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

                                  FORM 10-KSB/A

MARK ONE:

          [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGEACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

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

                         COMMISSION FILE NUMBER: 0-22055

                              AMEDIA NETWORKS, INC.
        (Exact name of Small Business Issuer as specified 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, 2005: $5,548

As of April 7, 2006, there were 26,363,460 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 $29.1 million based on the last
reported sale price of $1.16 per share on April 7, 2006 as quoted on the OTC
Bulletin Board.


                               Explanatory Note


<PAGE>


The Registrant hereby amends its Annual Report on Form 10-KSB to amend and
restate Part III in its entirety to provide the information called for therein
which the Registrant intended to be incorporated by reference to applicable
information in the Proxy Statement for the 2006 Annual Meeting of the
Stockholders.

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

<PAGE>


                              AMEDIA NETWORKS, INC.

                         2005 FORM 10-KSB ANNUAL REPORT

                                TABLE OF CONTENTS



<TABLE>
<CAPTION>
<S>                                                                           <C>
                                     PART I

 ITEM 1.    DESCRIPTION OF BUSINESS.............................................4

 ITEM 1A.   RISK FACTORS.......................................................23

 ITEM 2.    DESCRIPTION OF PROPERTY............................................34

 ITEM 3.    LEGAL PROCEEDINGS..................................................35

 ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................35

                                     PART II

 ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........35

 ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..........36

 ITEM 7.    FINANCIAL STATEMENTS...............................................43

 ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            AND FINANCIAL DISCLOSURE...........................................43

 ITEM 8A.   CONTROLS AND PROCEDURES............................................43

 ITEM 8B.   OTHER INFORMATION..................................................43

                                    PART III

 ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
            COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT..................43

 ITEM 10.   EXECUTIVE COMPENSATION.............................................45

 ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
            AND RELATED STOCKHOLDER MATTERS....................................47

 ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................49

 ITEM 13.   EXHIBITS...........................................................50

 ITEM 14.   PRINCIPAL ACCOUNTANT FEES & SERVICES...............................53
</TABLE>





<PAGE>


                           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

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<PAGE>


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. See "Recent
Developments". 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.

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.

                                        5

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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.

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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.

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.

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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.

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 2006, 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.

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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

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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.

In general, carriers will increasingly find the decision to deploy ESON or PON
to be less clear-cut than in past years, and will need to consider several
factors, the principal one being the density of their subscriber base.

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.

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, three of the four
largest domestic telephone carriers, AT&T Corporation (formerly SBC
Communications), 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.

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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.

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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.

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

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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.

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.

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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.

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. As of
December 2005, we announced one product in this family: the HG-V100 Home
Gateway.

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.

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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.

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

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Western Pennsylvania. We shipped our first units under this purchase order in
March 2006. This was our first sale in the U.S. market.

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. See "Recent Developments".

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.

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

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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.

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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.

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 3.2% of any
revenues received by us from the sale or license of products that use their
technologies. If Lucent expends substantial sales efforts with respect to any
customer (the extent and amount of such sales efforts being subject to mutual
prior agreement), then it is entitled to 7% of any revenues receive from such
customer.

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; a small direct domestic sales force
to address other strategic accounts; and the use of distributors, resellers,
sales agents, and other third parties to represent our products with most other
prospective customers.

Market communications programs were implemented to support the Company's brand
and value including our participation in key domestic and global trade shows and
expositions, event sponsorships, print advertisements, outbound e-mails
programs, and web-based initiatives. Thought leadership

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programs included the authoring of multiple articles by management in industry
publications, webinars, speaking engagements at several of leading conferences,
and engagements with industry analysts.

Co-marketing programs have been instituted with several other equipment vendors
with whom we interoperate. For example, Riverstone Networks and TUT Systems have
both represented our products with their customers, 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. See
"Recent Developments".

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 February 13, 2006, numbers 23 employees. These
teams performs hardware and software engineering, systems architecture design,
quality assurance, and systems testing.

As of February 2006, our QoStream products are commercially deployable. Current
development efforts are primarily focused toward feature enhancements of our
products.

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.

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.

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

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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

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<PAGE>


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.

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 March 31, 2006, we employed on a full time basis 34 employees. Of these
employees, 23 are engaged solely in research and development functions and
another seven employees are engaged in sales, marketing, and four 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.

In addition to full time employees, we also contract with several individuals
for both short term and longer term projects.

RECENT DEVELOPMENT

On April 5, 2006, we entered into a Strategic Alliance Agreement (the "Strategic
Alliance Agreement") with Motorola Wireline Networks, Inc. ("Motorola"), a
subsidiary of Motorola, Inc.,

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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 us $1.9 million
for engineering costs associated with the development of the Gateway Products,
approximately 32% of which is payable within 30 days of the effective date of
the agreement 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.

Under the Strategic Alliance Agreement, we have has granted Motorola the
exclusive right to resell our 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 its products that
it charges 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.

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<PAGE>


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.

                                  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 FOR

THE FORESEEABLE FUTURE.

Since inception, we have incurred significant net losses. We incurred net losses
applicable to common stockholders of $12,941,282 and $8,322,211 for the years
ended December 31, 2005 and 2004, respectively. As of December 31, 2005, we had
an accumulated deficit of $58,167,320. 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

                                       23

<PAGE>


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. We require additional funds to repay secured loans aggregating
approximately $3 million (of which approximately $1.5 million are scheduled to
mature on April 21, 2006 and $1.5 million in June 2006), to continue to meet our
other liquidity needs and satisfy our current business plan. We will need to
raise additional funds to pay existing current liabilities as they come due, as
well as to meet our operating requirements, prior to the receipt of revenues. 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. We may have difficulty obtaining
additional funds as and if needed, and we may have to accept terms that would
adversely affect our stockholders. 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. 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.

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.

Our independent registered public accountants have included an explanatory
paragraph in their report accompanying our audited consolidated financial
statements for the year ended December 31, 2005 relating to the uncertainty of
our ability to continue as a going concern. This qualification may make it more
difficult for us to raise additional capital when needed. We believe that there
are conditions that raise substantial doubt about 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.

     A DEFAULT BY US UNDER OUR BRIDGE LOAN WOULD ENABLE THE LENDERS TO TAKE

CONTROL OF ALL OF OUR ASSETS.

In December 2005, we entered into a bridge loan agreement pursuant to which two
institutional investors loaned us the aggregate principal amount of $1,000,000
(net of offering related fees and expenses) and we issued to the investors
secured promissory notes in the aggregate principal amount of

                                       24

<PAGE>


$1,080,000, which reflects an original issue discount on the principal amount of
the loan of 8% through the stated maturity thereof. The notes will mature on the
date that is the earlier of (i) the date on which we consummates a subsequent
financing that generates, on a cumulative basis together with any other interim
financings, gross proceeds to us of at least $2 million or (ii) April 21, 2006.
To secure our obligations under the bridge loan agreement, we granted the
investor a security interest in all of our assets (including, without
limitation, our intellectual property) pursuant to the terms and conditions of a
security interest agreement. In January 2006, in connection with our entering
into a bridge loan agreement pursuant to which three private investors loaned us
the aggregate principal amount of $500,000 (net of offering related fees and
expenses), the security interest agreement was amended to include the three
private investors among the secured parties thereunder. While we are currently
in discussion with these investors respecting an extension of the scheduled
maturity date of April 21, 2006, pending our obtaining long-term financing, no
assurance can be provided that we will be successful in obtaining such extension
on commercially acceptable terms. In addition, in March 2006, we borrowed an
additional $1.5 million in aggregate principal amount from one of the investors
who participated in the December 2005 bridge loan. These loans are scheduled to
mature on the earlier of (i) the date on which we consummate a subsequent
financing that generates, on a cumulative basis together with any other interim
financings, gross proceeds to us of at least $3.5 million or (ii) June 1, 2006.
Our obligations under the March 2006 bridge loan agreements are secured by a
lien on all our assets (including, without limitation, our intellectual
property) pursuant to the terms and conditions of a security interest agreement.
The security interest terminates upon payment or satisfaction of all of our
obligations under the bridge loan agreements. We believe that will be able to
satisfy these bridge loans when due only by raising funds from the sale of our
debt or equity instruments. We currently have no commitment for such funds. A
default by us under either bridge loan agreement would enable the investors to
foreclose on all of our assets. The investors have no operating experience in
our line of business and any foreclosure could force us to substantially curtail
or cease our operations.

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.

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OUR RELATIONSHIP WITH MOTOROLA IS VERY IMPORTANT TO US BECAUSE WE HAVE GRANTED
TO MOTOROLA EXCLUSIVE DISTRIBUTION RIGHTS FOR OUR PG 1000 AND HG-V100 PRODUCTS
WITH RESPECT TO 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 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 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.

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 development
IPTV Gateway 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 currently expect that sales through
Motorola, if any, will account for a major portion of our revenues for at least
fiscal year 2007. We believe that the rapid penetration of our products to
telecommunications carriers to be important to our success. If we are unable to
effectively manage and maintain our relationship with Motorola or for any reason
Motorola cannot successfully market our products, our business will 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.

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

                                       26

<PAGE>


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 of 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. 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.

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<PAGE>


Additionally, under the Development and Licensing Agreement, 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

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<PAGE>


regarding 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.

      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 $32 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

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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.

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<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.

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<PAGE>


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.

As of April 7, 2006, we had 75 million authorized shares of Common Stock, of
which 26,363,460 shares of our Common Stock were issued and outstanding. As of
April 7, 2006, an additional 31,177,927 shares are reserved for issuance upon
conversion of outstanding shares of our Series A Preferred Stock or Series B
Preferred Stock or exercise of outstanding options or warrants to purchase
Common Stock. Many of the above 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.

Additionally, 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. Such stock issuances may be made at a price that reflects a
discount from the then-current trading price of our Common Stock. In addition,
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.

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<PAGE>


These issuances would 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 of our Common
Stock. Our stockholders may incur additional dilution of net tangible book value
if holders of stock options or warrants, whether currently outstanding or
subsequently granted, exercise their options or warrants to purchase shares of
our Common Stock.

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.

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.

