**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**







**FORM
      10-QSB**







(MARK
                  ONE)**x**
              **QUARTERLY REPORT UNDER
                  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                  1934****For
                  the quarterly period ended June 30,
                  2007****OR****o**
              **TRANSITION
                  REPORT UNDER 13 OR 15(d) OF THE EXCHANGE ACT****For
                  the transition period from  ______________ to
                  ______________**






Commission
      File Number 000-51995




**TELANETIX,
                INC.**(Exact
                name of small business issuer as specified in its
                charter)**Delaware**
            
            **77-0622733**(State
                or other jurisdiction of incorporation or organization)
            
            (IRS
                Employer Identification No.)**6197
                Cornerstone Court E, Suite 108, San Diego, California
                92121**(Address
                of principal executive offices)**(858) 362-2250**
              (Issuer's
                telephone number)**____________________________________________________________________________**(Former
                name, former address and former fiscal year, if changed since last
                report)


****


Check
      whether the issuer (1) filed all reports required to be filed by
      Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
      such shorter period that the registrant was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past 90 days YES
þNO
o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act.): YES o  NO þ




As
      of
      August 9, 2007, there were 19,094,758 shares of the issuer's common stock
      outstanding. The common stock is the issuer's only class of common equity
      currently outstanding.





Transitional
      Small Business Disclosure Format (Check one): YES o    NO
þ








Table
            of Contents




**TABLE
        OFCONTENTS**




**Page**FORWARD
                LOOKING STATEMENTS
              1Part
                  I   FINANCIAL INFORMATIONItem
                  1.
              Financial
                  Statements
              2Item
                  2.
              Managements
                  Discussion and Analysis or Plan of Operation
              15Item
                  3.
              Controls
                  and
                  Procedures
              33Part
                  II   OTHER INFORMATIONItem
                  1.
              Legal
                  Proceedings
              34Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              34Item
                  3.
              Defaults
                  Upon
                  Senior Securities
              34Item
                  4.
              Submission
                  of
                  Matters to a Vote of Security Holders
              34Item
                  5.
              Other
                  Information
              34Item
                  6.
              Exhibits
              34Signatures
              35








Table
            of Contents







**FORWARD
      LOOKING STATEMENTS**




This
      quarterly report on Form 10-QSB includes forward-looking
      statements.   Forward-looking statements are those that predict
      or describe future events or trends and that do not relate solely to historical
      matters. You can generally identify forward-looking statements as statements
      containing the words "believe," "expect," "will," "anticipate," "intend,"
      "estimate," "project," "plan," "assume" or other similar expressions, or
      negatives of those expressions, although not all forward-looking statements
      contain these identifying words.  Such statements are based on
      management's current expectations and are subject to a number of factors and
      uncertainties that could cause actual results to differ materially from those
      described in the forward-looking statements. All statements other than
      historical facts contained or incorporated by reference in this report,
      including without limitation, statements under the heading "ITEM 2—MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," below, regarding our future
      strategy, future operations, projected financial position, estimated future
      revenues, projected costs, future prospects, the future of our industries and
      results that might be obtained by pursuing management's current plans and
      objectives are forward-looking statements.




Although
      we believe that the expectations reflected in such forward-looking statements
      are reasonable, we can give no assurance that such expectations will prove
      to
      have been correct. You should not place undue reliance on our forward-looking
      statements because the matters they describe are subject to known and unknown
      risks, uncertainties and other unpredictable factors, many of which are beyond
      our control. Our forward-looking statements are based on the information
      currently available to us and speak only as of the date of the filing of this
      report, or, in the case of forward-looking statements in documents incorporated
      by reference, as of the date of the date of the filing of the document that
      includes the statement. New risks and uncertainties arise from time to time,
      and
      it is impossible for us to predict these matters or how they may affect us.
      Over
      time, our actual results, performance or achievements will likely differ from
      the anticipated results, performance or achievements that are expressed or
      implied by our forward-looking statements, and such difference might be
      significant and materially adverse to our security holders. We do not undertake
      and specifically decline any obligation to update any forward-looking statements
      or to publicly announce the results of any revisions to any statements to
      reflect new information or future events or developments.




We
      have
      identified some of the important factors that could cause future events to
      differ from our current expectations and they include, but are not limited
      to,
      those items discussed under the heading "ITEM 2—MANAGEMENT'S DISCUSSION AND
      ANALYSIS OR PLAN OF OPERATION—Risk Factors," below.  Please consider
      our forward-looking statements in light of those risks as you read this
      report.







1
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            of Contents





**PART
      I--FINANCIAL INFORMATION**




**ITEM
      1. FINANCIAL
      STATEMENTS**




**TELANETIX,
                INC.****Condensed
                Consolidated Balance Sheets****(Unaudited)****June
                30, 2007**
            
            
            **December
                31, 2006****ASSETS**Current
                assetsCash
            
            $
            2,023,569
            
            
            $
            3,198,200Accounts
                receivable, net of allowance for doubtful accounts of$68,170
                and $-0- at June 30, 2007 and December 31, 2006,
                respectively
            
            
            978,422
            
            
            
            699,985Inventory
            
            
            410,397
            
            
            
            -Prepaid
                expenses and other current assets
            
            
            69,465
            
            
            
            42,976Total
                current assets
            
            
            3,481,853
            
            
            
            3,941,161Property
                and equipment, net
            
            
            163,764
            
            
            
            116,919Deposits
            
            
            15,632
            
            
            
            15,632Deferred
                financing costs, net
            
            
            187,193
            
            
            
            206,658Goodwill
            
            
            904,643
            
            
            
            -Purchased
                intangibles, net
            
            
            726,000
            
            
            
            -Total
                assets
            
            $
            5,479,085
            
            
            $
            4,280,370**LIABILITIES
                AND STOCKHOLDERS' DEFICIT**Current
                liabilitiesAccounts
                payable
            
            $
            809,030
            
            
            $
            361,512Accrued
                liabilities
            
            
            401,869
            
            
            
            404,007Lines
                of credit
            
            
            418,293
            
            
            
            -Deferred
                revenue
            
            
            218,794
            
            
            
            -Deferred
                compensation, current portion
            
            
            481,692
            
            
            
            481,692Notes
                payable, stockholder
            
            
            -
            
            
            
            1,300,000Convertible
                debentures, current portion
            
            
            1,583,386
            
            
            
            731,905Warrant
                liabilities
            
            
            4,462,357
            
            
            
            542,397Total
                current liabilities
            
            
            8,375,421
            
            
            
            3,821,513Non-current
                liabilitiesConvertible
                debentures, less current portion
            
            
            1,066,858
            
            
            
            1,463,810Deferred
                compensation
            
            
            481,692
            
            
            
            481,692Total
                non-current liabilities
            
            
            1,548,550
            
            
            
            1,945,502Total
                liabilities
            
            
            9,923,971
            
            
            
            5,767,015Stockholders'
                DeficitPreferred
                stock, no par value, Authorized:10,000,000; Issued and outstanding:
                none
            
            
            -
            
            
            
            -Common
                stock, $.0001 par value; Authorized: 200,000,000 shares;Issued
                and outstanding: 16,584,259 at June 30, 2007 and 15,557,166 at December
                31, 2006
            
            
            1,658
            
            
            
            1,556Additional
                paid in capital
            
            
            12,212,951
            
            
            
            8,515,232Warrants
            
            
            10,000
            
            
            
            10,000Accumulated
                deficit
            
            
            (16,669,495
            )
            
            
            (10,013,433
            )Total
                stockholders' deficit
            
            
            (4,444,886
            )
            
            
            (1,486,645
            )Total
                liabilities and stockholders' deficit
            
            $
            5,479,085
            
            
            $
            4,280,370The
                accompanying notes are in integral part of these condensed consolidated
                financial statements.








2
 Table
            of Contents








**TELANETIX,
                INC.****Condensed
                Consolidated Statements of Operations****(Unaudited)****Three
                months ended**
            
            
            **Six
                months ended****June
                30, 2007**
            
            
            **June
                30, 2006**
            
            
            **June
                30, 2007**
            
            
            **June
                30, 2006**Revenues:Product
                revenues
            
            $
            600,758
            
            
            $
            -
            
            
            $
            1,018,484
            
            
            $
            -Service
                revenues
            
            
            1,444,315
            
            
            
            48,438
            
            
            
            1,488,857
            
            
            
            75,938Total
                revenues
            
            
            2,045,073
            
            
            
            48,438
            
            
            
            2,507,341
            
            
            
            75,938Cost
                of revenues:Cost
                of product revenues
            
            
            335,156
            
            
            
            -
            
            
            
            437,207
            
            
            
            -Cost
                of service revenues
            
            
            1,172,440
            
            
            
            35,980
            
            
            
            1,212,094
            
            
            
            55,923Total
                cost of revenues
            
            
            1,507,596
            
            
            
            35,980
            
            
            
            1,649,301
            
            
            
            55,923Gross
                profit
            
            
            537,477
            
            
            
            12,458
            
            
            
            858,040
            
            
            
            20,015Operating
                expenses:Selling,
                general and administrative
            
            
            1,413,802
            
            
            
            837,468
            
            
            
            2,690,785
            
            
            
            1,280,615Research
                and development
            
            
            208,196
            
            
            
            98,071
            
            
            
            388,903
            
            
            
            184,546Amortization
                of purchased intangibles
            
            
            4,000
            
            
            
            -
            
            
            
            4,000
            
            
            
            -Total
                operating expenses
            
            
            1,625,998
            
            
            
            935,539
            
            
            
            3,083,688
            
            
            
            1,465,161Operating
                loss
            
            
            (1,088,521
            )
            
            
            (923,081
            )
            
            
            (2,225,648
            )
            
            
            (1,445,146
            )Other
                income (expense)Interest
                income
            
            
            15,104
            
            
            
            1,896
            
            
            
            22,644
            
            
            
            2,550Interest
                expense
            
            
            (718,101
            )
            
            
            (20,308
            )
            
            
            (1,089,268
            )
            
            
            (39,541
            )Change
                in fair market value of warrants
            
            
            603,019
            
            
            
            -
            
            
            
            (3,368,129
            )
            
            
            -Gain
                (loss) on disposal of fixed assets
            
            
            4,339
            
            
            
            2,193
            
            
            
            4,339
            
            
            
            (1,960
            )Total
                other income (expense)
            
            
            (95,639
            )
            
            
            (16,219
            )
            
            
            (4,430,414
            )
            
            
            (38,951
            )Loss
                before income taxes
            
            
            (1,184,160
            )
            
            
            (939,300
            )
            
            
            (6,656,062
            )
            
            
            (1,484,097
            )Provision
                for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
                loss
            
            $
            (1,184,160
            )
            
            $
            (939,300
            )
            
            $
            (6,656,062
            )
            
            $
            (1,484,097
            )Net
                loss per share - basic and diluted
            
            $
            (0.07
            )
            
            $
            (0.07
            )
            
            $
            (0.42
            )
            
            $
            (0.11
            )Weighted
                average shares outstanding -basic
                and diluted
            
            
            16,203,012
            
            
            
            14,433,568
            
            
            
            15,887,917
            
            
            
            14,113,535The
                accompanying notes are an integral part of these condensed consolidated
                financial statements.








3
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            of Contents








**TELANETIX,
                INC.****Condensed
                Consolidated Statements of Cash Flows****Six
                months ended****June
                30, 2007**
            
            
            **June
                30, 2006**Cash
                flows from operating activities:Net
                loss
            
            $
            (6,656,062
            )
            
            $
            (1,484,097
            )Adjustments
                to net loss to cashprovided
                by operating activities:Depreciation
            
            
            32,744
            
            
            
            57,535(Gain)
                Loss on disposal of fixed assets
            
            
            (4,339
            )
            
            
            1,960Amortization
                of deferred financing costs
            
            
            101,410
            
            
            
            -Amortization
                of intangible assets
            
            
            4,000
            
            
            
            -Amortization
                of fair value of stock options
            
            
            237,419
            
            
            
            454,083Amortization
                of note discounts
            
            
            831,960
            
            
            
            -Common
                stock issued for accrued interest
            
            
            49,711
            
            
            
            -Issuance
                of common stock for non-registration penalty
            
            
            5,043
            
            
            
            -Value
                of warrant issued for finance program agreement
            
            
            596,275
            
            
            
            -Change
                in fair value of warrant liabilities
            
            
            3,368,129
            
            
            
            -Changes
                in assets and liabilitiesAccounts
                receivable
            
            
            197,233
            
            
            
            1,248Inventory
            
            
            100,251
            
            
            
            -Prepaid
                expenses and deposits
            
            
            31,437
            
            
            
            (47,077
            )Accounts
                payable and accrued expenses
            
            
            (539,915
            )
            
            
            (82,812
            )Deferred
                revenue
            
            
            82,268
            
            
            
            100,000Net
                cash used by operating activities
            
            
            (1,562,436
            )
            
            
            (999,160
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (28,714
            )
            
            
            (54,199
            )Proceeds
                from disposal of fixed assets
            
            
            4,900
            
            
            
            13,267Cash
                acquired in purchase of AVS
            
            
            64,253
            
            
            
            -Net
                cash used by investing activities
            
            
            40,439
            
            
            
            (40,932
            )Cash
                flows from financing activities:Proceeds
                from notes payable issued to shareholders
            
            
            -
            
            
            
            1,459,000Proceeds
                from sale of convertible debentures
            
            
            1,351,000
            
            
            
            -Deferred
                financing costs
            
            
            (81,945
            )
            
            
            -Proceeds
                from exercise of warrants
            
            
            379,776
            
            
            
            -Payment
                of notes payable issued to a shareholder
            
            
            (1,300,000
            )
            
            
            (31,700
            )Payments
                on lines of credit
            
            
            (1,465
            )
            
            
            -Net
                cash provided by financing activities
            
            
            347,366
            
            
            
            1,427,300Net
                increase (decrease) in cash
            
            
            (1,174,631
            )
            
            
            387,208Cash
                at beginning of the period
            
            
            3,198,200
            
            
            
            47,906Cash
                at end of the period
            
            $
            2,023,569
            
            
            $
            435,114Interest
                paid
            
            $
            240,565
            
            
            $
            -Income
                taxes paid
            
            $
            -
            
            
            $
            -Common
                stock issued in connection with the acquisition of
                subsidiary
            
            $
            1,253,000
            
            
            $
            -Liabilities
                assumed in acquisition of subsidiary
            
            $
            1,541,576
            
            
            $
            -Convertible
                debentures converted into common stock
            
            $
            784,800
            
            
            $
            -The
                accompanying notes are an integral part of these condensed consolidated
                financial statements.








4
 Table
            of Contents





**TELANETIX,
      INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





**1.**
            **Basis
                of Presentation**




The
      accompanying unaudited financial statements, consisting of the condensed
      consolidated balance sheet as of June 30, 2007, the condensed consolidated
      statements of operations for the three months ended June 30, 2007 and 2006,
      the
      condensed consolidated statements of operations for the six months ended June
      30, 2007 and 2006, and the condensed consolidated statements of cash flows
      for
      the six months ended June 30, 2007 and 2006, have been prepared in accordance
      with accounting principles generally accepted in the United States of America
      for interim financial information and in accordance with the instructions to
      Form 10-QSB. Accordingly, these condensed consolidated financial statements
      do
      not include all of the information and footnotes typically found in the audited
      consolidated financial statements and footnotes thereto included in the Annual
      Report on Form 10-KSB of Telanetix, Inc. and its subsidiaries (the "Company").
      In the opinion of management, all adjustments (primarily consisting of normal
      recurring adjustments) considered necessary for a fair statement have been
      included.




The
      condensed consolidated balance sheet at December 31, 2006 has been derived
      from the audited consolidated financial statements as of that date but does
      not
      include all of the information and footnotes included in the Company's Annual
      Report on Form 10-KSB for the year ended December 31, 2006. For further
      information, refer to the consolidated financial statements and footnotes
      thereto included in the Company's Annual Report on Form 10-KSB for the year
      ended December 31, 2006.




