its dissolution, or applies
for or consents to the appointment of a trustee, liquidator or receiver for our
or for a substantial part of its property or business, (v) the Company's
insolvency or liquidation or a bankruptcy event, (vi) the entry of money
judgment or similar process in excess of $750,000 if such judgment remains
unvacated for 60 days.

(iii) On February 27, 2007, we obtained an additional short-term working capital
loan in the gross amount of $500,000 from an institutional stockholder and a
previous investor. The loan is evidenced by our promissory note in the principal
amount of $531,000 and becomes due and payable on the earliest to occur of (i)
the date on which the Company consummates a subsequent financing that generates,
on a cumulative basis with all other financings, gross proceeds to the Company
of at least $2 million or (ii) May 31, 2007. Under the terms of the Note, the
holder may declare the Note immediately due and payable upon the occurrence of
any of the following events of default: (i) failure to pay principal or any
other amount due under the Note when due, (ii) material breach of any of the
representations or warranties made in the Note, (iii) failure to observe any
undertaking contained in the Note or the other transaction documents in a
material respect if such failure continues for 30 calendar days after notice,
(iv) the Company's admits in writing as to its inability to pay its debts
generally as they mature, makes an assignment for the benefit of creditors or
commences proceedings for its dissolution, or applies for or consents to the
appointment of a trustee, liquidator or receiver for our or for a substantial
part of its property or business, (v) the Company's insolvency or liquidation or
a bankruptcy event, (vi) the entry of money judgment or similar process in
excess of $750,000 if such judgment remains unvacated for 60 days.

MAY 2006 PRIVATE PLACEMENT

As discussed in further detail in Item 6, in May 2006 we raised gross proceeds
of $10 million from the private placement to accredited institutional and
individual investors (the "Investors") of our two-year 8% Senior Secured
Convertible Debentures (the "Debentures"). The Debentures mature on April 30,
2008 and are convertible into shares of Common Stock at the holder's option at
any time at an initial conversion price of $0.75 per share, subject to
adjustment in the event of certain capital adjustments or similar transactions,
such as a stock split or merger and as further described below. Interest on the
Debentures accrues at the rate of 8% per annum, payable upon conversion or
semi-annually (June 30 and December 31 of each year, with the first scheduled
payment date having been December 31, 2006) or upon maturity, whichever occurs
first, and will continue to accrue until the Debentures are fully converted
and/or paid in full. Interest is payable, at the option of the Company, either
(i) in cash, or (2) in shares of Common Stock at a rate equal to 90% of the
volume weighted average price of the Common Stock for the five trading days
ending on the trading day immediately preceding the relevant interest payment
date; provided that interest payments may be made in shares of Common Stock only
if on the relevant interest payment date the Registration Statement (as defined
below) is then effective.


                                       14
<PAGE>

To secure our obligations under the Debentures, we granted a security interest
in substantially all of our assets, including without limitation, our
intellectual property, in favor of the holders of the Debentures. The security
interest terminates upon the earlier of (i) the date on which less than
one-fourth of the original principal amount of the Debentures originally issued
at closing are outstanding or (ii) payment or satisfaction of our obligations in
respect of these advances.

We undertook to file, within 75 days after the closing, a registration statement
(the "Registration Statement") covering the Common Stock underlying the
Debentures and to use reasonable best efforts to cause the Registration
Statement to be declared effective within 120 days of the closing. The
Registration Statement was filed on January 26, 2007. Under the agreements with
the holders of the Debentures, the Company is obligated to pay liquidated
damages to the holders of the Debentures because the Registration Statement was
not filed within the time frame provided therein and the registration statement
was not declared effective within 120 days of the Closing Date Accordingly, the
Company recorded accrued estimated penalties of approximately $1,700,000 at
December 31, 2006.

At our request, in January 2007 the holders of a majority-in-interest of the
principal amount of the Debentures agreed to defer to March 31, 2007 the payment
of liquidated damages payable to them in connection with the late
filing/effectiveness of the Registration Statement, whereupon any liquidated
damages due as of such date would then become payable in accordance with the
agreements with the investors. Under the terms of the agreements with the
holders of the Debentures, the consent obtained from such majority-in-interest
is binding on all holders of the Debentures. In addition, the holders of
$9,100,000 in principal amount of the Debentures agreed to defer to March 31,
2007 the payment of interest then accrued.

We have not made payments of interest in the amount of $725,479 and liquidated
damages (payable in connection with the late filing/effectiveness of the
Registration Statement) in the approximate amount of $1.7 million due as of
March 31, 2007. The delivery of notice to us by any one of these holders
demanding immediate payment will trigger an Event of Default under the
agreements with the Debenture holders and entitle these holders to foreclose on
our property. We and the holders of the Debentures are currently in discussion
in an attempt to reach an agreement restructuring the amounts owed, addressing
such issues as the further deferral of the payment of interest and liquidated
damages, the cessation of liquidated damages, the facilitation of additional
financing and the subordination of the Debenture holders security interest to
the providers of new funds. We are also in discussions with third parties in
connection with the immediate advance of a short-term loan. At the present time
we have no funding commitments for any such funding (which will be subject to
the consent of the Debenture holders) and no assurance can be given that any
will be forthcoming on commercially acceptable terms (or at all) and/or that we
will be able to reach a mutually acceptable agreement with the Debenture
holders. In May 2007, we withdrew the Registration Statement that we originally
filed in January 2007 covering the resale of common stock underlying the
securities held by the Debenture holders.

                          PREVIOUS BUSINESS ACTIVITIES

We were incorporated in Delaware in July 1994 under the name "TTR Technologies,
Inc." From our inception through February 2002, we were engaged in the business
of designing and developing digital security technologies that provide copy
protection for electronic content distributed on optical media and over the
Internet (the "Copy Protection Business"). On November 4, 2002, we entered into
an Asset Purchase Agreement (the "Purchase Agreement") with Macrovision
Corporation ("Macrovision"), then one of our largest stockholders, and
Macrovision Europe, Ltd., an affiliate of Macrovision (collectively, the
"Purchaser"), pursuant to which we agreed to sell to the Purchaser all of the
assets used in the Copy Protection Business. On May 28, 2003, we consummated the
sale of our Copy Protection Business for a cash payment of $5,050,000 and the
return for cancellation of 1,880,937 shares of our common stock, par value
$0.001 (the "Common Stock"), which Macrovision had purchased in January 2000 for
$4.0 million.

Following the sale of our Copy Protection Business, our then existing management
considered several possible alternatives regarding our strategic direction,
including the acquisition, development or investment in new lines of business.
We announced on January 14, 2004 that we had entered into the Development and
Licensing Agreement with Lucent, subject to the approval by our stockholders of
the transactions contemplated thereby (the "Transaction"). Our stockholders
approved the Transaction at a special meeting held on March 4, 2004.

AVAILABLE INFORMATION

Our Internet website is located at http://www.amedia.com. This reference to our
Internet website does not constitute incorporation by reference in this report
of the information contained on or hyperlinked from our Internet website and
such information should not be considered part of this report.

The public may read and copy any materials we file with the Securities and
Exchange Commission ("SEC") at the SEC's Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Rooms by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet website that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The SEC's Internet website is located at http://www.sec.gov.



                                       15
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                                  RISK FACTORS

Our business and strategy are subject to many risks discussed below. If any of
these risks occurs, our business, financial condition or operating results could
be adversely affected.

                          RISKS CONCERNING OUR BUSINESS

WE HAVE A HISTORY OF LOSSES AND WE EXPECT THESE LOSSES TO CONTINUE FORTHE
FORESEEABLE FUTURE.

Since inception, we have incurred significant net losses. We incurred net losses
applicable to common stockholders of $20,791,588 and $12,941,282 for the years
ended December 31, 2006 and 2005, respectively. As of December 31, 2006, we had
an accumulated deficit of $78,958,908. We expect to continue to incur net losses
for the foreseeable future as we continue to develop our products and
semiconductor technology. We have been funding our operations through the sale
of our securities and expect to continue doing so for the foreseeable future.
Our ability to generate and sustain significant additional revenues or achieve
profitability will depend upon the factors discussed elsewhere in this "Risk
Factors" section. We cannot assure you that we will achieve or sustain
profitability or that our operating losses will not increase in the future. If
we do achieve profitability, we cannot be certain that we can sustain or
increase profitability on a quarterly or annual basis in the future. We expect
to increase expense levels on research and development, continuing product
design and enhancements, manufacturing, marketing, sales and administration as
we begin to aggressively market our products. These expenditures will
necessarily precede the realization of substantial revenues from the sale of our
QoStream(TM) products or any future product.

OUR NEED FOR ADDITIONAL FINANCING IS ACUTE AND FAILURE TO OBTAIN ADEQUATE
FINANCING COULD LEAD TO THE FINANCIAL FAILURE OF OUR COMPANY IN THE FUTURE.

We believe that our existing cash resources are insufficient to enable us to
maintain operations as presently conducted and meet our obligations as they come
due. Since October 2006, we have been financing our business primarily through
the proceeds of short-term working capital loans advanced to us by certain of
our previous investors. See " BUSINESS-RECENT DEVELOPMENTS". Between October 23,
2006 and December 28, 2006, we raised approximately $1.45 million from such
advances; we issued promissory notes with a face amount of approximately $1.535
million, which amounts raised were due and payable by no later than February 20,
2007. We obtained from all but one investor an extension of the amounts due
under these loans to March 22, 2007 and, due to insufficient funds on hand, we
have not made payment on these loans and a loan in the approximate amount of
$1,407,699 is currently in default. In addition, Between January and April ,
2007, we received a short-term loans in the aggregate gross amount of $856,000
from certain of our institutional stockholder/investors. The loan is evidenced
by our promissory note in the principal amount of $915,480 and becomes due no
later than May 31, 2007. Additionally, we have not made payments in the
approximate amount of $2.4 million that were due on March 31, 2007.

We need to raise additional working capital on an immediate basis in order to
meet our operating requirements and satisfy our business plans as well as repay
these short-term working capital loans. We will most likely have to obtain such
capital from additional sales of our equity, convertible equity and/or debt
securities. At the present time, we have no commitments for any additional
financing, and there can be no assurance that additional capital will be
available to us on commercially acceptable terms or at all. We may have
difficulty obtaining additional funds as and when needed, and we may have to
accept terms that would adversely affect our stockholders. In connection with
the convertible debenture financing that we concluded in May 2006, we granted to
the holders of these debentures a security interest in all of our assets in
order to secure our obligation to them. Under the terms of the agreements with
these holders, without their consent we may not grant any additional security
interest until our obligations incurred in connection with such convertible
debenture financing are paid out.

In addition, in April 2007, we received a notice from our landlord purporting to
terminate the leases for non-payment. We are currently negotiating amendments to
the leases, which would allow us to retain a portion of the premises that we
currently lease and vacate the remaining portion of the premises while receiving
a reduction in our rental obligations. Of course, there can be no assurance that
we will be successful in reaching agreement with the landlord regarding such
amendments. The loss of our office lease for the premises that we currently
occupy would materially adversely affect our ability to continue our operations.

Additional equity financings are likely to be dilutive to holders of our Common
Stock and debt financing, if available, may involve significant payment
obligations and covenants that restrict how we operate our business or contain
rights, preferences and privileges senior to our Common Stock.

Even if we raise funds to address our immediate working capital requirements, we
also may be required to seek additional financing in the future to respond to
increased expenses or shortfalls in anticipated revenues, accelerate product
development and deployment, respond to competitive pressures, develop new or
enhanced products, or take advantage of unanticipated acquisition opportunities.
We cannot be certain we will be able to find such additional financing on
commercially reasonable terms, or at all.

If we are unable to obtain additional financing when needed, we could be
required to modify our business plan in accordance with the extent of available
financing. We also may not be able to accelerate the development and deployment
of our products, respond to competitive pressures, develop new or enhanced
products or take advantage of unanticipated acquisition opportunities. Finally,
we may be required to sell out assets or shut down the company and cease
operations.

                                       16
<PAGE>

These conditions raise substantial doubt as to our ability to continue as a
going concern and may make it more difficult for us to raise additional capital
when needed. The accompanying consolidated financial statements do not include
any adjustments relating to the recoverability of reported assets or liabilities
should we be unable to continue as a going concern.

A DEFAULT BY US UNDER OUR 8% SENIOR SECURED CONVERTIBLE DEBENTURES ISSUED IN MAY
2006 WOULD ENABLE THE DEBENTURE HOLDERS TO TAKE CONTROL OF ALL OF OUR ASSETS.

In May 2006, we issued $10,000,000 in aggregate principal amount of our 8%
Senior Secured Convertible Debentures. The debentures are scheduled to mature on
April 30, 2008. To secure our obligations under the debentures, we granted the
holders a security interest in substantially all of our assets, including,
without limitation, our intellectual property. The security interest terminates
upon the earlier of (i) the date on which less than $2.5 million in principal
amount of the Convertible Debentures is outstanding or (ii) payment or
satisfaction of all of our obligations under the Convertible Debentures and the
related agreements entered into with the holders thereof. The occurrence of an
Event of Default by us under the terms of the Convertible Debentures would
enable the holders to foreclose on our assets. Any foreclosure would force us to
substantially curtail or cease our operations.

We owed to the holders of these debentures as of March 31, 2007 approximately
$1.7 million in liquidated damages in respect of the delay in the filing and
effectiveness of the Registration Statement beyond the time frame specified in
the agreements with such holders as well as $725,479 in interest owed and
accruing. We are currently in discussions with the holders of the Debentures in
an attempt to reach an agreement restructuring the loans, addressing such issues
as the further deferral of the payment of interest and liquidated damages, the
cessation of liquidated damages, the facilitation of additional financing and
the subordination of the Debenture holders security interest to the providers of
new funds. If any one of the Debenture holders were to deliver to us notice
demanding payment of amounts due, then there would be an Event of Default under
the agreements with the holders of these debentures, enabling them to foreclose.
This condition raises substantial doubt as to our ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability of reported assets or liabilities
should we be unable to continue as a going concern.

IF OUR INITIAL QOSTREAM FAMILY OF PRODUCTS IS NOT SUCCESSFUL IN THE MARKET, WE
MAY NOT BE ABLE TO GENERATE SUBSTANTIAL REVENUES OR ACHIEVE SUSTAINED
PROFITABILITY.

Our success is substantially dependent on the success of our QoStream products,
the first of which became commercially available in January 2005. In June 2005,
we commenced limited commercial deployment of our QoStream product line. If the
market accepts our QoStream products, then we expect that these products will
account for the vast majority of our net revenue in the future. If our QoStream
products are unsatisfactory, or if we are unable to generate significant demand
for these products, or we fail to develop other significant products, our
business may be materially and adversely affected.

We have been engaged in the broadband access solutions business since only March
2004. Given our lack of operating history, it is difficult to predict our future
results. Investors should consider the risks and uncertainties that we may
encounter as a development-stage company in a new and unproven market. These
uncertainties include:

o our ability to design and engineer products having the desired technological
features in a cost efficient manner; o consumer demand for, and acceptance of
products utilizing our technologies; o our ability to demonstrate the benefits
of our products and services to end users; o our unproven and evolving products;
o our ability to expand the product offering and technological interface of our
product base to encompass sophisticated business applications and other in-house
wiring options; o unfavorable economic conditions in the technology industry; o
our ability to raise funds when needed on commercially acceptable terms; o
decreased capital spending on technology due to adverse economic conditions; and
o global economic conditions.

WE MAY BE DEPENDENT ON MOTOROLA IN DEALING WITH MOST OF THE LARGEST
TELECOMMUNICATION CARRIERS IN THE UNITED STATES AND CANADA.

On April 5, 2006, we entered into a three-year agreement with Motorola to
jointly develop a family of IP Home Gateway (IPTV Gateways) that will provide
expanded support for data, IPTV, High Definition TV, and Digital Video Recorders
using Motorola's existing Multi-Service Access Platform. Under this agreement we
have granted Motorola the exclusive right to resell our PG1000 and the HG-V100
products, and all derivative or substantially similar products (the "Exclusive
Products") to certain specified leading telecommunications carriers and their
affiliates (the "Exclusive Customers") for a period of 24 months from the
effective date of the agreement as part of Motorola's portfolio of broadband
wireline solutions. These exclusive customers serve a majority of all access
lines in the United States and Canada. The exclusivity may be terminated by us
unless, among other things, at least one of the Exclusive Customers shall have
accepted one of the Exclusive Products for lab testing within one year of the
effective date of the Strategic Alliance Agreement and signed a contract to
purchase Exclusive Products (which is reasonably expected to result in revenue
to us in a specified minimum amount) within 18 months of the effective date of
the agreement; provided, however, that if these conditions are satisfied with
respect to an Exclusive Customer, then Motorola's exclusivity period for such
Exclusive Customer will be extended for an additional 24 months. The Strategic
Alliance Agreement also provides that we will not, during the term of the
agreement and for a period of two years thereafter, directly or indirectly sell
to or solicit or accept any order for any of its products from any customer to
which Motorola has resold one of our products during the term of the agreement,
subject to certain exceptions. If Motorola sources, manufactures or resells a
gateway which has substantially the same functionality as our PG1000, the
exclusivity and the non-solicitation provisions contained in the Strategic
Alliance Agreement shall immediately terminate.

                                       17
<PAGE>

Under the terms of the agreement, Motorola is responsible for promoting and
marketing our PG 1000 and HG-V100 products to the specified telecommunications
carriers. Motorola has the discretion to determine the staffing and resources it
allocates to resell our products to the carriers. In addition, under the
agreement, Motorola is entitled to terminate at its convenience the IPTV Gateway
development program before the completion of its development. If Motorola elects
to so terminate the development program, the referred to exclusive distribution
rights for our other products continue in full force and effect, subject to the
terms of the agreement. We entered into the agreement with Motorola because we
believed that the rapid penetration of our products to telecommunications
carriers to be important to our success. If for any reason Motorola cannot
successfully market our products, our business may be materially adversely
affected. In addition, our condition could be adversely affected by changes in
the financial condition of Motorola or by any changes to Motorola's business.

In November 2006, Motorola announced that it is acquiring Netopia, Inc. for
approximately $200 million. The transaction is expected to close in the first
half of 2007. Netopia, a public company whose shares are listed on the Nasdaq
market, sells routers and modems used to provide broadband services over digital
subscriber lines, or DSL, to leading telephone companies, including AT&T,
Verizon Communications and Swisscom, and is one of our competitors. We cannot
assess what effect, if any, the transaction with Netopia will have on our
business or on our relationship with Motorola.

IF OUR THIRD-PARTY COLLABORATORS DO NOT EFFECTIVELY MARKET AND SERVICE OUR
PRODUCTS, WE MAY NOT GENERATE SIGNIFICANT REVENUES OR PROFITS FROM SALES OF OUR
PRODUCTS.

We utilize third parties, such as system vendors, consultants, value added
resellers and system integrators, to sell and/or assist us in selling our
products. To date, we have signed agreements with several of these third-party
collaborators. We believe that the establishment of a network of third-parties
with extensive and specific knowledge of the various applications critical in
the industrial market is important for us to succeed in that market. For the
foreseeable future, we may sell fewer products if we cannot attract and retain
third-party collaborators to sell and service our products effectively and to
provide timely and cost-effective customer support. An increasing number of
companies compete for access to the types of partners we use. We cannot assure
you that our partners will successfully sell or assist us in selling our
products or provide us with adequate customer support. If these relationships
are terminated or otherwise disrupted our operating performance and financial
results may be adversely affected.

WE ARE HIGHLY DEPENDENT ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS AND BECAUSE
OF COMPETITION FOR QUALIFIED PERSONNEL WE MAY NOT BE ABLE TO RECRUIT OR RETAIN
NECESSARY PERSONNEL.

Our continued growth and success depend to a significant degree on the continued
services of our Chief Executive Officer and President, Mr. Frank Galuppo, and
other key employees and our ability to attract and retain highly skilled and
experienced technical, managerial, sales and marketing personnel. While we have
recruited a management team with significant experience and expertise in the
broadband access field, as we enter this new line of business, we also expect to
encounter new product development challenges, new customer requirements, new
competitors and other new business challenges, with which our existing
management may be unfamiliar. There can be no assurance that we will be
successful in recruiting new personnel or in retaining existing personnel.
Except for our Chief Executive Officer (and President) and our Chief Financial
Officer, none of our current employees is subject to a long-term employment
agreement. The loss of one or more key employees or our inability to attract
additional qualified employees could have a material adverse effect on our
business, results of operations and financial condition. In addition, we may
experience increased compensation costs in order to attract and retain skilled
employees.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE AND RAPIDLY
EVOLVING BROADBAND COMMUNICATIONS MARKET.

The market for fiber optic subsystems and modules is highly competitive and we
expect competition to intensify in the future. Competition falls into several
categories. The companies that offer a solution similar to the one utilized in
our QoStream products include World Wide Packets and Allied Telesyn, as well as
Netopia Inc. (a public company which is in the process of being acquired by
Motorola). Other competitors, including Alcatel, Salira, Optical Solutions,
Motorola, UT Starcom and Wave 7 Optics, are positioning solutions employing a
different technological approach. We will also face indirect competition from
public and private companies providing products that address the same fiber
optic network problems that our QoStream products are designed to address. The
development of copper based alternative solutions to fiber optic transmission by
competitors, particularly systems companies that also manufacture modules, could
significantly limit our prospects and harm our competitive position. There is
also a possibility that certain wireless technologies could provide some measure
of competition.

Many of our competitors have longer operating histories, greater name
recognition and significantly greater financial, technical, sales and marketing
resources than we have. As a result, these competitors are able to devote
greater resources to the development, promotion, sale and support of their
products. In addition, these entities have large market capitalization or cash
reserves and are in a much better position to acquire other companies in order
to gain new technologies or products. In addition, many of our competitors have
much greater brand name recognition, more extensive customer bases, more
developed distribution channels and broader product offerings than we do. These
companies can use their broader customer bases and product offerings and adopt
aggressive pricing policies to gain market share.

We expect competitors to introduce new and improved products with lower prices,
and we will need to do the same to remain competitive. We may not be able to
compete successfully against either current or future competitors with respect
to new products.

                                       18
<PAGE>

Additionally, under our Development and Licensing Agreement with Lucent, we have
a non-exclusive, worldwide and perpetual license to develop and market FTTP
products utilizing Lucent technologies and solutions. Lucent has agreed, through
January 2014, not to use technologies specifically developed under the
Development and Licensing Agreement and subsequent supplemental agreements for
the purpose of developing or selling any products that may directly compete with
our products. Lucent is not restricted from using pre-existing Lucent
technologies or information contained in these products. We can provide no
assurance that Lucent will not in fact design, develop and market technologies
or products that serve the same functionality as our QoStream products. We
cannot predict the ease with which Lucent would be able to develop and market
products substantially similar in function or design to our product line.
Additionally, if for whatever reason Lucent elects to terminate the Development
and Licensing Agreement, then no assurance can be provided that it will be bound
by this no-compete provision. If Lucent were to successfully develop and market
such similar products, then our prospects and proposed business would be
materially adversely affected.

WE ARE SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.

We have and intend to continue to sell our products internationally. Our
international operations and activities subject us to a number of risks,
including the risk of political and economic instability, difficulty in managing
foreign operations, potentially adverse taxes, higher expenses and difficulty in
collection of accounts receivable in some of these countries. We do not
currently cover known or anticipated operating exposures through foreign
currency exchange option or forward contracts.

WE MAY NOT BE SUCCESSFUL IN DEVELOPING OR MAINTAINING STRONG DISTRIBUTION
CHANNELS FOR OUR PRODUCTS.

We intend to market our prospective products to communications carriers and
other providers of broadband access solutions and services. The success of our
current business plan depends, in large part, on developing strong relationships
with telecommunications carriers and other broadband communications providers
who are selling products and services to end-users. If we are not successful in
creating a strong distribution channel in a timely manner, we may not be able to
establish our marketing presence or gain significant sales.

LEGAL AND REGULATORY DEVELOPMENTS COULD HAVE ADVERSE CONSEQUENCES FOR OUR
BUSINESS.

The jurisdiction of the Federal Communications Commission (FCC) extends to the
entire communications industry in the United States, including potential
customers for products utilizing our solutions. Future FCC regulations affecting
the broadband access industry may harm our business. For example, FCC regulatory
policies affecting the availability of data and Internet services may impede the
penetration of our prospective product line into certain markets or affect the
prices that may be charged in such markets. In addition, international
regulatory bodies are beginning to adopt standards and regulations for the
broadband access industry. These domestic and foreign standards, laws and
regulations address various aspects of Internet, telephony and broadband use,
including issues relating to liability for information retrieved from or
transmitted over the Internet, online content regulation, user privacy,
taxation, consumer protection, security of data, access by law enforcement,
tariffs, as well as intellectual property ownership, obscenity and libel.
Changes in laws, standards and/or regulations, or judgments in favor of
plaintiffs in lawsuits against service providers, e-commerce and other Internet
companies, could adversely affect the development of e-commerce and other uses
of the Internet. This, in turn, could directly or indirectly materially
adversely impact the broadband telecommunications industry in which our
customers operate. To the extent our customers are adversely affected by laws or
regulations egarding their business, products or service offerings, this could
result in a material and adverse effect on our business, financial condition and
results of operations.

In addition, many of our potential customers will require that our products be
designed to interface with their customers' existing networks, each of which may
have different specifications, utilize multiple protocol standards and contain
multiple generations of products from different vendors. If our products cannot
operate in such an environment, they may not achieve market acceptance and our
ability to generate revenue would be seriously impaired.

THE BROADBAND ACCESS SOLUTIONS MARKET IS HIGHLY CYCLICAL.

We are engaged in the broadband access solutions industry, which is cyclical and
subject to rapid technological change. Recently, the industry has begun to
emerge from a significant downturn characterized by diminished product demand,
accelerated erosion of prices and excess production capacity. The most recent
downturn was and future downturns in the industry may be severe and prolonged.
Future downturns in the broadband communications industry, or any failure of
this industry to fully recover from its most recent downturn, could seriously
impact our business plan. This industry also periodically experiences increased
demand and production capacity constraints, which may affect our ability to ship
products in future periods.

IF WE DO NOT DEVELOP OR ACQUIRE AND INTRODUCE NEW AND ENHANCED PRODUCTS ON A
TIMELY BASIS, OUR PRODUCTS MAY BE RENDERED OBSOLETE.

The markets for our broadband access communication products are characterized by
rapidly changing technology. The introduction of products by others based on new
or more advanced technologies could render our products obsolete and
unmarketable. Therefore, our ability to build on our existing technologies and
products to develop and introduce new and enhanced products in a cost effective
and timely manner will be a critical factor in our ability to grow and compete.
We cannot assure you that we will develop new or enhanced products successfully
and in a timely manner. Further, we cannot assure you that the market will
accept new or enhanced products. Our failure to develop new or enhanced
products, including our failure to develop or acquire the technology necessary
to do so, would have a material adverse effect on our business.

                                       19
<PAGE>

During the fourth quarter of fiscal year 2006, we recorded an impairment charge
in the amount of $880,021 to certain intangible assets that we carry on our
books as capitalized software and recorded a write-down of inventory in the
amount of $898,808. The impairment and inventory write-down are primarily
attributable to the lack of market acceptance of our products in their existing
format as of December 31, 2006. We did not determine a similar impairment charge
for the year ended December 31, 2005. There can be no assurance that future
impairment tests of the intangible assets or write-down of inventory will not
result in an additional charge to operations.

IF OUR COMPETITORS INTRODUCE BETTER OR CHEAPER PRODUCTS, OUR PRODUCTS MAY NOT BE
PROFITABLE TO SELL OR TO CONTINUE TO DEVELOP.

The business in which we engage is highly competitive. Advances in technology,
product improvements and new product introductions, as well as marketing and
distribution capabilities, and price competition influence success. Failure to
keep pace with product and technological advances could adversely affect our
competitive position and prospects for growth. Our products compete with those
being offered by larger, traditional computer industry participants who have
substantially greater financial, technical, marketing and manufacturing
resources than us. We cannot assure you that we will be able to compete
successfully against these competitors or that competitive pressures faced by us
would not adversely affect our business or operating results.

THERE MAY BE SIGNIFICANT LIMITATIONS TO THE UTILIZATION OF NET OPERATING LOSSES
TO OFFSET FUTURE TAXABLE INCOME.

We estimate that we have a net operating loss carry-forward (NOL) of
approximately $46 million, which will be available to offset future U.S. taxable
income subject to limitations under Section 382 of the Internal Revenue Code
pertaining to changes in stock ownership. TTR Ltd., the Company's wholly owned
Israeli subsidiary, has a net operating loss carry-forward of approximately $6
million available to offset future taxable income in Israel. No assurance can be
provided that under prevailing law all, or even any part, of the NOL will be
available to offset future income.

                          RISKS CONCERNING OUR PRODUCTS

OUR QOSTREAM PRODUCT LINE REMAINS SUBJECT TO SIGNIFICANT UNCERTAINTY AND MAY NOT
BE ACCEPTED IN THE MARKETPLACE.

Our QoStream products are designed to deliver broadband access over a deployed
FTTP system. Certain of these products have been delivered to prospective
customers for their evaluation and since June 2005 there have been limited
commercial deployments. These products have not been commercially proven in
their current form.

The market for products related to broadband access is characterized by
uncertain user and customer requirements, and the emergence of new
communications standards and practices. Each of these characteristics could
impact our QoStream product line and prospective products, intellectual property
and system designs. Our success is subject to the risks that:

o our products are found to be ineffective for the intended purposes;
o the products are uneconomical to manufacture or market or do not achieve broad
market acceptance; and o third parties hold proprietary rights that preclude us
from marketing our products.

Significant undetected errors or delays in new products or releases may affect
market acceptance of our products. There can be no assurance that, despite
extensive testing, errors will not be found in our initial QoStream products or
subsequent releases after the commencement of commercial shipments, resulting in
loss of customers or failure to achieve market acceptance. In addition, the
technologies utilized in our QoStream product line will need to be compatible
with a broad array of disparate technologies in order to be interoperable with
other products routinely used in the broadband communications industry such as
routers, switches and operating systems. Without compatibility, we may not
achieve market acceptance or demand for our proposed products within our target
base of customers because they will not inter-operate with many of the
applications the target customers currently use.

WE WILL RELY ON THIRD PARTIES TO PROVIDE CERTAIN COMPONENTS FOR OUR PRODUCTS. IF
OUR VENDORS FAIL TO DELIVER THEIR PRODUCTS IN A RELIABLE, TIMELY AND
COST-EFFICIENT MANNER, OUR BUSINESS WILL SUFFER.