As of April 7, 2006, we had 75 million authorized shares of Common Stock, of
which 26,363,460 shares of our Common Stock were issued and outstanding and an
additional 31,177,927 shares are reserved for issuance upon conversion of
outstanding shares of our Series A Preferred Stock or Series B Preferred Stock
or exercise of outstanding options or warrants to purchase Common Stock. While
we have obtained a non-binding agreement-in-principle of one of our investors to
waive the reservation requirement with respect to approximately 1.3 million
shares issuable upon exercise of warrants that were issued to such investor,
thereby enabling us to use these shares for capital raising purposes, we need to
memorialize this agreement in a legally binding document. Accordingly, at
present, we have only 17,456,613 shares of Common Stock available for issuance.
We intend to propose at our 2006 annual meeting of stockholders that our
stockholders approve an increase in our authorized number of shares of Common
Stock. If our stockholders do not approve of the increase in the number of
authorized shares of Common Stock, our ability to raise additional capital
through the issuance of Common Stock or securities convertible into or
exercisable for our Common Stock will be severely limited.

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.

Further, our board of directors and our shareholders have approved at our 2005
annual stockholders meeting a proposal granting to our Board of Directors the
authority to effect a reverse stock split of our issued and outstanding Common
Stock in the range of 1:3 to 1:6, at the Board's discretion solely for the
purpose of qualifying for quotation of the Nasdaq National Market, the SmallCap
Market or the American Stock Exchange and only following satisfaction of all
listing requirements but for the minimum per share price. While we do not
currently meet the other listing criteria of these exchanges, if at any time
prior to our 2006 annual meeting we were to satisfy these criteria, then the
Board of Directors may exercise this authority at any time on or before the date
of our 2006 annual meeting of stockholders. The Board of Directors also has the
authority not to effect the reverse split in such timeframe. If effected, the
reverse stock split would result in a reduction in the number of shares of our
Common Stock issued and outstanding and an associated increase in the number of
authorized shares which would be unissued and available for future issuance
after the reverse stock split. Such shares could be used for any proper
corporate purpose including, among others, future financing transactions.
Presently, we have no intention of exercising this authority prior to the 2006
annual meeting, even if were to meet the other listing criteria.

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                          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 headquarters 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.

                                       34


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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

At a special meeting of our stockholders held on December 27, 2005, we submitted
to the vote of our stockholders a proposal to increase the number of shares of
Common Stock we are authorized to issue from 75,000,000 to 100,000,000 shares.
The special meeting was adjourned without any action taken by our stockholders
due to the absence of a quorum.

                                     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 April 7, 2006 was $1.16 per share.

                                              LOW       HIGH
                                              ----      ----
 Year Ended December 31, 2005
     First Quarter                           $0.82      $1.36
     Second Quarter                          $0.82      $1.26
     Third Quarter                           $0.76      $1.09
     Fourth Quarter                          $0.75      $1.00

 Year Ended December 31, 2004
     First Quarter                           $ 0.25     $1.00
     Second Quarter                          $ 0.52     $1.05
     Third Quarter                           $ 0.76     $1.15
     Fourth Quarter                          $ 0.85     $2.00


As of April 7, 2006, there were approximately 169 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.

                                       35

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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.

RECENT SALES OF UNREGISTERED SECURITIES

The following paragraph sets forth certain information with respect to all
securities sold by us during the year ended December 31, 2005 without
registration under the Securities Act and not previously included in a Quarterly
Report on Form 10-QSB.

1. In December 2005, we issued to two institutional investors five-year warrants
to purchase in the aggregate up to 500,000 shares of our Common Stock at an
exercise price of $1.50 per share. The warrants were issued pursuant to a bridge
loan agreement between us and the investors, under which the investors loaned us
the aggregate amount of $1,000,000 (before the payment of offering related fees
and expenses).

All of the securities issued in the transaction described above were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act or Regulation S under such
Securities Act. Except with respect to securities sold under Regulation S, the
recipients of securities in the transaction acquired the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof. Appropriate legends were affixed to the share certificates
issued in the above transaction. We believe the recipients were all "accredited
investors" within the meaning of Rule 501(a) of Regulation D under the
Securities Act, or had such knowledge and experience in financial and business
matters as to be able to evaluate the merits and risks of an investment in its
common stock. All recipients had adequate access to information about us. The
transaction described above did not involve general solicitation or advertising.

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.

We are a development stage company that has generated significant operating
losses since our inception in August 1994, all of which primarily relate to Copy
Protection Business in which we were

                                       36

<PAGE>


previously engaged. We have been engaged in the broadband access communication
business since only March 2004. From our inception in August 1994 through
October 2002, we were engaged in the Copy Protection Business under the name
"TTR Technologies, Inc." As a development stage company, we have a limited
operating history upon which an evaluation of our prospects can be made. Our
prospects must therefore be evaluated in light of the problems, expenses, delays
and complications associated with a development stage company.

PLAN OF OPERATIONS

Our initial QoStream products are ready for FTTP deployment and are
inter-operable with most installed FTTP communications networks and equipment.

Our products are designed and generally positioned in the market as a
comprehensive and integrated solution for network operators for the parts of
their networks that connect to a served premises. In October 2005, we introduced
a new product, our HG-V100 Home Gateway, that was designed and is being
positioned in the market as a stand-alone device that is interoperable with
other vendors' network access equipment. This product became available on a
limited basis in December 2005.

We are continuously upgrading our 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 500 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 include the
ability for our Gateways to distribute services within a served premise over
existing copper coaxial cables and possibly over telephone wires.

Subject to raising additional funds, we anticipate that we will continue to
significantly increase our investment in research and development efforts and
marketing, sales and operations over the next 12 months.

INITIAL COMMERCIALIZATION OF QOSTREAM PRODUCT LINE

In June 2005, we entered into the first sale agreement for our QoStream product
line with Tai Long Communication of China. Tai Long is licensed by the Chinese
government to operate broadband customer premise networks and ISP networks and
as an Internet content provider. As Tai Long ramps-up its nationwide access
project, they intend to implement FTTP-based services using our products,
subject to ongoing field testing.

In October 2005, we 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.

Also in October 2005, Hans Communications, a Korean-based CATV and high-speed
ISP operating in Mongolia, and Sejong Network Technologies, a Korean distributor
and systems integrator of our 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

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<PAGE>


Western Pennsylvania. We shipped our first units under this purchase order in
March 2006. This was our first sale in the U.S. market.

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 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. See
"Recent Developments".

Subject to our receipt of additional capital infusion, over the next twelve
months we anticipate that we will be expanding products applications to
encompass sophisticated business applications and other in-house wiring,
including copper networks as well as satisfying our obligations under the
agreement with Motorola. Accordingly, we anticipate that we will be
significantly increasing our investment in research and development efforts and
marketing.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004.

SALES AND COSTS OF GOODS SOLD. Revenues for the year ended December 31, 2005
were $5,548 and were derived from unit sales of 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 $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. No revenues
or cost of goods were recorded for the year ended December 31, 2004.

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 years ended December 31, 2005 and 2004, our research and development
expenses were $3,975,852 and $3,222,695, respectively. The increase in research
and development expenses during 2005 as compared to 2004 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 years ended December 31, 2005 and 2004 were
$2,422,999 and $505,313, respectively. The increase in sales and marketing
expenses during 2005 as compared to 2004 is primarily attributable to the hiring
of additional marketing and sales personnel during 2005 and other marketing
costs, such as trade shows.

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 years ended December 31, 2005 and
2004 were $2,209,171 and $1,860,959, respectively. The increase in general and
administrative expenses during the 2005 period compared to the 2004 period is
primarily attributable to the hiring of additional executive and staff
positions.

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<PAGE>


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

As permitted under SFAS 123, we have elected to continue to follow the intrinsic
value method in accounting for our stock-based employee compensation
arrangements. Had we applied the fair value recognition provision of SFAS 123
for the years ended December 31, 2005 and 2004, we would have recognized
stock-based compensation expense of $715,511 and $868,925, respectively.

In December 2004, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123R "Share Based
Payment". This statement is a revision of SFAS Statement No. 123, "Accounting
for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related implementation guidance. SFAS No.
123R addresses all forms of share based payment ("SBP") awards including shares
issued under employee stock purchase plans, stock options, restricted stock and
stock appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that
will be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest and will be reflected as compensation
expense in the financial statements. This statement is effective for public
entities that file as small business issuers as of the beginning of the first
annual reporting period that begins after December 15, 2005. Upon the adoption
of this pronouncement on January 1, 2006 the Company expects to record
additional stock compensation expense. As of December 31, 2005, there is
approximately $1,117,183 of future employee stock based compensation costs that
will be expensed over a three year period from 2006 through 2008.

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 the Company's 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.

                                       39


<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

Cash balances totaled approximately $424,415 at April 7, 2006, $333,787 at
December 31, 2005 and $2,275,377 at December 31, 2004.

Net cash used during fiscal 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 used
in investing activities.

Net cash provided by financing activities was approximately $8.0 million in
fiscal 2005 compared to approximately $4.6 million in fiscal 2004. Net cash
provided by financing activities in fiscal 2005 was the result of proceeds from
the issuance of Series B Preferred Stock amounting to $7,084,170 and proceeds
from notes payable of $877,470, in each case net of financing costs.

Net cash provided by financing activities in fiscal 2004 was the result of
proceeds from the issuance of Series A Preferred Stock amounting to $4,642,430,
net of financing costs.

From our inception in August 1994, we have financed our operations through the
sale of our securities. The proceeds from the sale of our Copy Protection
Business in May 2003 were also used to finance our operations. Below is a
summary of our recent financings.

In August 2004, we completed a private placement to certain private and
institutional investors of shares of our Series A Convertible Preferred Stock,
par value $0.001, as well as related warrants, for aggregate gross proceeds of
$5.25 million. We received net proceeds of approximately $4.6 million from the
private placement, following the repayment of offering related expenses. In
March 2005, certain of the warrant holders exercised their warrants for
aggregate net cash proceeds to us of approximately $189,000.

On April 5, 2005, we entered into a bridge loan agreement with an institutional
investor pursuant to which the investor loaned us the principal amount of
$1,500,000 at a per annum interest rate of 7%. We received net proceeds of
$1,350,000 from the proceeds of the loan, after the payment of transaction
related fees and expenses. On April 26, 2005, we repaid to the investor
$1,505,178 from the proceeds of the 2005 Private Placement referred to below,
representing the outstanding principal amount of the bridge loan and interest
accrued thereon.