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reported period. Actual results could differ from those estimates
      and
      operating results for the three months and for the six months ended June 30,
      2007 and are not necessarily indicative of the results that may be expected
      for
      the year ending December 31, 2007.




**2.**
            **Significant
                Accounting Policy Update**




**Revenue
      recognition**.  The Company recognizes revenue when sufficient
      evidence of an arrangement exists, title has transferred, payment is not
      contingent upon performance of installation or service obligations, the price
      is
      fixed or determinable, and collectibility is reasonably assured. In addition,
      the Company recognizes service revenue at project completion or based upon
      completed project milestones, as dictated by terms of the project contract,
      and
      in accordance with generally accepted accounting principles. In instances where
      final acceptance of the product or service is specified by the customer, revenue
      is deferred until all acceptance criteria have been met. Additionally, the
      Company recognizes extended service revenue on its hardware and software
      products as the service is performed, generally over one year.




The
        Company accrues for sales returns and other allowances as a reduction to
        revenues upon shipment based upon its contractual obligations and historical
        experience.
  **3.**
              **Acquisition,
                  Goodwill and Intangible
                  Assets**
  Effective
        April 1, 2007, the Company acquired all of the membership interests in AVS
        Installation Limited Liability Company and Union Labor Force One Limited
        Liability Company (together, "AVS"). AVS provides a full range of audio visual
        services to clients and end-users as the single point of contact during design
        and project implementation. The consideration paid by the Company for the
        membership interests of AVS consisted of 248,119 shares of the Company's
        common
        stock valued at $1,253,000. Management allocated the purchase price to the
        assets acquired and liabilities assumed based on their estimated fair values
        on
        the acquisition date. The Company may adjust the preliminary purchase price
        allocation after giving consideration to final valuation reports from
        independent appraisers and obtaining more information regarding, among other
        things, asset valuations, liabilities assumed, and revisions of preliminary
        estimates.


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 Table
            of Contents




The
      preliminary purchase price allocation as of April 1, 2007, subject to change
      pending completion of the final valuation and analysis, is as
      follows:




Tangible
                assets
            
            $
            1,159,933Goodwill
            
            
            904,643Customer
                relationships
            
            
            500,000Trade
                name
            
            
            150,000Workforce
            
            
            80,000Total
                assets acquired
            
            
            2,794,576Liabilities
                assumed
            
            
            (1,541,576
            )Net
                assets acquired
            
            $
            1,253,000




The
      primary reason for the acquisition and the factors that contributed to the
      recognition of goodwill of $904,643 relate to AVS's expertise in the audio
      visual field and their client base, that when combined with the Company's
      existing product offerings, will provide the Company with the ability to provide
      both the product and services required for videoconferencing and audio visual
      solutions. See "Note 4-Goodwill and Purchased Intangibles," below, for
      additional information.




AVS's
      results are included in the Company's results of operations from the acquisition
      date. The unaudited financial information table below summarizes the combined
      results of operations of the Company and AVS, on a pro forma basis, as if the
      acquisition had occurred at January 1, 2007 and 2006.  The
      unaudited pro forma financial information combines the historical results of
      operations of the Company and AVS for the six months ended June 30, 2007 and
      2006, and has been prepared for comparative purposes only and does not purport
      to be indicative of the actual operating results that would have been recorded
      had the acquisition actually taken place on January 1, 2007 or 2006, and
      should not be taken as indicative of future consolidated operating
      results.




**Six
                months ended****June
                30, 2007**
            
            
            **June
                30, 2006**Net
                revenues
            
            $
            3,698,442
            
            
            $
            1,638,652Gross
                profit
            
            $
            1,008,431
            
            
            $
            311,638Net
                loss
            
            $
            (6,772,997
            )
            
            $
            (1,443,878
            )Net
                loss per share - basic and diluted
            
            $
            (0.42
            )
            
            $
            (0.10
            )




**4.**
            **Goodwill
                and Purchased Intangibles**




As
      required under Statement of Financial Accounting Standards No. 142 (FAS 142),
      *Goodwill and Other Intangible Assets,* goodwill is separately disclosed
      from other intangible assets on the consolidated balance sheet and not
      amortized, but is tested for impairment on at least an annual basis. The Company
      determined that the customer relationships and trade name have indefinite lives
      as the Company expects to generate cash flows related to these assets
      indefinitely. Consequently, customer relationships and trade name are not
      amortized, but will be reviewed for impairment at least annually. The Company
      will complete impairment tests on its goodwill and purchased intangible assets
      at December 31, 2007. The Company will continue to perform future impairment
      tests as required by FAS 142 as of December 31 in future years or when
      indicators of impairment are noted.  The value attributable to the
      workforce will be amortized over a period of five years.




Purchased
      intangible assets consist of the following:




**June
                30, 2007**Customer
                relationships
            
            $
            500,000Trade
                name
            
            
            150,000Workforce
            
            
            80,000Total
            
            
            730,000Less
                accumulated amortization
            
            
            (4,000
            )Purchased
                intangible assets, net
            
            $
            726,000







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 Table
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**5.**
            **Inventory**




Inventory
      is valued at the lower of cost or market with cost computed on a first-in,
      first-out ("FIFO") basis. Consideration is given to obsolescence, excessive
      levels, deterioration and other factors in evaluation net realizable value.
      Inventory consists of purchased audio and video conferencing equipment and
      products held for resale.




**6.**
            **Accrued
                Liabilities**




Accrued
      liabilities consisted of the following:




**June
                30, 2007**
            
            
            **December
                31, 2006**Accrued
                payroll and taxes
            
            $
            159,468
            
            
            $
            173,964Accrued
                vacation and sick
            
            
            114,916
            
            
            
            88,204Accrued
                interest, stockholder
            
            
            -
            
            
            
            137,593Accrued
                interest
            
            
            -
            
            
            
            1,829Sales
                tax payable
            
            
            113,534
            
            
            
            2,417Other
            
            
            13,951
            
            
            
            -$
            401,869
            
            
            $
            404,007




**7.**
            **Lines
                of Credit**




The
      Company, through AVS, has two Revolving Credit Agreements (together, the "Credit
      Agreements") with Interstate Net Bank. The Company has the ability to
      borrow up to $250,000 under the terms of one of the Credit Agreements, and
      up to
      $300,000 under the other, both at the five year Treasury Bill Rate plus
      2.5%.  At June 30, 2007, the outstanding balance on each of the Credit
      Agreements was $144,900 and $273,393, respectively.  Subsequent
      to the end of the quarter, in July 2007, the Company paid off both of the Credit
      Agreements, totaling $418,293. In August 2007, the Company entered into a Loan
      and Security Agreement with Bridge Bank, National Association, pursuant to
      which
      the Company was granted a revolving line of credit of up to $1.5
      million.  See "Note 13 - Subsequent Events," below, for more
      information.




**8.**
            **Convertible
                Debentures**




On
      December 28, 2006, the Company issued original issue discount 6% unsecured
      convertible debentures and common stock purchase warrants to four unaffiliated
      institutional investors. The Company issued an aggregate of $3,657,143 principal
      amount of debentures at an original issue discount of 12.5% or $457,143 and
      949,907 warrants, resulting in net proceeds to the Company of $3,090,000 after
      deducting fees of $110,000. The Company incurred legal and other expenses of
      $97,446, and capitalized $207,446 of deferred financing costs.




On
      February 12, 2007, the Company issued original issue discount 6% unsecured
      convertible debentures and common stock purchase warrants to the same four
      unaffiliated institutional investors in the December private placement. The
      Company issued an aggregate of $1,544,000 principal amount of debentures at
      an
      original issue discount of 12.5% or $193,000 and 401,040 warrants, resulting
      in
      net proceeds to the Company of $1,312,225 after deducting fees of $38,775.
      The
      Company incurred legal and other expenses of $43,170, and capitalized $81,945
      of
      deferred financing costs.




The
      debentures issued in both private placements are due December 31, 2008. Interest
      on the debentures accrues at the rate of 6% per annum and is payable quarterly
      on April 1, July 1, October 1, and December 1, commencing on April 1, 2007.
      Monthly redemption payments equal to 1/18th of the principal amount due under
      each debenture begin July 1, 2007 and continue through December 31, 2008.
      Monthly redemption payments must also include any accrued interest on the
      portion of the debentures being redeemed. The Company has the right to pay
      interest and monthly redemption payments in cash, or upon notice to the holders
      and compliance with certain equity conditions (as defined in the debenture),
      the
      Company can pay all or a portion of any such payment in common stock valued
      at
      the price equal to the lesser of the then effective conversion price (initially
      $1.54) or 85% of the average of the volume weighted average price ("VWAP")
      per
      share as reported on Bloomberg for the Company's common stock for the ten
      trading days prior to the payment date or the date that the shares are
      delivered. The Company has the option, subject to compliance with certain equity
      conditions, to redeem the debentures before their maturity by payment in cash
      of
      120% of the then outstanding principal amount of the debenture plus accrued
      interest and other charges.




The
      debentures are convertible at any time at the discretion of the holder at a
      conversion price per share of $1.54, subject to adjustment including
      full-ratchet, anti-dilution protection. The Company also has the right, subject
      to compliance with certain equity conditions and certain limitations on the
      holders beneficial ownership of common stock, to force conversion if the average
      of the VWAP for the Company's common stock exceeds 200% of the effective
      conversion price (initially $3.08) for 20 trading days out of a consecutive
      30
      day trading period.





7
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            of Contents





The
      debentures impose certain covenants on the Company, including restrictions
      against incurring additional indebtedness (other than permitted indebtedness
      as
      defined in the debenture), creating any liens on its property (other than
      permitted liens as defined in the debenture), amending its certificate of
      incorporation or bylaws, redeeming or paying dividends on shares of its
      outstanding common stock, and entering into certain related party transactions.
      The debenture defines certain events of default, including without limitation
      failure to make a payment obligation, failure to observe other covenants of
      the
      debenture or related agreements (subject to applicable cure periods), breach
      of
      representation or warranty, bankruptcy, default under another significant
      contract or credit obligation, delisting of the Company's common stock, a change
      in control, failure to secure and maintain an effective registration statement
      covering the resale of the common stock underlying the debentures and the
      warrants, or failure to deliver share certificates in a timely manner. On the
      occurrence of an event of default, the holders of the debentures have the right
      to accelerate all amounts outstanding under the debentures and demand payment
      of
      a mandatory default amount equal to 130% of the amount outstanding under the
      debenture, plus accrued interest and expenses.




The
      Company also entered into registration rights agreements with the institutional
      investors in both the December and February private placements, pursuant to
      which the Company agreed to file a registration statement covering the resale
      of
      the shares of common stock that may be issued to investors upon the conversion
      of the debentures, payment in kind, and the exercise of the warrants, and to
      maintain the effectiveness of that registration statement (subject to certain
      limitations) for a period of time until the holders can sell the underlying
      common stock without volume restrictions under Rule 144(k).  The
      Company filed a registration statement, which was and currently remains
      effective, covering the resale of the shares of common stock issued and issuable
      upon conversion of the debentures and exercise of the warrants issued in the
      December 2006 private placement.  The Company filed a separate
      registration statement covering the resale of the shares of common stock issued
      and issuable upon conversion of the debentures and exercise of the warrants
      issued in the February 2007 private placement, which has not yet been declared
      effective.




The
      debentures and warrants were issued to the institutional investors in private
      placement transactions in accordance with Rule 506 under Regulation D of the
      Securities Act of 1933 (the "Securities Act").  Kaufman Bros., L.P.
      acted as an advisor to the Company in connection with both transactions and
      received fees of $113,775 in connection with its services.




In
      May
      2007, the holders of the debentures issued in December 2006 converted $784,800
      of principal value into 509,610 shares of common stock, reflecting a conversion
      price of $1.54 per share.




The
      following table summarizes information relative to the debentures issued in
      both
      the December 2006 and February 2007 private placements at June 30, 2007and
      December 31, 2006:




**June
                30, 2007**
            
            
            **December
                31, 2006**Convertible
                debentures
            
            $
            4,416,343
            
            
            $
            3,657,143Less
                discounts, net of amortization:Original
                issue discount - 12.5%
            
            
            (422,357
            )
            
            
            (455,247
            )Detachable
                warrants discount
            
            
            (758,836
            )
            
            
            (542,396
            )Beneficial
                conversion discount
            
            
            (584,906
            )
            
            
            (463,785
            )Convertible
                debentures, net of discounts
            
            
            2,650,244
            
            
            
            2,195,715Less
                current portion
            
            
            (1,583,386
            )
            
            
            (731,905
            )Convertible
                debentures, long term portion
            
            $
            1,066,858
            
            
            $
            1,463,810




Maturities
      of the debentures are as follows:




Due
                through June 30, 2008
            
            $
            2,872,343Due
                from July 1, 2008 to December 31, 2008
            
            
            1,544,000$
            4,416,343




Pursuant
      to Emerging Issues Task Force (EITF) No. 00-19, Accounting for Derivative
      Financial Instruments Indexed to and Potentially Settled in, a Company's Own
      Stock, the fair value of the warrants at the issuance was recorded as a warrant
      liability because (i) the shares issuable upon exercise of such warrants are
      required to be registered and (ii) net cash settlement could
      occur.  EITF No. 00-19 provides that contracts that include any
      provision that could require net cash settlement cannot be accounted for as
      equity of the Company.  See "Note 9-Warrants and Warrant Liabilities,"
      below, for more information.




In
      accordance with Statement of Financial Accounting Standards No. 133, Accounting
      for Derivative Instruments and Hedging Activities ("FASB 133"), the Company
      determined that the conversion feature of the debentures did not meet the
      criteria for bifurcation of the conversion option, as the debt met the
      definition of "conventional convertible debt", as defined under EITF No. 00-19,
      and therefore the conversion feature of the debentures did not need to be
      bifurcated and accounted for as a derivative.




8
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            of Contents





In
      accordance with EITF No. 00-27, Application of Issue No. 98-5 to Certain
      Convertible Instruments, which provides guidance on the calculation of a
      beneficial conversion feature on a convertible instrument, the Company has
      determined that the debentures issued in December 2006 had a non-cash beneficial
      conversion feature of $463,785. The beneficial conversion feature was determined
      based on the difference between the calculated conversion value after the
      allocation of the full fair value of the warrants issued in connection with
      such
      debentures of $542,396 to the debt discount and the fair value of the Company's
      common stock of $1.48 per share. After the allocation of proceeds between the
      debentures and warrants are made, the conversion price of $1.265 was calculated
      based on the allocated amount to debts divided by the total number of shares
      into which the debentures are convertible. The calculated amount of $0.215,
      the
      difference of the fair value of the common stock of $1.48 and the effective
      conversion price of $1.265, represents the beneficial value per
      share.  This beneficial value was applied to the total shares into
      which the debentures are convertible to calculate the beneficial conversion
      feature. The discounts on account of the beneficial conversion feature and
      fair
      value of the warrants will be recognized as additional interest
      expense.




Similarly,
      the Company has determined that the convertible debentures issued in February
      2007 had a non-cash beneficial conversion feature of $391,797. The beneficial
      conversion feature was determined based on the difference between the calculated
      conversion value after the allocation of the full fair value of the warrants
      issued in connection with such debentures of $551,831 to the debt discount
      and
      the fair value of the Company's common stock of $2.49 per share. After the
      allocation of proceeds between the debentures and warrants are made, a
      conversion price of $1.768 was calculated based on the allocated amount to
      debentures divided by the total number of shares into which the debentures
      are
      convertible. The calculated amount of $0.722, the difference of the fair value
      of the common stock of $2.49 and the effective conversion price of $1.768,
      represents the beneficial value per share. This beneficial value was applied
      to
      the total shares into which the debentures are convertible to calculate the
      beneficial conversion feature. The discounts on account of the beneficial
      conversion feature and fair value of the warrants will be recognized as
      additional interest expense.