We expect to depend on relationships with third parties such as contract
manufacturing companies, chip design companies and others who may be sole source
providers of key, leading edge technology components critical for our proposed
products. If these service providers or other providers of exclusive proprietary
technology do not produce these components on a timely basis, if the components
do not meet our specifications and quality control standards, or if the
components are otherwise flawed, we may have to delay product delivery, or
recall or replace unacceptable products. In addition, such failures could damage
our reputation and could adversely affect our operating results. As a result, we
could lose potential customers and any revenues that we may have at that time
may decline dramatically.

WE MAY NOT BE ABLE TO MEET OUR PRODUCT DEVELOPMENT OBJECTIVES OR MARKET
EXPECTATIONS.

                                       20
<PAGE>

Our product development and enhancement efforts are inherently difficult to
manage and keep on schedule and there can be no assurance that we will be able
to meet our development objectives or to meet market expectations. In addition
to development delays, we may experience substantial cost overruns in completing
development of our products. Our QoStream products may contain undetected flaws.
There can be no assurance that, despite testing by us and by potential
customers, flaws will not be found in our QoStream products, resulting in loss
of or delay in market acceptance. We may be unable, for technological or other
reasons, to develop and introduce our products in a timely manner in response to
changing customer requirements. Further, there can be no assurance that a
competitor will not introduce similar products. The introduction by a competitor
of either similar products or a superior alternative may diminish our
technological advantage, render our products and technologies partially or
wholly obsolete, or require substantial re-engineering of these products in
order to become commercially acceptable. Our failure to maintain our product
development schedules, avoid cost overruns and undetected errors or introduce
products that are superior to competing products would have a materially adverse
effect on our business, financial condition and results of operations.

WE MAY NOT BE ABLE TO PROTECT INTELLECTUAL PROPERTY INHERENT IN OUR PRODUCTS
AGAINST THIRD-PARTY INFRINGEMENTS OR CLAIMS OF INFRINGEMENT.

Under the Development and Licensing Agreement, we and Lucent jointly hold the
rights to any intellectual property developed in the course of the development
of the technologies underlying our QoStream products. Lucent owns the rights to
pre-existing Lucent technologies included in any product that we market. The
failure to protect these intellectual property rights may result in a loss of
the right to use these technologies. We plan to rely on patent, trade secret,
trademark and copyright law to protect these intellectual property rights. Our
patent position is subject to complex factual and legal issues that may give
rise to uncertainty as to the validity, scope and enforceability of a particular
patent. Accordingly, there can be no assurance that any patents will be issued
pursuant to any patent application or that patents issued pursuant to such
application will not be invalidated, circumvented or challenged. Moreover, there
can be no assurance that the rights granted under any such patents will provide
competitive advantages to us or be adequate to safeguard and maintain our
proprietary rights. In addition, effective patent, trademark, copyright and
trade secret protection may be unavailable, limited or not applied for in
certain foreign countries.

We also seek to protect our proprietary intellectual property, including
intellectual property that may not be patented or patentable, in part by
confidentiality agreements and, if applicable, inventor's rights agreements with
our current and future strategic partners and employees. We cannot assure you
that these agreements will not be breached, that we will have adequate remedies
for any breach or that such persons or institutions will not assert rights to
intellectual property arising out of these relationships.

Some of our intellectual property includes technologies and processes that may
be similar to the patented technologies and processes of third parties. If we do
not adequately secure our freedom to use our technology, we may have to pay
others for rights to use their intellectual property, pay damages for
infringement or misappropriation or be enjoined from using such intellectual
property. If we are found to be infringing third-party patents, we do not know
whether we will be able to obtain licenses to use such patents on acceptable
terms, if at all. While we are not currently engaged in any material
intellectual property disputes or litigation, we could become subject to
lawsuits in which it is alleged that we have infringed the intellectual property
rights of others or commence lawsuits against others who we believe are
infringing upon our rights. Our involvement in intellectual property litigation
could result in significant expense to us, adversely affecting the development
of the challenged product or intellectual property and diverting the efforts of
our technical and management personnel, whether or not such litigation concludes
favorably for our company.

LUCENT IS NOT INDEMNIFYING US FOR THIRD-PARTY PATENT OR COPYRIGHT INFRINGEMENT
CLAIMS RELATING TO LUCENT TECHNOLOGY CONTAINED IN OUR PRODUCTS AND ANY SUCH SUIT
OR CLAIM COULD HAVE A MATERIALLY ADVERSE EFFECT ON OUR BUSINESS.

Our initial products as well as further applications will include various and
complex technologies, some of which are solely owned by Lucent. While Lucent has
represented to us that it has not received any notice of a claim of infringement
of any patent, copyright or other intellectual property right of a third party
with reference to the technologies or other material or information included or
to be incorporated into our contemplated initial products, and that, to the best
knowledge and belief of its employees actually involved in the work contemplated
by the Development and Licensing Agreement such technologies or information or
other materials do not infringe on any patent, copyright, or other proprietary
rights of a third party, no assurance can be given that we will not be subject
to intellectual property infringement claims that are costly to defend and that
could limit our ability to market and sell our proposed products. Lucent is
under no obligation to indemnify us in the event of such suit. We did not
perform a technical due diligence investigation relating to the technologies
included or to be included in our contemplated products.

The broadband access solutions field is characterized by significant patent
infringement litigation. We could be subject to litigation alleging infringement
of a third party's right. Litigation could be expensive, lengthy and disruptive
to management's attention and detract resources from normal business operations.
Adverse determinations could prevent us from manufacturing or selling our
proposed products or any future derivative products. It may also subject us to
significant liabilities and require that we seek licenses from third parties. In
such case, no assurance can be furnished that licenses will be available on
commercially reasonable terms, if at all, from any third party that asserts
intellectual property claims against us. Any inability to obtain third party
licenses required to manufacture or sell our proposed or derivative products
could materially adversely affect our business and its prospects.

                     RISKS CONCERNING OUR CAPITAL STRUCTURE

FUTURE SALES OF COMMON STOCK OR OTHER DILUTIVE EVENTS MAY ADVERSELY AFFECT
PREVAILING MARKET PRICES FOR OUR COMMON STOCK.

                                       21
<PAGE>

As of March 31, 2007, we had 100 million authorized shares of Common Stock, of
which 30,259,747 shares of our Common Stock were issued and outstanding as of
such date. An additional 64,595,891 shares have been reserved for issuance upon
exercise or conversion of outstanding options, warrants and convertible
securities. In addition, we have outstanding warrants to purchase approximately
an additional 4,566,667 million shares of our Common Stock which are held by
holders of the Convertible Debentures. The holders of these warrants have waived
the share reservation requirements relating thereto until our next annual
meeting, as more fully discussed under, resulting in approximately 5.1M shares
available for issuance. Many of the those options, warrants and convertible
securities contain provisions that require the issuance of increased numbers of
shares of common stock upon exercise or conversion in the event of stock splits,
redemptions, mergers or other transactions. The occurrence of any such event or
the exercise or conversion of any of the options, warrants or convertible
securities described above would dilute the interest in our company represented
by each share of Common Stock and may adversely affect the prevailing market
price of our Common Stock.

Our board of directors has the authority, without further action or vote of our
stockholders, to issue all or any part of the shares of our Common Stock that
are authorized for issuance and neither issued nor reserved for issuance.
Additionally, we require additional funds to continue to meet our liquidity
needs and maintain our operations as presently conducted and to realize our
business plan. Such stock issuances may be made at a price that reflects a
discount from the then-current trading price of our Common Stock. In order to
raise capital that we need at today's stock prices, we would likely need to
issue securities that are convertible into or exercisable for a significant
number of shares of our Common Stock.

Furthermore, we currently have concurrent offerings of shares of our Common
Stock that will have a dilutive effect on any purchaser of shares under this
Prospectus.

In October 2006, we filed a post- effective amendment to a registration
statement on Form SB-2 (File Number 333-126351) covering sales by selling
stockholders of approximately 12.8 million shares issued or issuable upon
conversion of our Series B 8% Convertible Preferred Stock ("Series B Preferred
Stock"). This registration statement was declared effective on November 6, 2006.
As of March 31, 2007, there were 10,558,397 shares of our Common Stock reserved
for issuance upon (i) the conversion of our outstanding Series B Preferred Stock
and in payment of dividends thereon, (ii) upon exercise of warrants (the "Series
B Warrants") issued in connection with our Series B Preferred Stock and (iii)
upon exercise of warrants issued to certain persons as compensation in
connection with the placement of the Series B Preferred Stock. On May 5, 2006,
we completed a private placement of $10.0 million in aggregate principal amount
of our two year 8% Senior Secured Convertible Debentures. This private placement
resulted in the reduction to $0.75 per share of the conversion price of the
Series B Preferred Stock (from a conversion price of $1.01 per share immediately
prior to the reset) that had not been converted as of such date. A significant
part of the additional shares of Common Stock issuable as a result of the
reduction in the conversion price of the Series B Preferred Stock are not
included in the Series B Registration Statement. We intend to file in the near
future a new registration statement relating to the resale of approximately 2.1
million additional shares of our Common Stock issuable as a result of the
reduction in the conversion price of the Series B Preferred Stock.

In October 2006, we also filed a post-effective amendment to a registration
statement on Form SB-2 (File Number 333-1207711) covering sales by selling
stockholders of approximately 12.5 million shares issued or issuable upon
conversion of our Series A 7% Convertible Preferred Stock ("Series A Preferred
Stock"). This registration statement was declared effective on November 6, 2006.
As of March 31, 2007, there were 9,359,077 shares of our Common Stock reserved
for issuance upon (i) the conversion of our outstanding Series A Preferred Stock
and in payment of dividends thereon, (ii) upon exercise of warrants (the "Series
A Warrants") issued in connection with our Series A Preferred Stock and (iii)
upon exercise of warrants issued to certain persons as compensation in
connection with the placement of the Series A Preferred Stock.

The shares of Common Stock issuable upon conversion of our Series A Preferred
Stock or Series B Preferred Stock and exercise of the Series A Warrants (or the
other warrants included in the Series A Registration Statement) or the Series B
Warrants are saleable without restriction immediately upon issuance. Any of
these issuances will dilute the percentage ownership interests of our current
stockholders, which will have the effect of reducing their influence on matters
on which our stockholders vote, and might dilute the book value and market value
of our Common Stock. Our stockholders may incur additional dilution upon the
exercise of currently outstanding or subsequently granted options or warrants to
purchase shares of our Common Stock.

Lastly, in August 2004, we secured from an institutional investor a $6 million
equity line (the "Equity Line") on which we can draw from time to time during a
24-month period following the effectiveness of a separate registration
statement, subject to certain conditions. The Equity Line allows us to sell up
to $6 million of Common Stock at 98% of the then current market price, but in no
event at less than $2.00 per share. We also issued to the equity line investor
five year warrants to purchase up to 333,333 shares of Common Stock at a per
share exercise price of $1.50. These warrants are subject to cashless exercise
following the first anniversary of issuance if at the time of exercise there is
no effective registration statement in effect covering the resale of these
shares. In April 2006, we entered into an agreement with the Equity Line
investor to file a separate registration statement covering the Common Stock
issuable pursuant to the Equity Line by a date that is not earlier than the 90th
day following the effective date of the registration statement relating to the
resale of the Common Stock underlying the 8% Senior Secured Convertible
Debenture (nor later than the 120th day after such date). The shares of Common
Stock issuable upon our drawing down on the Equity Line and exercise of the
warrant will be saleable without restriction immediately upon issuance. The
issuance of Common Stock upon our drawing down on the Equity Line or exercise of
the warrant would further dilute the interest in our company represented by each
share of Common Stock and may adversely affect the prevailing market price of
our Common Stock.

WE HAVE A LIMITED NUMBER OF AUTHORIZED SHARES OF COMMON STOCK AVAILABLE FOR
ISSUANCE AND IF OUR STOCKHOLDERS DO NOT APPROVE AN INCREASE IN THE AUTHORIZED
NUMBER OF SHARES OF OUR COMMON STOCK WE WILL BE UNABLE TO RAISE ADDITIONAL
CAPITAL.

                                       22
<PAGE>

As of March 31, 2007, we had 100 million authorized shares of Common Stock, of
which 30,259,747 shares of our Common Stock were issued and outstanding and an
additional 64,595,882 are reserved for issuance upon exercise or conversion of
outstanding options, warrants and convertible securities and potential
liquidated damages. In addition, we have outstanding warrants to purchase
approximately an additional 4.6 million shares of our Common Stock, which are
held by holders of the Convertible Debentures; the holders of these warrants
have waived the share reservation requirements relating thereto until our next
annual meeting. Thus, we currently have only approximately 5.1 million shares of
Common Stock available for issuance. The limited availability of shares of
Common Stock may hinder our ability to raise capital through the issuance of
equity or securities convertible into equity.

OUR BOARD OF DIRECTORS' RIGHT TO AUTHORIZE THE ISSUANCE OF ADDITIONAL SHARES OF
PREFERRED STOCK COULD ADVERSELY IMPACT THE RIGHTS OF HOLDERS OF OUR COMMON
STOCK.

Our board of directors currently has the right to designate and authorize the
issuance up to an additional 4,862,500 shares of our preferred stock, in one or
more series, with such voting, dividend and other rights as our directors may
determine. The board of directors can designate new series of preferred stock
without the approval of the holders of our Common Stock. The rights of holders
of our Common Stock may be adversely affected by the rights of any holders of
shares of preferred stock that may be issued in the future, including without
limitation dilution of the equity ownership percentage of our holders of Common
Stock and their voting power if we issue preferred stock with voting rights.
Additionally, the issuance of preferred stock could make it more difficult for a
third party to acquire a majority of our outstanding voting stock.

OUR STOCK PRICE IS VOLATILE.

The trading price for our Common Stock has been volatile. The price has changed
dramatically over short periods, including changes of over 50% percent in a
single day. An investment in our Common Stock is subject to such volatility and,
consequently, is subject to significant risk.

ADDITIONAL BURDENS IMPOSED UPON BROKER-DEALERS BY THE APPLICATION OF THE "PENNY
STOCK" RULES TO OUR COMMON STOCK MAY LIMIT THE MARKET FOR OUR COMMON STOCK.

Broker-dealer practices in connection with transactions in "penny stocks" are
regulated by certain penny stock rules adopted by the Securities and Exchange
Commission. Penny stocks generally are equity securities with a price of less
than $5.00 (other than securities registered on certain national securities
exchanges or quoted on the Nasdaq system, provided that current prices and
volume information with respect to transactions in such securities are provided
by the exchange or system). If our Common Stock continues to be offered at a
market price less than $5.00 per share, and does not qualify for any exemption
from the penny stock regulations, our Common Stock will continue to be subject
to these additional regulations relating to low-priced stocks.

The penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules generally require that prior to a
transaction in a penny stock the broker-dealer make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
requirements have historically resulted in reducing the level of trading
activity in securities that become subject to the penny stock rules.

The additional burdens imposed upon broker-dealers by these penny stock
requirements may discourage broker-dealers from effecting transactions in the
Common Stock, which could severely limit the market liquidity of our Common
Stock and our shareholders' ability to sell our Common Stock in the secondary
market.

ITEM 2. DESCRIPTION OF PROPERTY

We do not own any real property. Our corporate offices are located at 2 Corbett
Way, Eatontown, New Jersey 07724 and are currently comprised of approximately
14,700 square feet. The term of the lease on our offices began in May 2005 and
was for originally approximately 9,300 square feet. In November 2005, we
modified the lease and let an additional 1,900 square feet of office premise. In
December 2005, we further modified the lease to let an additional 3,500 feet.
The lease is in effect through May 2010. From May through October 2005, our
monthly lease payments were approximately $9,800. Beginning November 2005 and
continuing through February 2006, total monthly payments under the modified
lease are approximately $12,600. From March 2006 lease payments are as follows:
for the first lease year, approximately $19,000 (after giving effect to agreed
upon rent credits for such year); for the second lease year, monthly payments of
approximately $24,500; for the third lease year, monthly payments of
approximately $25,000; for the fourth lease year, monthly payments of
approximately $25,500; and for the fifth lease year, monthly payments of
approximately $25,700.We believe that our facilities are generally in good
condition and suitable to carry on our business. We also believe that, if
required, suitable alternative or additional space will be available to us on
commercially reasonable terms.

In April 2007, we received a notice from the landlord who rents these facilities
to us purporting to terminate the leases for non-payment. We are currently
negotiating amendments to the leases, which would allow us to retain a portion
of the premises that we currently lease and vacate the remaining portion of the
premises while receiving a reduction in our rental obligations. Of course, there
can be no assurance that we will be successful in reaching agreement with the
landlord regarding such amendments. The loss of our office lease for the
premises that we currently occupy would materially adversely affect our ability
to continue our operations.

                                       23
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

We are not involved in any pending legal proceedings that we anticipate can
result in a material adverse effect on our business or operations.

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

No matters were submitted to our stockholders during the three months ended
December 31, 2006.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock is traded on Nasdaq's OTC Bulletin Board under the symbol
"AANI". Prior to May 28, 2004, our Common Stock was quoted under the symbol
"TTRE". Although trading in our Common Stock has occurred on a relatively
consistent basis, the volume of shares traded has been limited. There can be no
assurance that an established trading market will develop, that the current
market will be maintained or that a liquid market for our Common Stock will be
available in the future. Investors should not rely on historical stock price
performance as an indication of future price performance.

The following table shows the quarterly high and low bid prices for our Common
Stock over the last two completed fiscal years, as reported on the OTC Bulletin
Board. The prices represent quotations by dealers without adjustments for retail
mark-ups, mark-downs or commission and may not represent actual transactions.
The closing price of our Common Stock on May 16, 2007 was $0.45 per share.



                                           LOW     HIGH
                                          -----   -----
          Year Ending December 31, 2006
             First Quarter                $0.52   $1.10
             Second Quarter               $0.71   $1.25
             Third Quarter                $0.52   $0.77
             Fourth Quarter               $0.69   $1.10

          Year Ended December 31, 2005
             First Quarter                $0.82   $1.36
             Second Quarter               $0.82   $1.26
             Third Quarter                $0.75   $1.09
             Fourth Quarter               $0.75   $1.00

As of May 4, 2007, there were approximately 180 holders of record of our Common
Stock. We believe that a significant number of shares of our Common Stock are
held in either nominee name or street name brokerage accounts and, consequently,
we are unable to determine the number of beneficial owners of our stock.

DIVIDEND POLICY

We have paid no dividends on our Common Stock and do not expect to pay cash
dividends in the foreseeable future with respect to the Common Stock. It is the
present policy of our board of directors to retain all earnings to provide funds
for our growth. The declaration and payment of dividends in the future will be
determined by our board based upon our earnings, financial condition, capital
requirements and such other factors as our board may deem relevant. We are not
under any contractual restriction as to our present or future ability to pay
dividends.

ITEM 6. PLAN OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND THE NOTES RELATED TO THOSE STATEMENTS. SOME OF OUR DISCUSSION IS
FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING
RISK FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO
THE RISK FACTORS SECTION OF THIS ANNUAL REPORT.

OVERVIEW

We are engaged in the design, development and marketing of next-generation
technology-based broadband access solutions for voice, video and data services.
Our initial products are designed to deliver "triple play" (voice, video and
data) broadband communication. These products are designed for placement at
various points in the network infrastructure layout. We are marketing our
initial products to communications carriers, municipal authorities and
communication equipment companies.

Our initial QoStream product line is comprised of premises gateways, aggregation
switches and a network management systems. Our initial QoStream products include
technologies licensed from Lucent Technologies, Inc. ("Lucent") as well as
technologies developed jointly with Lucent. Lucent has granted us a worldwide
and perpetual non-exclusive license to manufacture, develop and sell products
designed to deliver broadband access solutions that use Lucent's technologies
and related patents. Recently, we developed a stand-alone triple play home
gateway product that is designed to inter-operate with other standards-based
devices deployed in the central offices of carriers or in the field.

                                       24
<PAGE>

We continue to upgrade and improve our Qostream product line to encompass
sophisticated network interfaces, expanded feature sets and increased
inter-operability with in-house wiring, including copper based facilities. For
example, in December 2005, we unveiled new features on our QoStream AS5000
Aggregator Switch and QoStream PG1000 Premises Gateway products that are
designed to enable a network operator to connect to a home or office and provide
sufficient bandwidth to enable voice, data, and video services over the existing
copper wires already in the ground. Additional feature upgrades that we are
working on in 2006 include the ability for our gateways to distribute services
within a served premise over existing copper coaxial cables and possibly over
telephone wires as well as additional PON based interfaces to our products as
well as the work we performed under the Motorola Agreement.

INITIAL COMMERCIALIZATION OF QOSTREAM PRODUCT LINE

Our business involves the development of new broadband access products with no
significant market penetration. We cannot predict when or to what extent our
QoStream product line or future extended applications will begin to produce
significant revenues, or whether we will ever reach profitability.

In December 2005, Salsgiver Inc., an ISP, agreed to purchase our PG1000 Premises
Gateways and AS5000 Aggregation Switches to support their service build-out in
the Allegheny Valley Region of Western Pennsylvania. We shipped our first units
under this purchase order in March 2006. This was our first significant sale in
the U.S. market.

In April 2006, we entered into an agreement with Motorola Wireline Networks,
Inc. ("Motorola"), a subsidiary of Motorola, Inc., pursuant to which Motorola
will distribute under the Motorola brand a family of up to three IP Home Gateway
products to be jointly developed by us and Motorola that are intended to provide
expanded support for data, IPTV, High Definition TV, and Digital Video Recorders
using Motorola's existing Multi-Service Access Platform for exclusive
distribution by Motorola under the Motorola brand. In October 2006, we
successfully passed the IPTV Gateway System Verification Testing Acceptance
Test, the second major engineering milestone test specified in the agreement
with Motorola. This test is the culmination of our system integration testing
and is designed to demonstrate the functionality and the stability of the
hardware and software of the IPTV Gateway.

Motorola has successfully completed its final System Verification Testing, the
success of which is necessary to the commencement of Alpha or Beta trials and
commercial release. Through January 2007, we have received from Motorola
purchase orders for gateway lab test units, Alpha and Beta test units and
prototypes in the aggregate purchase amount of approximately $475,000.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements and accompanying notes have been prepared
in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires we make estimates, judgments
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Management continually evaluates the accounting policies
and estimates it uses to prepare the consolidated financial statements. We base
our estimates on historical experience and assumptions believed to be reasonable
under current facts and circumstances. Actual amounts and results could differ
from these estimates made by management.

We do not participate in, nor has it created, any off-balance sheet special
purpose entities or other off-balance sheet financing. In addition, we do not
enter into any derivative financial instruments for speculative purposes and
uses derivative financial instruments primarily for managing its exposure to
changes in interest rates.

STOCK-BASED COMPENSATION

In December 2004, the Financial Accounting Standards Board (FASB) issued FAS No.
123R, "Share-Based Payment" (FAS 123R) that amends FAS 123, and FAS No. 95,
"Statement of Cash Flows" and supersedes Accounting Principles Board (APB)
Opinion No. 25, " Accounting for Stock Issued to Employees," and related
interpretations (APB 25). As of January 1, 2006, FAS 123R requires us to measure
the cost of employee services received in exchange for an award of equity
instruments, such as stock options, based on the grant-date fair value of the
award and to recognize such cost over the requisite period during which an
employee provides service. The grant-date fair value will be determined using
option-pricing models adjusted for unique characteristics of the equity
instruments. FAS 123R also addresses the accounting for transactions in which a
company incurs liabilities in exchange for goods or services that are based on
the fair value of our equity instruments or that may be settled through the
issuance of such equity instruments. Depending on the number of awards granted
and the related grant date fair value of such awards, the amount of compensation
expense that we recognize could vary from period to period. The statement does
not change the accounting for transactions in which we issue equity instruments
for services to non-employees. The pro forma disclosures previously permitted
under FAS 123 no longer will be an alternative to financial statement
recognition.

We adopted FAS 123R on January 1, 2006 and use the modified prospective method
in which compensation cost is recognized beginning with the effective date (a)
based on the requirements of FAS 123R for all share-based payments granted after
the effective date and (b) based on the requirements of FAS 123R for all awards
granted to employees prior to the effective date of FAS 123R that remain
unvested on the effective date.

Prior to January 1, 2006, we accounted for awards granted under those plans
following the recognition and measurement principles of APB 25.



                                       25
<PAGE>

CAPITALIZED SOFTWARE DEVELOPMENT COSTS

Capitalization of software development costs in accordance with SFAS No. 86
begins upon the establishment of technological feasibility. Technological
feasibility for our computer software is generally based upon achievement of a
detail program design free of high risk development issues and the completion of
research and development on the product hardware in which it is to be used. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized computer software development costs requires
considerable judgment by management with respect to certain external factors,
including, but not limited to, technological feasibility, anticipated future
gross revenue, estimated economic life and changes in software and hardware
technology. Amortization of capitalized software development costs commences
when the related products become available for general release to customers.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2006 (THE "2006 PERIOD") AND DECEMBER
31, 2005 (THE "2005 PREIOD")

SALES AND COSTS OF GOODS SOLD. Revenues for the 2006 Period and the 2005 Period
were $32,723 and $5,548, respectively, and were derived from the QoStream
product line and related hardware. We recorded revenues for the first time
during the quarter ended March 31, 2005. Cost of goods sold in the amount of
$26,628 in the 2006 Period produced a gross margin of $6,095. Cost of goods sold
of $6,078 for the year ended December 31, 2005 exceeded sales resulting in
negative gross profit. Certain of the units were sold to a customer at a
discount to the anticipated market price due to the necessity of further testing
and evaluation.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist of
expenses incurred primarily in product designing, developing and testing. These
expenses consist primarily of salaries and related expenses for personnel,
contract design and testing services and supplies used and consulting and
license fees paid to third parties.

For the 2006 Period and the 2005 Period, our research and development expenses
were $4,866,851 (net of $1,460,705 received from Motorola under the development
agreement) and $3,975,852, respectively. The increase in research and
development expenses during 2006 as compared to 2005 is primarily attributable
to the increase in amounts incurred for personnel, contracted labor and certain
materials and supplies used in product development and enhancement.

SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries
and related expenses for personnel, consulting fees, and trade show expenses
incurred in product distribution.

Sales and marketing expenses for the 2006 Period and the 2005 Period were
$1,350,033 and $2,422,999, respectively. The decrease in sales and marketing
expenses during the 2006 Period as compared to the 2005 Period is primarily
attributable to reduction in staff and reduced expenditures for trade shows and
other marketing related expenditures.

GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses consist
primarily of salaries and other related costs for personnel in executive and
other functions. Other significant components of general and administrative
costs include professional fees for legal, accounting and other services.

General and administrative expenses for the 2006 Period and the 2005 Period were
$3,767,961 and $2,209,171, respectively. The increase in general and
administrative expenses during the 2006 period compared to the 2005 period is
primarily attributable to retention in early 2006 of additional in-house
marketing staff, the retention of outside consultants in the investor relations
field and increased payments to accounting and other professionals.

LIQUIDITY AND CAPITAL RESOURCES

Cash balances were nil at May 4, 2007 and $368,294 at December 31, 2006.

Net cash used during the 2006 Period consisted of operating activities of
approximately $7.7 million, the purchase of property and equipment and the costs
associated with internally developed software of approximately $1.4 million. Net
cash used during the corresponding period in 2005 consisted of operating
activities of approximately $8.0 million, the purchase of property and equipment
and the costs associated with internally developed software of approximately
$1.9 million.

Net cash provided by financing activities during the 2006 Period was
approximately $9.1 million compared to approximately $8.0 million in the
corresponding period in 2005.

Net cash provided by financing activities during the 2006 Period was the result
of proceeds from the issuance of (i) short-term notes in the aggregate principal
amount of $2,581,500 offset by financing costs of $166,620 and original issue
discount of $131,500 and (ii) the issuance of our two year 8% secured
convertible debenture in May 2006 in connection with the private placement
discussed below and (iii) short term notes in the aggregate principal amount of
$1,633,759 offset by financing costs of $165,157 and original issue discount of
$86,663.

Net cash provided by financing activities during the corresponding period in
2005 was the result of the exercise of stock warrants and proceeds from the
placement in April and May 2005 of our Series B Preferred Stock and
approximately $1M from the proceeds of notes payable.

From our inception in August 1994, we have financed our operations through the
sale of our securities. Set forth below is a summary of our recent financings.

In February 2007, we obtained an additional short-term working capital loan in
the gross amount of $500,000 from an institutional stockholder and a previous
investor. The loan is evidenced by our promissory note in the principal amount
of $531,000 and becomes due and payable on the earliest to occur of (i) the date
on which the Company consummates a subsequent financing that generates, on a
cumulative basis with all other financings, gross proceeds to the Company of at
least $2 million or (ii) May 31, 2007.

                                       26
<PAGE>

In January 2007, we received a short-term loan in the aggregate gross amount of
$356,000 from one of our institutional stockholder/investors. The loan is
evidenced by our promissory note in the principal amount of $384,480 and becomes
due and payable on the earliest to occur of (i) the date on which we consummate
a subsequent financing that generates, on a cumulative basis with all other
financings, gross proceeds to us of at least $2 million or (ii) May 19, 2007.

On November 13, 2006, we received a short-term working capital loan from the
Chairman of our board of directors in the principal amount of $100,000. The
advance was made on a demand basis and accrues interest at the rate of 24% per
annum. In February 2007, we received an additional short-term capital loan in
the principal amount of $150,000, on the same terms and conditions. In February
we repaid approximately $27,150 of the principal amount of these loans and
accrued interest in the amount of $ 9,100.

Between October 23, 2006 and December 28, 2006, we consummated bridge loan
transactions pursuant to which we borrowed the approximate gross amount of $1.45
million (prior to the payment of offering related fees and expenses). The funds
were raised in response to an offer we made to the holders of the purchasers of
the of the Series B 8% Convertible Preferred Stock (the "Series B Preferred
Stock") and the Series A 7% Convertible Preferred Stock (the "Series A Preferred
Stock") to reinstate for a specified period certain price protection provisions
that were contained in the purchase agreements relating to these securities. An
initial loan in the gross amount of $600,000 was advanced on October 23, 2006
(the "Initial Closing Date") from institutional investors who purchased Series B
Preferred Stock and thereafter subsequent closings were held in November and
December 2006 with investors who had purchased either or both of our Series A or
Series B Preferred Stock. The offer expired on December 31, 2006. The loans are
evidenced by our promissory notes (each, a "Note" and collectively, "Notes") in
the aggregate principal amount equal to the amount advanced by investors
multiplied by the Applicable Percentage. The "Applicable Percentage" is the
percentage which is equal to (x) one hundred percent (100%), plus (y) (1) the
percent equal to twenty-four percent (24%), multiplied by (2) the fraction, of
which the numerator is the number of days from the closing date of the Loan for
the relevant investor until February 20, 2007 (the "Stated Maturity Date"),
which is 120 days after the Initial Closing Date, and the denominator is 360.
All loans, whether advanced on the Initial Closing Date or thereafter, are
scheduled to mature on the date (the "Maturity Date") which is the earliest of
(i) the Stated Maturity Date, (ii) the date on which we consummate a subsequent
financing that generates, on a cumulative basis with all other financings
(except for the proceeds of these loans and other limited exceptions specified
in the promissory notes evidencing the loans), gross proceeds to us of at least
$2 million or (iii) the date on which an investor accelerates payment on the
note evidencing a loan while there is existing an Event of Default under that
note. In February 2007, at our request, holders of approximately $1.463 million
in principal amount of the Notes agreed to extend the maturity date of such
notes until March 22, 2007 in consideration of our payment of a portion of the
principal of their respective Notes, and our agreement that the interest on the
unpaid balance of the outstanding principal amount of these loans will accrue
interest at a rate of 24% per annum. One of the holders of the Notes did not
agree to the extension and accordingly its note in the principal amount of
$71,020 was paid in full. Payments were made from the proceeds of short-term
loans that were advanced to the Company on February 27, 2007 discussed below. We
and these lenders are in discussions regarding an extension of the payment
period and/or a restructuring of the amounts owed, although there can be no
assurance that we will be able to reach agreement with the lenders on such
issues.