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 loan referred to above and payment of offering related expenses.

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. After payment of due diligence fees and transaction related fees and
expenses, we received net proceeds of $877,470. An amount equal to 108% of the
principal amount of the loan is due and payable on the date (the "Maturity
Date") that is the earlier of April 21, 2006 or the date we effect a financing
transaction or series of transactions resulting in gross proceeds to us of at
least $2 million. 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. An amount equal to approximately 106% of the principal
amount of the loan is due and payable on the Maturity Date. We are currently in
the process of negotiating an extension to the scheduled maturity date of April
21, 2006; however, no assurance can be provided that we will be successful in
obtaining such extension on commercially reasonable terms or at all.
Additionally, 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

                                       40

<PAGE>


$1.5 million in aggregate principal amount. After payment of due diligence fees
and transaction related fees and expenses, we received aggregate net proceeds of
$1,338,410 from these loans. An amount equal to approximately 106% of the
aggregate principal amount of the loans is due and payable on the date that is
the earlier of June 1, 2006 or the date we effect a financing transaction or
series of transactions resulting in gross proceeds to us of at least $3.5
million. 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. After payment of due diligence fees and transaction related
fees and expenses, we received aggregate net proceeds of $401,500 from this
loan. An amount equal to approximately 103.667% of the aggregate principal
amount of this loan is due and payable on the date that is the earlier of June
1, 2006 or the date we effect a financing transaction or series of transactions
resulting in gross proceeds to us of at least $3.5 million. We may prepay these
loans in whole or in part at any time without penalty. These loans are secured
by a lien on all of our assets.

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. We require additional funds to repay the bridge loans upon their scheduled
maturity, continue to meet our liquidity needs, maintain operations and realize
our business plan. We currently anticipate that we will be able to satisfy our
operating requirements and current liabilities solely through raising additional
funds from third party investors. Management is aggressively seeking to raise
capital that will provide the funds needed to continue our business operations
and realize our business plans. In December 2005, we engaged an investment bank
to assist us, on a best efforts basis, in raising funds. The period during which
the investment bank was entitled to provide such services to us on an exclusive
basis expired in March 2006. To date, we have not received a financing proposal
from any investor introduced to us by the investment bank. We have received a
non-binding financing proposal from a party not introduced to us by the
investment bank which is subject to, among other things, the negotiation and
execution of legally binding agreements. Presently, we do not have any
commitment from any person regarding any additional capital and there can be no
assurance that additional capital will be available to us on commercially
acceptable terms or at all. If we are unable to raise funds on an immediate
basis, we will need to further curtail expenses, reduce planned research and
development and sales and marketing efforts, forego business opportunities and
cease operations. If the warrants issued to the purchasers of the Series B
Preferred Stock, which have a per share exercise prices $1.50, are exercised by
these holders for cash in a net amount sufficient for our needs, we may be able
to generate working capital to satisfy some of our operating needs. No assurance
can be provided, though, that these warrants will in fact be exercised in
amounts sufficient for our needs. If these warrants are not so exercised, we
will need to raise additional funds through public or private sales of equity
securities or borrowings.

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.

Our independent registered public accounting firm's report accompanying our
consolidated financial statements for the year ended December 31, 2005 includes
an explanatory paragraph relating to the uncertainty of our ability to continue
as a going concern. This qualification may make it more difficult for us to
raise additional capital when needed. We believe that there are conditions that
raise substantial doubt about 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.

Furthermore, it is anticipated that any successful financing will have a
significant dilutive effect on existing stockholders. The inability to obtain
such financing will have a material adverse effect on our condition and
prospects.

                                       41

<PAGE>


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123R "Share Based
Payment". This statement is a revision of SFAS Statement No. 123, "Accounting
for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related implementation guidance. SFAS No.
123R addresses all forms of share based payment ("SBP") awards including shares
issued under employee stock purchase plans, stock options, restricted stock and
stock appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that
will be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest and will be reflected as compensation
expense in the financial statements. This statement is effective for public
entities that file as small business issuers as of the beginning of the first
annual reporting period that begins after December 15, 2005. Upon the adoption
of this pronouncement on January 1, 2006 the Company expects to record
additional stock compensation expense. As of December 31, 2005, there is
approximately $1,117,183 of future employee stock based compensation costs that
will be expensed over a three year period from 2006 through 2008.

In October 2004, the FASB ratified Emerging Issues Task Force ("EITF") 04-8,
"The Effect of Contingently Convertible Instruments on Diluted Earnings per
Share." The EITF reached a consensus that contingently convertible instruments,
such as contingently convertible debt, contingently convertible preferred stock,
and other such securities should be included in diluted earnings per share (if
dilutive) regardless of whether the market price trigger has been met. The
consensus is effective for reporting periods ending after December 15, 2004. The
adoption of this pronouncement did not have material effect on the Company's
financial statements.

In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements. This statement
changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.

In September 2005, the FASB ratified EITF Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature,"
which discusses whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the intrinsic
value of the beneficial conversion feature on the commitment date (which is
treated recorded in the shareholder's equity for book purposes, but as a
liability for income tax purposes), and, if so, whether that basis difference is
a temporary difference under SFAS No. 109, "Accounting for Income Taxes." This
Issue should be applied by retrospective application pursuant to SFAS No. 154 to
all instruments with a beneficial conversion feature accounted for under Issue
00-27 included in financial statements for reporting periods beginning after
December 15, 2005.

EITF Issues 05-7 and 05-8 do not currently have an effect on our consolidated
financial position or results of operations.

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

                                       42

<PAGE>


beginning after September 15, 2006. The Company is currently assessing the
impact that the adoption of SFAS 155 will have on its financial position and
results of operations.

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).

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 our last
calendar year 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 Officer`s; Compliance with Section 16(a) of the
Exchange Act

         Our directors, officers and key employees are as follows:


Name                   Age     Position

Frank Galuppo          59      Chief Executive Officer, President and Director

James D. Gardner       53      Chief Financial Officer

John R. Colton         64      Chief Technology Officer

Juan Mendez            41      Chairman of the Board of Directors

Richard Rosenblum      47      Director

Gerald Butters         61      Director

Bob Martin             62      Director

         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


                                       43
<PAGE>

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 our company 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.

         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 Mobile Reach International, 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. Mr. Butters has been a technical advisor to several
privately held technology firms from August 2000 through the present time and a
director of Lambda Optical Systems, a privately held company, since October
2003.

         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. Bob 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


                                       44
<PAGE>

Electrical and Electronics Engineers, Bob was 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
capitalists and startups in telecommunications, optical devices and product
innovation.

         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.

DIRECTOR RESIGNATIONS

         Mr. Sam Brill and Mr. Ivan Berkowitz declined to stand for re-election
as directors at the 2005 Annual Meeting.

AUDIT COMMITTEE

         The Board of Directors has a standing audit committee. The Audit
Committee is responsible for selecting our independent auditors, reviewing the
Company's accounting policies, financial procedures and internal controls, the
engagement of independent auditors and the general scope of the annual audit and
any other services that the auditors may be asked to perform, and review with
the auditors their report on the Company's financial statements following the
completion of each audit.

         The Audit Committee currently consists of 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 of the 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.

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 2005, 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.

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 earned by our Chief
Executive Officer and our most highly compensated executive officers and key
employees whose total annual salaries and bonuses exceeded $100,000 for the year
ended December 31, 2005 (the "Named Executive Officers"):


                                       45
<PAGE>



<TABLE>
<CAPTION>
                                               Annual Compensation                          Long-Term Compensation
                                    -------------------------------------------           --------------------------
                                                                                          Securities      All Other
Name and                                                        Other Annual              Underlying    Compensation
Principal Position          Year    Salary($)    Bonus($)      Compensation($)            Options (#)       ($)
------------------          ----    ---------    --------      ---------------            -----------       ---

<S>                         <C>     <C>             <C>            <C>                   <C>                <C>
Frank Galuppo               2005    204,692         --             --                      --              --
President and Chief         2004    141,923         --             --                   1,315,250(2)       --
Executive Officer (1)       2003          --        --             --                      --              --

James D. Gardner            2005    104,326         --             --                     300,000 (2)       --
Chief Financial             2004      --            --             --                     --
Officer (3) --              2003      --            --             --                     --                --


John R. Colton              2005    143,538         --             --                     125,000 (2)       --
Chief Technology            2004     69,842         --             --                     100,000 (2)       --
Officer (4)                 2003      --            --             --                      --               --
</TABLE>





(1)      Mr. Galuppo became Chief Executive Officer in March 2004. In December
         2004, he was elected President.

(2)      Represents shares of Common Stock issuable upon exercise of employee
         stock options issued under the Company's 2000 Equity Incentive Plan.

(3)      Mr. Gardner was appointed Chief Financial Officer in June 2005.

(4)      Mr. Colton Joined the Company in April 2004 and in June 2005 was
         appointed Chief Technology Officer.

OPTION GRANTS IN 2005

         The following table contains information concerning the grant of stock
options to the Named Executives Officers during the fiscal year ended December
31, 2005:




<TABLE>
<CAPTION>
                            NUMBER OF
                            SECURITIES            % OF TOTAL
                            UNDERLYING          OPTIONS GRANTED    EXERCISE OR
                              OPTIONS           TO EMPLOYEES IN       BASE         EXPIRATION
NAME                        GRANTED (#)         FISCAL YEAR (%)     PRICE ($)        DATE
----------------------     ------------         ---------------   -------------    ----------
<S>                          <C>                     <C>            <C>         <C>  <C>
Frank Galuppo                     --                  --               --            --
James D. Gardner             300,000(1)              14.64%         $1.05       5/23/2015
John R. Colton               125,000(1)               7.04%         $0.92       6/09/2015
</TABLE>


AGGREGATE OPTIONS EXERCISED IN 2005 AND 2005 YEAR END OPTION VALUES

         The following table sets forth information with respect to the Named
Executive Officers concerning the number and value of unexercised options held
at December 31, 2005.