**9.**
            **Warrants
                and Warrant Liabilities**




In
      March
      2005, the Company issued warrants to two individuals in exchange for services
      rendered to the Company. These warrants allow each of the individuals to
      purchase up to 50,000 shares at $1.25 per share and expire, if not exercised,
      on
      March 31, 2008.  In July 2005, the Company sold additional warrants to
      these same individuals for a total of $10,000. These warrants allow each of
      the
      individuals to purchase up to 100,000 shares of the Company's common stock
      at
      $1.80 per share and expire, if not exercised, on June 30, 2008.




In
      November 2006, the Company issued warrants to purchase 281,250 shares of its
      common stock at an exercise price of $1.50 per share in conjunction with a
      private placement of its common stock.  The warrants expire, if not
      exercised, three years from issuance.




On
      December 28, 2006, the Company issued warrants to purchase 949,907 shares of
      common stock at $1.69 per share in conjunction with the sale of its
      debentures.  On February 12, 2007, the Company issued warrants to
      purchase 401,040 shares of common stock at $1.69 per share in conjunction with
      the sale of its debentures. The warrants are immediately exercisable and expire
      five years from the issue date.




The
      warrants issued in December 2006 and February 2007 have registration rights
      for
      the underlying shares. EITF No. 00-19 provides that contracts that include
      any
      provision that could require net cash settlement cannot be accounted for as
      equity of the Company.  The warrant agreements related to the warrants
      issued in December 2006 and February 2007 require net cash settlement, at the
      option of the holder, if the Company fails to issue and deliver common stock
      on
      exercise of a warrant within three business days of receipt of a written
      exercise notice by the holder and the holder purchases shares of common stock
      to
      deliver in satisfaction of a sale of the common stock the holder anticipated
      to
      receive upon exercise of the warrant.  Pursuant to EITF No. 00-19, the
      Company recorded the fair value of the warrants at the issue date as a warrant
      liability.




The
      fair
      value of warrants was estimated at the issuance dates and revalued at June
      30,
      2007, using a Black Scholes option pricing model with the following assumptions:
      a risk free interest rate of approximately 4.72% to 4.84% at the issuance dates
      and 4.87% on June 30, 2007, no dividend yield, volatility factors of 39.53%
      to
      40.83% at the issuance dates and 39.24% to 39.46% at June 30, 2007,
      contractual terms of 5 years and expected terms based upon the formula
      prescribed in SEC Staff Accounting Bulletin 107 of 2.25 years to 2.30
      years. These assumptions use the interest rate prevailing at the time of
      issuance, volatility factors calculated as the weighted average of the stock
      price volatility of ranked comparable public companies, and contractual terms
      equal to the exercise periods of the respective warrants. The decrease in fair
      value of the warrants for the three months ended June 30, 2007 of $603,019
      was
      reported as non-operating income in the financial statements. The increase
      in
      fair value of the warrants for the six months ended June 30, 2007 of $3,368,129
      was reported as a non-operating expense in the financial
      statements.




The
      warrant liability related to the debentures issued in the Company’s December
      2006 and February 2007 private placements totals $4,462,357 and $542,397 at
      June
      30, 2007 and December 31, 2006, respectively.




On
      March
      6, 2007, the Company issued an immediately exercisable warrant to purchase
      250,000 shares of common stock at $2.00 per share in connection with its
      agreement with Aequitas Capital Management, Inc., to provide the Company's
      prospective customers with a leasing alternative for the Company's
      videoconferencing systems. The warrant has a three year term, and has been
      accounted for as an equity issuance in the financial statements.





9
 Table
            of Contents





The
      fair
      value of the warrant issued to Aequitas Capital at the issue date was calculated
      using a Black Scholes option pricing model with the following assumptions:
      a
      risk free interest rate of 4.58%, volatility factor of 43.35%, contractual
      term
      of 3 years and expected term based upon the formula prescribed in SEC Staff
      Accounting Bulletin 107 of 1.5 years. The fair value of the warrant of $596,275
      was expensed as financing program costs.




The
      following table summarizes warrant activity for the six months ended June 30,
      2007:




**Number
                of Shares**
              **Subject
                to Warrants**
            
            
            **Weighted
                Average**
              **Exercise
                Price**Balance
                - December 31, 2006
            
            
            1,531,157
            
            
            $
            1.64Granted
            
            
            651,040
            
            
            
            1.81Exercised
            
            
            (232,917
            )
            
            
            1.63Forfeited
            
            
            -
            
            
            
            -Expired
            
            
            -
            
            
            
            -Balance
                – June 30, 2007
            
            
            1,949,280
            
            
            $
            1.70





The
      following table summarizes information about warrants outstanding at June 30,
      2007:




**Exercise
                Prices**
            
            
            **Number
                of Shares**
              **Subject
                to Outstanding**
              **Warrants
                and Exercisable**
            
            
            **Weighted
                Average**
              **Remaining**
              **Contractual**
              **Life
                (years)**$
            1.25
            
            
            
            100,000
            
            
            
            0.75$
            1.50
            
            
            
            208,333
            
            
            
            2.42$
            1.80
            
            
            
            200,000
            
            
            
            1.00$
            1.69
            
            
            
            1,190,947
            
            
            
            4.54$
            2.00
            
            
            
            250,000
            
            
            
            2.681,949,280




**10.**
            **Stock
                Based Compensation**




Prior
      to
      year ended December 31, 2005, the Company elected to use the intrinsic value
      based method and to disclose the pro forma effect of using the fair value based
      method to account for its stock-based compensation. As a result of the recent
      adoption by the Financial Accounting Standards Board of SFAS No. 123 (revised
      2004) "Share-Based Payment" ("SFAS No. 123(R)"), the Company is now required
      to
      apply the fair value method as prescribed in SFAS No. 123 (R) which requires
      all
      share-based payments to employees, including grants of employee stock options,
      to be recognized in the income statement based on their fair
      values.




*Expense
      Information Under SFAS No. 123(R)*




The
      following table summarizes stock-based compensation expense recorded under
      SFAS
      No. 123(R) for the three months and six months ended June 30, 2007 and 2006
      and
      its allocation within the condensed consolidated statement of
      operations:




**Three
                months ended**
            
            
            **Six
                months ended****June
                30, 2007**
            
            
            **June
                30, 2006**
            
            
            **June
                30, 2007**
            
            
            **June
                30, 2006**Cost
                of service revenues
            
            $
            20,420
            
            
            $
            -
            
            
            $
            20,420
            
            
            $
            -Selling,
                general and administrative
            
            
            151,424
            
            
            
            417,190
            
            
            
            177,882
            
            
            
            448,297Research
                and development
            
            
            26,589
            
            
            
            2,893
            
            
            
            39,117
            
            
            
            5,786Stock
                based compensation included in operating expenses
            
            
            178,013
            
            
            
            420,083
            
            
            
            216,999
            
            
            
            454,083Stock-based
                compensation expense related to employee equity awards
            
            $
            198,433
            
            
            $
            420,083
            
            
            $
            237,419
            
            
            $
            454,083




10
 Table
          of Contents




*Valuation
      Assumptions*




The
      fair
      value of each option award is estimated on the date of grant using the Black
      Scholes option valuation model that uses the assumptions noted in the following
      table. The weighted-average grant-date fair value of options granted during
      the
      three months ended June 30, 2007
      and
      2006 was $3.00 and $-0- per share, respectively. No options were exercised
      during either of the six months ended June 30, 2007 or 2006.




Because
      the Black Scholes option valuation model incorporate ranges of assumptions
      for
      inputs, those ranges are disclosed. Expected volatilities are based on
      historical volatility of the Company's stock and other factors. The Company
      uses
      historical data to estimate option exercise and employee termination within
      the
      valuation model. The expected term of options granted is derived from estimates
      and represents the period of time that options granted are expected to be
      outstanding. The risk-free rate for periods within the contractual life of
      the
      option is based on the U.S. Treasury yield curve in effect at the time of
      grant.




**June
                    30, 2007**
                ****
                ****
                **March
                    31, 2007**
                ****
                ****
                **December
                    31, 2006**Expected
                    volatility
                
                
                58.8
                %
                
                
                60.7
                %
                
                
                0.1
                %Weighted-average
                    volatility
                
                
                58.8
                %
                
                
                60.7
                %
                
                
                0.0
                %Expected
                    dividends
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                0.0
                %Expected
                    term in years
                
                
                6.08
                
                
                
                6.08
                
                
                
                5
                  to 8Risk-free
                    rate
                
                
                4.5
                %
                
                
                4.7
                %
                
                
                4%
                  to 7
                %






A
      summary
      of option activity under the Company's 2005 Equity Incentive Plan (the "2005
      Plan") as of June 30, 2007 and December 31, 2006, and changes during the periods
      then ended is presented below:




**Shares
                Subject**
              **to
                Options**
            
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual**
              **Term
                (Years)**
            
            
            **Aggregate**
              **Intrinsic**
              **Value**Outstanding
                at January 1, 2006
            
            
            3,651,512
            
            
            $
            0.29
            
            
            
            6.9
            
            
            $
            -Granted
            
            
            10,000
            
            
            $
            1.50Exercised
            
            
            -
            
            
            $
            -Forfeited
                or expired
            
            
            (310,000
            )
            
            $
            0.24Outstanding
                at December 31, 2006
            
            
            3,351,512
            
            
            
            
            
            
            
            6.6
            
            
            $
            -Granted
            
            
            1,185,500
            
            
            $
            4.51Exercised
            
            
            -
            
            
            $
            -Forfeited
                or expired
            
            
            (30,956
            )
            
            $
            0.20Outstanding
                at June 30, 2007
            
            
            4,506,056
            
            
            $
            1.35
            
            
            
            7.1
            
            
            $
            16,692,222Exercisable
                at June 30, 2007
            
            
            3,105,556
            
            
            $
            1.01
            
            
            
            7.1
            
            
            $
            14,741,947




11
 Table
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A
      summary
      of the status of the Company's nonvested options as of June 30, 2007 and
      December 31, 2006, and changes during the periods then ended is presented
      below:




**Shares**
            
            
            **Weighted-**
              **Average**
              **Grant-Date**
              **Fair
                Value**Nonvested
                at January 1, 2006
            
            
            1,232,987
            
            
            $
            0.44Granted
            
            
            10,000
            
            
            $
            -Vested
            
            
            (778,193
            )
            
            $
            0.60Forfeited
            
            
            (179,794
            )
            
            $
            -Nonvested
                at December 31, 2006
            
            
            285,000
            
            
            $
            0.20Granted
            
            
            1,185,500
            
            
            $
            2.59Vested
            
            
            (70,000
            )
            
            $
            0.20Forfeited
            
            
            -
            
            
            $
            -Nonvested
                at June 30, 2007
            
            
            1,400,500
            
            
            $
            2.20




As
      of
      June 30, 2007, there was $2,894,190 of total unrecognized compensation cost
      related to nonvested share-based compensation arrangements granted under the
      2005 Plan. That cost is expected to be recognized over a weighted-average period
      of 3.68 years. The total fair value of options vested during the six months
      ended June 30, 2007 and 2006 was $14,000 and $40,750, respectively.




**11.**
              **Basic and Diluted Net Loss per
                Share**




Basic
      net
      loss per share is based upon the weighted average number of common shares
      outstanding. Diluted net loss per share is based on the assumption that all
      potential diluted stock options and warrants were converted or exercised. The
      calculation of diluted net loss per share excludes potential common stock
      equivalents if the effect is anti-dilutive. The Company's weighted average
      common shares outstanding for basic and dilutive were the same since the effect
      of common stock equivalents was anti-dilutive.




The
      Company has the following dilutive stock options and warrants as of June 30,
      2007 and December 31, 2006 which were excluded from the calculation since the
      effect is anti-dilutive.




**June
                30, 2007**
            
            
            **December
                31, 2006**Stock
                Options
            
            
            4,506,056
            
            
            
            3,351,512Warrants
            
            
            1,949,280
            
            
            
            1,531,157Total
            
            
            6,455,336
            
            
            
            4,882,669






12
 Table
          of Contents




**12.**
            **Going
                Concern and Operating
                Deficits**




As
      shown
      in the accompanying financial statements, the Company incurred a net loss of
      $6,656,062 during the six months ended June 30, 2007, and $3,119,056 during
      the
      year ended December 31, 2006, and has accumulated losses of $16,669,495 million
      since opening for business. These factors create an uncertainty as to the
      Company's ability to continue as a going concern. The ability of the Company
      to
      continue as a going concern is dependent upon the success of raising additional
      capital through the issuance of common stock and the ability to generate
      operating revenue. The financial statements do not include any adjustments
      that
      might be necessary should the Company be unable to continue as a going
      concern.




**13.**
            **Subsequent
                Events**




In
      July
      2007, the Company paid off the two lines of credit it acquired in connection
      with the AVS acquisition.  The total pay-off payment was $418,293. See
      "Note 7-Lines of Credit," above.****On August 8, 2007, the
      Company entered into a Loan and Security Agreement (the “LSA”) with Bridge Bank,
      National Association (“Bridge”), that provides the Company with up to a $1.5
      million revolving line of credit based on its accounts receivable
      balance.  Borrowings under the line of credit are secured by the
      Company’s intellectual and personal property, bear interest at the prime rate
      plus 1% and matures August 8, 2009.  Borrowings under the line of
      credit are subject to certain financial covenants and restrictions on liquidity,
      indebtedness, financial guarantees, business combinations, revenue levels and
      other related items.  Generally, upon an event of default, Bridge may
      stop making any future advances under the line of credit and all or a portion
      of
      the Company’s outstanding obligations thereunder may, at Bridge’s option, become
      due and payable in full.  The Company paid a facility fee of $7,500
      upon execution of the LSA, and a similar fee is due on each anniversary of
      the
      LSA.  In connection with the execution of the LSA, the Company granted
      Bridge a warrant to purchase 12,784 shares of the Company’s common stock at an
      exercise price of $3.52 per share, which equals 90% of the five day volume
      weighted average price of the Company’s common stock immediately before
      issuance.  The warrant is exercisable immediately, expires in three
      years, and contains piggyback registration rights.




In
      July
      2007, the investors in the Company's December 2006 and February 2007 private
      placements, in accordance with the terms of the debentures and warrants issued
      in those financings, waived the 4.99% limitation on their beneficial ownership
      of the Company's common stock in respect of certain of the debentures and
      warrants.  Accordingly, and in respect of the debentures and warrants as to
      which the 4.99% beneficial ownership cap was waived, the number of shares of
      common stock that may be issued upon conversion or exercise, respectively,
      of
      such debentures and warrants, increased to such number of shares that would
      cause such investor to beneficially own not more than 9.99% of the Company's
      then outstanding common stock immediately following the applicable conversion
      or
      exercise.




In
      July
      2007, holders of the debentures issued by the Company in its December 2006
      private placement converted an additional $922,534 of principal value into
      599,048 shares of common stock, reflecting a conversion price of $1.54 per
      share
      (see "Note 8-Convertible Debentures," for information regarding the conversion
      that occurred in May 2007).




In
      July
      2007 and August 2007, holders of the debentures issued by the Company in
      its February 2007 private placement converted 100% of the outstanding
      debentures ($1,544,000) into 1,002,598 unregistered shares of the Company's
      common stock, reflecting a conversion price of $1.54 per share.  The
      unamortized note discounts and deferred financing costs totaling $973,466
      associated with such debentures will be recognized as interest expense during
      the three months ended September 30, 2007. The Company issued an additional
      200,520 unregistered shares of its common stock to the holders of these
      debentures as an inducement for the early conversion and acceptance of
      unregistered shares, and will recognize a non-operating expense of approximately
      $812,000 related to the issuance of these additional shares.