On May 5, 2006, we raised gross proceeds of $10 million from the private
placement to certain institutional and individual investors of our two-year 8%
Senior Secured Convertible Debentures. At closing, we received net proceeds of
approximately $5.2 million, after payment of offering related fees and expenses
and after the repayment of bridge loans made between December 2005 and April
2006 in the aggregate amount of $3,691,500 (inclusive of $30,000 in related
fees). Certain of the investors in these bridge loans elected to participate in
the Convertible Debenture transaction and, accordingly, approximately $850,000
in principal amount of bridge loans was offset against these investors'
purchases of the Convertible Debentures. The holders of the Convertible
Debentures have a lien on all of our assets, including our intellectual
property. We owed to the holders of these debentures as of March 31, 2007
approximately $1.7 million in liquidated damages in respect of the delay in the
filing and effectiveness of the Registration Statement beyond the time frame
specified in the agreements with such holders as well as $725,479 in interest
owed and accruing. We have not made payments of interest and liquidated damages
(payable in connection with the late filing/effectiveness of the Registration
Statement) due as of March 31, 2007. We are currently in discussions with the
holders of the Debentures in an attempt to reach an agreement restructuring the
loans, addressing such issues as the further deferral of the payment of interest
and liquidated damages, the cessation of liquidated damages, the facilitation of
additional financing and the subordination of the Debenture holders security
interest to the providers of new funds. We are also in discussions with third
parties in connection with the immediate advance of a short-term loan. At the
present time we have no funding commitments for any such funding (which will be
subject to the consent of the Debenture holders) and no assurance can be given
that any will be forthcoming on commercially acceptable terms (or at all) and/or
that we will be able to reach a mutually acceptable agreement by the Debenture
holders. In May 2007, we withdrew the Registration Statement that we originally
filed in January 2007 covering the resale of shares of common stock underlying
the securities held by the Debenture holders.


On April 26, 2005, we completed a private placement to certain individual and
institutional investors of 60,000 shares of our newly designated Series B 8%
Convertible Preferred Stock, par value $0.001 per share (the "Series B Preferred
Stock") for gross proceeds of $6 million. Thereafter, on May 9, 2005, we sold to
institutional investors an additional 17,650 shares of Series B Preferred Stock
for aggregate gross proceeds of $1,765,000 (together with the private placement
completed in April 2005, the "2005 Private Placement"). We received aggregate
net proceeds of approximately $5,590,000 from the closings of the 2005 Private
Placement, following repayment of the outstanding principal and accrued interest
on the bridge loans and payment of offering related expenses. We issued to the
purchasers of the Series B Preferred Stock five-year warrants to purchase, in
the aggregate, up to 3,844,062 shares of Common Stock at a per share exercise
price of $1.50, subject to adjustment in certain circumstances. As a result of
the private placement in May 2006, the conversion rate for the Series B
Preferred Stock was reset from $1.01 to $0.75.

                                       27
<PAGE>

On December 22, 2005, we entered into a bridge loan agreement with two
institutional investors pursuant to which we borrowed $1.0 million from these
investors. On January 20, 2006, we entered into a bridge loan agreement on
identical terms with three private investors pursuant to which we borrowed an
additional $500,000. In February and March 2006, we entered into bridge loan
agreements with one of the institutional investors who participated in the
December 2005 bridge loan pursuant to which we borrowed $1.5 million in
aggregate principal amount. Additionally, in April 2006, we entered into a
bridge loan agreement with two institutional investors pursuant to which we
borrowed $450,000 in aggregate principal amount. On May 5, 2006, we repaid the
amounts owed on these short-term loans from the proceeds of the May 2006
Debentures.

On April 5, 2006, we entered into a Strategic Alliance Agreement with Motorola
pursuant to which we and Motorola will jointly develop a family of three IP Home
gateways that will provide expanded support for data, IPTV, High Definition TV,
and Digital Video Recorders using Motorola's existing Multi-Service Access
Platform for exclusive distribution by Motorola under the Motorola brand. The
Agreement with Motorola provides, among other things, that Motorola will pay to
us $1.9 million for engineering costs associated with the development of these
products, of which amount we have received approximately $1.56 million with the
remainder to be paid in installments upon the achievement of certain agreed upon
project milestones. Motorola is entitled to terminate the development program at
any time prior to the completion of the development of the gateway products and,
in the event that it does so, we will be entitled to retain any of the
engineering costs paid or due and owing by Motorola as of the date of
termination. In addition, we have to date received from Motorola purchase orders
for gateway lab test units, Alpha and Beta test units and prototypes in the
aggregate purchase amount of approximately $475,000. These purchase orders are
independent of and unrelated to the payments referred to above to which we are
entitled upon the achievement of specified milestones.

We need to raise additional funds on an immediate basis in order to meet our
operating requirements and to fulfill our business plan as well as satisfy the
working capital loans that have matured and not been repaid and those scheduled
to mature in May 2007. As previously disclosed in our periodic reports, we have
been actively seeking additional capital. We have laid-off most of our remaining
employees and as of May 14, 2007, we have 16 remaining employees on staff.
Additionally, we have been forced to delay payments to most of our vendors and
defer salaries for management. If we are unable to raise additional capital
almost immediately, we may be forced lay-off our remaining workforce and either
restructure or cease operations entirely. We may not be successful in our
efforts to raise additional funds. Even if we raise cash to meet our immediate
working capital needs, our cash needs could be heavier than anticipated in which
case we could be forced to raise additional capital. Even after we begin to sell
our products, we do not yet know what payment terms will be required by our
customers or if our products will be successful. At the present time, we have no
commitments for any additional financing, and there can be no assurance that, if
needed, additional capital will be available to us on commercially acceptable
terms or at all. If we are unable to raise funds as needed, we may need to
curtail expenses, reduce planned research and development and sales and
marketing efforts, forego business opportunities and cease operations. These
conditions raise substantial doubts as to our ability to continue as a going
concern, which may make it more difficult for us to raise additional capital
when needed.

Additional equity financings are likely to be dilutive to holders of our Common
Stock and debt financing, if available, may involve significant payment
obligations and covenants that restrict how we operate our business.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2006, the Financial Accounting Standards Board issued SFAS Statement
No. 155, "Accounting for Certain Hybrid Financial Instruments"(SFAS 155), which
amends SFAS Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133) and SFAS Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
(SFAS 140). SFAS 155 amends SFAS 133 to narrow the scope exception for
interest-only and principal-only strips on debt instruments to include only such
strips representing rights to receive a specified portion of the contractual
interest or principle cash flows. SFAS 155 also amends SFAS 140 to allow
qualifying special-purpose entities to hold a passive derivative financial
instrument pertaining to beneficial interests that itself is a derivative
instruments. We are currently assessing the impact that the adoption of SFAS 155
will have on our financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets" ("SFAS 156"), which amends SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS 156 permits the choice of the amortization method or
the fair value measurement method, with changes in fair value recorded in
income, for the subsequent measurement for each class of separately recognized
servicing assets and servicing liabilities. The statement is effective for years
beginning after September 15, 2006, with earlier adoption permitted. We do not
expect SFAS 156 to have a material impact on the Company's financial position or
results of operations.

In July 2006, the FASB issued FASB Interpretation 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN
48"), which prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions taken or expected
to be taken in a tax return. Additionally, FIN 48 provides guidance on the
recognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The accounting provisions of FIN 48
will be effective for the Company beginning January 1, 2007. We are in the
process of determining the effect, if any, that the adoption of FIN 48 will have
on its financial statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". SFAS
No. 157 provides guidance for using fair value to measure assets and
liabilities. In addition, this statement defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. Where applicable, this statement simplifies and codifies related
guidance within generally accepted accounting principles. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Our adoption
of SFAS No. 157 is not expected to have a material effect on its financial
statements.

                                       28
<PAGE>


In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides guidance on how prior year
misstatements should be taken into consideration when quantifying misstatements
in current year financial statements for purposes of determining whether the
current year's financial statements are materially misstated. SAB 108 is
effective for the fiscal year ending after November 15, 2006. The adoption of
SAB 108 did not impact the Company's financial statements.

In November 2006, EITF reached a final consensus in EITF issue 06-6 "Debtors
Accounting for a Modification (or Exchange) of Convertible Debt Instruments"
("EITF 06-6"). EITF 06-6 addresses the modification of a convertible debt
instrument that changes the fair value of an embedded conversion option and the
subsequent recognition of interest expense for the associated debt instrument
when the modification does not result in a debt extinguishment pursuant to EITF
96-19, "Debtors Accounting for a Modification or Exchange of Debt Instruments".
The consensus should be applied to modifications or exchanges of debt
instruments occurring in interim or annual periods beginning November 29, 2006.
The Company does not expect the adoption of EITF 06-6 to have a material impact
on its consolidated financial position, results of operations or cash flows.

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

In December 2006, the FASB issued FSP EITF 00-19-2 "Accounting for Registration
Payment Agreements". FSP EITF 00-19-2 addresses an issuers accounting for
registration payment arrangements. This pronouncement specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument, should
be separately recognized and accounted for as a contingency in accordance with
SFAS 5 "Accounting for Contingencies". FSP EITF 00-19-2 amending previous
standards relating to rights agreements became effective on December 21, 2006
with respect to those arrangements entered into prior to December 21, 2006. The
Company is currently evaluating the impact of this guidance on its consolidated
financial position, results of operations and financial condition.

In February 2007, the FASB issued SFAS 159 "The Fair Value Option for Financial
Assets and Liabilities" ("SFAS 159"). SFAS 159 provides companies with an option
to report selected financial assets and liabilities at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is in the process of evaluating
the adoption of this statement on the Company's results of operations and
financial condition.

ITEM 7. FINANCIAL STATEMENTS

The information called for by this Item 7 is included following the "Index to
Consolidated Financial Statements" contained in this Annual Report on Form
10-KSB.

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

None.

ITEM 8A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain disclosure
controls and procedures that are designed to ensure that information required to
be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to management, including
our Chief Executive Officer and our Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure based closely on the
definition of "disclosure controls and procedures" in Rule 13a-14(c).

                                       29
<PAGE>

As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Principal
Financial Officer concluded that our disclosure controls and procedures were
effective.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There have not been any
changes in our internal control over financial reporting identified in
connection with the evaluation discussed above that occurred during the three
months ended December 31, 2006 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.

ITEM 8B. OTHER INFORMATION

None.

                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT

The names, ages and positions of our directors, executive officers and key
employees are as follows:

     Name                Age   Position
     ----                ---   --------
     Frank Galuppo        60   Chief Executive Officer, President and Director
     James D. Gardner     54   Chief Financial Officer
     John R. Colton       64   Chief Technology Officer
     Juan Mendez          42   Chairman of the Board of Directors
     Richard Rosenblum    47   Director
     Gerald Butters       62   Director
     Bob Martin           64   Director

The business experience, principal occupations and employment, as well as the
periods of service, of each of the Company's directors and executive officers
during at least the last five years are set forth below.

FRANK GALUPPO has been a director and our Chief Executive Officer since March
2004 and President since December 2004. Mr. Galuppo possesses nearly 40 years of
experience in the Telecommunications Industry, serving in a number of senior
management positions with Lucent Technologies and AT&T. From March 2003 until he
began his employment with the Company, Mr. Galuppo had been assisting several
companies with business development support in the U.S. Government market where
he has extensive sales experience. Mr. Galuppo was employed by Lucent since its
formation in September 1996 until March 2003 in a series of management level and
operational positions. His most recent role at Lucent was President of Lucent's
Optical Networking Group, which he held since September 2002 and had worldwide
responsibility for the development and marketing of Lucent's global optical
portfolio which had annual sales of over $1 billion.

JAMES D. GARDNER has been our Chief Financial Officer since May 2005. From
January 2005 thru May 2005, Mr. Gardner served as Chief Operating Officer of
dotPhoto, a private company engaged in on-line photo processing and wireless
application development for cellular telephones. From January 2002 through April
2004, Mr. Gardner served as Chief Executive Officer for Comstar Interactive, a
private company engaged in the wireless credit card processing field. He has
also held the position of Chief Financial Officer at BellSouth Wireless Data
(renamed Cingular Interactive (May 1999 through November 2001), and as chief
financial officer of BellSouth Mobile Data (November 1995 through May 1999) and
chief financial officer of RAM/BSE Communications L.P. from 1991 though 1995,
with all companies involved in the provision of wireless packet data networks
and services, principally in the US and Europe. Mr. Gardner also held several
other senior executive positions at BellSouth and AT&T in the areas of Financial
Management, Domestic and International corporate finance, issuing debt and
equity and the related rating agency and investment banking interfaces,
shareholder relations and a number of other treasury, accounting and finance
positions.

JOHN R. COLTON has been with us since April 2004 and has been our Chief
Technology Officer and Senior Vice President, Product Realization since June
2005. From November 2001 to March 2004 Mr. Colton was Vice President of
Architecture, Systems Engineering, and Product Management for Lambda Optical
Systems, where he specified technology, product and network architecture, and
system applications for a next generation optical networking product line
incorporating optical switching, optical DWDM transmission, optical add/drop
multiplexing, and network management. From October 2000 to October 2001, John
founded and managed JRC Consulting, a company providing consultation in the
fields of optical communications, voice and data switching, and FTTP, a position
that led to officer and board positions with several startups. Before his
retirement after 36 years with Bell Labs, AT&T, and Lucent, Mr. Colton served in
senior positions in Lucent's Optical Networking Group as well as in technical
management and product management positions while at Bell Laboratories and AT&T
Network Systems. He holds an SMEE from the Massachusetts Institute of Technology
and a BSEE from the University of Pennsylvania.

JUAN MENDEZ has been a director since July 2003. Mr. Mendez is President, Chief
Executive Officer and co-founder of Total Claims Management, Inc., a privately
held company based in Miami, Florida. Mr. Mendez has held that position since
March 1999. Prior to co-founding Total Claims Management, Inc., Mr. Mendez was a
Public Insurance Adjuster from 1996 to 1999.



                                       30
<PAGE>

RICHARD ROSENBLUM has been a director since September 2003. Since July 2004, Mr.
Rosenblum has been a principal of Harborview Advisors, LLC, a firm that provides
structuring and financing advice to publicly and privately held firms. From
August 2004 through November 2004, Mr. Rosenblum was a Managing Director of
Greenfield Capital Partners, LLC, a private investment banking firm. From July
2001 until July 2004, Mr. Rosenblum was a Managing Director of Investment
Banking for vFinance Investments in New York, where he was responsible for
advising, structuring and financing publicly and privately held companies. From
July 2001 until July 2004, Mr. Rosenblum also served as Senior Managing Partner
of ACP Advisors in New York, where he was responsible for advising and raising
capital for emerging growth companies. From April 1999 until July 2001, Mr.
Rosenblum was a Managing Director at Robb Peck McCooey Financial Services, Inc.
in New York. Mr. Rosenblum also serves on the board of directors of Crystal
International Travel Group, Inc. and as a director and officer of Marine Park
Holdings, Inc. He is also a director, President, CEO and CFO of Mill Basin
Technologies, Ltd. and holds similar positions with Boxwoods, Inc.

GERALD BUTTERS has been a director since May 2004. Mr. Butters is a
communications industry veteran with more than 39 years experience in this
sector. His career encompasses senior executive positions at Nortel Networks,
AT&T, and Lucent Technologies. These include Chairman of the Board of AGCS (a
joint venture of GTE and AT&T), President of NTI (a Nortel Networks US
subsidiary). He was President of Global Public Networks at AT&T Network Systems
from October 1997 to November 1999, President of the Optical Networks Group at
Lucent Technologies from December 1999 to August 2000 and Senior Vice President
Marketing and Technology at Lucent Technologies. Mr. Butters retired from Lucent
Technologies in August 2000. Since August 2000 through the present time, Mr.
Butters has been a board director of Lambda Optical Systems a privately held
company since October 2003 and a technical advisor to several privately held
technology firms.

BOB MARTIN has been a director since May 2004. Mr. Martin retired as the Chief
Technology Officer of Lucent Technologies' Bell Laboratories in September 2003,
a position he held for seven years. In this role, he helped guide Lucent's
directions in next generation networks and in approaches the company used for
research and development. His background at Bell Laboratories and Bellcore
included a variety of positions related to large systems development. He has
been responsible for Unix, network management systems, intelligent network
systems, packet switching, and broadband access systems developments. Mr. Martin
received his Bachelor of Science in Electrical Engineering from Brown University
in 1964, and his Master of Science and Doctor of Philosophy degrees in
Electrical Engineering and Computer Science from Massachusetts Institute of
Technology in 1965 and 1967, respectively. In 1985, he attended the MIT Alfred
P. Sloan School Senior Executive Program. A Fellow of the Institute of
Electrical and Electronics Engineers, Mr. Martin was a member and first chair of
its Software Industrial Advisory Board. He has served on the National Research
Council's Computer Science and Telecommunications Board and the FCC's
Technological Advisory Board. He is on technical advisory boards for venture
capitalist's and startups in telecommunications, optical devices & product
innovation.

Officers are elected by the Board of Directors and serve at the discretion of
the Board of Directors and hold office until a successor is elected and
qualified or until his/her earlier resignation or removal.

There are no family relationships between any of the above executive officers or
directors, and there is no arrangement or understanding between any of the above
executive officers or directors and any other person pursuant to which the
officer or director was elected to hold office.

All directors hold office until the next annual meeting of stockholders and the
election and qualification of a successor.

CORPORATE GOVERNANCE

Our Board of Directors has an audit committee and a compensation committee. The
audit committee reviews the results and scope of the audit and other services
provided by our independent public accountant. The compensation committee
establishes the compensation policies applicable to our executive officers and
administers and grants stock options pursuant to our stock plans.

The current members of the audit committee are Juan Mendez and Richard
Rosenblum. We believe that each of Messrs. Mendez and Rosenblum meet the
independence criteria set out in Rule 4200(a)(14) of the Marketplace Rules of
the National Association of Securities Dealers ("NASD") and the rules and other
requirements of the SEC.

We do not believe that any of our existing audit committee members is an "audit
committee financial expert" as the term is defined in the SEC rules. It is
difficult for a company with a financial profile such as ours to attract and to
afford a director who qualifies as a financial expert. Nonetheless, we are
seeking an appropriate candidate who qualifies as an audit committee financial
expert. It may however be difficult for a company with a financial profile such
as ours to attract and to afford a director who qualifies as a financial expert.

The sole current member of the compensation committee is Richard Rosenblum.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act, requires officers and directors of the
Company and persons who own more than ten percent of the Common Stock, to file
initial statements of beneficial ownership (Form 3), and statements of changes
in beneficial ownership (Forms 4 or 5), of Common Stock with the SEC. Officers,
directors and greater than ten-percent stockholders are required by SEC
regulation to furnish the Company with copies of all such forms they file.

Based solely on review of the copies of such forms received by the Company with
respect to 2006, or written representations from certain reporting persons, the
Company believes that all filing requirements applicable to its directors and
officers and persons who own more than 10% of a registered class of the
Company's equity securities have been complied with, except for the late filing
of a Form 3 for John Colton, our Chief Technology Officer, in connection with
his appointment to such office.

                                       31
<PAGE>

CODE OF ETHICS

We have adopted a Code of Ethics applicable to our senior executive officers and
senior financial officers, including the principal executive officer, principal
financial officer and principal accounting officer. A copy of this code has been
filed as an exhibit to our Annual Report on Form 10-KSB for the year ended
December 31, 2003.

ITEM 10. EXECUTIVE COMPENSATION

         The following table sets forth all compensation for the last fiscal
year awarded to, earned by, or paid to our Chief Executive Officer and the two
most highly paid executive officers serving as such at the end of 2006 whose
salary and bonus exceeded $100,000 for the year ended December 31, 2006 (the
"Named Executive Officers").

<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE

                                                                                Option Awards       All Other           Total
      Name & Principal Position       Year      Salary ($)       Bonus ($)         ($) (1)       Compensation ($)        ($)
----------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>       <C>                              <C>                                 <C>
 FRANK GALUPPO
 President and Chief Executive
 Officer                             2006      230,192 (2)         --           121,806 (3)            --           351,998 (2)
----------------------------------------------------------------------------------------------------------------------------------
 JD GARDNER
 Chief Financial Officer              2006      175,054 (4)        --            56,911                --           231,965 (3)
----------------------------------------------------------------------------------------------------------------------------------
 JOHN C COLTION
 Chief Technology Officer             2006      150,000            --            65,731 (5)            --           215,731 (4)
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)     Amounts in this column reflect the expense recognized by us for
        accounting purposes calculated in accordance with FASB Statement of
        Financial Accounting Standards No. 123R ("FAS 123R") with respect to
        employee stock options issued under the Company's 2000 Equity Incentive
        Plan in 2006 and in previous years. The assumptions used to calculate
        the fair value of stock option grants under FAS 123R, were: expected
        holding period of 3.5 years, risk free interest rate of 4.68%, no
        dividend yield and volatility of 57%.

(2)     The payment of approximately $9,038.46 of this amount in respect of
        fiscal 2006 has been deferred by agreement of the named officer pending
        the raise by us of additional capital.

(3)     Includes the expense recognized by us for accounting purposes of options
        issued under the 2000 Equity Incentive Plan on February 22, 2006.

(4)     The payment of approximately $20,192.38 of this amount in respect of
        fiscal 2006 has been deferred by agreement of the named officer pending
        the raise by us of additional capital.


(5)     Includes the expense recognized by us for accounting purposes of options
        issued under the 2000 Equity Incentive Plan on February 22, 2006.

GRANTS OF PLAN-BASED AWARDS

     The following table sets forth information concerning each grant of an
award made during the fiscal year ended December 31, 2006 to each of the Named
Executive Officers:


GRANTS OF PLAN-BASED AWARDS -- YEAR ENDED DECEMBER 31, 2006

                                         OPTION        EXERCISE OR
                                         AWARDS:          BASE
                                         NUMBER           PRICE
                                      OF SECURITIES        OF
                                       UNDERLYING        OPTION
                    GRANT                OPTIONS          AWARD
      NAME           DATE                (#) (1)         ($/SH)
      ----           ----                -------         ------

Frank Galuppo      2/21/06            40,540 (2)           0.69

John Colton        2/22/06            54,548 (3)          0.70

1. All grants were made under our 2000 Equity Incentive Plan.

2. Represents an award of options made in connection with (and as consideration
for) the exercise for cash by the named executive officer of options for 20,270
shares at a per share exercise price of $0.74.


                                       32
<PAGE>

3. Represents an award of options made in connection with (and as consideration
for) the exercise for cash by the named executive officer of options for 27,274
shares at a per share exercise price of $0.55.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

         The following table sets forth information concerning unexercised
options and stock that has not vested for each of our executive officers named
in the Summary Compensation Table that are outstanding as of December 31, 2006.

<TABLE>
<CAPTION>
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END -- DECEMBER 31, 2006

                      Number of Securities   Number of Securities   Equity Incentive Plan
                     Underlying Unexercised  nderlying Unexercised    Awards: Number of
                           Options (#)           Options (#)        Securities Underlying  Option Exercise
                                                                    Unexercised Unearned          Price     Option Expiration
 Name                      Exercisable          Unexercisable            Options (#)                ($)           Date
--------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>       <C>            <C>                                             <C>          <C>
 Frank Galuppo            1,185,374 (1)            109,604                   --                    0.74         3/15/2014
--------------------------------------------------------------------------------------------------------------------------------
                           40,540 (2)                 --                     --                    0.69         2/21/2016
--------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------------
 JD Gardner                150,000 (3)             150,000                   --                    1.05         5/23/2015
--------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------------
 John C. Colton            56,059 (4)               16,667                   --                    0.55         7/1/2014
--------------------------------------------------------------------------------------------------------------------------------
                           65,972 (5)               59,028                   --                    0.92         6/9/2015
--------------------------------------------------------------------------------------------------------------------------------
                           54,548 (2)                 --                     --                    0.70         2/22/2016
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

1. The options vest over twelve succeeding quarters, beginning June 30, 2004.

2. The options vested upon grant.

3. The options vest 1/6 after 6 months service and the balance equally over the
next ten succeeding quarters, beginning November 23, 2005.

4. The options vest 1/3 after one year of service and the balance equally over
the next eight succeeding quarters, beginning June 30, 2005.

5. The options vest over twelve succeeding quarters, beginning June 9, 2005.

EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS

We and Mr. Frank Galuppo, our Chief Executive Officer and President and a
director, entered into three-year employment agreement, effective as of March
15, 2004, pursuant to which Mr. Galuppo is currently paid an annual salary of
$235,000. The agreement further provided that if Mr. Galuppo's employment is
terminated other than for cause (as defined in the employment agreement) or if
Mr. Galuppo terminates his employment for good reason (as defined in the
employment agreement), he will be entitled to receive the equivalent of six
months' base salary and benefits. We also issued to Mr. Galuppo an option under
our 2000 Equity Incentive Plan to purchase up to 1,315,250 shares of Common
Stock at a per share exercise price of $0.79, which option is scheduled to vest
over twelve succeeding quarters, beginning June 30, 2004. Mr. Galuppo has agreed
to certain customary confidentiality and non-compete provisions that prohibit
him from competing with us for one year, or soliciting our employees for one
year, following the termination of his employment.

In May 2005, we entered into an employment agreement with James D. Gardner
pursuant to which Mr. Gardner serves as our Chief Financial Officer. The
agreement has an initial term of one year. After the initial term of one year,
the agreement automatically renews for an additional one-year term unless either
party notifies the other in writing upon at least 45 days prior to the scheduled
termination of the initial term or any renewal term that it does not intend to
renew such agreement. Mr. Gardner is paid a monthly salary of $14,583 and was
granted options under the Company's 2000 Equity Incentive Plan to purchase
300,000 shares of Common Stock at a per share purchase price of $1.05. The
options vest over three years from the grant date on a quarterly basis. The
agreement may be terminated by Mr. Gardner for any reason on 60 days written
notice to us or by us immediately for cause. In the event of a termination by us
for any reason other than cause, we are to pay Mr. Gardner an amount equal to 6
months' salary. Mr. Gardner has agreed to certain customary confidentiality and
non-compete provisions that prohibit him from competing with us for one year, or
soliciting our employees for one year, following the termination of his
employment.

In June 2005, we entered into an employment agreement with John R. Colton
pursuant to which Mr. Colton serves as our Chief Technology Officer and pursuant
to which he is paid a monthly salary of $12,500. Either we or Mr. Colton may
terminate the agreement at any time upon advance notice. In connection with the
entry into the employment agreement, Mr. Colton was granted options under the
Company's 2000 Equity Incentive Plan to purchase 125,000 shares of Common Stock
at a per share purchase price of $0.92. The options vest over three years from
the grant date.

                                       33
<PAGE>

COMPENSATION OF DIRECTORS

In addition to cash compensation, we compensate our non-employee directors by
the grant of options from our 2002 Non-Employee Directors Stock Option Plan.

The following table summarizes data concerning the compensation of our
non-employee directors for the fiscal year ended December 31, 2006.

<TABLE>
<CAPTION>
                              Fees Earned              Option
                              or paid (1)          Awards($) (2)       Total ($)
                              -----------          -------------       ---------
<S>                               <C>                <C>       <C>       <C>
Juan Mendez                       23,750             $207,462  (3)       231,212

Richard Rosenblum                 29,250             $ 80,317 (4)        109,567

Gerald Butters                    12,000               63,515 (5)         75,515

Bob Martin                        16,500               38,995 (6)         55,495
</TABLE>

(1)    Certain of the amounts payable in respect of fiscal 2006 have been
       deferred pending the raise by us of additional financing, as follows: (i)
       payment to Mr. Mendez in the approximate amount of $5,750 have been
       deferred, (ii) payment to Mr. Rosenblum in the approximate amount of
       $7,250 have been deferred, (iii) payment to Mr. Butters in the
       approximate amount of $3,500 have been deferred and (iv) payment to Mr.
       Martin in the approximate amount of $4,000 have been deferred.
(2)    Amounts in this column reflect the expense recognized by the Company for
       accounting purposes calculated in accordance with FASB Statement of
       Financial Accounting Standards No. 123R ("FAS 123R") with respect to
       employee stock options issued under the Company's 2002 Non-Employee
       Directors Plan. For information on the assumptions used to calculate the
       value of stock option grants under FAS 123R, see Note ___ of the
       Company's financial statements for the year ended December 31, 2006
       included elsewhere in this report. Options are discussed in further
       detail in the Outstanding Equity Awards at Fiscal Year End Table. The
       assumptions used to calculate the fair value of stock option grants under
       FAS 123R, were: expected holding period of 3.5 years, risk free interest
       rate of 4.8-4.9%, no dividend yield and volatility of 55-70%.
(3)    Represents the expense associated with the grant of options for (i)
       136,250 shares issued on April 25, 2006 in consideration of service on
       the our Board of Directors during fiscal 2005, (ii) 115,000 shares issued
       on October 12, 2006 in consideration of service on our Board of Directors
       during fiscal 2006 and (iii) 328,812 shares issued on February 22, 2006.
(4)    Represents the expense associated with the grant of options for (i)
       116,250 shares issued on April 25, 2006 in consideration of service on
       the our Board of Directors and (ii) 75,000 shares issued on October 12,
       2006 in consideration of service on our Board of Directors during fiscal
       2006.
(5)    Represents the expense associated with the grant of options for (i)
       25,000 shares issued on April 25, 2006 in consideration of service on the
       our Board of Directors during fiscal 2005, (ii) 25,000 shares issued on
       October 12, 2006 in consideration of service on our Board of Directors
       during fiscal 2006 and (iii) 112,500 shares issued on February 22, 2006.
(6)    Represents the expense associated with the grant of options for 25,000
       shares issued on April 25, 2006 in consideration of service on the our
       Board of Directors during fiscal 2005 and (ii) 25,000 shares issued on
       October 12, 2006 in consideration of service on our Board of Directors
       during fiscal 2006. Does NOT include expense associated with the issuance
       of options for an additional 25,000 shares in connection with other
       services provided to the Company. See Item 12, "Certain Relationships and
       Related Transactions"

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

The following table sets forth certain information, as of May 16, 2007,
concerning the ownership of the Common Stock by (a) each person who, to the best
of the Company's knowledge, beneficially owned on that date more than 5% of the
outstanding Common Stock, (b) each of the Company's directors and Named
Executive Officers (as defined above under "Executive Compensation") and (c) all
current directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
                                                                                Number of Shares
                 Percent of                                          -----------------------------------------
                 Name of Beneficial Owner (1)                        Beneficially Owned (2)   Common Stock (2)
                 ----------------------------                        ----------------------   ----------------
<S>                                                                       <C>                       <C>
                 Frank Galuppo, President, Chief Executive Officer
                    and Director                                          1,370,789 (3)             4.56%

                 James D. Gardner, Chief Financial Officer                  211,100 (4)                *

                 John R. Colton, Chief Technology Officer                   225,602 (5)                *

                 Juan Mendez, Director                                    1,990,688 (6)             6.58%

                 Richard Rosenblum, Director                                372,323 (7)             1.24%

                 Gerald Butters, Director                                   237,500 (8)                *

                 Bob Martin, Director                                       150,000 (9)                *

                 Puritan LLC                                              1,533,334 (10)            5.07%

                 Melton Management Limited                                2,187,619 (11)            7.23%

                 All directors and executive officers as
                    a group(7 persons)                                    4,555,002                15.05%
</TABLE>

                                       34
<PAGE>


* Indicates less than 1%.