<TABLE>
<CAPTION>
                                                         Number of Securities      Value of Unexercised
                                                        Underlying Unexercised      In-the-Money Options
                          Shares          Value         Options at Fiscal Year     At Fiscal Year End ($)
                        Acquired on      Realized                End (#)                Exercisable/
Name                    Exercise (#)       ($)        Exercisable/Unexercisable      Unexercisable (1)
----                   -------------       ---        -------------------------      -----------------
<S>                        <C>             <C>        <C>         <C>                  <C>
Frank Galuppo               --              --        767,229  /  548,020              -- / --
James D. Gardner            --              --         50,000  /  250,000              -- / --
John R. Colton              --              --         74,306  /  150,694              11,000 / 11,000
</TABLE>


(1) Based upon the difference between the exercise price of such options and the
closing price of the Common Stock ($0.77) on December 30, 2005, as reported on
the OTC Bulletin Board.

DIRECTOR COMPENSATION


         CASH COMPENSATION: During 2005, each of OUR non-employee directors was
paid a cash fee of $500 per telephonic board meeting and $1,000 for each
board meeting attended in person. We also reimbursed directors for reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors
and any meetings of its committees.


                                       46
<PAGE>


         OPTION GRANTS: None of our directors was granted an option during 2005.

EMPLOYMENT AGREEMENTS WITH 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
$210,000. Mr. Galuppo's salary is scheduled to increase to $235,000 at the
beginning of the third year of employment. 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 of 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. 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 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 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 (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. 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.


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

         The following table sets forth certain information, as of April 25,
2006, concerning the ownership of our Common Stock by (a) each person who, to
our knowledge, beneficially owned on that date more than 5% of our outstanding
Common Stock, (b) each of our directors and Named Executive Officers (as defined
below under the heading "Executive Compensation") and (c) all of our current
directors and executive officers as a group.


<TABLE>
<CAPTION>
                                                      Number of Shares          Percent of
Name of Beneficial Owner (1)                        Beneficially Owned (2)   Common Stock (2)

<S>                                                      <C>        <C>           <C>
Frank Galuppo, President, Chief Executive Officer          561,771 (3)            2.09%
 and Director

James D. Gardner, Chief Financial Officer                   16,000 (4)               *

John R. Colton, Chief Technology Officer                   139,079 (5)               *

Juan Mendez, Director                                    1,725,688 (6)            6.43%

Richard Rosenblum, Director                                297,323 (7)            1.10%

Gerald Butters, Director                                    62,500 (8)               *

Bob Martin, Director                                        87,500 (9)               *
</TABLE>


                                       47
<PAGE>

<TABLE>
<CAPTION>
<S>                                                      <C>       <C>            <C>
Puritan LLC                                              1,533,334 (10)           5.82%

Melton Management Limited                                2,187,619 (11)           8.30%

All directors and executive officers as
 a group(7 persons)                                      2,889,861               10.10%
</TABLE>

* 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. We have calculated the percentages of shares beneficially
owned based on 26,363,460 shares of our Common Stock outstanding at April 25,
2006.

(3) Represents (i) 15,000 shares of Common Stock and (ii) 546,771 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 765,479 shares of Common Stock scheduled to
vest over the next two years.

(4) Does not include options to purchase an additional 300,000 shares of Common
Stock scheduled to vest by May 2008.

(5) Represents (i) 27,274 shares of Common Stock and (ii) 111,805 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 113,195 shares of Common Stock scheduled to
vest over the next two years.

(6) Represents (i) 1,260,626 shares of Common Stock and (ii) 465,062 shares of
Common Stock issuable upon exercise of currently exercisable options. Does not
include 150,000 shares issuable upon the exercise of warrants that are scheduled
to vest between July and October 2006. 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) 164,406 shares of Common Stock issuable upon exercise of
currently exercisable non-plan options, (ii) 16,667 shares of Common Stock
issuable upon exercise of warrants issued to Mr. Rosenblum as the designee of
Greenfield Capital Partners, LLC in August 2004 and (iii) 116,250 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 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. Does not include options to purchase an additional
37,500 shares of Common Stock scheduled to vest by September 2006.

(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. Does not include options to purchase an additional
37,500 shares of Common Stock scheduled to vest by September 2006.

(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,
2005 relating to our equity compensation plans.

                                       48
<PAGE>
                      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                6,509,424         $2.23             1,705,142

Equity compensation plans not approved
         by security holders               3,877,944(1)      $1.31                     -
                                          ----------                           ---------
               Total                      10,387,368         $1.89             1,705,142
                                          ==========                           =========
</TABLE>




(1) Comprised of to (i) 493,218 shares of our Common Stock that may be issuable
upon the exercise of non-plan five-year options issued to non-employee directors
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) 1,148,173 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 in connection
with a short-term loan made to us.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

         In August 2004, we paid Greenfield Capital Partners, LLC,
("Greenfield") and its designees, a placement fee with respect to the placement
of 2,500 shares of our Series A 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 options for 33,333 shares are
exercisable at a per share exercise price of $.75; options for 16,667 shares are
exercisable at a per share exercise price of $1.50; and options for the 16,667
shares are exercisable at a per share exercise price of $2.50. One of our
non-employee directors was a Managing Director of Greenfield at the time that
the private placement was consummated and Greenfield designated that director to
receive half of those warrants. The director subsequently left Greenfield.

         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 share of our Common Stock at a per share
exercise price of $1.50, subject to adjustment.


                                       49
<PAGE>



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

4.1     Specimen Common Stock Certificate. (1)

4.2     Form of Warrant issued by the Company to certain investors. (3)

4.3     Form of Agent Warrant issued by the Company to certain agents. (3)

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

4.5     Form of Common Stock Purchase Warrant issued by the Company to certain
        investors. (10)

4.6     Form of Common Stock Purchase Warrant issued by the Company to certain
        placement agents. (10)

4.7     Form of Common Stock Purchase Warrant issued by the Company to the
        investor identified therein. (10)

4.8     Certificate of Designations of Rights and Preferences of the Series B
        Convertible Preferred Stock of the Company. (11)

4.9     Form of Common Stock Purchase Warrant issued by the Company to certain
        investors as of April 26, 2005. (11)

4.10    Form of Secured Promissory Note issued on December 22, 2005. (13)

4.11    Form of Five-Year Warrant issued on December 22, 2005. (13)

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)


                                       50
<PAGE>



10.5    Asset Purchase Agreement dated as of November 4, 2002 among the Company,
        Macrovision Corporation and Macrovision Europe Ltd. (7)

10.6    Termination and Settlement Agreement dated as of January 28, 2004
        between the Company and Judah Marvin Feigenbaum. (8)

10.7    Stock Option Agreement dated as of January 28, 2004 between the Company
        and Judah Marvin Feigenbaum. (8)

10.8    Development and Licensing Agreement dated as of January 6, 2004 between
        the Company and Lucent Technologies Inc. (9)

10.9    Amendment to the Development and Licensing Agreement between the Company
        and Lucent Technologies, Inc. (9)

10.10   Employment Agreement dated as of March 3, 2004 between the Company and
        Frank Galuppo. (8) +

10.11   Form of Securities Purchase Agreement dated as of July 30, 2004 among
        the Company and purchasers of the Convertible Preferred Stock. (10)

10.12   Form of Registration Rights Agreement dated as of July 30, 2004 among
        the Company and certain investors identified therein. (10)

10.13   Private Equity Credit Agreement dated as of August 9, 2004 by and
        between the Company and the investor identified therein. (10)

10.14   Registration Rights Agreement dated as of August 9, 2004 by and between
        the Company and the investor identified therein. (10)

10.15   Lease dated as of February 9, 2005 between 2 Corbett Way, LLC and the
        Company. (11)

10.16   Form of Securities Purchase Agreement dated as of April 22, 2005 among
        the Company and certain investors identified therein. (11)

10.17   Form of Registration Rights Agreement dated as of April 22, 2005 among
        the Company and certain investors identified therein. (11)

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

10.19   Form of Bridge Loan Agreement dated as of December 15, 2005. (13)

10.20   Security Interest Agreement dated as of December 15, 2005 among the
        Company and the investors named therein and Krieger and Prager, as agent
        for the secured parties. (13)

14.1    Code of Business Conduct. (8)

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

23.1    Consent of Marcum & Kliegman, LLP.


                                       51
<PAGE>





31.1    Certification of Chief Executive Officer pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002.

32.1    Section 1350 Certification.

+       Management Agreement

(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 Proxy
        Statement and incorporated herein by reference.

(8)     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.

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

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

(11)    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.

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

(13)    Filed as an exhibit to the Registrant's
        Registration Statement on Form S-2 (File No.
        333-126351) filed on July 1, 2005 and
        incorporated herein by reference.

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



                                       52
<PAGE>


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 2005 and
2004 and fees billed for other services rendered by Marcum during 2005 and 2004.

Type of Service/Fee       Fiscal 2005        Fiscal 2004


Audit Fees (1)             $ 100,542           $92,200


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
2005 and fiscal 2004 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.


                                       53
<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 1, 2006         /S/ FRANK GALUPPO
                          -----------------
                              FRANK GALUPPO
                              CHIEF EXECUTIVE OFFICER AND DIRECTOR

DATE: MAY 1, 2006         /S/ JD GARDNER
                          --------------
                              JD GARDNER
                              CHIEF FINANCIAL OFFICER
                             (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)



                                       54
<PAGE>


                                INDEX TO AUDITED

                       CONSOLIDATED FINANCIAL STATEMENTS

 Report of Independent Registered Public Accounting Firm               F-1

 Consolidated Balance Sheet
   At December 31, 2005                                                F-2

 Consolidated Statements of Operations
   for the Years Ended December 31, 2005 and 2004                      F-3
   and from Inception (July 14, 1994) to December 31, 2005

 Consolidated Statements of Comprehensive Loss
   for the Years Ended December 31, 2005 and 2004                      F-4
   and from Inception (July 14, 1994) to December 31, 2005

 Consolidated Statements of Stockholders' (Deficiency) Equity
   from Inception (July 14, 1994) to December 31, 2005                 F-5

 Consolidated Statements of Cash Flows
   for the Years Ended December 31, 2005 and 2004                      F-6
   and from Inception (July 14, 1994) to December 31, 2005