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            of Contents





As
      a
      result of these conversions, monthly redemption payments through January 2008
      have been satisfied, and the next monthly redemption payment is in February
      2008. The principal amount of all debentures outstanding as of August 9, 2007
      is
      $1,949,807, and the monthly redemption payment amounts on such debentures are
      as
      follows:




**Date**
            
            **Monthly
                Redemption**
              **Payment
                Amount**2/1/2008
            
            $
            9,5243/1/2008
            
            
            111,7124/1/2008
            
            
            203,1755/1/2008
            
            
            203,1756/1/2008
            
            
            203,1757/1/2008
            
            
            203,1758/1/2008
            
            
            203,1759/1/2008
            
            
            203,17510/1/2008
            
            
            203,17511/1/2008
            
            
            203,17512/1/2008
            
            
            203,171$
            1,949,807




In
      July
      and August 2007, warrant holders exercised warrants for 708,333 shares resulting
      in gross proceeds to the Company of $1,235,000.




**14.**
            **Recent
                Accounting Pronouncements**




In
      September 2006, the Financial Accounting Standards Board ("FASB") issued
      Statement of Financial Accounting Standard ("SFAS") No. 157, "Fair Value
      Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework
      for measuring fair value in accordance with generally accepted accounting
      principles, and expands disclosures about fair value measurements. In February
      2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets
      and
      Financial Liabilities - Including an amendment to FASB Statement No. 115" ("SFAS
      159"). SFAS 159 permits entities to choose to measure many financial assets
      and
      financial liabilities at fair value. The objective is to improve financial
      reporting by providing entities with the opportunity to mitigate volatility
      in
      reported earnings caused by measuring related assets and liabilities differently
      without having to apply complex hedge accounting provisions. SFAS No. 159 is
      expected to expand the use of fair value measurement of accounting for financial
      instruments. The fair value option established by SFAS No. 159 permits all
      entities, including non-profits, to measure eligible items at fair value at
      specified election dates. Both SFAS 157 and SFAS 159 are effective for fiscal
      years beginning after November 15, 2007. The Company is currently assessing
      the
      impact the adoption of SFAS 157 and SFAS 159 will have on its financial
      statements.




In
      December 2006, FASB issued FASB Staff Position EITF 00-19-2 "Accounting for
      Registration Payment Arrangements," which specifies that the contingent
      obligation to make future payments or otherwise transfer consideration under
      a
      registration payment arrangement should be separately recognized and measured
      in
      accordance with SFAS No. 5, "Accounting for Contingencies." Adoption of EITF
      00-19-2 was required for fiscal years beginning after December 15, 2006. The
      Company is currently assessing the impact the adoption of EITF 00-19-2 will
      have
      on its financial statements.





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**ITEM
      2. MANAGEMENT'SDISCUSSION AND ANALYSIS
      OR PLAN OF OPERATION**




The
      following discussion and analysis is intended as a review of significant factors
      affecting our financial condition and results of operations for the periods
      indicated.  The discussion should be read in conjunction with our
      consolidated financial statements and the notes presented herein.  See
      "Item 1. Financial Statements," above.  In addition to historical
      information, the following Management's Discussion and Analysis of Financial
      Condition and Results of Operations contains forward-looking statements that
      involve risks and uncertainties. Our actual results could differ significantly
      from those anticipated in these forward-looking statements as a result of
      certain factors discussed in this report.  See "Forward-Looking
      Statements," above.




**Overview**




Telanetix,
      Inc., a Delaware corporation (the "Company," "our," "we," or "us"), is engaged
      in the business of developing and selling high definition videoconferencing
      solutions.  We market our videoconferencing solutions under the name
      Digital PresenceTM.  The core of our videoconferencing system is our
      software components, all of which are developed internally and pre-loaded on
      a
      standard Linux server.  Our videoconferencing systems can be designed,
      built-out and installed with a variety of components to meet the application
      needs of the customer.  By delivering Digital PresenceTM to the market
      in this manner, we offer flexibility to customers and can support conference
      rooms for both small and large audiences.  Our revenues are derived
      from the sale of videoconferencing products and related services.




We
      were a development stage company through 2005.  We completed the
      development of our initial videoconferencing solution and commenced initial
      product sales in 2005.  During 2005, we established channel partner
      relationships with three of the largest audio visual integrators in the United
      States and devoted a substantial portion of our business efforts to establishing
      customer sales through those channels.  In 2006 we focused our
      business efforts on developing our channel partner relationships with audio
      video resellers and systems integrators and securing working capital to fund
      operations.  During the third quarter of 2006, we also began selling
      our videoconferencing systems directly to end-users, and we secured our first
      significant customer accounts.




From
      November 2006 to February 2007, we raised net proceeds of $6.47 million from
      three significant financing transactions.  In November 2006, we sold
      in private placements to three accredited investors an aggregate of 562,499
      shares of our common stock at $1.20 per share and issued warrants to purchase
      281,250 shares of our common stock at $1.50 per share.  We refer to
      this as our November 2006 Private Placements.  In December 2006, we
      issued in a private placement with four institutional investors an aggregate
      of
      $3.66 million principal amount of debentures at an original issue discount
      of
      12.5% and warrants to purchase an aggregate of 949,907 shares of our common
      stock.  We refer to this as our December 2006 Private
      Placement.  In February 2007, we issued in a private placement with
      the same four institutional investors from our December 2006 Private Placement
      an aggregate of $1.544 million principal amount of debentures at an original
      issue discount of 12.5% and warrants to purchase an aggregate of 401,040 shares
      of our common stock.  We refer to this as our February 2007 Private
      Placement, and together with our December 2006 Private Placement as our
      December/February Private Placements.




**Recent
      Developments**




On
      March
      30, 2007, we entered into a stock purchase agreement with Robert Leggio and
      Elbert E. Layne, Jr., pursuant to which, effective April 1, 2007, we acquired
      all of the membership interests in AVS Installation Limited Liability Company
      and Union Labor Force One Limited Liability Company (together, "AVS") from
      Messrs. Leggio and Layne.  AVS provides integration, consultation and
      implementation services for customers desiring audio-visual and
      videoconferencing systems and products.  AVS was one of our channel
      partners who distributed our videoconferencing systems and related services
      in
      New York, New Jersey and nearby regions of the United States.  The
      operations of AVS as our wholly-owned subsidiary will remain the same as it
      did
      before the acquisition except that we will no longer have a channel partner
      relationship with AVS, though it will continue to distribute and integrate
      our
      videoconferencing systems.  The consideration paid to Messrs. Leggio
      and Layne under the stock purchase agreement was $1,253,000, which we paid
      with
      248,119 shares of our common stock based on the $5.05 closing sales price per
      share of our common stock on March 30, 2007.




As
      further discussed under "Liquidity and Capital Resources," below, during and
      subsequent to the end of the period ended June 30, 2007, the holders of the
      debentures we issued in our December Private Placement have converted a portion
      of the principal amounts of such debentures into shares of our common stock
      and
      the holders of the debentures we issued in our February 2007 Private Placement
      have converted the entire principal amount of such debentures ($1.544 million)
      into shares of our common stock.  Accordingly, only a portion of the
      debentures we issued in our December 2006 Private Placements remain outstanding,
      and the principal amount of such debentures, as a result of conversions of
      the
      principal amount of such debentures into shares of our common stock by the
      holders thereof, has decreased from $3.66 million to $1.95 million.




As
      further discussed under "Liquidity and Capital Resources," below, we believe
      our
      cash balance at June 30, 2007 is sufficient to fund our operations through
      at
      least June 30, 2008.  If cash reserves are not sufficient to sustain
      operations, we plan to raise additional capital by selling shares of capital
      stock or other debt or equity securities.  However, there are no
      commitments or arrangements for future financings in place at this time, and
      there can be no assurance that such capital will be available on favorable
      terms
      to us or at all.





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**Going
      Concern Issue**




As
      reported in the Report of Independent Registered Public Accounting Firm on
      our
      December 31, 2006 financial statements, we incurred net losses during 2005
      and
      2006, and have a stockholders' deficit at December 31, 2006.  We have
      yet to establish profitable operations.  These factors, among others,
      create an uncertainty about our ability to continue as a going concern.
      Furthermore, the factors leading to and the existence of the explanatory
      paragraph may adversely affect our relationship with customers and suppliers
      and
      have an adverse effect on our ability to obtain financing.




**Critical
      Accounting Policies Involving Management Estimates and
      Assumptions**




Our
      discussion and analysis of our financial condition and results of operations
      is
      based on our consolidated financial statements.  In preparing our
      consolidated financial statements in conformity with accounting principles
      generally accepted in the United States, we must make a variety of estimates
      that affect the reported amounts and related disclosures.  We have
      identified the following accounting policies that we believe require application
      of management's most subjective judgments, often requiring the need to make
      estimates about the effect of matters that are inherently uncertain and may
      change in subsequent periods.  Our significant accounting policies are
      described in more detail in the notes to consolidated financial statements
      included elsewhere in this filing.  If actual results differ
      significantly from our estimates and projections, there could be a material
      effect on our financial statements.




**Revenue
      Recognition**.  We recognize revenue when sufficient evidence
      of an arrangement exists, title has transferred, payment is not contingent
      upon
      performance of installation or service obligations, the price is fixed or
      determinable, and collectibility is reasonably assured. In addition, we
      recognize service revenue at project completion or based upon completed project
      milestones in accordance with generally accepted accounting principles. In
      instances where final acceptance of the product or service is specified by
      the
      customer, revenue is deferred until all acceptance criteria have been met.
      Additionally, we recognize extended service revenue on our hardware and software
      products as the service is performed, generally over one year.




We
      accrue
      for sales returns and other allowances as a reduction to revenues upon shipment
      based upon our contractual obligations and historical experience.




**Stock
      Based Compensation**.  Prior to and including the fiscal year
      ended December 31, 2005, we elected to use the intrinsic value based method
      and
      to disclose the pro forma effect of using the fair value based method to account
      for our stock-based compensation.  As of January 1, 2006, we account
      for employee stock-based compensation costs in accordance with Statement of
      Financial Accounting Standards, or SFAS, No. 123R, "Share-Based Payment," which
      requires all share-based payments to employees, including grants of employee
      stock options, to be recognized in the income statement based on their fair
      values.  We utilize the Black-Scholes option pricing model to estimate
      the fair value of employee stock based compensation at the date of grant, which
      requires the input of highly subjective assumptions, including expected
      volatility and expected life.  Changes in these inputs and assumptions
      can materially affect the measure of estimated fair value of our share-based
      compensation.




**Use
      of Estimates**.  The preparation of financial statements in
      conformity with generally accepted accounting principles requires management
      to
      make estimates and assumptions that affect certain reported amounts and
      disclosures. Accordingly, actual results could differ from those
      estimates.




**Allowance
      for Doubtful Accounts**.****We continually evaluate
      the creditworthiness of our customers' financial condition and generally do
      not
      require collateral.  We evaluate the collectability of our accounts
      based on a combination of factors.  In circumstances where we are
      aware of a specific customer's inability to meet its financial obligations
      to
      us, we record a specific reserve for bad debts against amounts
      due.  To date, we have not experienced significant losses on
      uncollectible accounts receivable.




**Deferred
      Tax Valuation Allowance***.*  Deferred tax assets and
      liabilities are recognized for the future tax consequences attributable to
      differences between the financial statements carrying amounts of existing assets
      and liabilities and their respective tax bases.  Deferred tax assets
      and liabilities are measured using enacted tax rates expected to apply to
      taxable income in the years in which those temporary differences are expected
      to
      be recovered or settled.  Valuation allowances are established when
      necessary to reduce deferred tax assets to the amount more likely than not
      to be
      realized.  Income tax expense is the total tax payable for the period
      and the change during the period in deferred tax assets and
      liabilities.





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            of Contents





**Results
      of Operations**




**Fluctuations
      in Operating Results**




We
      are in
      the early stages of our operations, and our results of operations are likely
      to
      fluctuate from period to period.  We anticipate that our quarterly and
      annual results of operations will be impacted for the foreseeable future by
      several factors, including the timing and volume of sales of our
      videoconferencing systems.  Because of the current size of our
      operations, the award or loss of a large order can have a significant impact
      on
      our financial results.  Due to these fluctuations, we believe that the
      period-to-period comparisons of our operating results are not a good indication
      of our future performance.




**Three
      and Six Months Ended June 30, 2007 and 2006**




**Revenues**




Total
      revenues for the three months ended June 30, 2007 were $2,045,073, an
      increase of $1,996,635, or 4,122%, over the same period of 2006. The increase
      in
      revenues was due to our acquisition of AVS which was effective April 1, 2007,
      increased sales of our videoconferencing systems, and an increase in revenues
      attributable to our services.  During the period our AVS subsidiary
      contributed revenues of $1,735,369.  In addition, we sold four
      videoconferencing systems and recorded revenue of $260,654 for the three months
      ended June 30, 2007.   We
      did
      not sell any systems in the period ended June 30, 2006.




Total
      revenues for the six months ended June 30, 2007 were $2,507,341, an
      increase of $2,431,403, or 3,202%, over the same period of 2006. The increase
      in
      revenues was due to our acquisition of AVS, increased sales of our
      videoconferencing systems, and increased service revenue.  For the six
      months ended June 30, 2007, our AVS subsidiary contributed revenues of
      $1,735,369 and we sold 13 videoconferencing systems and recorded revenue of
      $678,380.  We did not sell any videoconferencing systems during the
      same period in 2006. Of the 13 videoconferencing systems that we sold during
      the
      six months ended June 30, 2007, seven systems were sold to Aequitas Capital
      Management, Inc., one of our stockholders who with its affiliates owned in
      excess of 5% of our then outstanding common stock.




To
      date,
      we do not have any international sales and we do not have any regional
      concentrations. Three customers accounted for 44% and 46% of our revenues for
      the three and six months ended June 30, 2007, respectively. The loss of any
      one
      of these three customers could have a material adverse effect on our
      consolidated revenues in future periods. No one customer accounted for more
      than
      10% of our total net revenues for the three and six months ended June 30,
      2006.




As
      of
      June 30, 2007, we had $1.5 million of order backlog and did not have any
      backlog at June 30, 2006. We include in backlog open purchase orders which
      we
      expect to ship or services which we expect to bill and for which we expect
      to
      record revenue in the following quarter.  Our business is still
      developing, as a result backlog will fluctuate from quarter to quarter based
      upon our success in securing orders and the timing of our ability to ship
      product, provide services and recognize the related revenue from our direct
      and
      channel sales efforts.  In addition, orders from our channel partners
      are based on the level of demand from end-user customers. Any decline or
      uncertainty in end-user demand could negatively impact end-user orders, which
      in
      turn could negatively affect orders from our channel partners in any given
      quarter. As a result, our backlog could decline from current
      levels.




With
      the
      acquisition of AVS we are devoting an increasing portion of our management
      resources and efforts to direct sales of our videoconferencing products and
      services.  While we anticipate that sales volume will increase as a
      result of these efforts selling our products and services often require several
      customer meetings and demonstrations.  Consequently, sales cycles,
      closure rates, and the timing and amount of future revenues are necessarily
      difficult to predict.  Because of our limited size and resources, our
      revenues for the foreseeable future will be impacted significantly by our
      success or failure in securing significant sales transactions with a limited
      target customer base.  While our revenues may vary substantially from
      any one quarter to another on the basis of our success in securing orders,
      we
      believe that the revenues and operating income results from our second quarter
      are generally reflective of the results we expect for each of our third and
      fourth quarters of 2007. However, we can give no assurance that our revenues
      or
      actual operating income results for our third and fourth quarters will equal
      or
      exceed the results for our second quarter.