(1) Unless otherwise indicated, the address of each person listed is c/o Amedia
Networks, Inc., 2 Corbett Way, Eatontown, New Jersey 07724.

(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "SEC") and generally includes voting or
investment power with respect to securities. In accordance with SEC rules,
shares of Common Stock issuable upon the exercise of options or warrants which
are currently exercisable or which become exercisable within 60 days following
the date of the information in this table are deemed to be beneficially owned
by, and outstanding with respect to, the holder of such options or warrants.
Except as indicated by footnote, and subject to community property laws where
applicable, to the knowledge of the Company, each person listed is believed to
have sole voting and investment power with respect to all shares of Common Stock
owned by such person.

(3) Represents (i) 35,270 shares of Common Stock and (ii) 1,335,519 shares of
Common Stock issuable upon the exercise of currently exercisable employee stock
options issued under the Company's 2000 Equity Incentive

(4) Represents (i) 36,100 shares of Common Stock and (ii) 175,000 shares of
Common Stock issuable upon the exercise of currently exercisable employee stock
options issued under the Company's 2000 Equity Incentive Plan. Does not include
options to purchase an additional 125,000 shares of Common Stock scheduled to
vest by May 2008.

(5) Represents (i) 27,274 shares of Common Stock and (ii) 198,328shares of
Common Stock issuable upon the exercise of currently exercisable employee stock
options issued under the Company's 2000 Equity Incentive Plan. Does not include
options to purchase an additional 56,946 shares of Common Stock scheduled to
vest over the next two years.

(6) Represents (i) 1,260,626 shares of Common Stock and (ii) 730,062 shares of
Common Stock issuable upon exercise of currently exercisable options. The
foregoing is based, in part, on the Amendment No. 1 to Schedule 13D filed by the
stockholder on March 3, 2006.

(7) Represents (i) 16,667 shares of Common Stock, (ii) 164,406 shares of Common
Stock issuable upon exercise of currently exercisable non-plan options and (iii)
191,250 shares of Common Stock issuable upon the exercise of currently
exercisable employee stock options issued under the Company's 2002 Non-Employee
Directors Stock Option Plan.

(8) Represents (i) 56,250 shares of Common Stock and (ii) 181,250 shares of
Common Stock issuable upon the exercise of currently exercisable employee stock
options issued under the Company's 2002 Non-Employee Directors Stock Option
Plan.

(9) Represents shares of Common Stock issuable upon the exercise of currently
exercisable employee stock options issued under the Company's 2002 Non-Employee
Directors Stock Option Plan.

(10) The stockholder is a limited liability company. The address of such person
is 314 McDonald Avenue, Brooklyn, New York 11218. The foregoing is based on a
Schedule 13G filed by the stockholder on November 19, 2004.

(11) The address of such person is P.O. Box 3161, Road Town, Tortola, British
Virgin Islands. The foregoing is based on a Schedule 13G filed by the
stockholder on October 8, 2003, as amended on February 10, 2006. Does not
include shares of Common Stock issuable upon conversion of Convertible Preferred
Stock or exercise of warrants referred to under "Selling Stockholders."

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth certain information as of December 31, 2006
relating to our equity compensation plans.

EQUITY COMPENSATION PLAN INFORMATION

<TABLE>
<CAPTION>
                   Plan Category                  Number of       Weighted-          Number of
                                                securities to      average           securities
                                                  be issued    exercise price of     remaining
                                                    upon          outstanding      available for
                                                 exercise of       options,           future
                                                 outstanding       warrants          issuance.
                                                  options,        and rights
                                                warrants and
                                                   rights
                                                     (a)              (b)                 (c)
                                                 ----------     ------------         ---------
<S>                                               <C>               <C>               <C>
       Equity compensation plans approved by
                  security holders                8,186,364         $1.49             3,413,158

       Equity compensation plans not approved
                by security holders               6,492,626(1)      $1.38                     -
                                                 ----------                           ---------
                      Total                      14,678,990         $1.44            3,413,158
                                                 ==========                           =========
</TABLE>

                                       35
<PAGE>

(1) Comprised of to (i) 164,406 shares of our Common Stock that may be issuable
upon the exercise of non-plan five-year options issued to a non-employee
director in January 2004 and are exercisable at a per share exercise price of
$0.56, (ii) 100,000 shares of our Common Stock that may be issuable upon the
exercise of four year warrants issued to a service provider and are exercisable
at a per share exercise price of $0.62, (iii) 716,667 shares of our Common Stock
issuable upon exercise of five year warrants issued in August 2004 to placement
agent in connection with the private placement of our 7% Series A Convertible
Preferred Stock at prices ranging from $0.75 to $2.50 per share, subject to
cashless exercise provisions under certain terms, (iv) 333,333 shares of our
Common Stock issuable upon exercise of five year warrants issued in August 2004
to a provider of an equity line commitment discussed in Note 11to the
accompanying financial statement, (v) 150,000 shares of our Common Stock
issuable upon exercise of five year warrants issued in April 2005 in connection
with a short-term loan made to us (vi) 1,153,220 shares of our Common Stock
issuable upon exercise of five year warrants issued in April and May 2005 to a
placement agent in connection with the private placement of our 8% Series B
Convertible Preferred Stock, as more fully described in Note 5 of the
accompanying financial statement (vii) 500,000 shares of our Common Stock
issuable upon exercise of five year warrants issued in December 2005 in
connection with a short-term loan made to us, (viii) 1,375,000 shares of our
Common Stock issuable upon exercise of five year warrants issued between January
and May 2006 in connection with a short-term loan made to us, and (ix) 2,000,000
shares of our Common Stock issuable upon exercise of five year warrants issued
in July 2006 issued to a placement agent in connection with the private
placement of our 8% Convertible Debenture.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In December 2004, the Company entered into a service agreement with Elite
Financial Communications Group, LLC ("Elite"), pursuant to which Elite agreed to
provide investor relation services to the Company for compensation of $7,500 per
month (plus expenses). By its terms, the agreement with Elite expired in
December 2005. One of the Company's former non-employee directors was a partner
and managing member of Elite. This director resigned from service on the Board
of Directors as of June 9, 2005.

In August 2004, we paid to Greenfield Capital Partners, LLC, and its designees
("Greenfield"), a placement fee with respect to the placement of 2,500 shares of
our Convertible Preferred Stock. The placement fee was comprised of (i) a cash
payment of $25,000 and (ii) five-year warrants to purchase up to 66,667 shares
of our Common Stock, of which warrants to purchase 33,333 shares are exercisable
at a per share exercise price of $.75, warrants to purchase 16,667 shares are
exercisable at a per share exercise price of $1.50 and warrants to purchase
16,667 shares are exercisable at a per share exercise price of $2.50. The
warrants are otherwise exercisable on the same terms and conditions as those
relating to the Warrants issued to the purchasers of the Convertible Preferred
Stock. One of our directors, Mr. Richard Rosenblum, was a Managing Director of
such entity at the time that the private placement was consummated. At that time
Greenfield designated Mr. Rosenblum to receive half of those warrants. Mr.
Rosenblum subsequently left Greenfield Capital Partners, LLC.

In January 2006 we entered into bridge loan agreements with three private
investors (collectively the "January 2006 Investors"), pursuant to which these
investors loaned to us, on a secured basis, the aggregate amount of $500,000.
The January 2006 Investors included Mr. Juan Mendez, Chairman of the Company's
board of directors, who loaned the Company $250,000. Pursuant to the terms of
the agreements with these investors, we issued to Mr. Mendez five year warrants
to purchase up to 125,000 shares of our Common Stock at a per share exercise
price of $1.50, subject to adjustment.

On November 13, 2006, we obtained a $100,000 loan from Mr. Juan Mendez, the
Chairman of our board of directors, for purpose of meeting our operating
requirements. The loan was made pursuant to our demand promissory note issued to
Mr. Mendez in the principal amount of $100,000. Interest on the loan accrues at
the rate of 24% per annum.

 ITEM 13. EXHIBITS

3.1 Certificate of Incorporation of the Company dated July 14, 1994. (1)

3.2 Certificate of Amendment to the Certificate of Incorporation of the Company
    dated August 17, 1994. (2)

3.3 Certificate of Amendment to the Certificate of Incorporation of the Company
    dated January 30, 1999. (3)

3.4 Certificate of Amendment to the Certificate of Incorporation of the Company
    dated December 21, 1999. (3)

3.5 Certificate of Amendment to the Certificate of Incorporation of the Company
    dated July 15, 2000. (4)

3.6 Certificate of Amendment to the Certificate of Incorporation of the Company
    dated July 19, 2006. *

3.6 By-Laws of the Company, as amended. (2)

4.1 Specimen Common Stock Certificate. (1)

4.2 Certificate of Designations of Rights and Preferences of the Series A
    Convertible Preferred Stock of the Company. (10)

4.3 Form of Common Stock Purchase Warrant issued by the Company to certain
    investors. (9)

                                       36
<PAGE>

4.4   Form of Common Stock Purchase Warrant issued by the Company to certain
      placement agents. (9)

4.5   Form of Common Stock Purchase Warrant issued by the Company to the
      investor identified therein. (9)

4.6   Certificate of Designations of Rights and Preferences of the Series B
      Convertible Preferred Stock of the Company. (10)

4.7   Form of Common Stock Purchase Warrant issued by the Company to certain
      investors as of April 26, 2005. (10)

4.8   Form of Five-Year Warrant issued on December 22, 2005. (12)

4.10  Form of 8% Senior Secured Convertible Debenture issued on May 5,
      2006. (13)

4.11  Form of Five-Year Warrant issued on May 5, 2006. (14)

4.12  Form of Promissory Note issued on January 19, 2007 (16)

10.1  1996 Incentive and Non-Qualified Stock Option Plan, as amended. (2)

10.2  The Company's 2000 Equity Incentive Plan. (5)

10.3  The Company's Non-Executive Directors Stock Option Plan. (5)

10.4  The Company's 2002 Non-Employee Directors Stock Option Plan. (6)

10.5  Development and Licensing Agreement dated as of January 6, 2004 between
      the Company and Lucent Technologies Inc. (8)

10.6  Amendment to the Development and Licensing Agreement between the Company
      and Lucent Technologies, Inc. (8)

10.7  Employment Agreement dated as of March 3, 2004 between the Company and
      Frank Galuppo. (7) +

10.8  Form of Securities Purchase Agreement dated as of July 30, 2004 among the
      Company and purchasers of the Convertible Preferred Stock. (9)

10.9  Form of Registration Rights Agreement dated as of July 30, 2004 among the
      Company and certain investors identified therein. (9)

10.10 Private Equity Credit Agreement dated as of August 9, 2004 by and between
      the Company and the investor identified therein. (9)

10.11 Registration Rights Agreement dated as of August 9, 2004 by and between
      the Company and the investor identified therein. (9)

10.12 Lease dated as of February 9, 2005 between 2 Corbett Way, LLC and the
      Company. (10)

10.13 Form of Securities Purchase Agreement dated as of April 22, 2005 among the
      Company and certain investors identified therein. (10)

10.14 Form of Registration Rights Agreement dated as of April 22, 2005 among the
      Company and certain investors identified therein. (10)

                                       37
<PAGE>



10.15 Employment Agreement dated May 12, 2005 between the Company and James D.
      Gardner. (13)+

10.21 Form of Securities Purchase Agreement dated as of April 26, 2006 between
      the Company and the investors named therein. (13)

10.22 Form of Security Interest Agreement dated as of April 26, 2006 among the
      Company, the Secured Parties named therein, and Krieger & Prager, LLP,
      as agent for the Secured Parties. (13)

10.23 Form of Registration Rights Agreement dated as of April 26, 2006 between
      the Company and the investors named therein. (13)

10.24 Strategic Alliance Agreement, effective as of April 3, 2006 between the
      Company and Motorola Wireline Networks Inc. (14) (confidential treatment
      requested with respect to certain portions thereof; such portions have
      been redacted).

10.25 Offer Letter issued by the Company on October 16, 2006 to the investors
      specified therein.(15)

10.26 Form of Bridge Loan Agreement dated as of October 10, 2006. (15)

14.1  Code of Business Conduct. (7)

15.   Subsidiary of Amedia: TTR Technologies, Ltd., an Israeli corporation,
      wholly-owned.

31.1  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) /
      15d-14(a) *

31.2  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) /
      15d-14(a *

32.1  Certification of Chief Executive Officer pursuant to Section 906 of
      Sarbanes Oxley Act of 2002 *

32.2  Certification of Chief Financial Officer pursuant to Section 906 of
      Sarbanes Oxley Act of 2002 *

+ Management Agreement

* Filed Herewith

(1) Filed as an exhibit to the Registrant's Registration Statement on Form SB-2
(File No. 333-11829) filed on September 12, 1996 and incorporated herein by
reference.

(2) Filed as an exhibit to the Registrant's Annual Report on Form 10-KSB filed
for the year ended December 31, 1998 and incorporated herein by reference.

(3) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (File
No. 333-32662) filed on March 16, 2000 and incorporated herein by reference.

(4) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000 and incorporated herein by reference.

(5) Filed as an exhibit to Registrant's Annual Report on Form 10-K filed for the
year ended December 31, 2001 and incorporated herein by reference.

(6) Filed as an exhibit to Registrant's Revised Definitive Proxy Statement for
the 2002 Annual meeting of Stockholders, and incorporated herein by reference.

(7) Filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 2003 and incorporated herein by reference.

(8) Filed as an exhibit to Registrant's Definitive Proxy Statement filed on
February 10, 2004 and incorporated herein by reference.

(9) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
August 12, 2004 and incorporated herein by reference.

(10) Filed as an exhibit to Registrant's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2005 and incorporated herein by reference.

(11) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
April 28, 2005 and incorporated herein by reference.

(12) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
December 22, 2005 and incorporated herein by reference.

                                       38
<PAGE>

(13) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on May
11, 2006 and incorporated herein by reference.

(14) Filed as an exhibit to Registrant's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2006 and incorporated herein by reference.

(15) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
October 24, 2006 and incorporated herein by reference.

(16) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
January 25, 2007 and incorporated herein by reference

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table presents fees for professional audit services rendered by
Marcum for the audit of our annual financial statements for 2006 and 2005 and
fees billed for other services rendered by Marcum during 2005 and 2004.

                  Type of Service/Fee       Fiscal 2006        Fiscal 2005
                  -------------------       -----------        -----------

                  Audit Fees (1)             $208,000           $100,542


                  Audit Related Fees (2)      $0                  $0
                  Tax Fees (3)                $0                  $0
                  All Other Fees (4)          $0                  $0


(1) Consists of fees for professional services rendered for the audit of our
consolidated financial statements included in the annual report and the review
of the interim financial statements included in the quarterly reports, and for
the services that are normally provided in connection with regulatory filings or
engagements.

(2) Includes fees associated with assurance and related services that are
reasonably related to the performance of the audit or review of the Company's
financial statements. This category includes fees related to consultation
regarding generally accepted accounting principles.

(3) Consists of fees for tax compliance, tax advice and tax planning.

(4) Consists of fees for products and services not included in the above
categories.

The Audit Committee reviewed the non-audit services rendered for fiscal 2006 and
fiscal 2005 as set forth in the above table and concluded that such services
were compatible with maintaining the accountants' independence. The Audit
Committee's policy is to pre-approve all audit services and all non-audit
services that our independent auditor is permitted to perform under applicable
federal securities regulations. As permitted by the applicable regulations, the
Audit Committee's policy utilizes a combination of specific pre-approval on a
case-by-case basis of individual engagements of the independent auditor and
general pre-approval of certain categories of engagements up to predetermined
dollar thresholds that are reviewed annually by the Audit Committee. Specific
pre-approval is mandatory for the annual financial statement audit engagement,
among others.


                                       39
<PAGE>


                                   SIGNATURES

In accordance with the requirements of the Exchange Act the issuer caused this
report to be signed by the undersigned thereunto duly authorized.

  DATE: MAY 18, 2007                    /S/ FRANK GALUPPO
                                        -----------------
                                        FRANK GALUPPO
                                        CHIEF EXECUTIVE OFFICER (PRINCIPAL
                                        EXECUTIVE  OFFICER)

  DATE: MAY 18, 2007                    /S/ JD GARDNER
                                        --------------
                                        JD GARDNER
                                        CHIEF FINANCIAL OFFICER
                                        (PRINCIPAL FINANCIAL AND ACCOUNTING
                                        OFFICER)


In accordance with the Exchange Act, this report has been signed by the
following persons in the capacities and on the dates indicated.

           SIGNATURE                              TITLE                DATE
           ---------                              -----                ----


    /S/ FRANK GALUPPO                       PRESIDENT, CHIEF     MAY 18, 2007
    ------------------------------          EXECUTIVE OFFICER,
    FRANK GALUPPO                           DIRECTOR (PRINCIAL
                                            EXECUTIVE OFFICER)


    /S/ JUAN MENDEZ                         CHAIRMAN             MAY 18, 2007
    ------------------------------
    JUAN MENDEZ


    /S/ RICHARD ROSENBLUM                   DIRECTOR             MAY 18, 2007
    ------------------------------
    RICHARD ROSENBLUM


    /S/ GERALD BUTTERS                      DIRECTOR             MAY 18, 2007
    ------------------------------
    GERALD BUTTERS


    /S/ BOB MARTIN                          DIRECTOR             MAY 18, 2007
    ------------------------------
    BOB MARTIN


                                       40
<PAGE>

                                INDEX TO AUDITED

 CONSOLIDATED FINANCIAL STATEMENTS

      Report of Independent Registered Public Accounting Firm               F-2

      Consolidated Balance Sheet
        At December 31, 2006                                                F-3

      Consolidated Statements of Operations
        for the Years Ended December 31, 2006 and 2005                      F-4
        and from Inception (July 14, 1994) to December 31, 2006

      Consolidated Statements of Comprehensive Loss
        for the Years Ended December 31, 2006 and 2005                      F-5
        and from Inception (July 14, 1994) to December 31, 2006

      Consolidated Statements of Stockholders' Equity (Deficiency)
        from Inception (July 14, 1994) to December 31, 2006                 F-6

      Consolidated Statements of Cash Flows
        for the Years Ended December 31, 2006 and 2005                      F-7
        and from Inception (July 14, 1994) to December 31, 2006

      Notes to the Consolidated Financial Statements                        F-9

                                      F-1

<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the Board of Directors and
Stockholders of Amedia Networks, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheet of Amedia Networks,
Inc. and Subsidiary (a development stage company) (the "Company") as of December
31, 2006 and the related consolidated statements of operations, comprehensive
loss, stockholders' equity (deficiency), and cash flows for the years ended
December 31, 2006 and 2005 and for the period from January 1, 2003 to December
31, 2006 (for which the statements of operations and cash flows are not
presented separately herein). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

The consolidated financial statements of the Company for the period from July
14, 1994 (inception) to December 31, 2002 were audited by other auditors whose
report, dated March 20, 2003, expressed an unqualified opinion on those
statements and included an explanatory paragraph regarding the Company's ability
to continue as a going concern. The consolidated financial statements for the
period from July 14, 1994 (Inception) to December 31, 2002 reflect a net loss of
$40,370,429 of the total inception to date net loss of $70,456,875. The other
auditors' report has been furnished to us, and our opinion, insofar as it
related to the amounts included for such prior periods is based solely on the
report of such other auditors.

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

In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Amedia Networks, Inc. and
Subsidiary as of December 31, 2006, and the results of their operations and
their cash flows for the years ended December 31, 2006 and 2005 and for the
period from July 14, 1994 (Inception) to December 31, 2006, in conformity with
accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred significant
operating losses resulting in cash flow deficiencies from operations and a
working capital deficiency of $5,184,333 as of December 31, 2006. As described
more fully in Notes 2 and 13, the Company is in default on its loan agreements
in connection with certain bridge loans and, upon the receipt of notice from any
one investor, would be in default on its agreements in connection with its 8%
Senior Secured Convertible Debentures. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding these matters also are described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

  /s/ MARCUM & KLIEGMAN LLP

  New York, New York
  March 9, 2007 (except for Note 2 and
  Note 13B as to which the date is March 31, 2007,
  Note 13C as to which the date is March 22, 2007
  and Note 13D as to which the date is April 23, 2007)

                                      F-2
<PAGE>

<TABLE>
<CAPTION>
                           AMEDIA NETWORKS, INC. AND SUBSIDIARY
                               (A DEVELOPMENT STAGE COMPANY)
                                CONSOLIDATED BALANCE SHEET

                                     December 31, 2006

                                          ASSETS
Current assets
<S>                                                                          <C>
      Cash and cash equivalents                                              $    368,294
      Accounts receivable                                                           6,225
      Inventories                                                                 103,003
      Due from Motorola                                                           218,805
      Prepaid expenses and other current assets                                   181,215
                                                                             ------------
      Total current assets                                                        877,542
                                                                             ------------
Property and equipment - net                                                      730,724
                                                                             ------------

Other assets
      Capitalized software costs                                                  708,542
      Deferred financing costs                                                  1,557,548
      Security deposit                                                             46,750
                                                                             ------------
      Total other assets                                                        2,312,840
                                                                             ------------
         Total assets                                                        $  3,921,106
                                                                             ============

                   LIABILITIES AND STOCKHOLDERS' DEFICIENCY
LIABILITIES
Current liabilities
      Accounts payable                                                       $  1,464,736
      Accrued expenses                                                            311,500
      Accrued penalties                                                         2,156,946
      Accrued interest                                                            531,753
      Notes payable, net of unamortized discounts of $49,085                    1,584,675
      Current portion of capital leases                                            12,265
                                                                             ------------
      Total current liabilities                                                 6,061,875
                                                                             ------------

Long-term liabilities
      8% Convertible debentures, net of unamortized discount of $5,251,606      4,748,394
      Capital leases, less current maturities                                        --
                                                                             ------------
         Total liabilities                                                     10,810,269
                                                                             ------------

Commitments and contingencies

STOCKHOLDERS' DEFICIENCY
Preferred stock, $.001 par value;
   5,000,000 shares authorized;
   Series A convertible preferred stock,
   52,500 shares authorized; 10,418 issued and outstanding
   ($1,041,800 liquidation preference)                                                 10
   Series B convertible preferred stock,
   85,000 shares authorized; 33,000 issued and outstanding
   ($3,300,000 liquidation preference)                                                 33
Common stock, $.001 par value;
   100,000,000 shares authorized; 30,259,747
   issued and outstanding                                                          30,260
Additional paid-in capital                                                     72,065,941
Deficit accumulated during the development stage                              (78,958,908)
Deferred compensation                                                             (26,499)
                                                                             ------------
      Total stockholders' deficiency                                           (6,889,163)
                                                                             ------------
         Total liabilities and stockholders' deficiency                      $  3,921,106
                                                                             ============
</TABLE>

                See Notes to Consolidated Financial Statements.


                                           F-3
<PAGE>
<TABLE>
<CAPTION>
                                           AMEDIA NETWORKS, INC. AND SUBSIDIARY
                                              (A DEVELOPMENT STAGE COMPANY)
                                           CONSOLIDATED STATEMENTS OF OPERATION
                                                                                                               From
                                                                                                             Inception
                                                                                  Twelve Months              (July 14,
                                                                                      Ended                   1994) to
                                                                                  December 31,              December 31,
                                                                            2006              2005              2006
                                                                        ------------      ------------      ------------
<S>                                                                     <C>               <C>               <C>
Sales                                                                   $     32,723      $      5,548      $     38,271
                                                                        ------------      ------------      ------------
Cost of goods sold                                                            26,628             6,078            32,706
                                                                        ------------      ------------      ------------
Gross profit (loss)                                                            6,095              (530)            5,565
                                                                        ------------      ------------      ------------

Expenses
     Research and development (1)                                          4,866,851         3,975,852        18,225,768
     Sales and marketing (1)                                               1,350,033         2,422,999        14,072,360
     General and administrative (1)                                        3,767,961         2,209,171        26,459,044
     Inventory write off                                                     898,802              --             898,802
     Impairment of capitalized software                                      880,021              --             880,021
     Bad debt expense                                                           --                --             161,000
                                                                        ------------      ------------      ------------
Total expenses                                                            11,763,668         8,608,022        60,696,995
                                                                        ------------      ------------      ------------

Operating loss                                                           (11,757,573)       (8,608,552)      (60,691,430)
                                                                        ------------      ------------      ------------

Other expense (income)
     Legal settlement                                                           --                --             565,833
     Late filing penalty on stock registration rights                      1,904,018            86,742         2,190,260
     Realized gain of foreign currency translation                              --                --             (81,007)
     Loss on investment                                                         --                --              17,000
     Other income                                                               --                --             (75,000)
     Net losses of affiliate                                                    --                --           1,196,656
     Impairment loss on investment in affiliate                                 --                --             748,690
     Revenue from copy protection business                                      --                --            (125,724)
     Gain on sale of copy protection business                                   --                --          (5,708,328)
     Gain on sale of investment in affiliate                                    --                --             (40,000)
     Loss on disposition of fixed assets                                        --               1,692            30,873
     Amortization of deferred financing costs                                421,525              --           4,938,300
     Impaired offering costs                                                    --             267,404           267,404
     Interest income                                                         (43,109)          (36,006)       (1,027,844)
     Interest expense                                                      4,615,296           286,889         6,868,332
                                                                        ------------      ------------      ------------
Total other expense                                                        6,897,730           606,721         9,765,445
                                                                        ------------      ------------      ------------

Net loss                                                                $(18,655,303)     $ (9,215,273)     $(70,456,875)
                                                                        ============      ============      ============
Deemed dividend on convertible preferred stock                             1,591,525         3,076,104         7,162,382
Dividend on convertible preferred stock                                      544,760           649,905         1,339,651
                                                                        ------------      ------------      ------------

Net loss applicable to common stockholders                              $(20,791,588)     $(12,941,282)     $(78,958,908)
                                                                        ============      ============      ============

Per share data:

     Basic and diluted                                                  $      (0.78)     $      (0.64)
                                                                        ============      ============

Weighted average number
    of common shares used in
    basic and diluted loss per share                                      26,539,602        20,378,250
                                                                        ============      ============

(1) Includes non-cash, stock-based compensation expense as follows:

     Research and development                                           $    253,831      $     18,573      $    728,643
     Sales and marketing                                                     154,590              --           5,491,148
     General and administrative                                            1,235,190            73,592         7,007,545
                                                                        ------------      ------------      ------------
                                                                        $  1,643,611      $     92,165      $ 13,227,336
                                                                        ============      ============      ============

                                     See Notes to Consolidated Financial Statements.
</TABLE>

                                                           F-4
<PAGE>

<TABLE>
<CAPTION>
                                           AMEDIA NETWORKS, INC. AND SUBSIDIARY
                                              (A DEVELOPMENT STAGE COMPANY)
                                      CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

                                                                                                             From
                                                                                                             Inception
                                                                                   Year                      (July 14,
                                                                                   Ended                     1994) to
                                                                                 December 31,               December 31,
                                                                            2006              2005              2006
                                                                        ------------      ------------      ------------

<S>                                                                     <C>               <C>               <C>
Net loss                                                                $(18,655,303)     $ (9,215,273)     $(70,456,875)

Other comprehensive loss
     Foreign currency translation adjustments                                     --                --                --
                                                                        ------------      ------------      ------------
            Comprehensive loss                                          $(18,655,303)     $ (9,215,273)     $(70,456,875)
                                                                        ============      ============      ============
</TABLE>


                                                           F-5
<PAGE>

<TABLE>
<CAPTION>

                                           AMEDIA NETWORKS, INC. AND SUBSIDIARY
                                              (A DEVELOPMENT STAGE COMPANY)
                                    CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY


                                                                                                   Preferred Stock
                                                                                     Series A                      Series B
                                                                             Shares         Amount         Shares        Amount
                                                                          ------------   ------------   ------------   -----------
<S>                                                                                      <C>                           <C>
Balances at July 14, 1994 (date of inception)                                     --     $       --             --     $       --

Issuances of common stock, par value $.001
            Services rendered
            Cash

Net loss
                                                                          ------------   ------------   ------------   ------------
Balances at December 31, 1994

Common stock contributed
Issuances of common stock, par value $.001
            Services rendered
Stock options and warrants granted
Foreign currency translation adjustment
Net loss
                                                                          ------------   ------------   ------------   ------------

Balances at December 31, 1995

Issuances of common stock, par value $.001
            Cash, net of offering costs of $11,467
Foreign currency translation adjustment
Net loss
                                                                          ------------   ------------   ------------   ------------
Balances at December 31, 1996

Common stock contributed

Issuances of common stock, par value $.001
            Cash, net of offering costs of $832,551
            Services rendered
            Exercise of options
Common stock subscriptions
Sale of Underwriters warrants
Stock options and warrants granted
Amortization of deferred compensation
Foreign currency translation adjustment
Net loss
                                                                          ------------   ------------   ------------   ------------
Balances at December 31, 1997