 Notes to the Consolidated Financial Statements                        F-7


                                       55
<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, 2005 and the related consolidated statements of operations, comprehensive
loss, stockholders' equity, and cash flows for the years ended December 31, 2005
and 2004 and for the period from January 1, 2003 to December 31, 2005 (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 $42,586,299. 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, 2005, and the results of their operations and
their cash flows for the years ended December 31, 2005 and 2004 and for the
period from July 14, 1994 (Inception) to December 31, 2005, 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 described in Note 2 to the
consolidated financial statements, the Company has incurred significant
operating losses resulting in cash flow deficiencies from operations. This
condition raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans regarding this matter also is 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
February 27, 2006 (except for Note 13A(ii), as to which the date is March 13,
2006, Note 13A(iii), as to which the date is April 7, 2006, Note 13C, as to
which the date is March 2, 2006, Note 13D, as to which the date is April 5,
2006, Note 13E, as to which the date is April 12, 2006, and Note 13F, as to
which the date is April 7, 2006)



                                       F-1


<PAGE>


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

                           CONSOLIDATED BALANCE SHEET

                                December 31, 2005

                                     ASSETS

Current assets
   Cash and cash equivalents                                   $        333,787
   Inventories                                                          929,017
   Prepaid expenses                                                      79,193
                                                               -----------------

   Total current assets                                               1,341,997
                                                               -----------------

Property and equipment - net                                            690,884
                                                               -----------------

Other assets
   Capitalized software costs                                         1,260,382
   Deferred financing costs                                             112,323
   Security deposit                                                      46,750
                                                               -----------------

   Total other assets                                                 1,419,455
                                                               -----------------

      Total assets                                             $      3,452,336
                                                               =================


                LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES

Current liabilities
   Accounts payable                                            $      1,456,578
   Accrued expenses                                                     561,817
   Notes payable, net of unamortized discounts of $172,945              907,055
   Current portion of capital leases                                      4,965
                                                               -----------------

   Total current liabilities                                          2,930,415
                                                               -----------------

Long-term liabilities
   Capital leases, less current maturities                               12,265
                                                               -----------------

      Total liabilities                                               2,942,680
                                                               -----------------

Commitments and contingencies

STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value;
  5,000,000 shares authorized; Series A convertible
  preferred stock, 52,500 shares authorized; 21,178
  issued and outstanding
  ($2,117,800 liquidation preference)                                        21
  Series B convertible preferred stock,
  85,000 shares authorized; 71,150 issued and outstanding
  ($7,115,000 liquidation preference)                                        71
Common stock, $.001 par value;
  75,000,000 shares authorized; 22,315,851
  issued and outstanding                                                 22,316
Additional paid-in capital                                           58,781,193
Deficit accumulated during the development stage                    (58,167,320)
Deferred compensation                                                  (126,625)
                                                               -----------------

   Total stockholders' equity                                           509,656
                                                               -----------------

      Total liabilities and stockholders' equity               $      3,452,336
                                                               =================


                 See Notes to Consolidated Financial Statements.

                                       F-2


<PAGE>



                      AMEDIA NETWORKS, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                                                      From
                                                                                                                   Inception
                                                                                       Twelve Months               (July 14,
                                                                                           Ended                    1994) to
                                                                                        December 31,              December 31,
                                                                                   2005             2004              2005
                                                                             -----------------  --------------  ----------------
<S>                              <C>                                                <C>             <C>              <C>
   Sales                                                                     $          5,548   $           -   $         5,548
                                                                             -----------------  --------------  ----------------

   Cost of goods sold                                                                   6,078               -             6,078
                                                                             -----------------  --------------  ----------------

   Gross loss                                                                            (530)              -              (530)
                                                                             -----------------  --------------  ----------------

   Expenses
        Research and development (1)                                                3,975,852       3,222,695        13,358,917
        Sales and marketing (1)                                                     2,422,999         505,313        12,722,327
        General and administrative (1)                                              2,209,171       1,860,959        22,691,083
        Bad debt expense                                                                    -               -           161,000
                                                                             -----------------  --------------  ----------------
   Total expenses                                                                   8,608,022       5,588,967        48,933,327
                                                                             -----------------  --------------  ----------------

   Operating loss                                                                  (8,608,552)     (5,588,967)      (48,933,857)
                                                                             -----------------  --------------  ----------------

   Other expense (income)
        Legal settlement                                                                    -               -           565,833
        Late filing penalty on preferred stock registration                            86,742         199,500           286,242
        Realized gain of foreign currency translation                                       -         (81,007)          (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                                            -               -         4,516,775
        Impaired offering costs                                                       267,404               -           267,404
        Interest income                                                               (36,006)        (24,988)         (984,735)
        Interest expense                                                              286,889               -         2,253,036
                                                                             -----------------  --------------  ----------------

   Total other expense                                                                606,721          93,505         2,867,715
                                                                             -----------------  --------------  ----------------

   Net loss                                                                  $     (9,215,273)  $  (5,682,472)  $   (51,801,572)
                                                                             =================  ==============  ================

   Deemed dividend on convertible preferred stock                                   3,076,104       2,494,753         5,570,857
   Dividend on convertible preferred stock                                            649,905         144,986           794,891
                                                                             -----------------  --------------  ----------------

   Net loss applicable to common stockholders                                $    (12,941,282)  $  (8,322,211)  $   (58,167,320)
                                                                             =================  ==============  ================

   Per share data:

        Basic and diluted                                                    $          (0.64)  $       (0.51)
                                                                             =================  ==============

   Weighted average number
       of common shares used in
       basic and diluted loss per share                                            20,378,250      16,440,630
                                                                             =================  ==============

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

        Research and development                                             $         18,573   $           -   $       474,812
        Sales and marketing                                                                 -               -         5,336,558
        General and administrative                                                     73,592          85,850         5,772,355
                                                                             -----------------  --------------  ----------------

                                                                             $         92,165   $      85,850   $    11,583,725
                                                                             =================  ==============  ================
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                       F-3


<PAGE>



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


<TABLE>
<CAPTION>
                                                                                                                     From
                                                                                                                  Inception
                                                                                            Year                  (July 14,
                                                                                           Ended                   1994) to
                                                                                        December 31,             December 31,
                                                                                   2005             2004             2004
                                                                                   ----             ----             ----

<S>                                                                          <C>                <C>             <C>
   Net loss                                                                  $     (9,215,273)  $  (5,682,472)  $   (51,801,572)

   Other comprehensive loss
        Foreign currency translation adjustments                                            -         (81,007)                -
                                                                             -----------------  --------------  ----------------

               Comprehensive loss                                            $     (9,215,273)  $  (5,763,479)  $   (51,801,572)
                                                                             =================  ==============  ================
</TABLE>


                 See Notes to Consolidated Financial Statements.

                                       F-4


<PAGE>



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




<TABLE>
<CAPTION>
                                                                  Preferred Stock
                                                         Series A               Series B             Common Stock
                                                    Shares     Amount      Shares     Amount      Shares      Amount
                                                   --------   --------    --------   --------   ----------   --------
<S>                                               <C>         <C>          <C>       <C>         <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 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

   Common stock subscriptions                                                                       16,000         16
   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              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                          16,440,630     16,441

   Issuances of Series B preferred stock and
      warrants,                                                             77,650         78
   Series A preferred stock converted into common   (31,322)       (31)                          4,176,262      4,176
   Series B preferred stock converted into common                           (6,500)        (7)     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                     21,178  $      21      71,150   $     71   22,315,851     22,316
                                                   ========   ========    ========   ========   ==========   ========



                                                                                            Foreign       Accumulated
                                                        Common Stock       Additional       Currency         During
                                                         Subscribed          Paid-in      Translation      Development
                                                     Shares      Amount      Capital       Adjustment         Stage
                                                    --------   ----------   ----------   --------------   -------------

   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                          16,000     100,000
   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                      16,000      100,000    8,117,275           38,029      (6,179,571)

   Common stock subscriptions                        (16,000)    (100,000)      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                                                                                      267,404
   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)
                                                    ========   ==========   ==========   ==============   =============



                                                          Deferred           Deferred
                                                       Offering Costs      compensation          Total
                                                      ----------------   ----------------   ---------------

   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
   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
                                                      ================   ================   ===============
</TABLE>

                    See Notes to Consolidated Financial Statements.

                                       F-5


<PAGE>



                      AMEDIA NETWORKS, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                                             From
                                                                                        Twelve Months                 Inception
                                                                                            Ended                  (July 14, 1994)
                                                                                         December 31,              to December 31,
                                                                                   2005              2004               2005
                                                                                   ----              ----               ----
<S>                                                                          <C>               <C>                <C>
    CASH FLOWS FROM OPERATING ACTIVITIES
       Net loss                                                              $    (9,215,273)  $    (5,682,472)   $   (51,801,572)
       Adjustments to reconcile net loss
        to net cash used by operating activities:
          Depreciation and amortization                                              123,117             9,908          1,086,382
          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                            130,907                 -          4,797,132
          Impaired offering costs                                                    267,404                 -            267,404
          Foreign currency translation adjustment and realized gain                        -           (81,007)           (82,535)
          Beneficial conversion feature of convertible debt                                -                 -            572,505
          Stock, warrants and options issued for services and settlement              92,165            85,850         11,756,686
          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)
          Increase (decrease) in cash attributable
           to changes in assets and liabilities
            Accounts receivable                                                            -                 -                554
            Inventories                                                             (929,017)                -           (929,017)
            Prepaid expenses                                                          51,008            90,377           (108,851)
            Other assets                                                             (46,750)                -            (46,750)
            Accounts payable                                                       1,189,706           173,726            909,384
            Accrued expenses                                                         316,970           229,992          1,657,591
            Accrued severance pay                                                          -           (64,734)          (122,363)
            Interest payable                                                               -                 -            251,019
                                                                             ----------------  ----------------   ----------------

          Net cash used by operating activities                                   (8,018,071)       (5,238,360)       (35,292,692)
                                                                             ----------------  ----------------   ----------------

    CASH FLOWS FROM INVESTING ACTIVITIES
       Proceeds from sales of fixed assets                                                 -                 -             68,594
       Purchases of property and equipment                                          (643,360)         (159,783)        (1,805,745)
       Intangible asset                                                           (1,260,382)                -         (1,260,382)
       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                                   (1,903,742)         (159,783)          (145,213)
                                                                             ----------------  ----------------   ----------------