17
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            of Contents





**Cost
      of Revenues and Gross Margins**




**Three
                months ended**
            
            
            
            
            
            **Six
                months ended****June
                30, 2007**
            
            
            **June
                30, 2006**
            
            
            **Increase
                (Decrease)**
            
            
            **June
                30, 2007**
            
            
            **June
                30, 2006**
            
            
            **Increase
                (Decrease)**Product
                Cost of Revenues
            
            $
            335,156
            
            
            $
            -
            
            
            
            n/a
            
            
            $
            437,207
            
            
            $
            -
            
            
            
            n/a%
                of Product Revenues
            
            
            56
            %
            
            
            0
            %
            
            56
                pts
            
            
            
            43
            %
            
            
            0
            %
            
            43
                ptsProduct
                Gross Margins
            
            
            44
            %
            
            
            0
            %
            
            44
                pts
            
            
            
            57
            %
            
            
            0
            %
            
            57
                ptsService
                Cost of Revenues
            
            $
            1,172,440
            
            
            $
            35,980
            
            
            
            3159
            %
            
            $
            1,212,094
            
            
            $
            55,923
            
            
            2067%%
                of Service Revenues
            
            
            81
            %
            
            
            74
            %
            
            7
                pts
            
            
            
            81
            %
            
            
            74
            %
            
            7
                ptsService
                Gross Margins
            
            
            19
            %
            
            
            26
            %
            
            (7)
                pts
            
            
            
            19
            %
            
            
            26
            %
            
            (7)
                ptsTotal
                Cost of Revenues
            
            $
            1,507,596
            
            
            $
            35,980
            
            
            
            4090
            %
            
            $
            1,649,301
            
            
            $
            55,923
            
            
            
            2849
            %%
                of Total Revenues
            
            
            74
            %
            
            
            74
            %
            
            0
                pts
            
            
            
            66
            %
            
            
            74
            %
            
            (8)
                ptsTotal
                Gross Margins
            
            
            26
            %
            
            
            26
            %
            
            0
                pts
            
            
            
            34
            %
            
            
            26
            %
            
            8
                pts





*Cost
      of Product Revenues and Product Gross Margins*




Cost
      of
      product revenues consists primarily of costs of computers, monitors and other
      equipment purchased from third parties. These costs are variable, based on
      the
      prevailing market rates for these items.  Cost of product revenues
      were $335,156 and $437,207 for the three and six months ended June 30, 2007,
      respectively.  As a percentage of product revenues during the periods,
      costs of product revenues were 56% and 43%, respectively.  We had no
      product revenues or cost of product revenues in the same period in
      2006.




In
      recent
      years, costs for such products have declined following their introduction as
      they become “commoditized”, while newer advanced products may command higher
      prices.  Costs of product revenues in future periods will depend upon
      a number of factors that may vary from quarter to quarter, including the mix
      of
      products we sell, pricing practices of our competitors, the volume of products
      we sell, our ability to negotiate favorable terms with third party vendors,
      introductions of new technologies and end user acceptance and adoption of those
      new technologies.




*Cost
      of Service Revenues and Service Gross Margins*




Cost
      of
      service revenues consists primarily of material and direct labor, including
      stock-based compensation costs. Generally, services have a lower gross margin
      than our product gross margins. Cost of service revenues were $1,172,440 and
      $1,212,094 for the three and six months ended June 30, 2007, respectively,
      compared to $35,980 and $55,923 for the same periods in 2006, an increase of
      3,159% and 2,067%, respectively.  As a percentage of service revenues
      during the periods, costs of service revenues were 81% for both the three and
      six month periods ended June 30, 2007, as compared to 74% for the same periods
      in 2006.  Cost of service revenues and service gross margins included
      a $20,402 charge for stock-based compensation in both the three and six months
      ended June 30, 2007.




Cost
      of
      service revenues increased in the three and six month periods in 2007 as a
      result of our acquisition of AVS, which was effective April 1, 2007, and the
      corresponding increase in service revenues derived from that transaction.
      Service gross margins in the three and six month periods ended June 30, 2007
      decreased due to the lower margins on AVS service revenues.




**Selling,
      General and Administrative Expenses**




Selling,
      general and administrative expenses consist primarily of compensation costs,
      including stock-based compensation costs, consulting fees, professional service
      fees, travel related costs, insurance costs, and office related
      costs.




Selling,
      general and administrative expense for the three months ended June 30, 2007
      were $1,413,802, an increase of $576,334, or 68.8%, over the same period of
      2006. Selling, general and administrative expense for the six months ended
      June 30, 2007 were $2,690,785 an increase of $1,410,170, or 110.1%, over
      the same period of 2006.  Selling, general and administrative expenses
      included charges of $151,244 and $177,882, respectively, for stock-based
      compensation in the three and six months ended June 30, 2007.




18
 Table
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We
      acquired AVS effective April 1, 2007, and AVS accounted for $319,523 of the
      increase in our selling, general and administrative expenses for the periods
      ended June 30, 2007. Other increases and decreases in selling, general and
      administrative expenses are as follows:




Stock
      compensation expense decreased $265,666 and $270,415 during the three and six
      months ended June 30, 2007, respectively, from the same periods in 2006. In
      the
      prior year periods, we recorded stock compensation expense of $413,333 related
      to the accelerated vesting of Mr. Ono’s stock options. We had no charges in the
      current periods for accelerated vesting of stock options.





Compensation
      related costs increased $430,377 and $629,209 for the three and six months
      ended
      June 30, 2007, respectively, from the same periods in 2006. We increased our
      headcount by four employees and seven employees for the three and six months
      ended June 30, 2007, respectively, and expect our headcount to continue to
      grow
      as our business grows.




We
      recorded $596,275 of expense for the six months ended June 30, 2007 related
      to
      the issuance of a warrant to purchase 250,000 shares of our common stock that we
      issued to Aequitas Capital Management, Inc., in connection with our lease
      financing program.  We did not have a comparable transaction for the six
      months ended June 30, 2006.




Professional
      service fees increased $140,524 and $257,060 for the three and six months ended
      June 30, 2007, respectively, from the same periods in 2006. Our legal and
      accounting fees increased as a result of the filing of registrations statements
      during the 2007 periods.




Other
      selling, general and administrative costs and expenses have increased as our
      business has grown and evolved over the last 12 months.




**Research
      and Development Expenses**




Research
      and development expenses are expensed as incurred and consist primarily of
      compensation costs, including stock-based compensation costs, and outside
      services.




Research
      and development expense for the three months ended June 30, 2007 were
      $208,196, an increase of $110,125, or 112.3%, over the same period of 2006.
      Research and development expense for the six months ended June 30, 2007
      were $388,903, an increase of $204,357, or 110.7%, over the same period of
      2006.
      The increase in research and development expenses in the 2007 periods relates
      to
      compensation charges for merit increases, an increase in employee headcount,
      and
      increased outside consulting services.  Research and development
      expenses included charges of $26,589 and $39,117, respectively, for stock-based
      compensation in the three and six months ended June 30, 2007.




**Amortization
      of purchased intangibles**




For
      the
      three and six months ended June 30, 2007, we recorded $4,000 of amortization
      expense on the purchased intangible assets recorded as a result of the AVS
      acquisition. We determined that the customer relationships and trade name have
      indefinite lives, and recorded no amortization during the periods. We may adjust
      the preliminary purchase price allocation once the final valuation report from
      the independent appraisers is obtained, which could result in changes to
      amortization of the purchased intangibles in future quarters.




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**Interest
      Expense**




The
      debentures we issued in our December/February Private Placements had an original
      face value aggregating $5.2 million.  The interest rate on such
      debentures is 6%, and we recorded discounts to the debentures for the beneficial
      conversion feature and for the value of the warrants also granted in our
      December/February Private Placements.  We also recorded deferred
      financing costs related to our December/February Private
      Placements.  We are amortizing the discounts and the deferred
      financing costs to interest expense on a straight line basis through December
      31, 2008.




Following
      is a summary of interest expense for the three and six months ended June 30,
      2007. Interest expense for the three and six months ended June 30, 2006
      consisted of interest on the $1.3 million note payable to shareholder that
      was
      paid off in February 2007.




**Three
                months ended**
            
            
            **Six
                months ended****June
                30, 2007**
            
            
            **June
                30, 2007**Stated
                interest
            
            $
            72,872
            
            
            $
            148,941Amortization
                of note discounts
            
            
            568,283
            
            
            
            831,960Amortization
                of deferred financing costs
            
            
            69,989
            
            
            
            101,410Other
            
            
            6,957
            
            
            
            6,957$
            718,101
            
            
            $
            1,089,268




In
      July
      and August 2007, debentures with a face value of $2,466,534 that we issued
      in
      our December/February Private Placements were converted into 1,601,646 shares
      of
      our common stock. As a result of these conversions, interest expense for the
      three months ended September 30, 2007 will include accelerated amortization
      of
      note discounts and deferred financing costs of approximately
      $1,288,144.




Assuming
      the remaining debenture balance of $1,949,907 is not prepaid before maturity
      and
      interest payments are made in cash, we anticipate paying $125,604 in interest
      expense on these debentures through maturity in December 2008. In lieu of making
      such interest payments
      in cash, we have the option of paying the interest in shares of our common
      stock, subject to, among other things, meeting certain equity conditions,
      including having a currently effective registration statement covering the
      shares of common stock issued.  We can also force the holders of these
      debentures to convert the outstanding principal and accrued interest into common
      stock subject to compliance with certain equity conditions, including having
      a
      currently effective registration statement covering the shares of common stock
      issuable upon conversion of the debentures and subject to a the applicable
      cap
      on the beneficial ownership of our shares of common stock by the holder and
      its
      affiliates following such conversion contained in the debenture being
      converted.  See "Liquidity and Capital Resources," below.




**Change
      in Fair Value of Warrant Liabilities**




The
      warrants we issued in our December/February Private Placements have registration
      rights for the underlying shares.  Emerging Issues Task Force (EITF)
      No. 00-19, Accounting for Derivative Financial Instruments Indexed to and
      Potentially Settled in, a Company's Own Stock, provides that contracts that
      include any provision that could require net cash settlement cannot be accounted
      for as equity.  The warrant agreements related to the warrants we
      issued in our December/February Private Placements require net cash settlement,
      at the option of the holder, if we fail to issue and deliver common stock on
      exercise of a warrant within three business days of receipt of a written
      exercise notice by the holder and the holder purchases shares of common stock
      to
      deliver in satisfaction of a sale of the common stock the holder anticipated
      to
      receive upon exercise of the warrant.  Pursuant to EITF No. 00-19, we
      recorded the fair value of the warrants at the issue date as a warrant
      liability.




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The
      fair
      value of warrants was estimated at the issuance dates, at March 31, 2007, and
      at
      June 30, 2007. For the three months ended June 30, 2007, we recorded
      non-operating income of $603,019 for the decrease in the fair value of the
      warrants from April 1, 2007 to June 30, 2007. The decrease in fair value of
      the
      warrants is primarily attributable to a lower amount of warrants outstanding
      at
      June 30, 2007 due to the exercises during the three months then ended. For
      the
      six months ended June 30, 2007, we recorded non-operating expense of $3,368,129
      for the increase in fair value of the warrants from January 1, 2007 to June
      30,
      2007. The increase in fair value of the warrants is primarily attributable
      to
      the warrants issued in connection with the February Private Placement and the
      increase in the market value of our common stock subsequent to the dates of
      issuance. There were no such warrant liability transactions during the 2006
      periods.




To
      determine the fair market value of the warrants, we used the Black Scholes
      option pricing model with the following assumptions:




**June
                30, 2007**
            
            
            **March
                31, 2007**
            
            
            **Dates
                of Issuance**Expected
                volatility
            
            39.24%
                to 39.46
            %
            
            39.61%
                to 39.86
            %
            
            39.53%
                to 40.83
            %Expected
                dividends
            
            
            0.0
            %
            
            
            0.0
            %
            
            
            0.0
            %Contractual
                term in years
            
            
            5
            
            
            
            5
            
            
            
            5Expected
                term in years
            
            2.25
                to 2.30
            
            
            2.37
                to 2.44
            
            
            
            2.5Risk-free
                rate
            
            
            4.87
            %
            
            
            4.58
            %
            
            4.72%
                to 4.84
            %




**Liquidity
      and Capital Resources**




Our
      cash
      balance as of June 30, 2007 was $2.0 million and we had a working capital
      deficit of $4.9 million, which includes a warrant liability of $4.5 million.
      Our
      cash balance as of December 31, 2006 was $3.20 million and we had working
      capital of $119,648.  In July and August 2007, warrant holders
      exercised warrants for 708,333 shares resulting in gross proceeds to us of
      $1,235,000.




Cash
      used
      in operations during the quarter ended June 30, 2007 was $1,562,436. This was
      primarily the result of a net loss of $6,656,062 which was offset by non-cash
      charges for the change in fair value of the warrants of $3,368,129; amortization
      of note discounts and deferred financing costs of $933,370, finance program
      expense of $596,275 related to the warrant granted in connection with the lease
      financing program agreement we entered into with Aequitas Capital Management,
      Inc., and amortization of stock based compensation of $237,419.  Our
      net decrease in assets and liabilities of $128,726 also contributed to the
      cash
      used in operations.




Our
      revenue and gross profit for the previous three consecutive quarters have been
      higher than any previous quarters, yet our net cash used by operating activities
      continues to fluctuate due to the growth of our business.  We
      anticipate that our operations will continue to use cash through at least
      December 31, 2007, if not longer.




Net
      cash
      provided by financing activities was $347,366 during the six months ended June
      30, 2007.  During this period, in our February 2007 Private Placement
      we sold an aggregate of $1.544 million of principal amount of debentures at
      an
      original issue discount of 12.5% and warrants to purchase 401,040 shares of
      our
      common stock for net proceeds of $1.35 million, which we used to pay off a
      note
      payable to shareholder of $1.3 million.  As explained in further
      detail below, the holders of such debentures converted the entire principal
      amount of $1.544 million into 1,002,598 shares of our common stock at a
      conversion price of $1.54 per share.  Therefore, we no longer have any
      repayment obligations as to these debentures.




During
      the six months ended June 30, 2007, we also received proceeds of $379,776 from
      the exercise of warrants to purchase 232,917 shares of common
      stock.  These warrants were issued in our November 2006 Private
      Placements and the December 2006 Private Placement.




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In
      May
      2007, holders of the debentures we issued in our December 2006 Private Placement
      converted $784,800 of the principal amount of such debentures into 509,610
      shares of our common stock at a conversion price of $1.54 per
      share.  In addition, in July 2007, holders of such debentures
      converted an additional $922,534 of the principal amount of such debentures
      into
      599,048 shares of our common stock at a conversion price of $1.54 per
      share.  On July 30, 2007 and August 8, 2007, holders of the debentures
      we issued in our February 2007 Private Placement converted 100% of the
      outstanding balance ($1,544,000) into 1,002,598 unregistered shares of our
      common stock at a conversion price of $1.54.  The unamortized note
      discounts and deferred financing costs totaling $973,466 associated with such
      debentures will be recognized as interest expense during the three months ended
      September 30, 2007. We issued an additional 200,520 unregistered shares of
      our
      common stock to the holders of these debentures as an inducement for the early
      conversion and acceptance of unregistered shares, and will recognize a
      non-operating expense of approximately $812,000 related to the issuance of
      these
      additional shares.




As
      a
      result of these conversions, monthly redemption payments through January 2008
      have been satisfied, and the next monthly redemption payment is in February
      2008. The principal amount of all debentures outstanding as of August 9, 2007
      is
      $1,949,807, and the monthly redemption payment amounts on such debentures are
      as
      follows:




**Date**
            
            **Monthly
                Redemption**
              **Payment
                Amount**2/1/2008
            
            $
            9,5243/1/2008
            
            
            111,7124/1/2008
            
            
            203,1755/1/2008
            
            
            203,1756/1/2008
            
            
            203,1757/1/2008
            
            
            203,1758/1/2008
            
            
            203,1759/1/2008
            
            
            203,17510/1/2008
            
            
            203,17511/1/2008
            
            
            203,17512/1/2008
            
            
            203,171$
            1,949,807





Following
      the conversions discussed above, the aggregate remaining face value of our
      outstanding debentures, which consist solely of the debentures we issued in
      our
      December 2006 Private Placement, is $1,949,807.  Assuming monthly
      redemption payments are made in accordance with the schedule set forth above,
      the amount of interest to be paid through maturity in December 2008 is $125,604,
      or on average, $7,000 per month.