Common stock subscriptions
Common Stock forfeited
Transfer of temporary equity to permanent capital
Issuances of common stock, par value $.001
            Cash
            Services rendered
Stock options and warrants granted (cancelled)
Discount relating to shares and warrants issued
Amortization of deferred compensation
Warrant exchange
Foreign currency translation adjustment
Net loss
                                                                          ------------   ------------   ------------   ------------

Balances at December 31, 1998

Issuances of common stock, par value $.001
            Cash
            Services rendered
            Exercise of option
Stock options granted  (cancelled)
Conversion of debt into common stock
Fair value of warrants associated with financing agreement
Amortization of deferred compensation
Value assigned to beneficial conversion feature
     of convertible notes
Foreign currency translation adjustment
Net loss
                                                                          ------------   ------------   ------------   ------------
Balances at December 31, 1999

Issuances of common stock, par value $.001
            Cash, net of offering costs of $730,000
            Services rendered
            Exercise of options and warrants
Stock options granted
Amortization of deferred compensation
Foreign currency translation adjustment
Net loss
                                                                          ------------   ------------   ------------   ------------
Balances at December 31, 2000

Issuances of common stock, par value $.001
            Exercise of options and warrants
Stock options granted
Amortization of deferred compensation
Foreign currency translation adjustment
Net loss
                                                                          ------------   ------------   ------------   ------------
Balances at December 31, 2001

Issuances of common stock, par value $.001
            Exercise of options and warrants
Stock options granted
Amortization of deferred compensation
Foreign currency translation adjustment
Net loss
                                                                          ------------   ------------   ------------   ------------
Balances at December 31, 2002

Issuances of common stock, par value $.001
            Exercise of options and warrants
Stock options granted (forfeited)
Amortization of deferred compensation
Macrovision sale
Foreign currency translation adjustment
Net income
                                                                          ------------   ------------   ------------   ------------
Balances at December 31, 2003

Issuances of preferred stock and warrants,
            net of offering costs of $607,570                                   52,500             52
Issuance of warrants
Stock options and warrants granted
Amortization of deferred compensation
Realized gain of foreign currency translation
Net loss
Deemed dividend on convertible preferred stock
Dividend on convertible preferred stock
                                                                          ------------   ------------   ------------   ------------
Balances at December 31, 2004                                                   52,500             52

Issuances of Series B preferred stock and warrants,                                                           77,650             78
Series A preferred stock converted into common                                 (31,322)           (31)
Series B preferred stock converted into common                                                                (6,500)            (7)
Warrants issued for Note Payable
Warrants issued for bridge loan
Stock options and warrants granted
Stock warrants exercised
Amortization of deferred compensation
Accrued penalty paid in common stock
Impaired offering costs
Net loss
Deemed dividend on convertible preferred stock
Dividend on convertible preferred stock
                                                                          ------------   ------------   ------------   -----------
Balances at December 31, 2005                                                   21,178   $         21         71,150   $         71
                                                                          ------------   ------------   ------------   ------------

Reclassification of deferred compensation upon adoption of SFAS 123R
Series A preferred stock converted into common                                 (10,760)           (11)
Series B preferred stock converted into common                                                               (38,150)           (38)
Warrants issued to debenture investors and placement agents
Warrants issued in connection with bridge loans
Stock options and warrants exercised
Stock based compensation
Stock issued to consultants
Net loss
Deemed dividend on convertible preferred stock and beneficial conversion
            feature on convertible debentures
Dividend on convertible preferred stock
                                                                          ------------   ------------   ------------   ------------
Balances at December 31, 2006                                                   10,418   $         10         33,000   $         33
                                                                          ============   ============   ============   ============

</TABLE>




Table continued

<TABLE>
<CAPTION>


                                                                                                                Common Stock
                                                                                   Common Stock                 Subscribed
                                                                            Shares          Amount         Shares        Amount
                                                                         ------------   ------------   ------------   ------------
<S>                                                                        <C>                <C>
Balances at July 14, 1994 (date of inception)                                    --     $       --              --    $        --

Issuances of common stock, par value $.001
            Services rendered                                              1,200,000          1,200
            Cash                                                           1,200,000          1,200

Net loss
                                                                         ------------   ------------   ------------   ------------
Balances at December 31, 1994                                              2,400,000          2,400             --             --

Common stock contributed                                                    (561,453)          (561)
Issuances of common stock, par value $.001
            Services rendered                                                361,453            361
Stock options and warrants granted
Foreign currency translation adjustment
Net loss
                                                                         ------------   ------------   ------------   ------------

Balances at December 31, 1995                                               2,200,000         2,200             --             --

Issuances of common stock, par value $.001
            Cash, net of offering costs of $11,467                            850,000           850
Foreign currency translation adjustment
Net loss
                                                                         ------------   ------------   ------------   ------------
Balances at December 31, 1996                                               3,050,000         3,050             --             --

Common stock contributed                                                     (135,000)         (135)

Issuances of common stock, par value $.001
            Cash, net of offering costs of $832,551                           908,000           908
            Services rendered                                                  74,000            74
            Exercise of options                                               374,548           375
Common stock subscriptions                                                                                  16,000        100,000
Sale of Underwriters warrants
Stock options and warrants granted
Amortization of deferred compensation
Foreign currency translation adjustment
Net loss
                                                                         ------------   ------------   ------------   ------------
Balances at December 31, 1997                                               4,271,548         4,272         16,000        100,000

Common stock subscriptions                                                     16,000            16        (16,000)      (100,000)
Common Stock forfeited                                                     (1,000,000)       (1,000)
Transfer of temporary equity to permanent capital                              15,000            15
Issuances of common stock, par value $.001
            Cash                                                               41,667            42
            Services rendered                                                 244,000           244
Stock options and warrants granted (cancelled)
Discount relating to shares and warrants issued                               156,111           156
Amortization of deferred compensation
Warrant exchange                                                              432,000           432
Foreign currency translation adjustment
Net loss
                                                                         ------------   ------------   ------------   ------------

Balances at December 31, 1998                                               4,176,326         4,177             --             --

Issuances of common stock, par value $.001
            Cash                                                              314,774           315
            Services rendered                                               1,227,000         1,227
            Exercise of option                                              1,714,952         1,715
Stock options granted  (cancelled)
Conversion of debt into common stock                                        3,220,508         3,221
Fair value of warrants associated with financing agreement
Amortization of deferred compensation
Value assigned to beneficial conversion feature
     of convertible notes
Foreign currency translation adjustment
Net loss
                                                                         ------------   ------------   ------------   ------------
Balances at December 31, 1999                                              10,653,560        10,654             --             --

Issuances of common stock, par value $.001
            Cash, net of offering costs of $730,000                         3,680,937         3,681
            Services rendered                                                  16,269            16
            Exercise of options and warrants                                3,005,574         3,006
Stock options granted
Amortization of deferred compensation
Foreign currency translation adjustment
Net loss
                                                                         ------------   ------------   ------------   ------------
Balances at December 31, 2000                                              17,356,340        17,357             --             --

Issuances of common stock, par value $.001
            Exercise of options and warrants                                 237,556            238
Stock options granted
Amortization of deferred compensation
Foreign currency translation adjustment
Net loss
                                                                         ------------   ------------   ------------   ------------
Balances at December 31, 2001                                             17,593,896         17,594             --             --

Issuances of common stock, par value $.001
            Exercise of options and warrants                                 667,671            668
Stock options granted
Amortization of deferred compensation
Foreign currency translation adjustment
Net loss
                                                                         ------------   ------------   ------------   ------------
Balances at December 31, 2002                                              18,261,567        18,262             --             --

Issuances of common stock, par value $.001
            Exercise of options and warrants                                   60,000            60
Stock options granted (forfeited)
Amortization of deferred compensation
Macrovision sale                                                           (1,880,937)       (1,881)
Foreign currency translation adjustment
Net income
                                                                         ------------   ------------   ------------   ------------
Balances at December 31, 2003                                              16,440,630        16,441             --             --

Issuances of preferred stock and warrants,
            net of offering costs of $607,570
Issuance of warrants
Stock options and warrants granted
Amortization of deferred compensation
Realized gain of foreign currency translation
Net loss
Deemed dividend on convertible preferred stock
Dividend on convertible preferred stock
                                                                         ------------   ------------   ------------   ------------
Balances at December 31, 2004                                              16,440,630        16,441             --             --

Issuances of Series B preferred stock and warrants,
Series A preferred stock converted into common                              4,176,262         4,176
Series B preferred stock converted into common                                643,564           644
Warrants issued for Note Payable
Warrants issued for bridge loan
Stock options and warrants granted
Stock warrants exercised                                                     251,827            252
Amortization of deferred compensation
Accrued penalty paid in common stock                                          15,200             15
Impaired offering costs
Net loss
Deemed dividend on convertible preferred stock
Dividend on convertible preferred stock                                      788,368            788
                                                                         ------------   ------------   ------------   ------------
Balances at December 31, 2005                                              22,315,851   $    22,316             --    $        --
                                                                         ------------   ------------   ------------   ------------

Reclassification of deferred compensation upon adoption of SFAS 123R
Series A preferred stock converted into common                              1,434,666         1,434
Series B preferred stock converted into common                              4,257,756         4,258
Warrants issued to debenture investors and placement agents
Warrants issued in connection with bridge loans
Stock options and warrants exercised                                          661,018           661
Stock based compensation
Stock issued to consultants                                                   875,000           875
Net loss
Deemed dividend on convertible preferred stock and beneficial conversion
            feature on convertible debentures
Dividend on convertible preferred stock                                       715,455           716
                                                                         ------------   ------------   ------------   ------------
Balances at December 31, 2006                                              30,259,746   $    30,260   $              $
                                                                         ============   ============   ============   ============

</TABLE>





Table Continued
<TABLE>
<CAPTION>


                                                                                                              Deficit
                                                                                                            Accumulated
                                                                             Additional        Other          During
                                                                               Paid-in      Comprehensive   Development
                                                                               Capital       Income (Loss)     Stage
                                                                            ------------    ------------    ------------
<S>                                                                          <C>             <C>             <C>
Balances at July 14, 1994 (date of inception)                                $       --      $       --      $       --

Issuances of common stock, par value $.001
            Services rendered
            Cash                                                                 23,800

Net loss                                                                                                        (42,085)
                                                                            ------------    ------------    ------------
Balances at December 31, 1994                                                     23,800             --         (42,085)

Common stock contributed                                                             561
Issuances of common stock, par value $.001
            Services rendered                                                     17,712
Stock options and warrants granted                                                   600
Foreign currency translation adjustment                                                          22,652
Net loss                                                                                                       (896,663)
                                                                            ------------    ------------    ------------

Balances at December 31, 1995                                                     42,673         22,652        (938,748)

Issuances of common stock, par value $.001
            Cash, net of offering costs of $11,467                               362,683
Foreign currency translation adjustment                                                          35,044
Net loss                                                                                                     (1,121,211)
                                                                            ------------    ------------    ------------
Balances at December 31, 1996                                                    405,356         57,696      (2,059,959)

Common stock contributed                                                             135

Issuances of common stock, par value $.001
            Cash, net of offering costs of $832,551                            5,000,440
            Services rendered                                                    832,551
            Exercise of options                                                    3,370
Common stock subscriptions
Sale of Underwriters warrants                                                         80
Stock options and warrants granted                                             1,875,343
Amortization of deferred compensation
Foreign currency translation adjustment                                                         (19,667)
Net loss                                                                                                     (4,119,612)
                                                                            ------------    ------------    ------------
Balances at December 31, 1997                                                  8,117,275         38,029      (6,179,571)

Common stock subscriptions                                                        99,984
Common Stock forfeited                                                             1,000
Transfer of temporary equity to permanent capital                                 77,141
Issuances of common stock, par value $.001
            Cash                                                                  24,958
            Services rendered                                                    620,344
Stock options and warrants granted (cancelled)                                  (255,992)
Discount relating to shares and warrants issued                                  486,307
Amortization of deferred compensation
Warrant exchange                                                                    (432)
Foreign currency translation adjustment                                                          41,386
Net loss                                                                                                     (5,578,540)
                                                                            ------------    ------------    ------------

Balances at December 31, 1998                                                  9,170,585         79,415     (11,758,111)

Issuances of common stock, par value $.001
            Cash                                                                 225,140
            Services rendered                                                  1,669,548
            Exercise of option                                                 1,401,660
Stock options granted  (cancelled)                                             4,449,015
Conversion of debt into common stock                                           3,376,748
Fair value of warrants associated with financing agreement                     3,845,400
Amortization of deferred compensation
Value assigned to beneficial conversion feature
     of convertible notes                                                        572,505
Foreign currency translation adjustment                                                         (22,444)
Net loss                                                                                                    (13,072,237)
                                                                            ------------    ------------    ------------
Balances at December 31, 1999                                                 24,710,602         56,971     (24,830,348)

Issuances of common stock, par value $.001
            Cash, net of offering costs of $730,000                           13,266,319
            Services rendered                                                    114,609
            Exercise of options and warrants                                     220,716
Stock options granted                                                          2,028,720
Amortization of deferred compensation
Foreign currency translation adjustment                                                         (10,725)
Net loss                                                                                                     (4,796,693)
                                                                            ------------    ------------    ------------
Balances at December 31, 2000                                                 40,340,966         46,246     (29,627,041)

Issuances of common stock, par value $.001
            Exercise of options and warrants                                      17,012
Stock options granted                                                            168,604
Amortization of deferred compensation
Foreign currency translation adjustment                                                          (9,312)
Net loss                                                                                                     (5,498,637)
                                                                            ------------    ------------    ------------
Balances at December 31, 2001                                                 40,526,583         36,934     (35,125,678)

Issuances of common stock, par value $.001
            Exercise of options and warrants                                       1,314
Stock options granted                                                              5,696
Amortization of deferred compensation
Foreign currency translation adjustment                                                          47,336
Net loss                                                                                                     (5,244,751)
                                                                            ------------    ------------    ------------
Balances at December 31, 2002                                                 40,533,593         84,270    (40,370,429)

Issuances of common stock, par value $.001
            Exercise of options and warrants
Stock options granted (forfeited)                                                 (3,611)
Amortization of deferred compensation
Macrovision sale                                                                (656,506)
Foreign currency translation adjustment                                                          (3,263)
Net income                                                                                                    3,466,602
                                                                            ------------    ------------    ------------
Balances at December 31, 2003                                                 39,873,476         81,007    (36,903,827)

Issuances of preferred stock and warrants,
            net of offering costs of $607,570                                  4,642,378
Issuance of warrants                                                             267,404
Stock options and warrants granted                                               179,379
Amortization of deferred compensation
Realized gain of foreign currency translation                                                   (81,007)
Net loss                                                                                                     (5,682,472)
Deemed dividend on convertible preferred stock                                 2,494,753                     (2,494,753)
Dividend on convertible preferred stock                                                                        (144,986)
                                                                            ------------    ------------    ------------
Balances at December 31, 2004                                                 47,457,390             --     (45,226,038)

Issuances of Series B preferred stock and warrants,                            7,084,092
Series A preferred stock converted into common                                    (4,145)
Series B preferred stock converted into common                                      (637)
Warrants issued for Note Payable                                                 108,660
Warrants issued for bridge loan                                                  104,985
Stock options and warrants granted                                               125,261
Stock warrants exercised                                                         188,978
Amortization of deferred compensation
Accrued penalty paid in common stock                                              14,121
Impaired offering costs
Net loss                                                                                                     (9,215,273)
Deemed dividend on convertible preferred stock                                 3,076,104                     (3,076,104)
Dividend on convertible preferred stock                                          626,384                       (649,905)
                                                                            ------------    ------------    ------------
Balances at December 31, 2005                                               $ 58,781,193    $              $(58,167,320)
                                                                            ------------    ------------    ------------

Reclassification of deferred compensation upon adoption of SFAS 123R            (126,625)
Series A preferred stock converted into common                                    (1,423)
Series B preferred stock converted into common                                    (4,220)
Warrants issued to debenture investors and placement agents                    3,282,288
Warrants issued in connection with bridge loans                                  412,464
Stock options and warrants exercised                                             258,957
Stock based compensation                                                       1,101,460
Stock issued to consultants                                                      567,775
Net loss                                                                                                    (18,655,303)
Deemed dividend on convertible preferred stock and beneficial conversion
            feature on convertible debentures                                  7,250,028                     (1,591,525)
Dividend on convertible preferred stock                                          544,044                       (544,760)
                                                                            ------------    ------------    ------------
Balances at December 31, 2006                                               $ 72,065,941    $              $(78,958,908)
                                                                            ============    ============    ============

</TABLE>


Table Continued

<TABLE>
<CAPTION>





                                                                                  Deferred        Deferred
                                                                               Offering Costs    Compensation            Total
                                                                                ------------    ------------           ---------
<S>                                                                               <C>             <C>                  <C>
Balances at July 14, 1994 (date of inception)                                     $       --      $       --           $       --

Issuances of common stock, par value $.001
            Services rendered                                                                                               1,200
            Cash                                                                                                           25,000

Net loss                                                                                                                  (42,085)
                                                                                ------------    ------------          -----------
Balances at December 31, 1994                                                            --               --              (15,885)

Common stock contributed
Issuances of common stock, par value $.001
            Services rendered                                                                                              18,073
Stock options and warrants granted                                                                                            600
Foreign currency translation adjustment                                                                                    22,652
Net loss                                                                                                                 (896,663)
                                                                                ------------    ------------          -----------

Balances at December 31, 1995                                                             --              --             (871,223)

Issuances of common stock, par value $.001
            Cash, net of offering costs of $11,467                                                                        363,533
Foreign currency translation adjustment                                                                                    35,044
Net loss                                                                                                               (1,121,211)
                                                                                ------------    ------------          -----------
Balances at December 31, 1996                                                             --              --           (1,593,857)

Common stock contributed                                                                                                       --

Issuances of common stock, par value $.001
            Cash, net of offering costs of $832,551                                                                     5,001,348
            Services rendered                                                                       (500,000)             332,625
            Exercise of options                                                                                             3,745
Common stock subscriptions                                                                                                100,000
Sale of Underwriters warrants                                                                                                  80
Stock options and warrants granted                                                                (1,875,343)                  --
Amortization of deferred compensation                                                                972,567              972,567
Foreign currency translation adjustment                                                                                   (19,667)
Net loss                                                                                                               (4,119,612)
                                                                                ------------    ------------          -----------
Balances at December 31, 1997                                                             --      (1,402,776)             677,229

Common stock subscriptions                                                                                                     --
Common Stock forfeited                                                                                                         --
Transfer of temporary equity to permanent capital                                                                          77,156
Issuances of common stock, par value $.001
            Cash                                                                                                           25,000
            Services rendered                                                                       (620,588)                  --
Stock options and warrants granted (cancelled)                                                       255,992                   --
Discount relating to shares and warrants issued                                                                           486,463
Amortization of deferred compensation                                                               1,173,139           1,173,139
Warrant exchange                                                                                                               --
Foreign currency translation adjustment                                                                                    41,386
Net loss                                                                                                               (5,578,540)
                                                                                ------------    ------------          -----------

Balances at December 31, 1998                                                             --        (594,233)          (3,098,167)

Issuances of common stock, par value $.001
            Cash                                                                                                          225,455
            Services rendered                                                                       (445,725)           1,225,050
            Exercise of option                                                                                          1,403,375
Stock options granted  (cancelled)                                                                  (613,435)           3,835,580
Conversion of debt into common stock                                                                                    3,379,969
Fair value of warrants associated with financing agreement                                                              3,845,400
Amortization of deferred compensation                                                              1,374,518            1,374,518
Value assigned to beneficial conversion feature
     of convertible notes                                                                                                 572,505
Foreign currency translation adjustment                                                                                   (22,444)
Net loss                                                                                                              (13,072,237)
                                                                                ------------    ------------          -----------
Balances at December 31, 1999                                                             --        (278,875)            (330,996)

Issuances of common stock, par value $.001
            Cash, net of offering costs of $730,000                                                                    13,270,000
            Services rendered                                                                                             114,625
            Exercise of options and warrants                                                                              223,722
Stock options granted                                                                             (2,028,720)                  --
Amortization of deferred compensation                                                              1,527,024            1,527,024
Foreign currency translation adjustment                                                                                   (10,725)
Net loss                                                                                                               (4,796,693)
                                                                                ------------    ------------          -----------
Balances at December 31, 2000                                                             --        (780,571)           9,996,957

Issuances of common stock, par value $.001
            Exercise of options and warrants                                                                               17,250
Stock options granted                                                                               (168,604)                  --
Amortization of deferred compensation                                                                909,959              909,959
Foreign currency translation adjustment                                                                                    (9,312)
Net loss                                                                                                               (5,498,637)
                                                                                ------------    ------------          -----------
Balances at December 31, 2001                                                   $         --         (39,216)           5,416,217

Issuances of common stock, par value $.001
            Exercise of options and warrants                                                                                1,982
Stock options granted                                                                                 (5,696)                  --
Amortization of deferred compensation                                                                 35,251               35,251
Foreign currency translation adjustment                                                                                    47,336
Net loss                                                                                                                (5,244,751)
                                                                                ------------    ------------          -----------
Balances at December 31, 2002                                                  $          --    $     (9,661)             256,035

Issuances of common stock, par value $.001
            Exercise of options and warrants                                                                                   60
Stock options granted (forfeited)                                                                      3,611                   --
Amortization of deferred compensation                                                                  6,050                6,050
Macrovision sale                                                                                                         (658,387)
Foreign currency translation adjustment                                                                                    (3,263)
Net income                                                                                                              3,466,602
                                                                                ------------    ------------          -----------
Balances at December 31, 2003                                                 $          --     $         --            3,067,097

Issuances of preferred stock and warrants,
            net of offering costs of $607,570                                                                           4,642,430
Issuance of warrants                                                                (267,404)                                  --
Stock options and warrants granted                                                                  (179,379)                  --
Amortization of deferred compensation                                                                 85,850               85,850
Realized gain of foreign currency translation                                                                             (81,007)
Net loss                                                                                                               (5,682,472)
Deemed dividend on convertible preferred stock                                                                                 --
Dividend on convertible preferred stock                                                                                  (144,986)
                                                                                ------------    ------------          -----------
Balances at December 31, 2004                                                       (267,404)        (93,529)           1,886,912

Issuances of Series B preferred stock and warrants,                                                                     7,084,170
Series A preferred stock converted into common
Series B preferred stock converted into common
Warrants issued for Note Payable                                                                                          108,660
Warrants issued for bridge loan                                                                                           104,985
Stock options and warrants granted                                                                  (125,261)                  --
Stock warrants exercised                                                                                                  189,230
Amortization of deferred compensation                                                                 92,165               92,165
Accrued penalty paid in common stock                                                                                       14,136
Impaired offering costs                                                              267,404                              267,404
Net loss                                                                                                               (9,215,273)
Deemed dividend on convertible preferred stock                                                                                 --
Dividend on convertible preferred stock                                                                                   (22,733)
                                                                                ------------    ------------          -----------
Balances at December 31, 2005                                                  $                    (126,625)        $    509,656
                                                                                ------------    ------------         ------------

Reclassification of deferred compensation upon adoption of SFAS 123R                                 126,625
Series A preferred stock converted into common
Series B preferred stock converted into common
Warrants issued to debenture investors and placement agents                                                             3,282,288
Warrants issued in connection with bridge loans                                                                           412,464
Stock options and warrants exercised                                                                                      259,618
Stock based compensation                                                                                                1,101,460
Stock issued to consultants                                                                          (26,499)             542,151
Net loss                                                                                                              (18,655,303)
Deemed dividend on convertible preferred stock and beneficial conversion
            feature on convertible debentures                                                                           5,658,503
Dividend on convertible preferred stock
                                                                                ------------    ------------          -----------
Balances at December 31, 2006                                                  $               $     (26,499)        $ (6,889,163)
                                                                                ============    ============          ============

</TABLE>



                                                           F-6
<PAGE>

<TABLE>
<CAPTION>
                                        AMEDIA NETWORKS, INC. AND ITS SUBSIDIARY
                                           (A DEVELOPMENT STAGE COMPANY)
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                                                          From
                                                                                               Twelve Months            Inception
                                                                                                   Ended            (July 14, 1994)
                                                                                                December 31,        to December 31,
                                                                                           2006            2005            2006
                                                                                       ------------    ------------    ------------
<S>                                                                                    <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                          $(18,655,303)   $ (9,215,273)   $(70,456,875)
     Adjustments to reconcile net loss
      to net cash used by operating activities:
          Depreciation and amortization                                                     996,613         123,117       2,082,995
          Forgiveness of note receivable, officer                                              --              --           100,000
          Loss from disposition of fixed assets                                                --             1,692         197,065
          Bad debt expense                                                                     --              --           161,000
          Amortization of note discount and finance costs                                 2,600,064         130,907       7,397,196
          Impaired offering costs                                                              --           267,404         267,404
          Foreign currency translation adjustment and realized gain                            --              --           (82,535)
          Beneficial conversion feature of convertible debt                               1,873,161            --         2,445,666
          Stock, warrants and options issued for services and settlement                  1,643,611          92,165      13,400,297
          Payment of common stock issued with guaranteed selling price                         --              --          (155,344)
          Net losses of affiliate                                                              --              --         1,196,656
          Impairment loss on investment in affiliate                                           --              --           748,690
          Gain on sale of Copy Protection Business                                             --              --        (5,708,328)
          Gain on sale of investment in affiliate                                              --              --           (40,000)
          Inventory write off                                                               898,802            --           898,802
          Impairment of intangibles                                                         880,021            --           880,021
          Increase (decrease) in cash attributable
           to changes in assets and liabilities
                Accounts receivable                                                          (6,224)           --            (5,670)
                Inventories                                                                 (72,788)       (929,017)     (1,001,805)
                Prepaid expenses and other current assets                                  (320,827)         51,008        (429,678)
                Other assets                                                                   --           (46,750)        (46,750)
                Accounts payable                                                              8,156       1,189,706         917,540
                Accrued expenses                                                             12,933         316,970       1,670,524
                Accrued penalties                                                         1,893,698            --         1,771,335
                Accrued interest                                                            531,753            --           782,772
                                                                                       ------------    ------------    ------------

          Net cash used by operating activities                                          (7,716,330)     (8,018,071)    (43,009,022)
                                                                                       ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Proceeds from sales of fixed assets                                                       --              --            68,594
     Purchases of property and equipment                                                   (242,838)       (643,360)     (2,048,583)
     Development of capitalized software                                                 (1,121,796)     (1,260,382)     (2,382,178)
     Proceeds from sale of Copy Protection Business                                            --              --         5,050,000
     Proceeds from sale of investment in affiliate                                             --              --            40,000
     Investment in ComSign, Ltd.                                                               --              --        (2,000,000)
     Increase in note receivable, officer                                                      --              --          (100,000)
     Increase in note receivable                                                               --              --          (130,000)
     Increase in organization costs                                                            --              --            (7,680)
                                                                                       ------------    ------------    ------------

          Net cash used by investing activities                                          (1,364,634)     (1,903,742)     (1,509,847)
                                                                                       ------------    ------------    ------------
</TABLE>


                                                           F-7
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                                      <C>              <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES
     Net proceeds from issuance of convertible preferred stock                                 --         7,084,170      11,726,600
     Proceeds from exercise of warrants                                                        --           189,230         189,230
     Proceeds from issuance of common stock                                                 259,618            --        21,436,972
     Stock offering costs                                                                      --              --          (475,664)
     Deferred financing costs                                                            (1,474,778)       (122,530)     (2,279,620)
     Proceeds from notes payable                                                          3,997,097       1,000,000       4,997,097
     Proceeds from short-term borrowings                                                       --              --         1,356,155
     Payments on capital lease obligations                                                   (4,966)         (2,928)         (7,894)
     Proceeds from long-term debt                                                              --              --         2,751,825
     Proceeds from convertible debentures                                                 9,150,000            --        11,150,000
     Repayment of notes payable and short-term borrowings                                (2,811,500)           --        (4,168,582)
     Repayments of long-term debt                                                              --              --        (1,615,825)
     Dividends paid to preferred stockholders                                                  --          (167,719)       (167,719)
                                                                                       ------------    ------------    ------------

          Net cash provided by financing activities                                       9,115,471       7,980,223      44,892,575
                                                                                       ------------    ------------    ------------

Effect of exchange rate changes on cash                                                        --              --            (5,412)
                                                                                       ------------    ------------    ------------

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                             34,507      (1,941,590)        368,294

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                              333,787       2,275,377            --
                                                                                       ------------    ------------    ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                               $    368,294    $    333,787    $    368,294
                                                                                       ============    ============    ============

SUPPLEMENTAL DISCLOSURES OF
     CASH FLOW INFORMATION
          Cash paid during the periods for:
                Interest                                                               $     30,000    $      5,514    $    512,492
                                                                                       ============    ============    ============

          Non-cash investing and financing activities:

                Deemed dividend in connection with sale
                   of convertible preferred stock                                      $  1,591,525    $  3,076,104    $  7,162,382
                                                                                       ============    ============    ============

                Beneficial conversion feature in connection with sale
                   of convertible debentures                                           $  5,658,503    $       --      $  5,658,503
                                                                                       ============    ============    ============

                Issuance of Common Stock warrants in connection with
                   Convertible debentures                                              $  3,282,288    $       --      $  3,282,288
                                                                                       ============    ============    ============

                Issuance of common stock warrants in connection
                   with note payable                                                   $       --      $    108,660    $    108,660
                                                                                       ============    ============    ============

                Original issue discount on notes payable                               $    218,163    $     80,000    $    298,163
                                                                                       ============    ============    ============

                Issuance of common stock warrants in connection
                   with bridge loans                                                   $    412,464    $    104,985    $    517,449
                                                                                       ============    ============    ============

                Capital leases                                                         $       --      $     20,158    $     20,158
                                                                                       ============    ============    ============

                Late filing penalty on preferred stock registration
                   paid in common stock                                                $       --      $     14,136    $     14,136
                                                                                       ============    ============    ============

                Repayments of notes payable by issuance
                   of convertible debentures                                           $    850,000    $       --      $    850,000
                                                                                       ============    ============    ============
</TABLE>




                                See Notes to Consolidated Financial Statements

                                                           F-8
<PAGE>



                      AMEDIA NETWORKS, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS AND DEVELOPMENT STAGE OPERATIONS

Amedia Networks, Inc. (hereinafter, the "Company" or "Amedia"), is a development
stage company that designs, develops and markets technology-based broadband
access solutions for voice, video and data services and home networking
applications. The Company's products are designed to provide key functionality
that enables service providers to deliver "triple play" (voice, video and data)
broadband communication to their subscribers. These products are designed for
placement at various points in the network infrastructure layout and within the
home and can be deployed with optical fibers as well as with copper wires. A
portion of the core technologies underlying the Company's initial broadband
access products were co-developed with Lucent Technologies, Inc. ("Lucent") at
Lucent's Bell Labs in New Jersey pursuant to a Development and Licensing
Agreement with Lucent dated as of January 6, 2004 (the "Development and
Licensing Agreement") entered into by the Company and Lucent. Under the
Development and Licensing Agreement, Lucent has granted to Amedia a worldwide
and perpetual non-exclusive license to manufacture, develop and sell products
designed to deliver broadband based access solutions utilizing the Lucent owned
technologies and related patents. The Company is marketing its initial products
to communications carriers and communication equipment companies.