    CASH FLOWS FROM FINANCING ACTIVITIES
       Net proceeds from issuance of convertible preferred stock                   7,084,170         4,642,430         11,726,600
       Proceeds from exercise of warrants                                            189,230                 -            189,230
       Proceeds from issuance of common stock                                              -                 -         21,177,354
       Stock offering costs                                                                -                 -           (475,664)
       Deferred financing costs                                                     (122,530)                -           (804,842)
       Proceeds from note payable                                                  1,000,000                 -          1,000,000
       Proceeds from short-term borrowings                                                 -                 -          1,356,155
       Payments on capital lease obligations                                          (2,928)                -             (2,928)
       Proceeds from long-term debt                                                        -                 -          2,751,825
       Proceeds from convertible debentures                                                -                 -          2,000,000
       Repayment of short-term borrowings                                                  -                 -         (1,357,082)
       Repayments of long-term debt                                                        -                 -         (1,615,825)
       Dividends paid to preferred stockholders                                     (167,719)                -           (167,719)
                                                                             ----------------  ----------------   ----------------

          Net cash provided by financing activities                                7,980,223         4,642,430         35,777,104
                                                                             ----------------  ----------------   ----------------

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

    (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                              (1,941,590)         (755,713)           333,787

    CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                 2,275,377         3,031,090                  -
                                                                             ----------------  ----------------   ----------------

    CASH AND CASH EQUIVALENTS AT END OF YEAR                                 $       333,787   $     2,275,377    $       333,787
                                                                             ================  ================   ================

    SUPPLEMENTAL DISCLOSURES OF
       CASH FLOW INFORMATION
          Cash paid during the periods for:
            Interest                                                         $         5,514   $             -    $       482,492
                                                                             ================  ================   ================

          Non-cash investing and financing activities:

            Deemed dividend in connection with sale
              of convertible preferred stock                                 $     3,076,104   $     2,494,753    $     5,570,857
                                                                             ================  ================   ================

            Accrual of dividend on convertible preferred stock               $             -   $       144,986    $       144,986
                                                                             ================  ================   ================

            Deferred offering costs                                          $             -   $       267,404    $       267,404
                                                                             ================  ================   ================

            Deferred compensation                                            $             -   $       179,379    $       179,379
                                                                             ================  ================   ================

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

            Original issue discount on notes payable                         $        80,000   $             -    $        80,000
                                                                             ================  ================   ================

            Issuance of common stock warrants in connection
              with bridge loan                                               $       104,985   $             -    $       104,985
                                                                             ================  ================   ================

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

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


                 See Notes to Consolidated Financial Statements.

                                       F-6

<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. 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 can be deployed with optical fibers as well as
with copper wires. A significant portion of the core technologies underlying the
Company's initial 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, municipal authorities 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 December
31, 2005, the Company had a cash balance of $333,787 and incurred a net loss
applicable to common stockholders of $12,941,982 for the year ended December 31,
2005. The Company expects to incur additional losses for the foreseeable future
and will need to raise additional funds in order to 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 mature on April 21, 2006, realize its current business
plan and maintain operations. Management of the Company is continuing its
efforts to secure funds through equity and/or debt instruments for its
operations. In December 2005, the Company engaged an investment bank to assist
the Company, on a best efforts basis, in raising funds. The period during which
the investment bank was entitled to provide such services to the Company on an
exclusive basis expired in

                                       F-7

<PAGE>


March 2006. To date, the Company has not received a financing proposal from any
investor introduced to it by the investment bank. The Company has received a
non-binding financing proposal from a party not introduced to it by the
investment bank which is subject to, among other things, the negotiation and
execution of legally binding agreements. Presently, the Company does not have
any financing commitment from any person and there can be no assurance that
additional capital will be available to the Company on commercially acceptable
terms or at all. The inability to obtain such financing will have a material
adverse effect on the Company, its condition and prospects. Furthermore, it is
anticipated that any successful financing will have a significant dilutive
effect on existing stockholders. As more fully described in Note 5 below, the
Company funded its operations during fiscal year 2005 from the private placement
of its convertible preferred stock and short-term notes resulting in approximate
net proceeds to the Company of $7.09 million and $887,000, respectively. In
addition, from January 1 to April 7 2006, the Company raised net proceeds of
$2,234,880 from short term loans. See Note 13.

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.

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.

RECLASSIFICATIONS

Certain amounts in the financial statements for the year ended December 31, 2004
have been reclassified for comparative purposes to conform to the presentation
in the financial statements for the year ended December 31, 2005. These
reclassifications had no effect on the previously reported net loss.

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.

                                       F-8

<PAGE>


STOCK BASED COMPENSATION

As permitted under SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amended SFAS No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation," the Company has elected to
continue to follow the intrinsic value method in accounting for its stock-based
employee compensation arrangements, as defined by Accounting Principles Board
Opinion("APB") No. 25, Accounting for Stock Issued to Employees," and related
interpretations including Financial Accounting Standards Board Interpretations
No. 44, "Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB No. 25.

Accordingly, the Company records deferred compensation for share options granted
to employees at the date of grant based on the difference between the exercise
price of the options and the market value of the underlying shares at that date.
Deferred compensation is amortized to compensation expense over the vesting
period of the underlying options. No compensation expense is recorded for fixed
stock options that are granted to employees and directors at an exercise price
equal to the fair market value of the common stock, par value $0.001 (the
"Common Stock") at the time of the grant. Stock options and warrants granted to
non-employees are recorded at their fair value.

The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation for the years ended December 31, 2005 and
2004:

                                                  Year Ended        Year Ended
                                                  December 31,     December 31,
                                                     2005              2004
                                                 --------------   --------------
 Net loss applicable to common
      stockholders, as reported                  $ (12,941,282)   $  (8,322,211)

 Add: Stock-based employee compensation
      expense included in reported
      net loss, net of related tax effects              14,000            7,000

 Deduct: Total stock-based employee
      compensation expense determined
      under fair value based method
      for all awards, net of related
      tax effects                                     (715,511)        (868,925)
                                                 --------------   --------------

      Pro forma net loss                         $ (13,642,793)   $  (9,184,136)
                                                 ==============   ==============

 Net loss per share applicable to
      common stockholders, basic and diluted,
      as reported                                $       (0.64)   $       (0.51)
                                                 ==============   ==============

      Pro forma net loss per share,
              basic and diluted                  $       (0.67)   $       (0.56)
                                                 ==============   ==============

                                       F-9

<PAGE>


The fair value of each option granted in 2005 and 2004 is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:

                                                         2005       2004
                                                         ----       ----
                  Risk free interest rates              3.76%      2.32%
                  Expected option lives                  3.4        3.5
                  Expected volatilities                   69%       133%
                  Expected dividend yields               None      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 2005 or 2004. During 2004 the Company
realized a gain from foreign currency translation of $81,007.

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, 2005 and 2004 as their inclusion would be
anti-dilutive. Potentially dilutive options to purchase 7,002,642 and 4,998,642
shares of Common Stock were outstanding at December 31, 2005 and 2004,
respectively. Potentially dilutive warrants to purchase 14,228,786 and
10,598,333 shares of Common Stock were outstanding at December 31, 2005 and
2004, respectively. In addition, there were 21,178 and 52,500 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
2,823,733 and 7,000,000 shares of Common Stock at December 31, 2005 and 2004,
respectively. In addition, 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 7,044,554 shares of Common Stock at December 31,
2005.

In addition, see Note 13 for issuances of Common Stock subsequent to year end.

REVENUE RECOGNITION

                                      F-10

<PAGE>


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 year ended December 31, 2005
the Company recorded $5,548 from sales of units of its QoStream products and
related hardware. The Company did not record any revenue during 2004.

INVENTORY

Inventory includes costs for materials and finished product which is stated at
the lower of cost or market. As of December 31, 2005 any items relieved from
inventory have been determined under the specific identification method. The
balance at December 31, 2005 of inventories amounted to $929,017, which included
raw materials of $172,238 and finished goods of $756,779.

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 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 and 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, 2005 the Company capitalized $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 as of December 31, 2005 had not been achieved.

IMPAIRMENT OF LONG LIVED ASSETS

The Company reviews the carrying value of its intangible assets when specific
events and circumstances

                                      F-11

<PAGE>


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. The Company, based on its most recent evaluation, 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 a 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, 2005 and 2004 were $3,975,852 and $3,222,695,
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 necessary, to reduce deferred tax
assets, if it is more likely than not that all or a portion of it will not be
realized.

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. 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 2005 or 2004. During 2004 the Company
realized a gain from foreign currency translation of $81,007.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123R "Share Based
Payment". This statement is a revision of SFAS Statement No. 123, "Accounting
for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related implementation guidance. SFAS No.
123R addresses all forms of share based payment ("SBP") awards including shares
issued under employee stock purchase plans, stock options, restricted stock and
stock appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that
will be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest and will be reflected as compensation
expense in the financial

                                      F-12

<PAGE>


statements. This statement is effective for public entities that file as small
business issuers as of the beginning of the first annual reporting period that
begins after December 15, 2005. Upon the adoption of this pronouncement on
January 1, 2006 the Company expects to record additional stock compensation
expense. As of December 31, 2005, there is approximately $1,117,183 of future
employee stock based compensation costs that will be expensed over a three year
period from 2006 through 2008.

In October 2004, the FASB ratified Emerging Issues Task Force ("EITF") 04-8,
"The Effect of Contingently Convertible Instruments on Diluted Earnings per
Share." The EITF reached a consensus that contingently convertible instruments,
such as contingently convertible debt, contingently convertible preferred stock,
and other such securities should be included in diluted earnings per share (if
dilutive) regardless of whether the market price trigger has been met. The
consensus is effective for reporting periods ending after December 15, 2004. The
adoption of this pronouncement did not have material effect on the Company's
financial statements.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", a replacement of APB Opinion No. 20 and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements. This statement changes the
requirements for the accounting for and reporting of a change in accounting
principle. This Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. This statement is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The adoption of this pronouncement is not expected to have a material
effect on the Company's financial statements.

In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues", which addresses whether a modification to a conversion option that
changes its fair value affects the recognition of interest expense for the
associated debt instrument after the modification, and whether a borrower should
recognize a beneficial conversion feature, not a debt extinguishment, if a debt
modification increases the intrinsic value of the debt (for example, the
modification reduces the conversion price of the debt).