We
      have
      the right to pay interest and monthly principal payments due in respect of
      the
      debentures in cash, or upon notice to the holders and compliance with certain
      equity conditions, including having a currently effective registration statement
      covering the shares of common stock issuable upon conversion of the debentures,
      which we currently do, we can pay all or a portion of any such payment in common
      stock valued at a price equal to the lesser of the then effective conversion
      price (initially $1.54) or 85% of the average of the volume weighted average
      price, or VWAP, per share as reported on Bloomberg for our common stock for
      the
      10 consecutive trading days immediately prior to the applicable payment date.
       On the other hand, if the holders voluntarily elect to convert all or a
      portion of the debentures into common stock, the conversion price will be $1.54,
      subject to adjustment including full-ratchet and anti-dilution protection.
       This could result in substantial dilution to our existing stockholders.




The
      closing market price of our common stock was $3.75 on August 9, 2007.
 Subject to compliance with certain equity conditions, including having a
      currently effective registration statement covering the shares of common stock
      issuable upon conversion of the debentures, which we currently do, and subject
      to the applicable cap on the beneficial ownership of our shares of common stock
      by the holder and its affiliates following such conversion, we have the right
      to
      force conversion of the entire amount of principal and accrued interest of
      the
      debentures if the average of the VWAP for our common stock exceeds 200% of
      the
      effective conversion price for 20 trading days out of a consecutive 30 trading
      day period. The current conversion price is $1.54, and therefore 200% of the
      conversion price is $3.08.  Since February 16, 2007, the closing market
      price of our common stock has exceeded $3.08.  Accordingly, assuming we
      meet the relevant equity conditions, and subject to the applicable cap on the
      beneficial ownership, we may force the holders of the debentures to convert
      the
      maximum amount of principal and accrued interest into shares of our common
      stock
      at a conversion price of $1.54.





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If
      the
      price of our common stock falls below $3.08 per share but remains substantially
      above $1.54 per share, we anticipate that the holders of the debentures will
      elect to convert monthly payments of interest and principal into shares of
      common stock rather than receive cash.  If the price of our common stock
      were to fall to a level below $1.54, the current conversion price, we intend
      to
      make principal and interest payments in cash to the extent that our cash flows
      from operations provide sufficient ability to do so.  If our cash flows
      from operations are not sufficient to make principal and interest payments
      in
      cash, we will evaluate other equity financing opportunities, the proceeds of
      which could be used to repay the debentures.  If we are unable to pay the
      principal and interest in cash, we will make the payments in our common stock
      pursuant to the terms of the agreements including a conversion price based
      on
      the lower of $1.54 or 85% of the average of the VWAP per share as reported
      on
      Bloomberg for our common stock for the 10 consecutive trading days immediately
      prior to the applicable payment date.




We
      believe our cash balance is sufficient to fund our operations through at least
      June 30, 2008.  If cash reserves are not sufficient to sustain operations,
      we plan to raise additional capital by selling shares of capital stock or other
      securities.  However, there are no commitments or arrangements for future
      financings in place at this time, and we can give no assurance that such capital
      will be available on favorable terms or at all.  We may need additional
      financing thereafter until we can achieve profitability.  If we cannot, we
      will be forced to curtail our operations or possibly be forced to evaluate
      a
      sale or liquidation of our assets.  Even if we are successful in raising
      additional funds, there is no assurance regarding the terms of any additional
      investment.  Any future financing may involve substantial dilution to
      existing investors.




**Other
      Matters Relating to Future Amortizable Charges**




As
      of
      June 30, 2007, we have $1,766,098 million of debt discount and $187,193 of
      deferred debt issuance costs on our balance sheet, which will be amortized
      to
      interest expense using the straight-line method over the life of the related
      debt. In July and August 2007, debentures with a face value of $2,466,534 were
      converted into common stock, which will result in accelerated amortization
      of
      note discounts and deferred financing costs of approximately $1,288,144 for
      the
      three months ended September 30, 2007.




**Recent
      Accounting Pronouncements**




In
      September 2006, the SEC issued SAB 108, "Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements," which provides interpretive guidance on how the effects of the
      carryover or reversal of prior year misstatements should be considered in
      quantifying a current year misstatement.  The pronouncement prescribes
      an approach whereby the effect of all unrecorded identified errors should be
      considered on all of the financial statements rather than just either the effect
      on the balance sheet or the income statement.  We adopted the
      provisions of SAB 108 as of December 31, 2006.  The adoption of SAB
      108 did not have a material impact on our consolidated financial
      statements.




On
      July
      13, 2006, the Financial Accounting Standards Board, or FASB, issued
      Interpretation No. 48, "Accounting for Uncertainty in Income Taxes — an
      interpretation of FASB Statement No. 109," or FIN 48, which clarifies the
      accounting for uncertainty in tax positions.  FIN 48 requires
      recognition in the financial statements of the impact of a tax position, if
      that
      position is more likely than not of being sustained on audit, based on the
      technical merits of the position.  The provisions are effective for
      our first quarter 2007 financial statements with the cumulative effect, if
      any,
      of the change in accounting principle recorded as an adjustment to the opening
      balance of retained earnings.  We are currently evaluating the impact
      of adopting FIN 48 on our future consolidated financial statements but do not
      expect the impact to be material.




In
      September 2006, FASB issued SFAS No. 157, "Fair Value Measurements,” which
      defines fair value, establishes a framework for measuring fair value in
      accordance with generally accepted accounting principles, and expands
      disclosures about fair value measurements. In February 2007, FASB issued SFAS
      No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities
      -
      Including an amendment to FASB Statement No. 115.” SFAS 159 permits entities to
      choose to measure many financial assets and financial liabilities at fair value.
      The objective is to improve financial reporting by providing entities with
      the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply complex
      hedge
      accounting provisions. SFAS No. 159 is expected to expand the use of fair value
      measurement of accounting for financial instruments. The fair value option
      established by SFAS No. 159 permits all entities, including non-profits, to
      measure eligible items at fair value at specified election dates. Both SFAS
      157
      and SFAS 159 are effective for fiscal years beginning after November 15, 2007.
      We are currently assessing the impact the adoption of SFAS 157 and SFAS 159
      will
      have on our financial statements.




In
      December 2006, FASB issued FASB Staff Position EITF 00-19-2 "Accounting for
      Registration Payment Arrangements" which specifies that the contingent
      obligation to make future payments or otherwise transfer consideration under
      a
      registration payment arrangement should be separately recognized and measured
      in
      accordance with SFAS No. 5, "Accounting for Contingencies." Adoption of EITF
      00-19-2 was required for fiscal years beginning after December 15, 2006. We
      are
      currently assessing the impact the adoption of EITF 00-19-2 will have on our
      consolidated financial statements.




**Off-Balance
      Sheet Arrangements**




We
      did
      not have any off-balance sheet arrangements as of the year ended December 31,
      2006, nor do we have any as of June 30, 2007.





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**RISK
      FACTORS**




This
      report includes forward-looking statements about our business and results of
      operations that are subject to risks and uncertainties.  See
      "Forward-Looking Statements," above.  Factors that could cause or
      contribute to such differences include those discussed below.  In
      addition to the risk factors discussed below, we are also subject to additional
      risks and uncertainties not presently known to us or that we currently deem
      immaterial.  If any of these known or unknown risks or uncertainties
      actually occur, our business could be harmed substantially.




**Risks
      Related To Our Financial Condition**




***We
      have a limited operating history, have experienced significant expenditures
      related to funding our initial product development, and are currently carrying
      a
      net loss.  If our business model is not successful, or if we are
      unable to generate sufficient revenue to offset our start-up expenditures,
      we
      may not become profitable, and the value of your investment may
      decline.***




We
      have a
      limited operating history from which to evaluate our business and
      prospects.  We incurred a net loss of $6.66 million for the six months
      ended June 30, 2007 and $3.12 million for the year ended December 31,
      2006.  We have an accumulated deficit of $16.67 million and a
      stockholders' deficit of $4.44 million at June 30, 2007.  We cannot
      assure you that our future planned operations will be implemented successfully
      or that we will ever have profits.  We have yet to establish
      significant customer demand for our product and may not for a significant period
      of time, if ever, which may result in our inability to continue
      operations.  Furthermore, we are experiencing the initial costs and
      uncertainties of a young operating company, including start-up expenditures,
      unforeseen costs and difficulties, complications, and delays, all of which
      must
      be resolved and/or paid without the benefit of a predictable revenue
      stream.  We cannot be sure that we will be successful in meeting these
      challenges and addressing these risks and uncertainties.  If we are
      unable to do so, our business will not be successful.




***Our
      auditors have expressed substantial doubt regarding our ability to continue
      as a
      going concern.***




As
      of the
      date of our most recent audit, which included the fiscal years ended December
      31, 2006 and December 31, 2005, we had not generated sufficient revenues to
      meet
      our cash flow needs.  As a result, our auditors have expressed
      substantial doubt about our ability to continue as a going
      concern.  Although we have generated revenue, we are still operating
      at a net loss, and expect to continue to incur losses for a period of
      time.  We incurred a net loss of $6.66 million for the six months
      ended June 30, 2007 and $3.12 million for the year ended December 31,
      2006.  We cannot assure you that we will be able to obtain sufficient
      funds from our operating or financing activities to support our continued
      operations.  If we cannot continue as a going concern, we may need to
      substantially revise our business plan or cease operations, which may reduce
      or
      negate the value of your investment.




***The
      sale of the shares of our common stock acquired in private placements could
      cause the price of our common stock to decline.***




In
      our
      November 2006 Private Placements, in the aggregate, we issued 566,667 shares
      of
      our common stock and warrants to purchase 281,250 shares of our common
      stock.  In our December/February Private Placements, in the aggregate,
      we issued a total of $5.2 million principal amount of original issue discount
      6%
      convertible debentures and warrants to purchase 1,350,947 shares of our common
      stock.  In accordance with the terms of such private placements, we
      have registered for resale by the investors the shares of common stock
      acquirable upon the conversion of the debentures and the exercise of the
      warrants and such registrations, other than the shares of common stock
      underlying the debentures and warrants issued in our February 2007 Private
      Placement, are currently effective.  Depending upon market liquidity
      at the time a resale of our common stock is made by the investors in such
      private placements, such sale could cause the trading price of our common stock
      to decline.  In addition, the sale of a substantial number of shares
      of our common stock, or anticipation of such sales, could make it more difficult
      for us to sell equity or equity-related securities in the future at a time
      and
      at a price that we might otherwise wish to effect sales.




24
 Table
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***We
      have indebtedness and agreed to certain restrictions as a result of our recent
      private placement of convertible debentures.***




We
      incurred $5.2 million in principal amount of indebtedness as a result of the
      issuance of the debentures in our December/February Private Placements, the
      principal balance of which is $1,949,807 as of August 9, 2007.  The
      debentures carry substantial covenants that impose significant restrictions
      on
      us, including restrictions against incurring additional indebtedness, creating
      any liens on our property, amending our certificate of incorporation or bylaws,
      redeeming or paying dividends on shares of our outstanding common stock, and
      entering into certain related party transactions.  The debentures also
      carry substantial covenants that impose significant requirements on us,
      including, among others, requirements that:




·
            we
                pay interest and other charges on the
                debentures;


·
            we
                use the proceeds from the sale of the debentures only for permitted
                purposes;


·
            while
                the debentures are outstanding, if we issue equity or equity linked
                securities at a price lower than the conversion price of the debentures,
                then the conversion price of the debentures will be reduced to the
                same
                price of


·
            the
                equity or equity linked securities so
                issued;


·
            we
                keep reserved out of our authorized shares of common stock sufficient
                shares to satisfy our obligation to issue shares on conversion of
                the
                debentures and the exercise of the related warrants issued in connection
                with the sale of the debentures;


·
            we
                must file a registration statement with the SEC registering the shares
                of
                common stock issuable upon the conversion of the debentures and the
                exercise of the related warrants on a timely basis, and it must be
                declared effective within a certain period of time, or else we are
                required to pay to each investor partial liquidated damages;
                and


·
            we
                may not, directly or indirectly, redeem, purchase or otherwise acquire
                any
                capital stock or set aside any monies for such redemption, purchase
                or
                other acquisition.





Our
      ability to comply with these provisions may be affected by changes in our
      business condition or results of our operations, or other events beyond our
      control.  The breach of any of these covenants could result in a
      default under the debentures, permitting the holders thereof to accelerate
      the
      maturity of the debentures and demand repayment in full.  Such actions
      by such holders could impair our ability to operate or cause us to seek
      bankruptcy protection.




***Certain
      covenants we agreed to in connection with the debentures may impair our ability
      to issue additional debt or equity.***




The
      debentures we issued in our December/February Private Placements impose
      significant covenants on us, some of which may impair our ability to issue
      additional debt or equity, if necessary.  Also impairing our ability
      to issue additional debt or equity, if necessary, is the right of the investors
      in our December/February Private Placements to participate in up to 100% of
      any
      debt or equity financing we propose to undertake through the date that is the
      12
      month anniversary of the effectiveness of the registration statement registering
      for resale our shares of common stock issuable upon conversion and exercise
      of
      the debentures and warrants we issued in our February 2007 Private
      Placement.




***If
      we pay interest or principal on the debentures in shares of common stock when
      our stock price is low, the holders thereof have the ability to negatively
      affect our stock price and to create a greater dilution to our
      stockholders.***




We
      have
      the right to pay interest and monthly principal payments in cash, or upon notice
      to the holders and compliance with certain equity conditions, including having
      a
      currently effective registration statement covering the shares of common stock
      issuable upon conversion of the debentures, we can pay all or a portion of
      any
      such payment in common stock valued at a price equal to the lesser of the then
      effective conversion price (initially $1.54) or 85% of the average of the volume
      weighted average price, or VWAP, per share as reported on Bloomberg for our
      common stock for the 10 consecutive trading days immediately prior to the
      applicable payment date.  To the extent that we pay principal or
      interest in common stock during a period when our common stock price is low,
      such investor will receive a larger number of shares of our common stock as
      a
      result of the conversion, which such investor could sell at high volumes to
      drive the VWAP downward.  Since principal payment obligations under
      the debentures are monthly beginning in July 2007, downward pressure on the
      price from consecutive conversions could result in the investors receiving
      payment on the debentures at successively lower conversion rates, thereby
      causing a successively greater dilution of our stockholders, and causing a
      downward spiraling affect on the price of our stock (a so-called "death
      spiral").  Further, to the extent that conversion of the debenture
      requires us to issue more shares of common stock, we are obligated to register
      the additional shares of stock pursuant to a new registration
      statement.




***Our
      failure to secure registration of the common stock could result in substantial
      liquidated damages.***




Under
      the
      terms of the registration rights agreements we entered into with the investors
      in connection with our December/February Private Placements, we agreed to file
      two separate registration statements covering the resale of the shares of common
      stock that have been and may be issued to investors upon the conversion of
      the
      debentures and the exercise of the warrants, and to maintain the effectiveness
      of the registration statements (subject to certain limitations) for a period
      of
      time until the holders can sell the underlying common stock without volume
      restrictions under Rule 144(k) of the Securities Act.  The
      registration statement relating to our December 2006 Private Placement has
      been
      declared and is currently effective.  However, the registration
      statement relating to our February 2007 Private Placement has not yet been
      declared effective.  If that registration statement is not declared
      effective by the SEC by September 17, 2007, or if we fail to maintain the
      effectiveness of either of the registration statements, we are required to
      pay
      partial liquidated damages to the investors.




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***Our
      failure to repay the debentures could result in substantial penalties against
      us, and legal action which could substantially impair our
      operations.***




The
      debentures we issued in connection with our December 2006 Private Placement
      require monthly principal payments equal to 1/18th of the principal amount
      due
      under each debenture beginning July 1, 2007 and continue through December 31,
      2008, on which date they are due and payable in full.  The debentures
      accrue interest at the rate of 6% per annum, which is payable quarterly on
      April
      1, July 1, October 1, and December 1, commencing on April 1, 2007.  We
      have the right to pay interest and monthly principal payments in cash, or upon
      notice to the holders and compliance with certain equity conditions, we can
      pay
      all or a portion of any such payment in common stock.  To repay the
      debentures in cash, we will be required to use our limited working capital
      or
      raise additional funds.  If we are unable to repay the debentures when
      required, either in cash or in common stock, the holders could commence legal
      action against us.  Any such action could impose significant costs on
      us and require us to curtail or cease operations.