The Company has been engaged in the broadband access communications business
since March 2004. From its inception in July 1994 through May 2003, Amedia was
primarily engaged in the business of designing and developing technologies that
provide copy protection for electronic content distributed on optical media and
the Internet under the name of "TTR Technologies, Inc." In May 2003, the Company
sold its copy protection business. In May 2004, the Company changed its name to
"Amedia Networks, Inc."

NOTE 2 - GOING CONCERN AND MANAGEMENT'S PLAN

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred significant operating losses for the past
several years, the majority of which are related to the development of the
Company's copy protection business which it sold in May 2003. These losses have
produced operating cash flow deficiencies, and negative working capital. As
indicated in the accompanying consolidated financial statements, as of and for
the year ended December 31, 2006, the Company had a cash balance of $368,294 and
incurred a net loss applicable to common stockholders of $ 20,791,588. The
Company expects to incur additional losses for the foreseeable future and will
need to raise additional funds in order to meet its operating requirements and
realize its business plan. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. These financial statements do
not include any adjustments relating to the recovery of the recorded assets or
the classification of the liabilities that might be necessary should the Company
be unable to continue as a going concern.

The Company's future operations are dependent upon management's ability to find
sources of additional equity capital. The Company needs to raise additional
funds on an immediate basis to continue to meet its liquidity needs, repay
short-term loans that matured in March 2007 and have not been repaid and
additional short-term loans scheduled to mature in May 2007, realize its current
business plan and maintain operations. Management of the Company is continuing
its efforts to secure funds for its operations.

As more fully described in Note 6 (Private Placement) and 5 (Notes Payable), the
Company funded its operations during 2006 from the proceeds of the sale of its
short-term notes issued (and subsequently repaid) from December 2005 through
April 2006, the Private Placement in May 2006, additional short-term loans in
the amount of $1,381,940 of net proceeds that it obtained between October and
December 2006 and $1,241,900 from the work done for Motorola under the Strategic
Alliance Agreement. The Company also raised net proceeds of $914,707 during
2007. See Note 13A (Subsequent Events). As of March 22, 2007, the Company has
not repaid principal and accrued interest that became due as of such date in the
aggregate amount of $1,407,699. In addition, the Company did not make interest
payments in the aggregate amount of $725,479 due and owing as of March 31, 2007
and certain other payments in the aggregate amount of approximately $1.7 million
owing as of March 31, 2007 to the holders of the convertible debentures that the
Company issued in the May 2006 private placement. The delivery of notice to the
Company by any one of these holders demanding immediate payment will trigger an
Event of Default under the agreements with the debenture holders and entitle
these holders to foreclose on our property. The Company and the holders of these
debts are in discussions in an attempt to address these and resolve these issues
but no assurance can be provided that the Company will be able to reach a
mutually acceptable resolution of these issues. See Note 13. An Event of Default
will materially adversely affect the Company's business and may result in the
cessation of operations.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, TTR Ltd., which has been inactive since December
2002. All material inter-company accounts and transactions have been eliminated
in consolidation.


                                      F-9
<PAGE>


USE OF ESTIMATES

The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
(the "U.S.") requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and revenue and
expenses during the period reported. These estimates include assessing the
collectability of accounts receivable, the use and recoverability of inventory,
the realization of deferred tax assets, tax contingencies and valuation
allowances, employee benefits, useful lives for depreciation and amortization
periods of tangible and intangible assets, and long-lived asset impairments,
among others. The markets for the Company's products are characterized by
intense competition, rapid technological development, evolving standards, short
product life cycles and price competition, all of which could impact the future
realizable value of the Company's assets. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the period that they
are determined to be necessary. Actual results could differ from those
estimates.

CASH EQUIVALENTS

This includes all short-term highly liquid investments that are readily
convertible to known amounts of cash and have maturities of three months or less
when purchased.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Substantially all of the Company's financial instruments, consisting primarily
of cash equivalents, accounts payable and accrued expenses, are carried at, or
approximate, fair value because of their short-term nature or because they carry
market rates of interest.

STOCK BASED COMPENSATION

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payment" (SFAS 123R) that amends SFAS 123, and SFAS No. 95, "Statement of Cash
Flows" and supersedes Accounting Principles Board (APB) Opinion No. 25, "
Accounting for Stock Issued to Employees," and related interpretations (APB 25).
As of January 1, 2006, SFAS 123R requires the Company to measure the cost of
employee services received in exchange for an award of equity instruments, such
as stock options, based on the grant-date fair value of the award and to
recognize such cost over the requisite period during which an employee provides
service. The grant-date fair value will be determined using option-pricing
models adjusted for unique characteristics of the equity instruments. SFAS 123R
also addresses the accounting for transactions in which a company incurs
liabilities in exchange for goods or services that are based on the fair value
of the Company's equity instruments or that may be settled through the issuance
of such equity instruments. The statement does not change the accounting for
transactions in which the Company issues equity instruments for services to
non-employees. The pro forma disclosures previously permitted under SFAS 123 no
longer will be an alternative to financial statement recognition.

The Company adopted SFAS 123R on January 1, 2006 and uses the modified
prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of SFAS 123R for all share-based
payments granted after the effective date and (b) based on the requirements of
SFAS 123R for all awards granted to employees prior to the effective date of FAS
123R that remain unvested on the effective date.

During 2006 the Company has reclassified certain components of its stockholders'
equity section to reflect the elimination of deferred compensation arising from
unvested share-based compensation pursuant to the requirements of Staff
        Accounting Bulletin No. 107, regarding Statement of Financial Accounting
Standards No.123(R), "Share-Based Payment." This deferred compensation was
previously recorded as an increase to additional paid-in capital with a
corresponding reduction to stockholders' equity for such deferred compensation.
This reclassification has no effect on net income or total stockholders' equity
as previously reported. The Company will record an increase to additional
paid-in capital as the share-based payments vest.

Prior to January 1, 2006, the Company accounted for awards granted under those
plans following the recognition and measurement principles of APB 25.

Pro-forma net loss  for the year ended December 31, 2005, including effects of
expensing stock options, follows:

<TABLE>
<CAPTION>

<S>                                                                                                 <C>
Net loss applicable to common stockholders, as reported                                             (12,941,282)
Add:  Stock based compensation included in net loss                                                      14,000
Less: Stock based compensation - fair value method                                                      715,511
                                                                                                    -----------
Pro-forma net loss applicable to common stockholders, as reported                                   (13,642,793)
                                                                                                    ===========
Net loss per share applicable to common stockholders, basic and diluted, as reported                      (0.64)
Pro forma affect of stock based compensation expense-fair value method                                    (0.03)
                                                                                                    -----------
Pro forma net loss per share applicable to common stockholders, basic and diluted, as reported            (0.67)
</TABLE>


                                      F-10
<PAGE>


The fair value of each option granted in 2005 is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:


                                                         2005
                                                         ----
                 Risk free interest rates                3.76%
                 Expected option lives                   3.4
                 Expected volatilities                   69%
                 Expected dividend yields                None


FOREIGN CURRENCY TRANSLATIONS

The financial statements of TTR Ltd. have been translated into U.S. dollars in
accordance with Statement No. 52 of the Financial Accounting Standards Board
(FASB). Assets and liabilities have been translated at year-end exchange rates
and expenses have been translated at average rates prevailing during the year.
The translation adjustments have been recorded as a separate component in the
consolidated statement of stockholders' equity (deficiency). TTR Ltd. has been
inactive since December 2002 and the Company has not recorded any foreign
currency translation adjustments during 2006 or 2005.

NET LOSS PER SHARE

Basic loss per share, "EPS" is computed by dividing net loss applicable to
common shares by the weighted-average of common shares outstanding during the
period.

Diluted loss per share adjusts basic loss per share for the effects of
convertible securities, stock options and other potentially dilutive
instruments, only in the periods in which such effect is dilutive. The shares
assumable upon exercise of stock options and warrants are excluded from the
calculation of net loss per share, as their inclusion would be anti-dilutive.

Common stock equivalents have been excluded from the weighted-average shares for
the years ended December 31, 2006 and 2005 as their inclusion would be
anti-dilutive. Potentially dilutive options to purchase 8,348,894 and 7,002,642
shares of Common Stock were outstanding at December 31, 2006 and 2005,
respectively. Potentially dilutive warrants to purchase 23,838,947 and
14,228,786 shares of Common Stock were outstanding at December 31, 2006 and
2005, respectively. In addition, there were 10,418 and 21,178 shares of the
Company's Series A 7% Convertible Preferred Stock, par value $0.001 per share
("Series A Preferred Stock"), outstanding and potentially convertible into
1,389,067 and 2,823,733 and shares of Common Stock at December 31, 2006 and
2005, respectively. In addition, 33,000 and 71,150 shares of the Company's
Series B 8% Convertible Preferred Stock, par value $0.001 per share, were
outstanding and potentially convertible into 4,400,000 (at a conversion rate of
$.75) and 7,044,554 shares of Common Stock (at a conversion rate of $1.01) at
December 31, 2006 and 2005.

REVENUE RECOGNITION

Revenue is derived from sales of the Company's QoStream product line which is
comprised of hardware and software as well as related hardware. Revenue is
recognized when persuasive evidence of an arrangement exists, the product has
been delivered and title and risk of loss have transferred, the price is fixed
and determinable, and collection of the resulting receivable is reasonably
assured.

Utilizing these criteria, product revenue is generally recognized upon delivery
of the product at the end-customer's location when the risks and rewards of
ownership have passed to the customer. During the years ended December 31, 2006
and 2005 the Company recorded $32,723 and $5,548 respectively from sales of
units of its products developed under the Motorola Strategic Alliance Agreement,
QoStream products and related hardware.

INVENTORY

Inventory includes costs for materials and finished product which is stated at
the lower of cost or market. As of December 31, 2006 any items relieved from
inventory have been determined under the specific identification method. The
balance at December 31, 2006 of inventories amounted to $103,003, which included
finished goods of $87,229 and raw materials of $15,774. The Company wrote off
$898,802 of inventory, consisting of $705,316 of finished goods and $193,486 of
raw materials, due to obsolescence during the fourth quarter of 2006 which is
recorded as a charge to operations in the accompanying consolidated statements
of operations. This was due to the Company focusing its efforts on new
technology for its product line.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization is determined using the straight-line method over
the estimated useful lives of the various asset classes. Leasehold improvements
are amortized using the straight line method over the lesser of the term of the
lease or the estimated useful lives of the assets. Equipment leases qualifying
as capital leases are also included in property and equipment.

Estimated useful lives range from three to seven years for property and other
equipment. Major renewals and improvements are capitalized and minor
replacements, maintenance, and repairs are charged to current operations as
incurred. Upon retirement or disposal of assets, the cost and


                                      F-11
<PAGE>


related accumulated depreciation are removed from the consolidated balance
sheets and any gain or loss is reflected in the consolidated statements of
operations.

INTERNAL USE SOFTWARE

Certain costs of computer software developed or obtained for internal use are
capitalized and amortized on a straight-line basis over three years. The
capitalized costs related to internal use software are included in property and
equipment. Costs for general and administrative, overhead, maintenance and
training, as well as the cost of software that does not add functionality to the
existing system, are expensed as incurred.

CAPITALIZED SOFTWARE COSTS

During the year ended December 31, 2006 and 2005 the Company capitalized
$1,121,796 and $1,260,382, of internally developed software product costs.
Capitalization of software development costs that are to be sold, leased or
otherwise marketed begins upon the establishment of technological feasibility.
Technological feasibility is based on reaching a high level design stage with
regards to a certain product as defined in SFAS No. 86. Such software product
costs are to be amortized over the expected beneficial life once the general
release stage of the product is reached, which was reached for certain products
during 2006.


                                       2006                   2005
                                -------------------     ------------------

BEGINNING OF YEAR                   1,260,382                   0
CAPITALIZED                         1,121,796               1,260,382
AMORTIZATION                        (793,615)                   0
WRITE OFF                           (880,021)                   0
                                -------------------     ------------------

  NET                                708,542                1,260,382
                                ===================     ==================

As a result of the impairment discussed below, the remaining capitalized
software as of December 31, 2006 has not been made "generally available" and,
accordingly, amortization has not yet begun.

IMPAIRMENT OF LONG LIVED ASSETS

The Company reviews the carrying value of its intangible assets when specific
events and circumstances would indicate that their carrying amounts may not be
recoverable. The Company considers relevant cash flow and profitability
information, including estimated future operating results, trends and other
available information, in assessing whether the carrying value of the intangible
assets can be recovered. If it is determined that the carrying value of the
intangible assets will not be recovered from the undiscounted future cash flows,
the carrying value of the assets would be considered impaired. An impairment
charge is measured as the excess of the carrying amount of an intangible asset
over its estimated fair value. During 2006, certain intangible assets recorded
as capitalized software costs were impaired during the fourth quarter resulting
in a charge to operations of $880,021 in the accompanying consolidated
statements of operations. This was due to the Company focusing its efforts on
new technology for its product line. The Company determined that its intangible
assets were not impaired during the year ended December 31, 2005. There can be
no assurance that future impairment tests of the intangible assets will not
result in an additional charge to operations.

RESEARCH AND DEVELOPMENT

Research and development costs incurred in connection with product development
and testing are expensed as incurred. Research and development costs for the
years ended December 31, 2006 and 2005 were $4,866,851 (net of $1,460,705
received from Motorola under our development agreement-See Note 8) and
$3,975,852, respectively.

INCOME TAXES

The Company uses the asset and liability method to determine its income tax
expense. This method requires the establishment of a deferred tax asset or
liability for the recognition of future deductible or taxable amounts and
operating loss carry-forwards. Deferred tax expense or benefit is recognized as
a result of the changes in the assets and liabilities during the year.

Valuation allowances are established when required, to reduce deferred tax
assets, if it is more likely than not that all or a portion of it will not be
realized.


                                      F-12
<PAGE>


CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash. The Company's cash is
maintained at one financial institution, and from time to time the account
balance at this financial institution may exceed the amount of insurance
provided on such accounts. Generally, these deposits may be redeemed upon demand
and therefore, bear minimal risk.

COMPREHENSIVE LOSS

In January 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income,"
which establishes standards for reporting the components of comprehensive income
or loss. Since 1998, the foreign currency translation adjustment was the
Company's only component of comprehensive loss. The Company has not recorded any
foreign currency translation adjustments during 2006 or 2005.

REGISTRATION RIGHTS AGREEMENTS

The Company has adopted View C of EITF 05-4 "Effects of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF 00-19" ("EITF
05-4). Accordingly, the Company classifies as liability instruments, the fair
value of registration rights agreements when such agreements (i) require it to
file, and to cause to be declared effective under the Securities Act, a
registration statement with the SEC within contractually fixed time periods, and
(ii) provide for the payment of liquidated damages in the event of its failure
to comply with such agreements. Under View C of EITF 05-4, (i) registration
rights wit these characteristics are accounted for as derivative financial
instruments at fair value an (ii) contracts that are (a) indexed to and
potentially settled in an issuer's own stock and (b) permit gross physical or
net share settlement with no net cash settlement alternatives are classified as
equity instruments. At December 31, 2006, the Company recorded registration
rights penalty liabilities totaling $2,156,946 which have been included on the
accompanying consolidated balance sheet. In December 2006, the FASB issued FSP
00-19-2 which may impact the accounting for the penalties described above.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2006, the FASB issued SFAS No. 155 "Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140" ("SFAS
155"). SFAS 155 clarifies certain issues relating to embedded derivatives and
beneficial interests in securitized financial assets. The provisions of SFAS 155
are effective for all financial instruments acquired or issued after fiscal
years beginning after September 15, 2006. The Company does not expect SFAS No.
155 to have a material effect on the financial position or results of operations
of the Company.

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets" ("SFAS 156"), which amends SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS 156 permits the choice of the amortization method or
the fair value measurement method, with changes in fair value recorded in
income, for the subsequent measurement for each class of separately recognized
servicing assets and servicing liabilities. The statement is effective for years
beginning after September 15, 2006, with earlier adoption permitted. The Company
does not expect SFAS 156 to have a material impact on the Company's financial
position or results of operations.

In July 2006, the FASB issued FASB Interpretation 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN
48"), which prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions taken or expected
to be taken in a tax return. Additionally, FIN 48 provides guidance on the
recognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The accounting provisions of FIN 48
will be effective for the Company beginning January 1, 2007. The Company does
not expect FIN 48 to have a material effect on the financial position or results
of operations of the Company.

In September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS. SFAS
No. 157 provides guidance for using fair value to measure assets and
liabilities. In addition, this statement defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. Where applicable, this statement simplifies and codifies related
guidance within generally accepted accounting principles. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company's
adoption of SFAS No. 157 is not expected to have a material effect on its
financial statements.


In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides guidance on how prior year
misstatements should be taken into consideration when quantifying misstatements
in current year financial statements for purposes of determining whether the
current year's financial statements are materially misstated. SAB 108 is
effective for the fiscal year ending after November 15, 2006. The adoption of
SAB 108 did not impact the Company's financial statements.

In November 2006, EITF reached a final consensus in EITF issue 06-6 "Debtors
Accounting for a Modification (or Exchange) of Convertible Debt Instruments"
("EITF 06-6"). EITF 06-6 addresses the modification of a convertible debt
instrument that changes the fair value of an


                                      F-13
<PAGE>


embedded conversion option and the subsequent recognition of interest expense
for the associated debt instrument when the modification does not result in a
debt extinguishment pursuant to EITF 96-19, "Debtors Accounting for a
Modification or Exchange of Debt Instruments". The consensus should be applied
to modifications or exchanges of debt instruments occurring in interim or annual
periods beginning November 29, 2006. The Company is currently evaluating the
impact of this guidance on its consolidated financial position, results of
operations and financial condition.

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

In December 2006, the FASB issued FSP EITF 00-19-2 "Accounting for Registration
Payment Agreements". FSP EITF 00-19-2 addresses an issuers accounting for
registration payment arrangements. This pronouncement specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument, should
be separately recognized and accounted for as a contingency in accordance with
SFAS 5 "Accounting for Contingencies". FSP EITF 00-19-2 amending previous
standards relating to rights agreements became effective on December 21, 2006
with respect to those arrangements entered into prior to December 21, 2006. The
Company is currently evaluating the impact of this guidance on its consolidated
financial position, results of operations and financial condition.

In February 2007, the FASB issued SFAS 159 "The Fair Value Option for Financial
Assets and Liabilities" ("SFAS 159"). SFAS 159 provides companies with an option
to report selected financial assets and liabilities at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is in the process of evaluating
the adoption of this statement on the Company's results of operations and
financial condition.

NOTE 4- FINANCINGS

SERIES A PREFERRED STOCK

On August 9, 2004, the Company completed a private placement to certain private
and institutional investors of 52,500 shares of its Series A 7% Convertible
Preferred Stock, par value $0.001 per share (the "Series A Preferred Stock") for
aggregate gross proceeds of $5.25 million. In connection with the issuance of
the Series A Preferred Stock, the Company issued five-year warrants (the
"Investor Warrants") to purchase up to 3.5 million shares of the Company's
common stock, par value $0.001 per share (the "Common Stock") at a per share
exercise price of $1.50 and up to an additional 3.5 million shares of the
Company's Common Stock at a per share exercise price of $2.50.

Each share of Series A Preferred Stock has a stated value of $100 and is
convertible into Common Stock at an initial conversion rate equal to $0.75 per
share of Common Stock, subject to adjustment if there are certain capital
adjustments or similar transactions, such as a stock split or merger. Dividends
at the rate of 7% per annum are payable on a semi-annual basis and, under
certain conditions at the option of the Company, dividends may be paid in shares
of Common Stock at rate of $0.75 per share. If not converted earlier, on the
fifth anniversary of issuance, the Series A Preferred Stock will automatically
convert into shares of the Company's Common Stock at the per share of Common
Stock conversion price then in effect.

The exercise prices of the Investor Warrants are also subject to adjustment if
there are certain capital adjustments or similar transactions, such as a stock
split or merger.

In connection with the placement of the Series A Preferred Stock, the Company
issued to placement agents five year warrants (the "Compensation Warrants") to
purchase up to 1.4 million shares of Common Stock. The breakdown of the
Compensation Warrants is as follows, 700,000 shares are issuable at a per share
exercise price of $0.75, 350,000 shares are issuable at a per share exercise
price of $1.50 and 350,000 shares are issuable at a per share exercise price of
$2.50. Other than as specified above, the Compensation Warrants have the same
substantive provisions as the Investor Warrants.

Pursuant to the terms of the agreements with the holders of the Series A
Preferred Stock, the Company filed on November 24, 2004 a registration statement
(the "Registration Statement") covering the Common Stock underlying the Series A
Preferred Stock, the Investor


                                      F-14
<PAGE>


Warrants and the Placement Agent Warrants which was declared effective on
February 11, 2005. As a result of a delay in the filing and the effectiveness of
the Registration Statement beyond the dates specified in the agreements with the
holders of the Series A Preferred Stock, under the agreements with the holders
of the Series A Preferred Stock, the Company is required to pay the holders of
the Series A Preferred Stock upon request a penalty in the aggregate amount of
approximately $199,500. For the year ended December 31, 2004 the Company
recorded this amount as a late filing penalty. In addition, as a post effective
amendment to such Registration Statement became effective as of November 6,
2006, the Company accrued an additional late filing penalty of $118,552
(reflecting penalties due through the effective date of the registration
statement) as of December 31, 2006.

SERIES B PREFERRED STOCK

On April 26, 2005 the Company completed a private placement to certain
individual and institutional investors of 60,000 shares of Series B 8%
Convertible Preferred Stock par value $0.001 per share (the "Series B Preferred
Stock") for gross proceeds of $6 million. Thereafter, on May 9, 2005, the
Company sold to institutional investors an additional 17,650 shares of Series B
Preferred Stock for aggregate gross proceeds of $1,765,000 (together with the
private placement in April 2005 the "2005 Private Placement"). Each share of
Series B Preferred Stock has a stated value of $100 and is convertible into
shares of Common Stock at an initial conversion rate of $1.01 per share, subject
to adjustment in the event of certain lower priced issuances of Common Stock
equivalents and certain capital adjustments or similar transactions, such as a
stock split or merger. The rights and preferences of the Series B Preferred
Stock are set forth in a Certificate of Designations of Rights and Preferences
that Company filed with the Secretary of State of the State of Delaware on April
20, 2005. In connection with the issuance of the Series B Preferred Stock, the
Company issued to the investors five-year warrants (the "Series B Investor
Warrants") to purchase, in the aggregate, up to approximately 3,844,062 shares
of Common Stock at a per share exercise price of $1.50, subject to adjustment in
the event of certain lower priced issuances of Common Stock equivalents and
certain capital adjustments or similar transactions, such as a stock split or
merger. Holders of the Investor Warrants are entitled to exercise those warrants
on a cashless basis following the first anniversary of issuance if a
registration statement covering the Common Stock issuable upon exercise of the
Investor Warrants is not in effect at the time of exercise.

The Company received aggregate net proceeds of approximately $5,590,000, after
payment of offering related expenses, repayment of the outstanding principal and
accrued interest on the Bridge Loan (See Note 5 - Notes Payable). The 2005
Private Placement resulted in a beneficial conversion feature of $3,076,104 for
which the Company recorded as a deemed dividend in accordance with Emerging
Issues Task Force ("EITF") 98-5 and EITF 00-27 for the year ended December 31,
2005. This beneficial conversion feature is calculated after the warrants have
been valued with proceeds allocated on a relative value basis.

Dividends on the Series B Preferred Stock accrue at the rate of 8% per annum and
are payable bi-annually on each of June 30 and December 31 and on conversion.
When due, dividends may be paid, at the option of the Company, either in cash or
in shares of Common Stock at a rate equal to 90% of the volume weighted average
market price of the Common Stock for the five trading days before payment. If
not converted earlier, the Series B Preferred Stock will automatically convert
on the fifth anniversary of issuance into shares of Common Stock at the
conversion price then in effect. The Company issued shares of Common Stock with
a fair market value of $436,679 and $444,539 for the preferred stock dividend
and recorded a charge to net loss applicable to common stockholders for the year
ended December 31, 2006 and December 31,2005 respectively..

In connection with the placement of the Series B Preferred Stock, the Company
issued to a placement agent warrants (the "Placement Agent Warrants") to
purchase up to 1,153,220 shares of Common Stock, pursuant to which (i) 768,814
shares are issuable at a per share exercise price of $1.01 and (ii) 384,406
shares are issuable at a per share exercise price of $1.50. The Placement Agent
Warrants have an expiration date of approximately five years from the closing
and are exercisable on substantially the same terms and conditions as the Series
B Investor Warrants, including without limitation, expiration date, potential
adjustments and cashless exercise rights. In addition, at the closing the
Company also paid to the placement agent fees totaling 8% of the gross proceeds.

The post effective amendment to the registration statement covering the Common
Stock underlying Series B Preferred Stock, the Series B Investor Warrants and
the Series B Placement Agent Warrants became effective as November 6, 2006.
Accordingly, the Company accrued penalties of $169,473 for the period from June
1, 2006 to November 6, 2006 in connection with the filing and effectiveness of
such post effective amendment to such registration statement.

NOTE 5- NOTES PAYABLE

During 2005:

(i) On April 5, 2005 the Company entered into a Bridge Loan Agreement ("April
2005 Bridge Loan Agreement") with an institutional investor (the "April 2005
Bridge Lender") pursuant to which the April 2005 Bridge Lender advanced a loan
to the Company in the principal amount of $1,500,000 (the "Bridge Loan").
Interest on the April 2005 Bridge Loan accrued at the rate of 7% per annum.
Pursuant to the April 2005 Loan Agreement, the Company issued to the April 2005
Bridge Lender a convertible promissory note in the principal amount of
$1,500,000. To secure the Company's obligations under the April 2005 Bridge
Loan, the Company granted to such investor a security interest in substantially
all of its assets, including without limitation, its intellectual property. The
Company received net proceeds of $1,350,000 from the proceeds of the loan, after
the payment of transaction related fees and expenses. These fees and expenses
were recorded as interest expense during the year ended December 31, 2005. On
April 26, 2005 the Company repaid to the April 2005 Bridge Lender $1,505,178
from the proceeds of the 2005


                                      F-15
<PAGE>


Private Placement, representing the outstanding principal amount of the April
2005 Bridge Loan, fees, and expenses and interest accrued thereon and the lien
on the assets was released.

In connection with the April 2005 Bridge Loan, the Company also issued to the
April 2005 Bridge Lender a five-year warrant (the "Bridge Warrant") to purchase
up to 150,000 shares of Common Stock at a per share exercise price of $2.50.
Upon the closing of the 2005 Private Placement, the per share exercise price of
the Bridge Warrant was adjusted to $1.50, in accordance with the terms of the
April 2005 Loan Agreement. The Company recorded as interest expense $104,985 of
amortization of the note discount in the accompanying consolidated statements of
operations for the year ended December 31, 2005 for this transaction.

(ii) On December 22, 2005 the Company entered into a Bridge Loan Agreement
("December 2005 Bridge Loan Agreement") with two institutional investors
(collectively the " December 2005 Bridge Investors ") pursuant to which the
December 2005 Bridge Investors advanced a loan to the Company in the aggregate
principal amount of $1,000,000 (the " December 2005 Bridge Loan"). Pursuant to
the December 2005 Bridge Loan Agreement, the Company issued to the December 2005
Bridge Investors secured promissory notes in the aggregate principal amount of
$1,080,000 (collectively the " December 2005 Bridge Notes"), representing an
original issue discount of 8%. The Notes were scheduled to mature on the date
(the "Maturity Date") which is the earlier of (i) a subsequent financing that
generates, on a cumulative basis together with any other interim financings,
gross proceeds to the Company of at least $2 million or (ii) April 21, 2006. To
secure the Company's obligations under the December 2005 Bridge Loan, the
Company granted to these investors a security interest in substantially all of
its assets, including without limitation, its intellectual property, under the
terms and conditions of a Security Agreement (the "December 2005 Security
Agreement") dated as of the date of the December 2005 Bridge Loan Agreement,
which security interest, by its terms, is released upon payment or other
satisfaction of the outstanding amounts. The Company received net proceeds of
$877,470 from the proceeds of the loan, after the payment of transaction related
fees and expenses. In connection with the December 2005 Bridge Loan, the Company
issued to these December 2005 Bridge Investors a five-year warrant (the
"December 2005 Bridge Warrants") to purchase up to 500,000 shares of Common
Stock at a per share exercise price of $1.50, subject to adjustment in the event
of certain capital adjustments or similar transactions, such as a stock split or
merger or, under certain circumstances (including obtaining appropriate consent
of certain other parties), if prior to the expiration of exercise period, the
Company issues warrants having a lower exercise price to investors in a
subsequent financing transaction.

In accordance with Accounting Principles Board Opinion No. 14 "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants," the Company
recorded a $108,660 discount on the note payable based upon the relative fair
values of the note and the Common Stock purchase warrants that is amortizing
over the 120 day term of the note. Amortization of the discount on the note
payable for the year ended December 31, 2005 was $9,051 and is included as
interest expense in the accompanying consolidated statement of operations. The
Company is amortizing the $80,000 original issue discount over the 120 day term
of the Notes. Amortization of the discount on the note payable for the year
ended December 31, 2005 was $6,664 and is included as interest expense in the
accompanying consolidated statements of operations.

The Company paid $122,530 of issue costs on the note payable which is being
amortized over the 120 day term of the Notes. Amortization of the issue costs on
the note payable for the year ended December 31, 2005 was $10,207 and is
included as interest expense in the accompanying consolidated statements of
operations.

On May 5, 2006, the Company paid to the December 2005 Bridge Investors a total
of $750,000 from the proceeds of the May 2006 Private Placement referred to in
Note 5 (Private Placement) below in satisfaction of the December 2005 Bridge
Notes. Certain of the investors in these bridge loans elected to participate in
the Convertible Debenture transaction and, accordingly, approximately $850,000
in principal amount of bridge loans was offset against these investors'
purchases of the Convertible Debentures.