In September 2005, the FASB also ratified EITF Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature,"
which discusses whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the intrinsic
value of the beneficial conversion feature on the commitment date (which is
treated recorded in the shareholder's equity for book purposes, but as a
liability for income tax purposes), and, if so, whether that basis difference is
a temporary difference under SFAS No. 109, "Accounting for Income Taxes." This
Issue should be applied by retrospective application pursuant to SFAS No. 154 to
all instruments with a beneficial conversion feature accounted for under EITF
Issue 00-27 included in financial statements for reporting periods beginning
after December 15, 2005.

EITF Issues 05-7 and 05-8 did not have an effect on the Company's consolidated
financial position or results of operations.

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 is currently assessing the
impact that the adoption of SFAS 155 will have on its financial position and
results of operations.

                                      F-13

<PAGE>


NOTE 4- FINANCING

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. The Company
received net proceeds of approximately $4.6 million from the sale of the Series
A Preferred Stock, net of payment of offering related expenses. The private
placement resulted in a beneficial conversion feature of $2,494,753 for which
the Company recorded a deemed dividend in accordance with Emerging Issues Task
Force ("EITF") 98-5 and EITF 00-27 for the year ended December 31, 2004. This
beneficial conversion feature is calculated after the warrants have been valued
with proceeds allocated on a relative value basis.

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. The Company recorded an accrual for
the preferred stock dividend payable of approximately $145,000 as of December
31, 2004. 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 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 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 was not filed by
the date specified in the agreements with the holders of the Series A Preferred
Stock, the Company accrued an additional late filing penalty of $84,006 as of
December 31, 2005.

                                      F-14

<PAGE>


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 "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 $444,539 for the preferred stock dividend and recorded a
charge to net loss applicable to common stockholders for the year ended December
31, 2005.

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
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.

NOTE 5- NOTES PAYABLE

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

                                      F-15

<PAGE>


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 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.


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 are 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. Prior to the Maturity
Date, the Company may, at its option, prepay the December 2005 Bridge Notes in
whole or in part. If not paid at maturity, interest on the December 2005 Bridge
Notes will accrue at 14% per annum from the Maturity Date until the actual date
of payment. 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 "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. On
April 19, 2006, the Company entered into an agreement to extend the maturity
date of the December 2005 Bridge Loan. See Note 13G (Subsequent Events) -
Extension of Bridge Loans (Unaudited).


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.

                                      F-16

<PAGE>


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. In
January 2006, the Company obtained Additional Short-Term Loans in the aggregate
principal amount of $500,000 and, from February through April 2006, the Company
obtained additional bridge loans in the aggregate principal amount of
$1,950,000. See Note 13 (Subsequent Events).

NOTE 6 - 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 QoSteam 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, 2005, 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. The Company is currently pursuing a number of options,
including completing in-house certain of these product features/enhancements,
out-sourcing the completion of certain of the other features and working with
Lucent to complete the design of such deliverables. 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.
During the year ended December 31, 2005, research and development costs incurred
in connection with this supplementary agreement were $277,000. As of December
31, 2005, $170,000 of internally developed software product costs was
capitalized in connection with this supplementary agreement.

NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

                                             December 31,
                                                 2005
                                                 ----
 Computer and office equipment                 $704,771
 Furniture and fixtures                          15,769
 Leasehold improvements                          16,699
 Software                                        86,062
                                               --------
     Subtotal                                   823,301

 Less:  Accumulated depreciation               (132,417)
                                               --------
      Property and Equipment, net              $690,884
                                               ========

                                      F-17

<PAGE>


Depreciation expense was $123,117, $9,908 for the years ended December 31, 2005
and 2004, respectively, and $1,086,382 for the period from July 14, 1994
(inception) through December 31, 2005.

NOTE 8 - 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,
                                                             ------------
                                                          2005        2004
 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%          3%
                                                        ---------   ---------
                                                              45%         44%
 Less valuation allowance                                    (45%)       (44%)
                                                        ---------   ---------
 Effective income tax rate                                     0%          0%
                                                        =========   =========


At December 31, 2005, the Company had available approximately $32 million of net
operating loss carryforwards for U.S. federal income tax purposes which expire
in the years 2014 through 2025, 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,
                                               2005

Net operating loss carryforwards           $  13,543,200
Capital loss carryforward                        686,000
Stock based compensation                         309,214
Other                                            273,016
                                           --------------

Total deferred tax assets                     14,811,430
Valuation allowance                          (14,811,430)
                                           --------------

Net deferred tax assets                    $           -
                                           ==============

                                      F-18

<PAGE>


The valuation allowance increased $3,481,373 for the year ended December 31,
2005.

NOTE 9 - STOCKHOLDERS' EQUITY

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, 2005 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 further
amended to increase the total number of shares available for grant to 1,000,000.
As of December 31, 2005, options to purchase a total of 225,000 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 and in
May 2004 the 2000 Incentive Plan was further amended to increase the total
number of shares available for grant to 5,000,000, The plan was further amended
in April 2005 to increase the total number of shares available for issuance to
6,500,000. 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, 2005, there were options to purchase
5,569,858 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.

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 2005 and 2004 is summarized as follows:

                                      F-19

<PAGE>



                                                                      Weighted
                                           Options                    Average
                               --------------------------------       Exercise
                               Plan        Nonplan        Total         Price
                               ----        -------        -----         -----
Options outstanding,
 December 31, 2003            2,000,175            0      2,000,175     $1.85
Granted                       2,505,249      493,218      2,998,467      0.74
Exercised                             0            0              0      0.00
Forfeited                             0            0              0      0.00
                            -----------  -----------    -----------

Options outstanding
 December 31, 2004            4,505,424      493,218      4,998,642      1.85
Granted                       2,049,000            0      2,049,000      0.50
Exercised                             0            0              0      0.00
Forfeited                       (45,000)           0        (45,000)     1.02
                            -----------  -----------    -----------

Options outstanding,
December 31, 2005             6,509,424      493,218      7,002,642      1.60
                            -----------  -----------    -----------

Shares of common stock
available for future
grant under the plans         1,705,142
                            -----------


The following table summarizes significant ranges of outstanding and exercisable
stock options outstanding at December 31, 2005:

                    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        6.77          0.16           50,000       0.16
 $0.56-0.82     2,728,467        8.34          0.70        1,793,780       0.68
 $0.85-1.25     2,274,000        9.29          0.99          489,528       1.00
 $1.53-1.68       293,300        5.86          1.66          293,300       1.66
 $2.56-3.56       324,941        4.29          3.25          324,941       3.25
 $3.91-5.06     1,323,934        4.47          4.08        1,323,934       4.08
 $6.84-7.00         8,000        2.40          6.93            8,000       6.93
                   ------       -----         -----           ------       ----
 $0.16-$7.00    7,002,642        7.61         $1.60        4,283,483      $2.04
                ---------       -----         -----       ----------      -----

                                      F-20

<PAGE>


Weighted-average grant date fair value of options granted in 2005 and 2004,
under the Black-Scholes option pricing model, was $0.50 and $0.74 per option,
respectively.

During 2004 the Company issued the following stock options:

On January 21, 2004, the Company's Compensation Committee awarded to each of the
Company's then two independent directors 164,406 non-qualified options to
purchase the Company's Common Stock at a $0.56 strike price and immediate
vesting, exercisable for five years.

In March 2004, in conjunction with their employment agreements, three new
Company employees received options to purchase a total of up to 280,000 shares
of the Company's Common Stock under the Company's 2000 Equity Incentive Plan,
such options will vest on the first anniversary of their employment agreements,
at various exercise prices based on the closing market price of the Company's
Common Stock on their date of hire (the exercise prices range from $0.62 to
$0.80).

In April 2004, in conjunction with an employment agreement, a new Company
employee received options to purchase a total of up to 20,000 shares of the
Company's Common Stock under the Company's 2000 Equity Incentive Plan, of which
options for one-fourth (1/4) of the shares is to vest on the first anniversary
of employment and options for the remaining shares to vest in equal quarterly
installments thereafter at an exercise price of $0.65, which is based on the
closing market price of the Company's Common Stock on the date of hire.

On May 25, 2004 the Company's Compensation Committee granted from the 2000
Equity Incentive Plan 60,000 non-qualified options to purchase the Company's
Common Stock at a $0.71 strike price vesting over 2 years to a member of the
Company's newly formed Advisory Board. The $0.71 strike price equaled the
closing market price of the Company's Common Stock on the date of issuance. The
fair value of the options amounted to $34,087 and is amortized over the 2-year
vesting period. Amortization expense for the year ended December 31, 2004 was
$12,783.

On May 25, 2004 the Company's Compensation Committee granted from the 2002
Non-Employee Directors Stock Option Plan 225,000 non-qualified options to
purchase the Company's Common Stock at a $0.71 strike price vesting over 2 years
to three new directors of the Company's Board. The $0.71 strike price equaled
the closing market price of the Company's Common Stock on the date of issuance.

On July 1, 2004 in conjunction with a new employment agreement, an employee
received options to purchase a total of up to 100,000 shares of the Company's
Common Stock under the Company's 2000 Equity Incentive Plan, vesting over a
three year period. The options have an exercise price of $0.55, which was less
than the closing market price of the Company's Common Stock on the date of hire.
As such, the Company recorded deferred compensation of $42,000 which is
amortized over the 3-year vesting period. Amortization expense for the year
ended December 31, 2004 was $7,000.

In August and September 2004, in conjunction with their employment agreements,
three new Company employees received options to purchase a total of up to
220,000 shares of the Company's Common Stock under the Company's 2000 Equity
Incentive Plan. The options will vest over a two or three year period, at
exercise prices ranging from $0.91 to $1.05 based on the closing market price of
the Company's Common Stock on their respective dates of hire.

In October 2004, in conjunction with their employment agreements, three new
Company employees received options to purchase a total of up to 225,000 shares
of the Company's Common Stock under the

                                      F-21

<PAGE>


Company's 2000 Equity Incentive Plan. The options will vest over a two or three
year period, at exercise prices ranging from $0.85 to $0.92 based on the closing
market price of the Company's Common Stock on their respective dates of hire.

On November 4, 2004 the Company's Compensation Committee granted from the 2000
Equity Incentive Plan 60,000 non-qualified options to purchase the Company's
Common Stock at a $0.99 strike price vesting over 2 years to a member of the
Company's Advisory Board. The $0.99 strike price equaled the closing market
price of the Company's Common Stock on the date of issuance. The fair value of
the options amounted to $42,543 and is amortized over the 2-year vesting period.
Amortization expense for the year ended December 31, 2004 was $5,318.