In
      addition, the debentures define certain events of default, including without
      limitation failure to make a payment obligation, failure to observe other
      covenants of the debenture or related agreements (subject to applicable cure
      periods), breach of representation or warranty, bankruptcy, default under
      another significant contract or credit obligation, delisting of our common
      stock, a change in control, failure secure and maintain an effective
      registration statement covering the resale of the common stock underlying the
      debentures and the warrants, or failure to deliver share certificates in a
      timely manner. In the event of default, which is not cured within specified
      grace periods, the holders of the debentures have the right to accelerate all
      amounts outstanding under the debentures and demand payment of a mandatory
      default amount equal to 130% of the amount outstanding under the debenture,
      plus
      accrued interest and expenses.  If we were unable to repay the
      mandatory default amount when required, the holders could commence legal action
      against us.  Any such action could impose significant costs on us and
      require us to curtail or cease operations.




***We
      cannot predict the number of warrants, if any, that will be exercised, or the
      proceeds that we will receive from the exercise of
      warrants.***




Holders
      of outstanding warrants are under no obligation to exercise such warrants,
      and
      can be expected to do so only if it is economically
      reasonable.  Typically, warrants are not exercised unless exercise is
      forced, either by us calling them for redemption, or because they are scheduled
      to expire; and then they will be exercised only if the exercise price is less
      than the market price of our common stock underlying the warrants. Accordingly,
      there is no assurance that the warrants will be exercised during the period
      they
      are exercisable, or that we will receive any proceeds from the exercise of
      the
      warrants.




***We
      will have broad discretion to allocate any proceeds we receive from the exercise
      of warrants.  We cannot guarantee that the monies received will
      improve our operations.***




The
      monies that we may receive from the exercise of warrants have been allocated
      generally to provide working capital for operations.  As such, we will
      use funds as they are received for such purposes and in such proportions as
      we
      deem advisable.  While we will apply the proceeds in a manner
      consistent with our fiduciary duty and in a manner consistent with our best
      interests, we cannot assure you that the monies received will result in any
      present or future improvement in our results of operations.




***The
      market price of our securities could be adversely affected by sales of
      registered and restricted securities.***




Actual
      sales or the prospect of future sales of shares of our common stock under Rule
      144 may have a depressive effect upon the price of, and market for, our common
      stock.  As of August 9, 2007, 19,094,758 shares of our common stock
      were issued and outstanding. 11,563,943 of these shares are "restricted
      securities" and under some circumstances may, in the future, be under a
      registration under the Securities Act or in compliance with Rule 144 adopted
      under the Securities Act.  In general, under Rule 144, subject to the
      satisfaction of other conditions, a person who has beneficially owned restricted
      shares of common stock for at least one year is entitled to sell, within any
      three month period, a number of shares that:




·
            does
                not exceed the greater of 1% of the total number of outstanding shares
                of
                the same class; or


·
            if
                the common stock is quoted on NASDAQ or a stock exchange, the average
                weekly trading volume during the four calendar weeks immediately
                preceding
                the sale.





A
      person
      who presently is not and who has not been one of our affiliates for at least
      three months immediately preceding a sale and who has beneficially owned the
      shares of common stock for at least two years is entitled to sell these shares
      under Rule 144 without regard to any of the volume limitations described
      above.  We cannot predict what effect, if any, that sales of shares of
      common stock, or the availability of these shares for sale, will have on the
      market prices prevailing from time to time.  Nevertheless, the
      possibility that substantial amounts of common stock may be sold in the public
      market may adversely effect prevailing prices for our common stock and could
      impair our ability to raise capital in the future through the sale of equity
      securities.




In
      addition to the 11,563,943 shares of "restricted securities" that were issued
      and outstanding as of August 9, 2007, an aggregate of 5,922,143 shares of
      common stock that have been issued or will be issuable upon the conversion
      and
      exercise of outstanding debentures and warrants are or will be registered for
      resale in registration statements, not including shares of common stock issuable
      upon conversion of interest accrued on the debentures.  The
      additional overhang represented by these registered and to-be registered
      securities could also have a depressive effect on the public trading price
      of
      our common stock.





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**Risks
      Related to Our Business**




***We
      face competition from much larger and well-established
      companies.***




We
      face
      competition in the videoconferencing industry from much larger and
      well-established companies, including Polycom, Inc., and Tandberg, and new
      entrants such as Hewlett-Packard and Cisco Systems.  These companies
      have or may have greater financial resources, production, sales, marketing,
      engineering and other capabilities with which to develop, manufacture, market
      and sell their products, and more experience in research and development than
      we
      have.  In addition, other established or new companies may develop or
      market products competitive with, or superior to, our products.  We
      cannot assure you that our competitors will not succeed in developing or
      marketing technologies or products that are more effective or commercially
      attractive than our products or that would render our products and services
      obsolete.  Our success will depend in large part on our ability to
      maintain a competitive position with our products.




***Lower
      than expected market acceptance of our products or services would negatively
      impact our business.***




We
      have
      yet to establish significant customer acceptance of our products or
      services.  End-users will not begin to use our products or services
      unless they determine that our products and services are reliable,
      cost-effective and an effective means of communication.  For some
      end-users, our products and services are a major capital purchase and purchase
      decisions are greatly influenced by senior management who are subject to
      increasing pressures to reduce costs.  These and other factors may
      affect the rate and level of market acceptance of our products,
      including:




·
            our
                videoconferencing system's price relative to competing products or
                alternative means of communication;


·
            effectiveness
                of our sales and marketing efforts;


·
            capital
                equipment budgets of our targeted
                end-users;


·
            perception
                by our targeted end-users of our videoconferencing system's reliability,
                efficacy and benefits compared to competing
                technologies;


·
            willingness
                of our targeted end-users to adopt new technologies;
                and


·
            development
                of new products and technologies by our
                competitors.




If
      our
      products and services do not achieve market acceptance, our ability to achieve
      any level of profitability would be harmed and our stock price would
      decline.




***Price
      competition would negatively impact our business.***




Our
      profitability could be negatively affected in the future as a result of
      competitive price pressures in the sale of videoconferencing systems, which
      could cause us to reduce the price of our videoconferencing
      system.  Any such reduction could have an adverse impact on our
      product margins and profitability.




***The
      sales cycle for our videoconferencing system can be long and
      unpredictable.***




Selling
      our products and services often requires several customer meetings and
      demonstrations and the time from introduction to sale of our videoconferencing
      system can take months as end-users educate themselves on the benefits of
      products and services.  Our quarterly revenues and operating results
      depend upon the timing of orders received during a given quarter and the
      shipment and recognition of resulting revenue during each quarter, each of
      which
      is extremely difficult to forecast.




***We
      face risks related to our dependence on channel partners to sell our
      products.***




Although
      we recently acquired sales and integration expertise with our acquisition of
      AVS, we will continue to depend on two**channel partners to sell
      our videoconferencing system to customers in certain geographic regions of
      the
      country.  We have invested a significant amount of time and resources
      selecting, educating and training our channel partners on the installation,
      use
      and benefits of our videoconferencing system.  We will need to
      continue to devote significant resources to educate and train our channel
      partners about the benefits of our product.  Even if we are successful
      in these tasks, we cannot control the efforts and resources our channel partners
      devote to marketing our videoconferencing system, which may not be sufficient
      to
      successfully market and sell our videoconferencing system.  In
      addition, our channel partners carry videoconferencing products of our
      competitors from which they derive significant revenues and our channel partners
      will be selling our competitor's products as well as our
      products.  These sales may be to customers who would have otherwise
      purchased our videoconferencing system and, as such, may reduce our sales and
      profits.





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***Our
      channel partner agreements are typically short-term and terminable at will,
      and
      early termination of these contracts may harm our results of
      operations.***




Our
      agreements with our channel partners are only for terms of one year and we
      cannot be certain whether such agreements will be renewed when they
      expire.  We rely on our channel partners for assistance in the sales
      process, as well as for integration and installation of our systems, which
      are
      specialized skills.  If a channel partner does not renew its agreement
      with us, we will lose that distribution channel and will need to identify and
      secure another source, which could be an expensive and time-consuming process
      and sales could decrease during and after any transition period.  If
      we were unable to timely find a replacement channel partner or alternative
      distribution source, it would harm our results of operations.




In
      addition, our channel partner agreements may be terminated at any by either
      party if the other party breaches the agreement and fails to cure such breach
      within a 30-day cure period, files for bankruptcy, becomes insolvent or ceases
      to conduct operations.  In the event of an early termination of a
      channel partner agreement, we believe that the end-user customer would likely
      purchase from another one of our channel partners or directly from
      us.  If this did not occur and we were unable to rapidly replace that
      revenue source, its loss would harm our results of operations




***The
      high unit price of our system, as well as other factors may contribute to
      substantial fluctuations in our operating results and stock
      price.***




Because
      of a relatively high unit price of our system, and the relatively small number
      of units sold each quarter, each sale of our system can represent a significant
      component of our revenue for a particular quarter.  Therefore, if we
      do not sell one of our systems when anticipated, our operating results may
      vary
      significantly and our stock price may be materially harmed.  These
      fluctuations and other potential fluctuations mean that you should not rely
      upon
      our operating results in any particular period as an indication of future
      performance.  In particular, factors which may contribute to these
      fluctuations may include:




·
            timing
                of when we are able to recognize revenue associated with sales of
                our
                system, which varies depending upon the terms of the applicable sales
                and
                service contracts;


·
            timing
                and level of expenditures associated with new product development
                activities;


·
            timing
                of the announcement, introduction and delivery of new products or
                product
                upgrades by us or by our
                competitors;


·
            timing
                and level of expenditures associated with expansion of sales and
                marketing
                activities such as trade shows and our overall operations;
                and


·
            changes
                in a customer's financial
                condition.




These
      factors are difficult to forecast and may contribute to substantial fluctuations
      in our quarterly revenues and substantial variation from our projections,
      particularly during the periods in which our sales volume is low.  Any
      failure to meet investor expectations regarding our operating results may cause
      our stock price to decline.




***General
      economic conditions may reduce our revenues and harm our
      business.***




As
      our
      business grows, we will become increasingly exposed to adverse changes in
      general economic conditions which can result in reductions in capital
      expenditures by end-users of our products, longer sales cycles, deferral or
      delay of purchase commitments for our products and increased
      competition.  These factors could adversely impact our operating
      results.




***We
      may experience delays in product introductions and our products may contain
      defects which could seriously harm our results of
      operations.***




We
      may
      experience delays in the introduction of new products and
      enhancements.  Delays in product or enhancement release dates, whether
      caused by factors such as unforeseen technology issues or otherwise, could
      negatively impact our sales revenue in the relevant period.  In
      addition, we may terminate new product or enhancement development efforts prior
      to any introduction of a new product or enhancement.  Any delays for
      new product offerings currently under development or any product defect issues
      or product recalls could adversely affect the market acceptance of our products,
      our ability to compete effectively in the market, and our reputation, and
      therefore, could lead to decreased product sales and could seriously harm our
      results of operations.




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**Risks
      Relating to Our Industry**




***We
      face risks associated with our products and product development, including
      new
      product introductions and transitions.***




The
      videoconferencing industry is characterized by rapidly changing technology,
      such
      as the recent demand for high definition video technology, evolving industry
      standards and frequent new product introductions, which may result in products
      that are superior to ours.  If we are unable to anticipate or keep
      pace with changes in the marketplace and the direction of technological
      innovation and customer demands, our products may become less useful or obsolete
      and our operating results will suffer.  To compete successfully, we
      will need to continue to demonstrate the advantages of our products and services
      over alternative products and technologies, and convince end users of the
      advantages of our products and services.




The
      success of our products depends on several factors, including proper new product
      definition, product cost, timely completion and introduction of new products,
      proper positioning of new products in relation to our total product portfolio
      and their relative pricing, differentiation of new products from those of our
      competitors, and market acceptance of these products.  Additionally,
      properly addressing the complexities associated with compatibility issues,
      channel partner and sales force training, technical and sales support, as well
      as field support, are also factors that may affect our success.




***Because
      the videoconferencing industry is characterized by competing intellectual
      property, we may be sued for violating the intellectual property rights of
      others.***




The
      videoconferencing industry is susceptible to litigation over patent and other
      intellectual property rights.  Determining whether a product infringes
      a patent involves complex legal and factual issues, and the outcome of patent
      litigation actions is often uncertain.  We have not conducted an
      extensive search of patents issued to third parties, and no assurance can be
      given that third party patents containing claims covering our products, parts
      of
      our products, technology or methods do not exist, have not been filed, or could
      not be filed or issued.




In
      the
      event that we become subject to a patent infringement or other intellectual
      property lawsuit and if the relevant patents or other intellectual property
      were
      upheld as valid and enforceable and we were found to infringe or violate the
      terms of a license to which we are a party, we could be prevented from selling
      our products unless we could obtain a license or were able to redesign the
      product to avoid infringement.  If we were unable to obtain a license
      or successfully redesign our system, we might be prevented from selling our
      system.  If there is an allegation or determination that we have
      infringed the intellectual property rights of a competitor or other person,
      we
      may be required to pay damages, or a settlement or ongoing
      royalties.  In these circumstances, we may be unable to sell our
      products at competitive prices or at all, our business and operating results
      could be harmed and our stock price may decline.




***We
      depend on key employees, the loss of whom would adversely affect our
      business.  If we fail to attract and retain employees with the
      expertise required for our business, we cannot grow or achieve
      profitability.***




We
      have
      elected to retain a small employee base while we have transitioned from a
      development company to an operating company.  As a result, we are
      highly dependent on the members of our senior management and research and
      development staff.  The loss of any one of them would have a
      significant impact on our operations.  Our future success will depend
      in part on our ability to retain these key employees and to identify, hire
      and
      retain additional personnel.  If we fail to hire and retain personnel
      in key positions, we may be unable to grow our business
      successfully.




***If
      we do not effectively manage our growth, our business may be significantly
      harmed.***




We
      recently acquired AVS with their attendant operations, systems and
      employees.  To implement our business strategy, we expect continued
      growth in our employee and infrastructure requirements, particularly as we
      expand our engineering, sales and marketing capacities.  To manage our
      growth, we must integrate and augment our operational and financial systems,
      hire and train additional qualified personnel, and expand our marketing and
      distribution capabilities.  We cannot be certain that our personnel,
      systems, procedures and internal controls will be adequate to support our future
      operations.  If we cannot manage our growth effectively, our business
      will suffer.




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**Risks
      Related to the Market for Our Common Stock**




***We
      may experience significant fluctuations in the market price of our common
      stock.***




The
      market price of our common stock may experience significant
      fluctuations.  These fluctuations may be unrelated or out of
      proportion to our operating performance, and could harm our stock
      price.  Any negative change in the public's perception of the
      prospects of companies that employ similar technology or sell into similar
      markets could also depress our stock price, regardless of our actual
      results.




The
      market price of our common stock may be significantly affected by a variety
      of
      factors, including:




·
            the
                announcement of new products, product enhancements, new services
                or
                service enhancements by us or our
                competitors;


·
            announcements
                of strategic alliances or significant agreements by us or by our
                competitors;


·
            technological
                innovations by us or our
                competitors;


·
            quarterly
                variations in our results of
                operations;


·
            acquisition
                of one of our competitors by a significantly larger
                company;


·
            general
                market conditions or market conditions specific to technology
                industries;


·
            sales
                of large blocks of our common stock;
                and


·
            domestic
                and international macroeconomic
                factors.