The December 2005 Bridge Loan Agreement provides that, prior to the Maturity
Date, the Company can obtain up to an additional $500,000 in short term funding
(the "Additional Short-Term Loans") from these investors or other sources with
such additional amount being secured PARI-PASSU with the amounts advanced under
the December 2005 Bridge Notes, subject to certain specified conditions

During 2006:

(i) On January 20, 2006, the Company entered into short term loan agreements
with three private investors (collectively the "January 2006 Bridge Investors"),
pursuant to which these investors loaned the Company the aggregate amount of
$500,000. The January 2006 Investors included Mr. Juan Mendez, Chairman of the
Company's board of directors, who loaned the Company $250,000. Pursuant to the
January 2006 Loan Agreement, the Company issued to the January 2006 Investors
secured promissory notes (the "January 2006 Bridge Notes") in the aggregate
principal amount of $530,000 , representing an original issue discount of 6%
with respect to the principal amount of $500,000 through the stated maturity
date of April 21, 2006. The Company received net proceeds of $495,000 from these
loans, after payment of offering related fees and expenses. The Company issued
to the January 2006 Investors warrants expiring December 31, 2010 (the "January
2006 Bridge Loan Warrants") to purchase in the aggregate up to 250,000 shares of
the Company's Common Stock, at a per share exercise price of $1.50, subject to
adjustment upon certain specified conditions. On April 19, 2006, the maturity
date of these loans was extended to May 21, 2006 and, in connection with such
extension, the Company issued to the January 2006 Bridge Investors warrants to
purchase an additional 50,000 shares of Common Stock on terms and conditions,
including without limitation, exercise price and period, identical to the
December 2005 Bridge Warrants and agreed to pay to them in the aggregate
$10,000.


                                      F-16
<PAGE>


On May 5, 2006, the Company paid to the January 2006 Bridge Investors a total of
$290,000 from the proceeds of the May 2006 Private Placement referred to in
Note5 (Private Placement) above in satisfaction of the January 2006 Bridge
Notes. Two of the January 2006 Bridge Investors participated in the May 2006
Private Placement and, accordingly, $250,000 of the original principal amount of
the January 2006 Bridge Notes issued to these investors was offset against the
purchase price of the securities these investors purchased in the May 2006
Private Placement.

The Company recorded a $40,134 discount on the short term loan based upon the
relative fair values of the January 20, 2006 Bridge Notes and the January 20,
2006 Bridge warrants that was amortized over the 91day term of the note.
Amortization of the discount on the January 20, 2006 short term loan for the
year ended December 31, 2006 was $40,134 and is included as interest expense in
the accompanying condensed consolidated statement of operations. The Company
amortized the $30,000 original issue discount over the 91day term of the January
20, 2006 short term loan. Amortization of the discount on the note payable for
the year ended December 31, 2006 was $30,000 and is included as interest expense
in the accompanying consolidated statements of operations.

(ii) From February 27 through March 13, 2006, the Company entered into
additional short term loan agreements under which it borrowed the aggregate
amount of $1,500,000 (the "March 2006 Short-Term Loans") from one of the
institutional investors who advanced to the Company a short-term loan in
December 2005. The Company issued to the investor secured promissory notes in
the aggregate principal amount of $1,585,000, representing an original issue
discount of approximately 6% with respect to the principal amount loaned through
the stated maturity date of June 1, 2006. The Company received net proceeds of
$1,328,410 from the proceeds of these loans, after payment of offering related
fees and expenses. The Company issued to the investor five year warrants to
purchase in the aggregate up to 750,000 shares of the Company's Common Stock, at
a per share exercise price of $1.50, subject to adjustment upon certain
specified conditions. The March 2006 Short Term Loans were on terms and
conditions substantially similar to the December 2005 Bridge Loan. On May 5,
2006, the Company paid to this investor $1,585,000 from the proceeds of the May
2006 Private Placement referred to in Note 5 (Private Placement) in satisfaction
of the March 2006 Short-Term Loans.

The Company recorded a $205,182 discount on the notes payable based upon the
relative fair values of the note and the Common Stock purchase warrants that it
amortized over the term of the note. Amortization of the discount on the note
payable for the year ended December 31, 2006 was $205,182 and is included as
interest expense in the accompanying consolidated statement of operations. The
Company amortized the $85,000 original issue discount over the term of the
Notes. Amortization of the discount on the notes payable for the year ended
December 31, 2006 was $85,000 and is included as interest expense in the
accompanying consolidated statements of operations. The Company paid $171,590 of
financing costs on the notes payable which are being amortized over the term of
the Notes which vary from 79 to 92 days. Amortization of the issue costs on the
note payable for the year ended December 31, 2006 was $171,590 and is included
as interest expense in the accompanying consolidated statements of operations.

(iii) On April 7, 2006 the Company entered into a Bridge Loan Agreement ("April
2006 Bridge Loan Agreement") with two institutional investors (the "April 2006
Bridge Investors") pursuant to which the April 2006 Bridge Investors loaned to
the Company the aggregate amount of $450,000 (the "April 2006 Bridge Loan").
Pursuant to the April 2006 Bridge Loan Agreement, the Company issued to the
April 2006 Bridge Investor secured promissory notes in the aggregate principal
amount of $466,500 (the "April 2006 Bridge Note"), representing an original
issue discount of approximately 3.5% with respect to the principal amount of
$450,000 through the stated maturity date of June 1, 2006. The Company received
net proceeds of $401,500 from the proceeds of the loan, after the payment of
transaction related fees and expenses. In connection with the April 2006 Bridge
Loan, the Company issued to the April 2006 Bridge Investors five-year warrants
to purchase up to 225,000 shares of Common Stock at a per share exercise price
of $1.50, subject to adjustment under certain specified conditions.

On May 5, 2006, the Company paid to the April 2006 Bridge Investors a total of
$216,500 from the proceeds of the May 2006 Private Placement referred to in Note
5 (Private Placement) in satisfaction of the April 2006 Bridge Notes. As these
investors elected to participate in the May 2006 Private Placement, $250,000 of
the original principal amount of the April 2006 Bridge Notes was offset against
the purchase price of the securities that these investors purchased in the May
2006 Private Placement.

The Company recorded a $93,639 discount on the notes payable based upon the
relative fair values of the note and the Common Stock purchase warrants that was
amortized over the term of the note. Amortization of the discount on the note
payable for the year ended December 31, 2006 was $93,639 and is included as
interest expense in the accompanying consolidated statement of operations. The
Company amortized the $16,500 original issue discount over the term of the
Notes. Amortization of the discount on the notes payable for the year ended
December 31, 2006 was $16,500 and is included as interest expense in the
accompanying consolidated statements of operations. The Company paid $48,500 of
issue costs on the notes payable which was amortized over the term of the Notes.
Amortization of the issue costs on the note payable for the year ended December
31, 2006 was $48,500 and is included as interest expense in the accompanying
consolidated statements of operations.

(iv) On April 19, 2006, the Company issued warrants to purchase up to an
additional 150,000 shares of Common Stock, on terms and conditions identical to
the January 2006 Bridge Loan Warrants, as consideration for the extension from
April 21, 2006 to May 21, 2006 of the scheduled maturity date of the December
2005 and January 2006 Bridge Notes, with an aggregate principal amount of
$1,610, 000. In addition the Company agreed to pay these same investors $30,000.
In connection with the extension of the stated maturity date of these loans, the
Company recorded a $73,509 discount to the face values of the bridge notes which
was amortized over the extended term of the notes and is included in interest
expense in the accompanying consolidated statement of operations for the year
ended December 31, 2006.


                                      F-17
<PAGE>


(v) Between October 23, 2006 and December 28, 2006, pursuant to the terms of a
Bridge Loan Agreement, dated as of October 10, 2006 (the "Loan Agreement"), the
Company obtained short-term working capital loans (hereinafter, collectively the
"Loan") in the approximate gross amount of $1.45 million. The Loans were made in
response to the Company's offer (the "Offer") in October 2006, to the purchasers
of its Series A Preferred Stock and its Series B Preferred Stock to reinstate
elements of the anti-dilution price protection that was originally included in
the agreements (such protection, respectively, the "Price Protection
Provisions") with the purchasers of these securities in consideration of new
Loans that these investors make to the Company. By their terms, the relevant
Price Protection Provisions expired in August 2005 with respect to the Series A
Preferred Stock and in August 2006 with respect to the Series B Preferred Stock.
Under the Company's offer, each investor who advanced a Loan to the Company
(each, a "Qualified Investor") received the benefit of the relevant Price
Protection Provisions with respect to three times the principal amount that is
advanced to the Company by that Qualified Investor (hereinafter, the "Protected
Amount") in connection with a Loan. Under the terms of the Offer, the Price
Protection Provisions will be operative with respect to Series A Preferred Stock
and/or Series B Preferred Stock, as well as the warrants issued in connection
therewith, held by such Qualified Investor on the day on which the Loan is
advanced to the Company from that closing date through August 31, 2007 (the
"Current Protection Period"). An initial closing of $600,000 in gross proceeds
occurred on October 23, 2006 (the "Initial Closing Date"). The Offer expired on
December 31, 2006. Purchasers of the Series A Preferred Stock and/or Series B
Preferred Stock who did not make any Loans pursuant to the Offer will not have
the benefit of the Price Protection Provisions during this period.

Pursuant to the Loan Agreement, the Loan from each Qualified Investor is
evidenced by the Company's promissory note (each, a "Note" and collectively,
"Notes") in the principal amount equal to the amount advanced by such Qualified
Investor multiplied by the Applicable Percentage. The "Applicable Percentage" is
the percentage which is equal to (x) one hundred percent (100%), plus (y) (1)
the percent equal to twenty-four percent (24%), multiplied by (2) the fraction,
of which the numerator is the number of days from the closing date of the Loan
for the relevant Qualified Investor until February 20, 2007 (the "Stated
Maturity Date"), which is 120 days after the Initial Closing Date, and the
denominator is 360. The Stated Maturity Date was subsequently extended to March
22, 2007, which extension is discussed further below. The aggregate face amount
of the Notes is $1,535,000. Each of the Notes, whether issued on the Initial
Closing Date or on a subsequent closing date, is scheduled to mature on the date
(the "Maturity Date") which is the earliest of (i) the Stated Maturity Date,
(ii) the date on which the Company consummates a subsequent financing that
generates, on a cumulative basis with all other financings after the Initial
Closing Date (except for the proceeds of the Loans and certain limited
exceptions specified in the Notes), gross proceeds to the Company of at least $2
million or (iii) the date on which a holder of a Note accelerates payment of the
Note while there is an Event of Default existing under that Note. Prior to the
Maturity Date, the Company may, at its option, prepay the Notes in whole or in
part. If not paid at maturity, interest on the Notes will accrue at 24% per
annum from the Maturity Date until the actual date of payment.

Each of the respective Price Protection Provisions originally contained in the
securities purchase agreements previously entered into by the Company and the
purchasers of the Series A Preferred Stock and the Series B Preferred stock,
respectively, provides that if the Company enters into a "Lower Price
Transaction" (as defined in the relevant such purchase agreement) during a
specific period specified in each such agreement, where the (i) lowest per share
purchase price contemplated thereunder or the lowest conversion price which
would be applicable under the terms of such transaction is below the then
current conversion price and/or (ii) the lowest exercise price of any warrants
issued thereunder is lower than the then current exercise prices of the warrants
issued in connection with such Series A Preferred Stock or Series B Preferred
Stock, as the case may be, then the terms of any unconverted share of the
relevant Series A Preferred Stock or Series B Preferred Stock will be modified
to adjust the relevant conversion price and/or the terms of any unexercised
warrants issued in connection therewith shall be modified to adjust the relevant
warrant exercise price, and/or the number of warrant shares may be increased
depending on the terms of the Lower Price Transaction. The reinstatement of the
Price Protective Provisions for the Protected Amount pursuant to the Company's
Offer relate solely with respect to the occurrence of a Lower Price Transaction
during the Current Protection Period and not to any other protective provision
that may be included in such agreements.

At the request of the Company, holders of approximately $1.463 million in
principal amount of the 2006 Notes agreed to extend the maturity date of such
notes until March 22, 2007 in consideration of the Company's payment of a
portion of the principal of their respective 2006 Notes, and the Company's
agreement that the interest on the unpaid balance of the outstanding principal
amount of these loans will accrue interest at a rate of 24% per annum. One of
the holders of the 2006 Notes did not agree to the extension and accordingly its
note in the principal amount of $71,020 was paid in full. Payments were made
from the proceeds of short-term loans that were advanced to the Company on
February 27, 2007. See Note 13C (Subsequent Events).

In connection with the placement of the Notes, the Company paid to a registered
broker dealer which acted as placement agent a cash fee equal to 10% of the
aggregate amount advanced to the Company on account of the Notes. The Company
incurred additional closing related fees and expenses.

The Company recorded and is amortizing the $86,663 of original issue discount
over the term of the Notes. Amortization of the discount on the notes payable
for the year ended December 31, 2006 was $37,578 and is included as interest
expense in the accompanying consolidated statements of operations. The Company
paid $165,158 of financing costs on the notes payable which are being amortized
over the term of the Notes which vary from 53 to 120 days. Amortization of the
issue costs on the note payable for the year ended December 31, 2006 was $62,652
and is included as interest expense in the accompanying consolidated statements
of operations.

See Note 12 (Related Party Transactions) for advances made by a Company insider.

NOTE 6 - MAY 2006 PRIVATE PLACEMENT


                                      F-18
<PAGE>


On May 5, 2006, the Company raised gross proceeds of $10 million from the
private placement (the "May 2006 Private Placement") to accredited institutional
and individual investors (the "Investors") of its two-year 8% Senior Secured
Convertible Debentures (the "Debentures"). In connection with the issuance of
the Debentures, the Company issued to the investors warrants, exercisable
through the last day of the month in which the fifth anniversary of the
effective date of the Registration Statement (as defined below) occurs (the
"Investor Warrants"), to purchase up to 6,666,675 shares of the Company's Common
Stock at a per share exercise price of $1.50. At closing, the Company received
net proceeds of approximately $5.2 million from the proceeds of the Debentures,
after the payment of offering related fees and expenses and after the repayment
in full of the bridge loans made between December 2005 and April 2006 (the
"Bridge Loans") in the aggregate amount of $3,691,500 (inclusive of $30,000 in
related fees). Certain of the investors in the Bridge Loans elected to
participate in the May 2006 Private Placement and, accordingly, approximately
$850,000 in principal amount of Bridge Loans was offset against these investors'
purchases of the Debentures.

The Debentures mature on April 30, 2008 and are convertible into shares of
Common Stock at the holder's option at any time at an initial conversion price
of $0.75 per share, subject to adjustment in the event of certain capital
adjustments or similar transactions, such as a stock split or merger and as
further described below. Interest on the Debentures accrues at the rate of 8%
per annum, payable upon conversion or semi-annually (June 30 and December 31 of
each year, with the first scheduled payment date being December 31, 2006) or
upon maturity, whichever occurs first, and will continue to accrue until the
Debentures are fully converted and/or paid in full. Interest is payable, at the
option of the Company, either (i) in cash, or (2) in shares of Common Stock at a
rate equal to 90% of the volume weighted average price of the Common Stock for
the five trading days ending on the trading day immediately preceding the
relevant interest payment date; provided that interest payments may be made in
shares of Common Stock only if on the relevant interest payment date the
Registration Statement (as defined below) is then effective. In addition,
provided the Registration Statement is effective, the Company may prepay the
amounts outstanding on the Debentures by giving advance notice and paying an
amount equal to 120% of the sum of (x) the principal being prepaid plus (y) the
accrued interest thereon. Holders will continue to have the right to convert
their Debentures prior to the actual prepayment. The Company recorded accrued
interest of $528,219 in the accompanying consolidated financial statements for
the year ended December 31, 2006 for this transaction.

Under certain conditions, the Company is entitled to require the holders of the
Debentures to convert all or a part of the outstanding principal amount of the
Debentures. If the closing sale price of the Company's Common Stock as quoted on
the OTC Bulletin Board equals to or exceeds 200% of the conversion price then in
effect (i.e., $1.50 with respect to the initial conversion price of $0.75)
(which amount may be adjusted for certain capital events, such as stock splits)
on each of twenty consecutive trading days, then, subject to certain specified
conditions, within five trading days after the last day in such period, the
Company may, at its option (exercised by written notice to the holders of the
Convertible Debentures), require the holders thereof to convert all or any part
of their Debentures on or before a specified date, which date shall not be less
than 20 and not more than 60 trading days after the date of such notice.

To secure the Company's obligations under the Debentures, the Company has
granted a security interest in substantially all of its assets, including
without limitation, its intellectual property, in favor of the Investors. The
security interest terminates upon the earlier of (i) the date on which less than
one-fourth of the original principal amount of the Debentures originally issued
at closing are outstanding or (ii) payment or satisfaction of all of the
Company's obligations in respect of these advances.

The Company undertook to file, within 75 days after the closing, a registration
statement (the "Registration Statement") covering the Common Stock underlying
the Debentures and the Warrants, as well as certain other securities agreed to
by the parties and to use reasonable best efforts to cause the Registration
Statement to be declared effective within 120 days of the closing. The
Registration Statement was filed on January 26, 2007. Under the agreements with
the holders of the Debentures, the Company is obligated to pay liquidated
damages to the holders of the Debentures because the Registration Statement was
not filed within the time frame provided therein and the registration statement
was not declared effective within 120 days of the Closing Date Accordingly, the
Company recorded accrued estimated penalties of approximately $1,700,000 at
December 31, 2006 (estimated through March 31, 2007 pursuant to View C of ETIF
05-4). The Debenture holders have the right to have these liquidated damages
paid in shares of Common Stock (valued at the conversion price).

The May 2006 Private Placement resulted in a beneficial conversion feature of
$5,658,503 which the Company recorded as a discount to the face value of the
Debentures. The Company also recorded a $2,191,836 discount on the Debentures
based upon the relative fair values of the Debentures and the Investor Warrants.
During the year ended December 31, 2006, $2,598,733 of these discounts was
amortized and is included in interest expense in the accompanying consolidated
financial statements. The remaining unaccreted discount of $5,251,606 will be
amortized over the remaining term of the Debentures.

In connection with the placement of the Debentures, a placement agent has
received a cash fee of $1,000,000 and warrants, with a grant date value of
$1,090,452, to purchase up to 2,000,000 shares of the Company's Common Stock, of
which warrants for 1,333,333 shares have an initial exercise price equal to
$0.75 per share and warrants for 666,667 shares have an initial exercise price
equal to $1.50. These warrants become first exercisable on the earlier of (i)
the sixth month following the effective date of the Registration Statement or
(ii) one year after issuance and continue to be exercisable through the last day
of the month in which the fifth anniversary of the effective date of the
Registration Statement occurs. The resale of the Common Stock underlying the
Placement Agent's Warrants will also be included in the Registration Statement.
The Company paid an additional $84,500 in other costs associated with the
placement of the Debentures. Accordingly, a total of $2,174,952 was recorded as
deferred financing costs. During the year ended December 31, 2006 $360,940 and
$358,970 were amortized and are included in interest expense and amortization of
deferred financing costs respectively.


                                      F-19
<PAGE>


The placement of the Debentures resulted in the reduction to $0.75 from $1.01 of
the conversion rate into Common Stock of the then outstanding and unconverted
46,000 shares of the Company's Series B 8% Convertible Preferred Stock issued in
April and May of 2005. The reduction in the conversion price resulted in an
additional beneficial conversion feature of $1,591,525 which the Company
recorded as a deemed dividend for this transaction in the accompanying condensed
consolidated financial statements for the year ended December 31, 2006.

 NOTE 7 - PRODUCT ENHANCEMENT

The Company and Lucent Technologies, Inc. ("Lucent") are parties to a
Development and Licensing Agreement effective as of January 2004. In April 2004
and in September 2004, the Company and Lucent entered into supplementary
development agreements to add to the Company's QoStream product line additional
product features and upgrades intended to enhance product competitiveness in
respect of which the Company agreed to pay to Lucent an additional $868,000 upon
receipt of deliverables. As of December 31, 2006, the Company has remitted the
entire $868,000 to Lucent for this development work.

During May 2005, the Company and Lucent entered into a supplementary development
agreement to add additional product features and developments to the Company's
QoStream product line for agreed upon consideration of approximately $1,100,000.
Under the agreement, payment is due upon delivery and acceptance of the
deliverables by the Company. Certain of the deliverables received by the Company
under such agreement have not been completed in accordance with design and
development criteria specified in the agreement and the Company has not accepted
delivery of these items. Accordingly, the Company has not recorded the expense
and the related amount payable to Lucent concerning the non-accepted
deliverables in the accompanying consolidated financial statements.

On July 14, 2006, the Company and Lucent entered into the Amendment to Prior
Agreements, dated as of July 10, 2006 (the "Amendment"), pursuant to which they
have amended the terms of a number of prior agreements entered into by them,
including, without limitation, the (i) Development and Licensing Agreement of
January 6, 2004 and (ii) the Supplementary Development Agreement between the
Company and Lucent effective as of May 5, 2005 as well as various supplementary
agreements and amendments thereto entered into by them (collectively the
"Agreements").

Under the terms of the Amendment, in lieu of the current royalties of 3.2% of
certain revenues payable (under certain circumstances) to Lucent under the
Agreements, the Company will be required to pay to Lucent royalties in the
amount of 1.5% of specified revenue sources from the Company's Gateway and
Switch products that include Lucent owned technologies, provided, that, no
royalties accrue or become payable until July 10, 2008. In addition, Lucent
waived payments aggregating $835,000 that were outstanding under the Agreements
in respect of deliverables received by the Company from Lucent under the
Agreements upon the Company's remittal to Lucent of $200,000 in July of 2006. In
addition, the parties agreed to terminate the license that the Company was
granted to Lucent owned patents under the Agreements; accordingly, the Company
is no longer obligated to make any payments to Lucent, if any, owing under such
patent license. The termination of the patent license does not affect the
Company's rights under the Agreements to develop and sell products based upon or
incorporating Lucent owned technologies.

NOTE 8 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

                                                              December 31,
                                                                  2006
                                                               ---------
                  Computer and office equipment                $ 890,214
                  Furniture and fixtures                          18,364
                  Leasehold improvements                          39,292
                  Software                                       118,082
                                                               ---------
                      Subtotal                                 1,065,952

                  Less:  Accumulated depreciation               (335,228)
                                                               ---------
                       Property and Equipment, net
                                                               $ 730,724
                                                               =========


                                      F-20
<PAGE>


Depreciation expense was $202,998 and $123,117 for the years ended December 31,
2006 and 2005.

NOTE 9 - INCOME TAXES

The following table presents the principal reasons for the difference between
the expected and effective income tax rates for each of the years presented as
follows:

                                                               DECEMBER 31,
                                                          --------------------
                                                             2006       2005
                                                          ---------  ---------
   U. S. federal expected income tax rate                       35%        35%
   State and local income taxes, net of federal benefit          6%         6%
   Effect of permanent differences                               4%         4%
                                                          ---------  ---------
                                                                45%        45%
   Less valuation allowance                                    (45%)      (45%)
                                                          ---------  ---------
   Effective income tax rate                                     0%         0%
                                                          =========  =========


At December 31, 2006, the Company had available approximately $44 million of net
operating loss carryforwards for U.S. federal income tax purposes which expire
in the years 2014 through 2026, and approximately $6 million of foreign net
operating loss carryforwards from its wholly-owned subsidiary with no expiration
date. Due to the uncertainty of their realization, no income tax benefit has
been recorded by the Company for these net operating loss carryforwards as
valuation allowances have been established for any such benefits. The use of the
U.S. federal net operating loss carryforwards is subject to limitations under
Section 382 of the Internal Revenue Code pertaining to changes in stock
ownership.

Significant components of the Company's deferred tax assets for U.S. federal and
Israel income taxes are as follows:

                                                            December 31,
                                                               2006

                Net operating loss carryforwards           $   17,663,000
                Capital loss carryforward                         686,000
                Stock based compensation                          884,478
                Other                                             285,971
                                                           --------------
                Total deferred tax assets                      19,519,449
                Valuation allowance                           (19,519,449)
                                                           --------------
                Net deferred tax assets                    $            -
                                                           ==============


                                      F-21
<PAGE>


The valuation allowance increased $4,707,990 for the year ended December 31,
2006 and $3,481,373 for the year ended December 31, 2005.

NOTE 10 - STOCKHOLDERS' EQUITY

COMMON STOCK

On July 20, 2006, the Company amended its certificate of incorporation to
increase the number of shares of Common Stock that the Company is authorized to
issue from time to time to 100 million shares.

STOCK OPTION PLANS

In July 1996, the Board of Directors adopted the Company's Incentive and
Non-qualified Stock Option Plan (the "Plan") and has reserved up to 450,000
shares of Common Stock for issuance thereunder. In December 1999, the Plan was
amended to increase the total number of shares available for grant to 1.5
million. As of December 31, 2006 a total of 714,566 options were outstanding
under the 1996 Plan. Future grants under the 1996 Plan were discontinued in July
2000.

In July 1998, the Board of Directors adopted the Non-Executive Directors Stock
Option Plan (the "Directors' Plan") and has reserved up to 25,000 shares of
common stock for issuance thereunder. In May 2001, the Plan was amended to
increase the total number of shares available for grant to 75,000. In August
2002, the Company adopted the 2002 Non-Employee Directors' Plan (the "2002
Directors' Plan") which provides for 275,000 shares available for grant. Both
plans provide for the grant of options to directors who are not otherwise
employed by the Company. In May 2004, the 2002 Directors Plan was amended to
increase the total number of shares available for grant to 1,000,000 and in July
2006 such plan was further amended to increase the shares available thereunder
to 2,000,000 shares. As of December 31, 2006, options to purchase a total of
1,177,562 shares of Common Stock were outstanding under the Directors' Plan and
the 2002 Directors' Plan.

In July 2000, the Company adopted the 2000 Equity Incentive Plan (the "2000
Incentive Plan") and originally reserved a total of 1,500,000 shares of common
stock for issuance thereunder. In May 2001, the 2000 Incentive Plan was amended
to increase the total number of shares available for grant to 3,500,000; in May
2004 the 2000 Incentive Plan was amended to increase the total number of shares
available for grant to 5,000,000; in April 2005 the plan was amended to increase
the total number of shares available for issuance to 6,500,000; and in July
2006, the plan was further amended to increase the total number of shares
available for issuance to 10,000,000. The 2000 Incentive Plan provides for the
grant of incentive stock options, nonqualified stock options, stock appreciation
rights, restricted stock, bonus stock, awards in lieu of cash obligations, other
stock-based awards and performance units. The 2000 Incentive Plan also permits
cash payments under certain conditions. As of December 31, 2006, there were
options to purchase 6,294,236 shares of Common Stock issued and outstanding
under the 2000 Incentive Plan. The Compensation Committee of the Board of
Directors is responsible for determining the type of award, when and to whom
awards are granted, the number of shares and the terms of the awards and
exercise prices. The options are exercisable for a period not to exceed ten
years from the date of grant. Vesting periods range from immediately to four
years.

<TABLE>
<CAPTION>

OTHER OPTION GRANTS

In addition to the options granted under the Stock Option Plans, the Company has
issued options outside of the plans, pursuant to various agreements. Stock
option activity for 2006 is summarized as follows:

                                                                                  Weighted     Weighted
                                                                                  Average       Average       Aggregate
                                                          Options                 Exercise     Remaining      Intrinsic
                                             Plan         Nonplan       Total      Price        Years          Value
                                           ---------     ---------    ---------  ---------    ---------      ---------
<S>                                        <C>             <C>        <C>             <C>          <C>         <C>
Options outstanding, December 31, 2005     6,509,425       493,218    7,002,643       1.60
Granted                                    2,300,400             0    2,300,400       0.78
Exercised                                   (240,044)     (328,812)    (568,856)      0.62
Forfeited                                   (383,417)            0     (383,417)      0.87

Options outstanding, December 31, 2006     8,186,364       164,406    8,350,770       1.47         6.73        167,242
                                           ---------     ---------    ---------  ---------    ---------      ---------
Options Exercisable, December 31, 2006     6,379,982       164,406    6,544,388       1.65         6.13        101,317
</TABLE>


                                      F-22
<PAGE>


The following table summarizes significant ranges of outstanding and exercisable
stock options outstanding at December 31, 2006:


                   Stock Options Outstanding           Stock Options Exercisable
            -----------------------------------------  -------------------------
                                Weighted Average
                          ---------------------------                  Weighted
                             Remaining                                  Average
Ranges of      Number       Contractual     Exercise       Number      Exercise
Prices       Outstanding     Life(years)     Price      Exercisable      Price
-----        -----------    -----------      -----      -----------      -----

$0.16             50,000        5.77          0.16           50,000       0.16
$0.55-0.83     3,527,262        7.95          0.71        2,739,325       0.71
$0.85-1.25     2,823,333        7.36          0.98        1,804,889       1.00
$1.53-1.68       293,300        4.86          1.66          293,300       1.66
$2.56-3.56       324,941        3.29          3.25          324,941       3.25
$3.91-5.06     1,323,934        3.47          4.08        1,323,934       4.08
$6.84-7.00         8,000        1.40          6.93            8,000       6.93
               ---------       -----         -----       ----------      -----

$0.16-$7.00    8,350,770        6.73         $1.47        6,544,388      $1.65
               ---------       -----         -----       ----------      -----



The total fair value of shares vested during the twelve months ended December
31, 2006 was $1,392,272.

The fair value of employee stock options at the date of grant was estimated
using the Black-Scholes option pricing method during the twelve months ended
December 31, 2006, with the following weighted average assumptions:

                    Expected life (Years)               3.5
                    Interest Rate                       4.81%
                    Annual Rate of Dividends            ----%
                    Volatility                          59.3%

Weighted average grant date fair value of options granted during the twelve
months ended December 31, 2006, under Black-Scholes option pricing model, was
$0.36. The total intrinsic value of options exercised during the twelve months
ended December 31, 2006 was $175,705.

A summary of Plan and options activity of non-vested options as of December 31,
2006, and changes during the twelve months ended December 31, 2006 are presented
below:

                                                                     Weighted
                                                                      Average
                                                                   Grant Date
                                                    2006           Fair Value
                                                  ---------        ----------
                    Non Vested at 1/1/06          2,719,159           0.54
                    Granted                       2,300,400           0.36
                    Vested                       (2,829,761)          0.49
                    Forfeited                      (383,417)          0.74

                    Non-Vested at 12/31/06        1,806,382           0.43


                                      F-23
<PAGE>


Weighted-average grant date fair value of options granted in 2006 and 2005 under
the Black-Scholes option pricing model, was $0.36 and $0.50 per option,
respectively.