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

                                      F-22

<PAGE>


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 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.

WARRANTS

Warrant activity for 2004 and 2005 is summarized as follows:

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

Warrants outstanding, December 31, 2003           1,670,000     $8.08
Granted                                           8,833,333     $1.89
Exercised                                                 0     $0.00
Forfeited                                          (400,000)    $7.50
                                                -----------

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
                                                -----------

                                      F-23

<PAGE>


On May 11, 2004, the Company issued 100,000 four-year warrants to a service
provider. The warrants have an exercise price of $0.62 per share. The $0.62
strike price equaled the closing market price of the Company's Common Stock on
the date of issuance. The Company recorded stock-based compensation expense of
$60,749 in the accompanying financial statements for the year ended December 31,
2004 for this transaction.

The warrants forfeited in 2004 and 2005 expired in those years unexercised in
accordance with their terms.

STOCK ISSUANCES

During the year ended December 31, 2004, the Company completed the following
Preferred and Common Stock transactions:

The Company issued 52,500 shares of Series A 7% Convertible Preferred Stock.

The Company did not issue any shares of Common Stock during 2004.

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.

                                      F-24

<PAGE>


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.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

EMPLOYMENT AGREEMENTS

The Company and Mr. Frank Galuppo, the Company's Chief Executive Officer entered
into a three-year employment agreement, effective as of March 15, 2004, pursuant
to which Mr. Galuppo is currently paid an annual salary of $210,000. Prior to
March 15, 2005, Mr. Galuppo's annual salary was $180,000. Mr. Galuppo's salary
is scheduled to increase to $235,000 at the beginning of the third year of his
employment. The agreement further provides 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. The Company also issued to Mr. Galuppo options
under the Company's 2000 Equity Incentive Plan to purchase up to 1,315,250
shares of the Company's common stock, par value $0.001 (the "Common Stock") at a
per share exercise price of $0.74, which are scheduled to vest over 12
succeeding quarters, beginning June 30, 2004.

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 are approximately $403,743 and $233,745 during 2006 and 2007,
respectively. 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

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<PAGE>


Company 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 will increase by $7,000 beginning on March 1, 2006.

As a result of the lease payments above the Company recorded $37,527 of deferred
rent included in accrued expenses on the balance sheet in the accompanying
consolidated financial statements as of December 31, 2005.

During the year ended December 31, 2005 the Company incurred rent expense of
$162,247 for its previous and current facilities. The Company had no rent
expense for the year ended December 31, 2004.

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 (see Note 13e).

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.

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<PAGE>


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 due in
connection with the Bridge Loan referred to in Note 5. Management 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, 2005 in the accompanying consolidated financial statements.

NOTE 12 - RELATED PARTY 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 non-employee directors was a partner and
managing member of Elite. This director resigned from service on the Company's
board of directors as of June 9, 2005.

In August 2004, the Company paid Greenfield Capital Partners, LLC,
("Greenfield") and its designees, a placement fee with respect to the placement
of 2,500 shares of its Series A Preferred Stock. See Note 4 (Financing). 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 the Company's Common Stock, of which
options for 33,333 shares are exercisable at a per share exercise price of $.75;
options for 16,667 shares are exercisable at a per share exercise price of
$1.50; and options for the 16,667 shares are exercisable at a per share exercise
price of $2.50. One of the Company's non-employee directors was a Managing
Director of Greenfield at the time that the private placement was consummated
and Greenfield designated that director to receive half of those warrants. The
director subsequently left Greenfield.

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 (see Note 13a).

NOTE 13 - SUBSEQUENT EVENTS

A. BRIDGE LOANS

(i) On January 20, 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 principal
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 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 January 2006 Notes are scheduled to mature
on the Maturity Date of the Short-Term Loan incurred in December 2005 (see Note
5). To secure the Company's obligations under the January 2006 Loan Agreement,
the Security Agreement between the Company and the Secured Parties named

                                      F-27

<PAGE>



therein which was entered into in connection with the December 2005 Short-Term
Loan was amended to reflect the new loan by the January 2006 Investors. The
Company also 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. The Company
received net proceeds of $495,000 from the proceeds of the loan, after the
payment of transaction related fees and expenses. The additional loans were on
terms and conditions substantially similar to the Short Term Loan that were
incurred in December 2005. On April 19, 2006, the Company entered into an
agreement to extend the maturity date of the January 2006 Bridge Notes. See Note
13G (Subsequent Events - Extension of Bridge Loans (Unaudited).


(ii) From February 27 through March 13, 2006, the Company entered into
additional short term loan agreements under which it borrowed the aggregate
principal amount of $1,500,000 (the "March 2006 Short-Term Loans") from one of
the institutional investors who participated in the Bridge Loan Agreement that
closed in December 2005 (see Note 5). These loans are scheduled to mature on the
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 $3.5 million or (ii) June 1, 2006. 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. To secure the Company's obligations in connection with the March 2006
Short-Term Loans, the Security Agreement between the Company and the Secured
Parties named therein which was entered into in connection with the Short-Term
Loan that was incurred in December 2005 was amended to reflect the new loans. In
addition, the Company issued to the investor five year bridge loan 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 additional loan was on terms and conditions
substantially similar to the Short Term Loan that were incurred in December
2005.

(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 principal 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 3.667%. The Note is 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 $3.5 million or (ii) June 1, 2006.
Prior to the Maturity Date, the Company may, at its option, prepay the April
2006 Bridge Note in whole or in part. If not paid at maturity, interest on the
April 2006 Bridge Notes will accrue at 14% per annum from the Maturity Date
until the actual date of payment. To secure the Company's obligations under the
April 2006 Bridge Loan, the security interest agreement dated as of March 13,
2006 between the Company and the secured parties named therein was amended and
restated to include the April 2006 Bridge Loan. 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
(the "April 2006 Bridge Warrants") to purchase up to 225,000 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.







B. OPTION EXERCISES AND ISSUANCES

In February 2006 the Company received cash proceeds of $162,000 from the
exercise by certain

                                      F-28



<PAGE>





C. INVESTOR RELATIONS AGREEMENT

On March 2, 2006 the Company entered into an agreement with a consultant to
provide investor relations services to increase awareness of the Company and its
products. In consideration of services provided, the Company paid to the
consultant $432,000 and issued to the consultant's designee 250,000 restricted
shares of the Company's Common Stock under the Company's 2000 Incentive Plan.

D. MOTOROLA STRATEGIC ALLIANCE AGREEMENT

On April 5, 2006, the Company entered into a Strategic Alliance Agreement (the
"Strategic Alliance Agreement") with Motorola Wireline Networks, Inc.
("Motorola"), a subsidiary of Motorola, Inc., pursuant to which the Company 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, the Company has also granted Motorola certain
rights with respect to the resale of the Company's products as described below.

The Strategic Alliance Agreement provides that Motorola will pay to the Company
$1.9 million for engineering costs associated with the development of the
Gateway Products, approximately 32% of which is payable within 30 days of the
effective date of the agreement 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, the Company 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 the Company for exclusive sale to Motorola.

Under the Strategic Alliance Agreement, the Company has 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 the Company 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 the Company 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 the Company
retains the right to sell the Exclusive Products to customers other than the
Exclusive Customers. In addition, the Company also granted Motorola the
non-exclusive right to resell all of the Company's other existing products
worldwide.

                                      F-29

<PAGE>


The Strategic Alliance Agreement also provides that the Company 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 a Company product during the term of
the agreement. These provisions will not apply to customers to whom the Company
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
the Company 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 the Company's PG1000 or HG-V100
products, the exclusivity and the non-solicitation provisions contained in the
Strategic Alliance Agreement shall immediately terminate. The Company has also
agreed that the prices for its products that it charges Motorola will be no
higher than the prices that the Company charges 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.

E. AMENDMENT TO EQUITY LINE AGREEMENT

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 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 any
resale registration statement that the Company files subsequent to the date of
the amendment in connection with a private placement of the Company's long-term
debt or equity securities resulting in aggregate proceeds to the Company of at
least $6.0 million. 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. The
equity line investor also agreed to waive the requirement under the equity line
that the Company reserve at all times a sufficient number of shares of its
Common Stock to satisfy its obligations under the equity line and the warrant,
pending the amendment of the Company's certificate of incorporation to increase
the number of shares of Common Stock authorized for issuance.

F. ISSUANCES OF COMMON STOCK

From January 1, 2006 through April 7, 2006, the Company has issued 1,085,151
shares of the Company's Common Stock upon the conversion of $802,500 in stated
value of shares of the Company's Series A Preferred Stock and accrued dividends
thereon. The stated value and accrued dividends were converted at a rate equal
to $0.75 per share of Common Stock. As of April 7, 2006, $1,315,300 in stated
value of Series A Preferred Stock remain outstanding.

From January 1, 2006 through April 7, 2006, the Company has issued 2,444,258
shares of the Company's Common Stock upon the conversion of $2,415,000 in stated
value of shares of the Company's Series B Preferred Stock and accrued dividends
thereon. The state value was converted at a rate equal to $1.01 per share of
Common Stock and dividends were paid at a rate equal to 90% of the volume
weighted average market price of the Common Stock for the five trading days
preceding payment. As of April 7, 2006, $4,700,000 in stated value of Series B
Preferred Stock remain outstanding.


G. EXTENSION OF BRIDGE LOANS (UNAUDITED)

On April 19, 2006, the Company, the December 2005 Bridge Loan Investors and the
January 2006 Investors entered in to an agreement to extend the maturity date of
the December 2005 Bridge Notes and the January 2006 Notes until May 21, 2006 (or
the earlier date on which the Company completes a financing that generates, on a
cumulative basis together with any other interim financings, gross proceeds to
the Company of at least $2.0 million). In consideration of this extension, the
Company issued to the December 2005 Bridge Loan Investors January and the
January 2006 Investors warrants to purchase, in the aggregate, up to 150,000
shares of Common Stock at $1.50 per share and otherwise having terms and
conditions identical to the December 2005 Bridge Warrants and the January 2006
Bridge Loan Warrants.



                                      F-30