During 2005 the Company issued the following stock options:

From January 1 through March 31, 2005, in conjunction with their employment
agreements, seven new Company employees received options to purchase up to an
aggregate of 315,000 shares of the Company's common stock, par value $0.001
("Common Stock") under the Company's 2000 Equity Incentive Plan (the "2000
Equity Incentive Plan"). The options vest over a two or three-year period from
the date of grant and are exercisable at exercise prices ranging from $0.89 to
$1.24 per share (based on the closing market price of the Common Stock on the
day preceding the date of grant).

On February 14, 2005 the Company granted to a consultant a non-qualified option
under the 2000 Equity Incentive Plan to purchase up to 25,000 shares of Common
Stock at an exercise price of $0.89 per share. The option was fully vested upon
the date of grant. The $0.89 exercise price equaled the closing market price of
the Common Stock on the date of grant. The fair value of the option on the date
of grant equaled $10,161. The Company recorded stock-based compensation expense
of $10,161 in the accompanying consolidated financial statements for the year
ended December 31, 2005 for this transaction.

On February 16, 2005 the Company granted to two consultants non-qualified
options under the 2000 Equity Incentive Plan to purchase up to an aggregate of
50,000 shares of Common Stock at an exercise price of $0.94 per share, with such
option vesting over 3 years. The $0.94 exercise price equaled the closing market
price of the Common Stock on the date of grant. The fair value of the options
amounted to $27,440 and is being amortized over the 3-year vesting period. The
Company recorded stock-based compensation expense of $9,146 in the accompanying
consolidated financial statements for the year ended December 31, 2005 for this
transaction.

From April 1 through June 30, 2005, six new Company employees received options
to purchase up to an aggregate of 285,000 shares of Common Stock under the
Company's 2000 Equity Incentive Plan. The options vest over a two or three-year
period from the date of grant and are exercisable at exercise prices ranging
from $1.02 to $1.25 per share (based on the closing market price of the Common
Stock on the day preceding the date of grant).

On May 23, 2005, pursuant to an employment agreement (See Note 9 Employment
Agreement) the Company's new Chief Financial Officer received options to
purchase a total of up to 300,000 shares of Common Stock under the Company's
2000 Equity Incentive Plan. The options vest over a three-year period from the
date of grant and are exercisable at an exercise price of $1.05 per share (based
on the closing market price of the Company's Common Stock on the day preceding
the date of grant ).

On May 25, 2005 the Company granted to a member of its advisory board, on the
one-year anniversary of service, a non-qualified option under the 2000 Equity
Incentive Plan to purchase up to 20,000 shares of Common Stock at an exercise
price of $0.98 per share. The option vests over a two-year period from the date
of grant. The $0.98 exercise price equaled the closing market price of the
Common Stock on the date of grant. The fair value of the option on the date of
grant equaled $10,620. The Company recorded stock-based compensation expense of
$3,982 in the accompanying consolidated financial statements for the year ended
December 31, 2005 for this transaction.

On June 9, 2005, the Company awarded six employees options to purchase up to an
aggregate of 319,000 shares of Common Stock under the Company's 2000 Equity
Incentive Plan. The options vest over a three-year period from the date of grant
and are exercisable at an exercise price of $.92 per share (based on the closing
market price of the Common Stock on the date preceding the date of grant).

During August and September 2005, four new Company employees received options to
purchase a total of up to 190,000 shares of Common Stock under the Company's
2000 Equity Incentive Plan. The options vest over a three-year period from the
date of grant and are exercisable at exercise prices ranging from $.78 to $.98
per share (based on the closing market price of the Common Stock on the day
preceding the date of grant).

During September 2005, the Company granted to two new members of its advisory
board non-qualified options under the 2000 Equity Incentive Plan to purchase up
to 120,000 shares of Common Stock at an exercise price of $0.95 per share. The
options vest over a two-year period from the date of grant. The $0.95 exercise
price equaled the closing market price of the Common Stock on the date of grant.
The fair value of the options on the date of grant equaled $55,440. The Company
recorded stock-based compensation expense of $8,258 in the accompanying
consolidated financial statements for the year ended December 31, 2005 for this
transaction.

During October, November and December 2005, eight new Company employees received
options to purchase a total of up to 365,000 shares of Common Stock under the
Company's 2000 Equity Incentive Plan. The options vest over a three-year period
from the date of grant and are exercisable at exercise prices ranging from $.82
to $.90 per share (based on the closing market price of the Common Stock on the
day preceding the date of grant).

During October 2005, the Company granted to a new member of its advisory board
non-qualified options under the 2000 Equity Incentive Plan to purchase up to
60,000 shares of Common Stock at an exercise price of $0.90 per share. The
options vest over a two-year period from the date of grant. The $0.90 exercise
price equaled the closing market price of the Common Stock on the date of grant.
The fair value of the options


                                      F-24
<PAGE>


on the date of grant equaled $21,600. The Company recorded stock-based
compensation expense of $2,700 in the accompanying consolidated statement of
operations for the year ended December 31, 2005 for this transaction.

During 2006 the Company issued the following stock options:

On February 2, 2006, the Company granted to an employee stock options to
purchase up to an aggregate of 10,000 shares of Common Stock under the Company's
2000 Equity Incentive Plan. The options were scheduled to vest over a three-year
period from the date of grant and were exercisable at an exercise price of $.65
per share (based on the closing market price of the Common Stock on the date
preceding the date of grant). The fair value of the options amounted to $2,954
and is being amortized over the three-year vesting period. The Company recorded
stock-based compensation expense of $164 in the accompanying consolidated
financial statements for the year ended December 31, 2006 for this transaction.
As the employee subsequently forfeited these options, the Company will not
recognize any further expense for this transaction.

On February 3, 2006 the Company granted to two consultants non-qualified stock
options under the 2000 Equity Incentive Plan to purchase up to an aggregate of
60,000 shares of Common Stock at an exercise price of $0.65 per share, with such
option vesting over 3 years. The $0.65 exercise price equaled the closing market
price of the Common Stock on the date of grant. The fair value of the options
amounted to $17,274 and is being amortized over the 3-year vesting period. The
Company recorded stock-based compensation expense of $5,280 in the accompanying
consolidated financial statements for the year ended December 31, 2006 for this
transaction.

In February 2006, the Company received cash proceeds of $162,000 from the
exercise by certain Company officers and directors of stock options to purchase
a total of 268,200 shares of the Company's Common Stock. In consideration of
those stock option exercises, the Company issued to the exercising officers and
directors stock options to purchase up to 95,088 shares of the Company's Common
Stock from the 2000 Equity Incentive Plan and stock options to purchase up to
441,312 shares of the Company's Common Stock under the 2002 Directors Plan, in
each case at per share exercise prices ranging from $0.69 to $0.70. The exercise
price of each of these options is equal to the closing price of the Common Stock
on the date of issuance. The fair value of the options amounted to $169,484 and
was expensed immediately because the options were fully vested at the grant
date. The Company recorded stock-based compensation expense of $169,484 in the
accompanying financial statements for the year ended December 31, 2006 for this
transaction.

On March 14, 2006, the Company issued to a total of 29 employees options to
purchase up to an aggregate of 486,500 shares of the Company's common stock, par
value $0.001 ("Common Stock") under the Company's 2000 Equity Incentive Plan.
The options vest over a three-year period from the date of grant and are
exercisable at an exercise price of $0.86 per share (based on the closing market
price of the Common Stock on the date of the grant). The fair value of the
options amounted to $190,895 and is being amortized over the 3-year vesting
period. The Company recorded stock-based compensation expense of $50,644 in the
accompanying financial statements for the year ended December 31, 2006 for this
transaction. Since three employees subsequently forfeited 38,000 options, the
Company will not recognize any further expense for those forfeited options.

On April 25, 2006 the Company granted to four non-employee directors, on the
one-year anniversary of their service on the Company's board of directors,
non-qualified options under the 2002 Non Employee Directors Stock Option Plan to
purchase up to 327,500 shares of the Company's Common Stock at an exercise price
of $1.03 per share (based on the closing market price of the Common Stock on the
date of the grant). The options immediately vested on the grant date. The fair
value of the options on the date of grant equaled $149,075. The Company recorded
stock-based compensation expense of $149,075 in the accompanying consolidated
financial statements for the year ended December 31, 2006 for this transaction.

On May 1, 2006, the Company granted to a new employee stock options to purchase
up to an aggregate of 50,000 shares of Common Stock under the Company's 2000
Equity Incentive Plan. The options vest over a three-year period from the date
of grant and are exercisable at an exercise price of $1.07 per share (based on
the closing market price of the Common Stock on the date preceding the date of
grant). The fair value of the options amounted to $23,649 and is being amortized
over the three-year vesting period. The Company recorded stock-based
compensation expense of $5,255 in the accompanying consolidated financial
statements for the year ended December 31, 2006 for this transaction.

During July and September 2006, the Company issued to a total of nine new
employees options to purchase up to an aggregate of 415,000 shares of the
Company's Common Stock under the Company's 2000 Equity Incentive Plan. The
options vest over a three-year period from the date of grant and are exercisable
at exercise prices ranging from $0.62 to $0.73 per share (based on the closing
market price of the Common Stock on the date of the grant). The fair value of
the options amounted to $125,211 and is being amortized over the 3-year vesting
period. The Company recorded stock-based compensation expense of $19,329 in the
accompanying financial statements for the year ended December 31, 2006 for this
transaction.

During July 2006 the Company granted to a member of the Company's advisory board
non-qualified stock options under the 2000 Equity Incentive Plan to purchase up
to an aggregate of 60,000 shares of Common Stock at an exercise price of $0.62
per share, with such option vesting over 3 years. The $0.62 exercise price
equaled the closing market price of the Common Stock on the date of grant. The
fair value of the options amounted to $17,817 and is being amortized over the
3-year vesting period. The Company recorded stock-based compensation expense of
$2,969 in the accompanying consolidated financial statements for year ended
December 31, 2006 for this transaction.


                                      F-25
<PAGE>


On October 12, 2006 the Company granted to four non-employee directors,
non-qualified options under the 2002 Non Employee Directors Stock Option Plan to
purchase up to 240,000 shares of the Company's Common Stock at an exercise price
of $.70 per share (based on the closing market price of the Common Stock on the
date of the grant). The options immediately vested on the grant date. The fair
value of the options on the date of grant equaled $87,684. The Company recorded
stock-based compensation expense of $87,684 in the accompanying consolidated
financial statements for the year ended December 31, 2006 for this transaction.

During October and November, 2006 the Company granted to two consultants
non-qualified stock options under the 2000 Equity Incentive Plan to purchase up
to an aggregate of 115,000 shares of Common Stock at an exercise price of $0.83
and $.89 per share, with such options vesting over 3 years. The exercise price
equaled the closing market price of the Common Stock on the date of grant. The
fair value of the options amounted to $52,069 and is being amortized over the
3-year vesting period. The Company recorded stock-based compensation expense of
$1,928 in the accompanying consolidated financial statements for the year ended
December 31, 2006 for this transaction.

WARRANTS

Warrant activity for 2005 and 2006 is summarized as follows:

                                                                       Weighted
                                                                        Average
                                                                       Exercise
                                                           Warrants      Price
                                                           --------      -----

           Warrants outstanding, December 31, 2004        10,103,333     $2.56
           Granted                                         5,647,280     $1.59
           Exercised                                        (251,827)    $0.75
           Forfeited                                      (1,270,000)    $8.27
                                                         -----------

           Warrants outstanding, December 31, 2005        14,228,786     $1.79
           Granted                                        10,041,667     $1.45
           Exercised                                        (431,506)    $0.75
           Forfeited                                               0     $0.00
                                                          ----------

           Warrants outstanding, December 31, 2006        23,838,947      $1.66
                                                          ----------


STOCK ISSUANCES

During the year ended December 31, 2005, the Company completed the following
Preferred and Common Stock transactions:

The Company issued 77,650 shares of Series B 8% Convertible Preferred Stock from
this equity raise (See Note 4).

The Company issued 4,176,267 shares of Common Stock upon the conversion of
31,322 shares of Series A Preferred Stock representing $3,132,200 in stated
value at a per share conversion price of $0.75.

The Company issued 643,564 shares of Common Stock upon the conversion of 6,500
shares of Series B Preferred Stock representing $650,000 in stated value at a
per share conversion price of $1.01.

The Company issued 251,827 shares of Common Stock upon the exercise of stock
warrants resulting in proceeds of approximately $189,000.

The Company issued 215,916 shares of Common Stock with a total value of $182,633
to Series A Preferred Stockholders as stock dividends. The shares were issued at
$0.75 per share which was a discount to the fair market value on the date of
issuance.

The Company issued 572,451 shares of Common Stock with a total value of $444,539
to Series B Preferred Stockholders as stock dividends. The shares were issued at
various prices per share, each of which was a discount to the fair market value
on the date of issuance.

The Company issued 15,200 shares of Common Stock with a total value of $14,136
for late filing penalty on preferred stock registration. The shares were issued
at $0.75 per share which was a discount to the fair market value on the date of
issuance.

During the year ended December 31, 2006, the Company completed the following
Preferred and Common Stock transactions:

On July 20, 2006, the Company amended its certificate of incorporation to
increase the number of shares of Common Stock that the Company is authorized to
issue from time to time to 100 million shares.

The Company issued 1,434,666 shares of Common Stock upon the conversion of
10,760 shares of Series A Preferred Stock representing $1,076,000 in stated
value at a per share conversion price of $0.75.

The Company issued 4,257,755 shares of Common Stock upon the conversion of
38,150 shares of Series B Preferred Stock representing $3,815,000 in stated
value at per share conversion prices of $1.01 and $0.75.


                                      F-26
<PAGE>


The Company issued 493,699 shares of Common Stock upon the exercise of stock
options resulting in proceeds of approximately $260,000.

The Company issued 167,319 shares of Common Stock upon the exercise of 431,506
stock warrants. The Company did not receive any proceeds from this cashless
exercise.

The Company issued 875,000 shares of Common Stock with a total fair market value
of $613,000 to four consultants.

The Company issued 129,936 shares of Common Stock valued at a total fair market
value of $101,079 to Series A Preferred Stockholders as payment for accrued
stock dividends. The shares were issued at prices between $0.71 and $1.13 per
share which depending on the fair market price when issued may have been a
discount to the fair market value on the date of issuance.

The Company issued 585,520 shares of Common Stock valued at a total fair market
value of $443,679 to Series B Preferred Stockholders as payment for accrued
stock dividends. The shares were issued at prices between $0.71 and $1.16 per
share which was a discount to the fair market value on the date of issuance.

The Company is obligated to pay liquidated damages to the holders of the Series
A Preferred Stock as the registration statement relating to the resale of the
Common Stock underlying such preferred stock was not updated to maintain
effectiveness. The Company recorded accrued penalties of $287,475 as of December
31, 2006 for these liquidating damages. Following the filing of a post effective
amendment, such registration statement became effective as of November 6, 2006.

The Company is obligated to pay liquidated damages to the holders of the Series
B Preferred Stock as the registration statement relating to the resale of the
Common Stock underlying such preferred stock was not updated to maintain
effectiveness. The Company recorded accrued estimated penalties of $169,473 as
of December 31, 2006 for these liquidating damages. Following the filing of a
post effective amendment, such registration statement became effective as of
November 6, 2006

NOTE 11 - COMMITMENTS AND CONTINGENCIES

EMPLOYMENT AGREEMENTS

The Company and Mr. Frank Galuppo, the Company's Chief Executive Officer and
President and a director, entered into three-year employment agreement,
effective as of March 15, 2004, pursuant to which Mr. Galuppo is currently paid
an annual salary of $235,000. The agreement further provided that if Mr.
Galuppo's employment is terminated other than for cause (as defined in the
employment agreement) or if Mr. Galuppo terminates his employment for good
reason (as defined in the employment agreement), he will be entitled to receive
the equivalent of three months' base salary and benefits, if such termination
takes place during the first twelve months following the effective date of the
agreement. If such termination takes place after the first year of employment,
then Mr. Galuppo will be entitled to receive the equivalent of six months' base
salary and benefits. The Company also issued to Mr. Galuppo an option under our
2000 Equity Incentive Plan to purchase up to 1,315,250 shares of Common Stock at
a per share exercise price of $0.79, which option is scheduled to vest over
twelve succeeding quarters, beginning June 30, 2004. Mr. Galuppo has agreed to
certain customary confidentiality and non-compete provisions that prohibit him
from competing with the company for one year, or soliciting our employees for
one year, following the termination of his employment..

On May 25, 2005, the Company entered into an employment agreement with James D.
Gardner pursuant to which Mr. Gardner serves as the Company's Chief Financial
Officer. The agreement has an initial term of one year. After the initial term
of one year, the agreement is automatically renewable for an additional one-year
term unless either party notifies the other in writing upon at least 45 days
prior to the scheduled termination of the initial term or any renewal term that
it does not intend to renew such agreement. Mr. Gardner is paid a monthly salary
of $14,583 and was granted options under the Company's 2000 Equity Incentive
Plan to purchase 300,000 shares of Common Stock at a per share purchase price of
$1.05. The options vest over three years from the grant date and on a quarterly
basis. The agreement may be terminated by Mr. Gardner for any reason on 60 days
written notice to the Company or by the Company immediately for cause. In the
event of a termination by the Company for any reason other than cause, the
Company shall pay Mr. Gardner (i) if such termination occurs during the initial
term of the agreement, an amount equal to 3 months' salary and (ii) if such
termination occurs after the initial term, an amount equal to 6 months' salary.

The Company's aggregate annual commitments under the existing employment
agreements is approximately $373,958 during 2007,In addition, each of the
employment agreements provides for payments through the term of the employment
agreement under certain circumstances.

LEASE COMMITMENTS

On February 9, 2005, the Company entered into a lease for office facilities at 2
Corbett Way, Eatontown, New Jersey, 07724, to which it relocated in May 2005.
The new facilities are comprised of approximately 7,500 square feet. The lease
term began in May 2005 and is for a term of approximately five years. Monthly
payments under the lease vary as follows: for the first lease year, monthly
payments of approximately $10,000 (after giving effect to agreed upon rent
credits for such year); for the second lease year, monthly payments of
approximately $14,000; for the third lease year, monthly payments of
approximately $14,500; for the fourth lease year, monthly payments of
approximately $14,700; and for the fifth lease year, monthly payments of
approximately $14,900. In connection with the lease the Company


                                      F-27
<PAGE>


paid a security deposit of approximately $26,000 and, in connection with the
lease modification discussed below, the Company paid in July 2005 an additional
security deposit of approximately $6,650.

On June 1, 2005 the Company entered into a modification of the lease pursuant to
which the Company leases an additional 1,900 square feet. The modified lease
began as of November 1, 2005. Beginning November 2005, total monthly payments
under the modified lease are as follows: for the first lease year, monthly
payments of approximately $12,000 (after giving effect to agreed upon rent
credits for such year); for the second lease year, monthly payments of
approximately $17,500; for the third lease year, monthly payments of
approximately $18,000; for the fourth lease year, monthly payments of
approximately $18,500; and for the fifth lease year, monthly payments of
approximately $18,700.

On December 22, 2005 the Company entered into a second modification of the lease
pursuant to which the Company leases an additional 3500 sq. ft. The Company paid
a $14,000 security deposit, representing two months rent, upon entering into the
second modification. Under the second lease modification, the Company's monthly
rental expense increased by $7,000 beginning on March 1, 2006.

As a result of the lease payments above the Company recorded $40,731 of deferred
rent included in accrued expenses on the balance sheet in the accompanying
consolidated financial statements as of December 31, 2006.

During the years ended December 31,2006 and 2005 the Company incurred rent
expense of $261,544 and $162,247, respectively for its previous and current
facilities.

<TABLE>
<CAPTION>

                                  2007           2008             2009          2010
                             -------------   -------------    ------------  ------------
<S>                             <C>             <C>              <C>          <C>
01/01-08/31                     $196,355        $201,034         $204,153     $205,712
09/01-12/31                     $100,517        $102,076         $102,856
                             -------------   -------------    ------------  ------------

TOTAL COMMITMENT PER YEAR       $296,872        $303,110         $307,009     $205,712
                             =============   =============    ============  ============
</TABLE>


In April 2007, the Company received a notice from the landlord who rents these
facilities to the Company purporting to terminate the leases for non-payment.
The Company is currently negotiating amendments to the leases, which would allow
it to retain a portion of the premises that it currently leases and vacate the
remaining portion of the premises while receiving a reduction in the rental
obligations. There can be no assurance that the Company will be successful in
reaching agreement with the landlord regarding such amendments.


EQUITY LINE

In August 2004, the Company secured a $6 million equity line commitment from an
institutional investor on which it can draw from time to time during a 24 month
period following the effectiveness of a registration statement relating thereto,
subject to certain conditions. The Company undertook to file a registration
statement in respect of such equity line no earlier than the 90th day following
the effective date of the registration statement for the Common Stock underlying
the Series B Preferred Stock (i.e., December 1, 2005), but no later than the
120th day after such date (i.e. December 31, 2005) discussed in Note 4
(Financing). The investor may terminate the equity line commitment if the
Company does not timely file the registration statement relating to the equity
line or if such registration statement is not declared effective within 180 days
following the filing thereof. No such registration statement has been filed as
of the filing of this Annual Report on Form 10-KSB.

The equity line allows the sale of up to $6 million of Common Stock at 98 % of
the then current market price, but in no event at less than $2.00. The Company
may not draw down more than $500,000 under the equity line during any 30-day
period. The investor is entitled to 5% of the cash proceeds from the sale of the
shares to it by the Company under the equity line. No assurance can be provided
that the equity line will in fact ever become available for use by the Company.
The Company subsequently amended this equity line.

In August 2004, the Company issued to the equity line investor five year
warrants to purchase up to 333,333 shares of Common Stock at a per share
exercise price of $2.00. These warrants are subject to cashless exercise
following the first anniversary of issuance if at the time of exercise there is
no effective registration statement in effect. The Company recorded deferred
offering costs of $267,404 for the value of these warrants. During 2005 the
Company recorded $267,404 as impaired offering costs in the accompanying
Consolidated Statements of Operations.

On April 12, 2006, the Company and the equity investor entered in to an
amendment of the $6 million equity line commitment the Company obtained in
August 2004. Under the amendment, the price at which Company has the right to
sell Common Stock to the investor under the


                                      F-28
<PAGE>


equity line was reduced to 89% of the then-current market price but in no event
at less than $1.50 per share. In addition, under the terms of the amendment the
Company agreed to file such registration statement between 90 and 120 days after
the effective date of the resale registration statement that the Company intends
to file in connection with the May 2006 Private Placement. The amendment also
provides that the exercise price of common stock purchase warrant issued to the
equity line investor in August 2004 will be reduced to $1.50, subject to further
adjustment as therein provided.

DISPUTED PAYABLE

Stifel Nicolaus & Company ("Stifel"), the successor-in-interest to Legg Mason
Walker Wood LLC, an investment banking firm, has made a demand on the Company
for payment of $700,000 as fees for financial advisory services that it claims
are due in connection with certain of the bridge loans referred to in Note 5.
The Company believes that Stifel's position, which is based on Stifel's
interpretation of a placement agency agreement entered into by the Company and
the investment bank in September 2005 and terminated by the Company in December
2005, is without merit. It is the Company's intention to defend itself against
any claim for payment asserted by Stifel vigorously. The Company also reserves
the right to dispute the balance due on the initial retainer payable under the
agreement as well as related out-of-pocket expenses claimed by Stifel, which
together total approximately $96,000, which are recorded and included in
accounts payable as of December, 31, 2006 in the accompanying condensed
consolidated financial statements. Additionally, Stifel also made demands with
respect to payment of amounts raised by the Company in the private placement
that it completed in May 2006. In April 2007, the Company and Stifel resolved
the outstanding differences between them. See Note 13 D (Subsequent Events).

NOTE 12 - RELATED PARTY TRANSACTIONS

In January 2006 the Company entered into additional Short Term Loans with three
private investors (collectively the "January 2006 Investors"), pursuant to which
these investors loaned to the Company the aggregate amount of $500,000. The
January 2006 Investors included Mr. Juan Mendez, Chairman of the Company's board
of directors, who loaned the Company $250,000. In addition, on November 13,
2006, the Company obtained a $100,000 loan from Mr. Juan Mendez, the Chairman of
its board of directors, for purpose of meeting its operating requirements. The
loan was made pursuant to the Company's demand promissory note issued to Mr.
Mendez in the principal amount of $100,000. Interest on the loan accrues at the
rate of 24% per annum. In February 2007, Mr. Mendez advanced an additional
$150,000 to the Company on identical terms. (See Note 13A).

NOTE 13 - SUBSEQUENT EVENTS

A. BRIDGE LOANS

(i) On January 19, 2007, the Company received a short-term loan in the aggregate
gross amount of $356,000 from one of its institutional stockholder/investors.
The loan is evidenced by the Company's promissory note in the principal amount
of $384,480 and becomes due and payable on the earliest to occur of (i) the date
on which we consummate a subsequent financing that generates, on a cumulative
basis with all other financings, gross proceeds to the Company of at least $2
million or (ii) May 19, 2007. Under the terms of the note, the holder may
declare the note immediately due and payable upon the occurrence of any of the
following events of default: (i) failure to pay principal or any other amount
due under the note when due, (ii) material breach of any of the representations
or warranties made in such note, (iii) failure to observe any undertaking
contained in such note or the other transaction documents in a material respect
if such failure continues for 30 calendar days after notice, (iv) our admission
in writing as to our inability to pay our debts generally as they mature, makes
an assignment for the benefit of creditors or commences proceedings for our
dissolution, or apply for or consent to the appointment of a trustee, liquidator
or receiver for our or for a substantial part of our property or business, (v)
our insolvency or liquidation or a bankruptcy event, (vi) the entry of money
judgment or similar process in excess of $750,000 if such judgment remains
unvacated for 60 days.

(ii) On January 31, 2007 the Company obtained an additional short-term working
capital loan in the gross amount of $200,000 from an institutional investor. The
loan is evidenced by the Company's promissory note in the principal amount of
$216,000 and becomes due and payable on the earliest to occur of (i) the date on
which the Company consummates a subsequent financing that generates, on a
cumulative basis with all other financings, gross proceeds to the Company of at
least $2 million or (ii) May 31, 2007. Under the terms of the Note, the holder
may declare the Note immediately due and payable upon the occurrence of any of
the following events of default: (i) failure to pay principal or any other
amount due under the Note when due, (ii) material breach of any of the
representations or warranties made in the Note, (iii) failure to observe any
undertaking contained in the Note or the other transaction documents in a
material respect if such failure continues for 30 calendar days after notice,
(iv) the Company's admits in writing as to its inability to pay its debts
generally as they mature, makes an assignment for the benefit of creditors or
commences proceedings for its dissolution, or applies for or consents to the
appointment of a trustee, liquidator or receiver for our or for a substantial
part of its property or business, (v) the Company's insolvency or liquidation or
a bankruptcy event, (vi) the entry of money judgment or similar process in
excess of $750,000 if such judgment remains unvacated for 60 days.

(iii) On February 27, 2007, the Company obtained an additional short-term
working capital loan in the gross amount of $500,000 from an institutional
stockholder and a previous investor. The loan is evidenced by the Company's
promissory note in the principal amount of $531,000 and becomes due and payable
on the earliest to occur of (i) the date on which the Company consummates a
subsequent financing that generates, on a cumulative basis with all other
financings, gross proceeds to the Company of at least $2 million or (ii) May 31,
2007. Under the terms of the Note, the holder may declare the Note immediately
due and payable upon the occurrence of any of the following events of default:


                                      F-29
<PAGE>


(i) failure to pay principal or any other amount due under the Note when due,
(ii) material breach of any of the representations or warranties made in the
Note, (iii) failure to observe any undertaking contained in the Note or the
other transaction documents in a material respect if such failure continues for
30 calendar days after notice, (iv) the Company's admits in writing as to its
inability to pay its debts generally as they mature, makes an assignment for the
benefit of creditors or commences proceedings for its dissolution, or applies
for or consents to the appointment of a trustee, liquidator or receiver for our
or for a substantial part of its property or business, (v) the Company's
insolvency or liquidation or a bankruptcy event, (vi) the entry of money
judgment or similar process in excess of $750,000 if such judgment remains
unvacated for 60 days.

B. MAY 2006 PRIVATE PLACEMENT

At the request of the Company, in January 2007 the holders of a
majority-in-interest of the principal amount of the Debentures agreed to defer
to March 31, 2007 the payment of liquidated damages payable to them in
connection with the late filing/effectiveness of the Registration Statement
referred to in Note 6 (Private Placement), whereupon any liquidated damages due
as of such date would then become payable in accordance with the agreements with
the investors, as well as omit from the Registration Statement the shares of
Common Stock issuable upon exercise of the Investor Warrants. Under the terms of
the agreements with the holders of the Debentures, the consent obtained from
such majority-in-interest is binding on all holders of the Debentures. In
addition, the holders of $9,100,000 in principal amount of the Debentures agreed
to defer to March 31, 2007 the payment of interest accrued as of December 31,
2006.

The Company has not made payments of interest in the amount of $725,479and
liquidated damages (payable in connection with the late filing/effectiveness of
the Registration Statement) in the approximate amount of $1.7 million due as of
March 31, 2007. The delivery of notice to the Company by any one of these
holders demanding immediate payment will trigger an Event of Default under the
agreements with the Debenture holders and entitle these holders to foreclose on
the Company's property. The Company is currently in discussions with the holders
of the Debentures in an attempt to reach an agreement restructuring the loans,
addressing such issues as the further deferral of the payment of interest and
liquidated damages, the cessation of liquidated damages, the facilitation of
additional financing and the subordination of the Debenture holders security
interest to the providers of new funds. The Company is also in discussions with
third parties in connection with the immediate advance of a short-term loan. At
the present time the Company has no funding commitments for any such funding
(which will be subject to the consent of the Debenture holders) and no assurance
can be given that any will be forthcoming on commercially acceptable terms (or
at all) and/or that the Company will be able to reach a mutually acceptable
agreement by the Debenture holders. In May 2007, the Company withdrew the
Registration Statement that it originally filed in January 2007 covering the
resale of the shares of common stock underlying the securities held by the
Debenture holders.

C. DEFAULT ON PAYMENT OF AMOUNTS OWED

The Company did not make payments to holders of approximately $1.463 million in
principal amount of notes that became due on March 22, 2007. The outstanding
amount accrues interest at the per annum rate of 24%. The Company and these
lenders are in discussions regarding an extension of the payment period and/or a
restructure of the amounts owed.

D. DISPUTED PAYABLE

On April 23, 2007, the Company and Stifel entered into a settlement agreement
pursuant to which the issues surrounding the disputed payable referred to in
Note 11 above were resolved. Pursuant to such agreement, the parties granted
each other mutual releases and the Company issued to Stifel 500,000 shares under
the Company's 2000 Equity Incentive Plan.


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