***Our
      board of directors has the right to issue additional shares of common stock
      or
      preferred stock, without stockholder consent, which could have the effect of
      creating substantial dilution or impeding or discouraging a takeover
      transaction.***




Pursuant
      to our certificate of incorporation, our board of directors may issue additional
      shares of common or preferred stock.  Any additional issuance of
      common stock or the issuance of preferred stock could have the effect of
      impeding or discouraging the acquisition of control of us by means of a merger,
      tender offer, proxy contest or otherwise, including a transaction in which
      our
      stockholders would receive a premium over the market price for their shares,
      and
      thereby protects the continuity of our management.  Specifically, if
      in the due exercise of its fiduciary obligations, our board of directors was
      to
      determine that a takeover proposal was not in the best interest of the Company
      or our stockholders, shares could be issued by our board of directors without
      stockholder approval in one or more transactions that might prevent or render
      more difficult or costly the completion of the takeover by:




·
            diluting
                the voting or other rights of the proposed acquirer or insurgent
                stockholder group;


·
            putting
                a substantial voting block in institutional or other hands that might
                undertake to support the incumbent board of directors;
                or


·
            effecting
                an acquisition that might complicate or preclude the
                takeover.




***If
      we need additional financing in the future and are required to issue securities
      which are priced at less than the conversion price of our convertible debentures
      or the exercise price of warrants sold in our December/February Private
      Placements, it will result in additional dilution.***




In
      our
      December/February Private Placements, we issued debentures convertible into,
      and
      warrants to purchase, shares of our common stock.  Both the debentures
      and the warrants contain provisions that will require us to reduce the
      conversion price of the debentures (currently $1.54 per share) and the exercise
      price of the warrants (currently $1.69 per share) if we issue additional
      securities while the debentures and warrants are outstanding which contain
      purchase prices, conversion prices or exercise prices less than the conversion
      price of the debentures or the exercise price of the warrants issued in our
      December/February Private Placements.  If this were to occur, current
      investors, other than the investors in our December/February Private Placements,
      would sustain material dilution in their ownership interest.




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***If
      the holders of our outstanding convertible debentures, warrants and options
      convert and exercise their securities into common stock, we will issue up to
      5,637,065 shares, which will materially dilute the voting power of our currently
      outstanding common stock and possibly result in a change of control of our
      company.***




As
        of
        August 9, 2007, we had 19,094,758 shares of common stock
        outstanding.  As of August 9, 2007, we also have debentures which
        convert into 1,266,111 shares of common stock (assuming conversion at the
        current conversion price of $1.54, which it is now; and assuming payment
        of all
        accrued interest in cash), warrants which are exercisable for 1,253,731 shares
        of common stock and stock options exercisable for 3,117,223 shares of common
        stock.  Additionally, we may elect to pay principal or interest on our
        debentures in shares of common stock, or holders thereof may elect to convert
        all or any portion of such debentures into shares of common stock.  As
        discussed in the risk factor above, the conversion price and exercise price,
        respectively, of the debentures and warrants we issued in our December/February
        Private Placements is subject to adjustment.  If such conversion price
        or exercise price is adjusted, this would lead to the issuance of additional
        shares upon conversion or exercise, as applicable.  If the holders of
        our debentures, warrants, and stock options convert or exercise their securities
        into common stock, it will materially dilute the voting power of our outstanding
        common stock and may result in a change of control of our
        company.




***An
      investment in our company may be diluted in the future as a result of the
      issuance of additional securities, the conversion of debentures, or the exercise
      of options or warrants.***




In
      order
      to raise additional capital to fund our business plan, we may issue additional
      shares of common stock or securities convertible, exchangeable or exercisable
      into common stock from time to time, which, as further explained in the risk
      factor above, could result in substantial dilution to current
      stockholders.  The issuance of additional debt securities would result
      in increased expenses and could result in covenants that would restrict our
      operations.  No arrangements for any such offering exist, and no
      assurance can be given concerning the terms of any future offering or that
      we
      will be successful in issuing common stock or other securities at
      all.  If adequate funds are not available, we may not be able to
      continue our operations or implement our planned additional research and
      development activities, any of which would adversely affect our results of
      operations and financial condition.





***We
      may be the subject of securities class action litigation due to future stock
      price volatility.***




In
      the
      past, when the market price of a stock has been volatile, holders of that stock
      have often instituted securities class action litigation against the company
      that issued the stock.  If any of our stockholders brought a lawsuit
      against us, we could incur substantial costs defending the
      lawsuit.  The lawsuit could also divert the time and attention of our
      management.




***We
      have never paid dividends on our capital stock, and we do not anticipate paying
      any cash dividends in the foreseeable future.***




We
      have
      paid no cash dividends on any of our classes of capital stock to
      date.  In addition, we are currently restricted from paying any
      dividends on our common stock under the terms of the debentures we issued in
      our
      December/February Private Placements.  Even absent such restriction,
      we currently intend to retain our future earnings, if any, to fund the
      development and growth of our business.  In addition, the terms of any
      future debt or credit facility, if any, may preclude us from paying
      dividends.  As a result, capital appreciation, if any, of our common
      stock will be your sole source of gain for the foreseeable future.




***Because
      we will be required to comply with the internal control attestation provisions
      of Section 404 of the Sarbanes-Oxley Act of 2002 beginning for the fiscal year
      ended December 31, 2007, our compliance with the SEC's rules concerning internal
      controls will be costly, time-consuming and difficult for
      us.***




The
      Sarbanes-Oxley Act of 2002, or "SOX," that became law in July 2002 requires
      changes in some of our corporate governance, public disclosure and compliance
      practices.  Currently, the SEC's rules under Section 404 of SOX will
      require us to have our management attest to the adequacy of our internal
      controls in our annual report on Form 10-KSB for the year ended December 31,
      2007.  No member of our management has any experience in complying
      with Section 404.  Furthermore, we have been advised by our
      independent registered public accounting firm that we will be required to make
      substantial changes to our internal controls in order for our management to
      be
      able to attest that as of December 31, 2007, our internal controls are
      effective.  Larger public companies which have been required to comply
      with Section 404 have encountered significant expenses, both from diversion
      of
      management time and attention, the acquisition of new computer software, the
      employing of additional personnel and training and third party internal controls
      consultants.  While our business is not as sophisticated or complex as
      these larger companies, we anticipate it will be time-consuming, costly and
      difficult for us to develop and implement the internal controls necessary for
      our management to attest that our internal controls are effective as of December
      31, 2007.  We may need to hire additional financial reporting and
      internal controls personnel, acquire software and retain a third party
      consultant during 2007.  If our management is unable to attest that
      our internal controls are effective as of December 31, 2007, investors may
      react
      by selling our stock and causing its price to fall.




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***Our
      common stock is traded on the OTC Bulletin Board, which may be detrimental
      to
      investors.***




Our
      common stock is currently traded on the OTC Bulletin Board.  Stocks
      traded on the OTC Bulletin Board generally have limited trading volume and
      exhibit a wide spread between the bid/ask quotation.  Accordingly, you
      may not be able to sell your shares quickly or at the market price if trading
      in
      our stock is not active.




***Our
      directors, executive officers and 5% stockholders beneficially own approximately
      38.08% of our outstanding common stock, which could limit your ability to
      influence the outcome of key transactions, including changes of
      control.***




As
      of
      August 9, 2007, our directors, executive officers, and holders of 5% or more
      of
      our outstanding common stock, beneficially own, in the aggregate, approximately
      38.08% of our outstanding common stock.  As a result, a small number
      of shareholders will have voting control and would be able to control the
      election of directors and the approval of significant corporate
      transactions.  This concentration of ownership may also delay, deter
      or prevent a change of control of our company and will make some transactions
      more difficult or impossible without the support of these
      shareholders.




***Our
      common stock is subject to penny stock rules.***




Our
      common stock is subject to Rule 15g-1 through 15g-9 under the Securities
      Exchange Act of 1934, as amended, or the "Exchange Act," which imposes certain
      sales practice requirements on broker-dealers which sell our common stock to
      persons other than established customers and "accredited investors" (generally,
      individuals with a net worth in excess of $1,000,000 or annual incomes exceeding
      $200,000 (or $300,000 together with their spouse)).  For transactions
      covered by this rule, a broker-dealer must make a special suitability
      determination for the purchaser and have received the purchaser's written
      consent to the transaction prior to the sale.  This rule adversely
      affects the ability of broker-dealers to sell our common stock and purchasers
      of
      our common stock to sell their shares of such common
      stock.  Additionally, our common stock is subject to the SEC
      regulations for "penny stock."  Penny stock includes any non-NASDAQ
      equity security that has a market price of less than $5.00 per share, subject
      to
      certain exceptions.  The regulations require that prior to any
      non-exempt buy/sell transaction in a penny stock, a disclosure schedule set
      forth by the SEC relating to the penny stock market must be delivered to the
      purchaser of such penny stock.  This disclosure must include the
      amount of commissions payable to both the broker-dealer and the registered
      representative and current price
      quotations for the common stock.  The regulations also require that
      monthly statements be sent to holders of penny stock which disclose recent
      price
      information for the penny stock and information of the limited market for penny
      stocks.  These requirements adversely affect the market liquidity of
      our common stock.




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**ITEM
      3. CONTROLSAND
      PROCEDURES**




**Disclosure
      Controls and Procedures**




Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that the information required to be disclosed by a company in the reports
      that it files or submits under the Exchange Act is recorded, processed,
      summarized and reported, within the time periods specified in the SEC's rules
      and forms.  Disclosure controls and procedures include, without
      limitation, controls and procedures designed to ensure that information required
      to be disclosed in the reports that a company files or submits under the
      Exchange Act is accumulated and communicated to management, including the
      principal executive officer and principal financial officer, as appropriate
      to
      allow timely decisions regarding required disclosure.




We
      maintain disclosure controls and procedures designed to ensure that material
      information related to our company is recorded, processed, summarized and
      reported within the time periods specified in the SEC rules and forms, and
      that
      such information is accumulated and communicated to our management, including
      our chief executive officer and chief financial officer, as appropriate, to
      allow timely decisions regarding required disclosure.




As
      of the
      end of the period covered by this report, under the supervision and with the
      participation of our chief executive officer and our chief financial officer,
      we
      evaluated the effectiveness of the design and operation of our disclosure
      controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
      Exchange Act.  Based upon that evaluation, our chief executive officer
      and chief financial officer concluded that as of June 30, 2007, our Company's
      disclosure controls and procedures were designed and functioning effectively
      to
      provide reasonable assurance that the information required to be disclosed
      by us
      in reports filed under the Exchange Act is (i) recorded, processed, summarized
      and reported within the time periods specified in the SEC’s rules and forms and
      (ii) accumulated and communicated to management including our chief executive
      officer and chief financial officer, as appropriate to allow timely decisions
      regarding disclosure.




**Changes
      in Internal Controls over Financial Reporting**




There
      were no significant changes made in our internal controls over financial
      reporting that occurred during our most recently completed fiscal quarter that
      that have materially affected or are reasonably likely to materially affect
      our
      internal control over financial reporting.




**Limitations
      on Disclosure Controls and Procedures**




Our
      disclosure controls and procedures are designed to provide reasonable assurances
      that material information related to our company is recorded, processed,
      summarized and reported within the time periods specified in the SEC rules
      and
      forms, and that such information is accumulated and communicated to our
      management, including our chief executive officer and chief financial officer,
      as appropriate, to allow timely decisions regarding required
      disclosure.  Our chief executive officer and chief financial officer
      have determined that as of June 30, 2007, our disclosure controls were effective
      at that "reasonable assurance" level.  Our management, including our
      chief executive officer and chief financial officer, does not expect that our
      disclosure controls or internal controls over financial reporting will prevent
      all errors or all instances of fraud.  A control system, no matter how
      well designed and operated, can provide only reasonable, not absolute, assurance
      that the control system's objectives will be met.  Further, the design
      of a control system must reflect the fact that there are resource constraints,
      and the benefits of controls must be considered relative to their
      costs.  Because of the inherent limitations in all control systems, no
      evaluation of controls can provide absolute assurance that all control issues
      and instances of fraud, if any, within our company have been
      detected.  These inherent limitations include the realities that
      judgments in decision-making can be faulty, and that breakdowns can occur
      because of simple error or mistake.  Controls can also be circumvented
      by the individual acts of some persons, by collusion of two or more people,
      or
      by management override of the controls.  Because of the small size of
      our current operations, supervision of financial controls is concentrated in
      a
      few individuals and we have limited opportunity to segregate duties or implement
      checks and balances.  The design of any system of controls is based in
      part upon certain assumptions about the likelihood of future events, and any
      design may not succeed in achieving its stated goals under all potential future
      conditions.  Over time, controls may become inadequate because of
      changes in conditions or deterioration in the degree of compliance with policies
      or procedures.  Because of the inherent limitation of a cost-effective
      control system, misstatements due to error or fraud may occur and not be
      detected.





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**PART
      II--OTHER INFORMATION**




**ITEM
      1. LEGALPROCEEDINGS**




From
      time
      to time and in the course of our business, we may become involved in various
      legal proceedings seeking monetary damages and other relief. The amount of
      the
      ultimate liability, if any, from such claims cannot be determined. However,
      in
      the opinion of our management, there are no legal claims currently pending
      or
      threatened against us that would be likely to have a material adverse effect
      on
      our financial position, results of operations or cash flows.




**ITEM
      2. UNREGISTEREDSALES OF EQUITY SECURITIES
      AND USE OF PROCEEDS**




On
        August
        3, 2007, we issued 250,000 shares of our common stock upon exercise of a
        warrant
        held by Aequitas Capital Management.  On that same day we issued an
        additional 208,333 shares of our common stock upon exercise of warrants held
        by
        Aequitas Hybrid Fund, LLC.  We received gross proceeds of $812,500
        upon exercise of the foregoing warrants.




On
      August
      8, 2007, we issued an aggregate of 375,974 shares of our common stock upon
      conversion of $579,000 in principal amount of a debenture we issued in our
      February 2007 Private Placement, which reflects a conversion price of $1.54
      per
      share.  We issued an additional 75,195 unregistered shares of our
      common stock to the holder of this debenture as an inducement for the early
      conversion and acceptance of unregistered shares.




On
      August
      8, 2007, in connection with loan and security agreement we entered into with
      Bridge Bank, National Association, we issued Bridge Bank an immediately
      exercisable warrant to purchase 12,784 shares of our common stock at an exercise
      price of $3.52 per share, which equals 90% of the five day volume weighted
      average price of our common stock immediately before issuance.  The
      warrant expires in three years and gives Bridge Bank piggyback registration
      rights.




Each
      of
      the transactions described above was exempt from registration under the
      Securities Act pursuant to Section 4(2) thereof.  None of the
      transactions was conducted in connection with a public offering, and no public
      solicitation or advertisement was made or relied upon by any of the investors
      in
      connection with any offering.




**ITEM
      3. DEFAULTS UPON
      SENIOR SECURITIES**




None.




**ITEM
      4. SUBMISSIONOF
      MATTERS TO A VOTE OF SECURITY HOLDERS**




None.




**ITEM
      5. OTHERINFORMATION**




None.




**ITEM
      6. EXHIBITS**




**Exhibit
                No.**
            
            **Description**10.1*
            
            Loan
                and Security Agreement by and among Telanetix Inc., AVS Installations,
                LLC, and Union Labor Force One, LLC  and Bridge Bank, National
                Association dated August 8, 200710.2*
            
            Intellectual
                Property Security Agreement by and among Telanetix Inc., AVS
                Installations, LLC, and Union Labor Force One, LLC  and Bridge
                Bank, National Association dated August 8, 200731.1*
            
            Certification
                pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act,
                as
                amended, by Chief Executive Officer31.2*
            
            Certification
                pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act,
                as
                amended, by Chief Financial Officer32.1*
            
            Certification
                pursuant to 18 U.S.C. §1350 by Chief Executive Officer32.2*
            
            Certification
                pursuant to 18 U.S.C. §1350 by Chief Financial Officer*
            
            Filed
                as an exhibit to this report











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






**TELANETIX,
              INC.**Dated:
                August 14, 2007
            By:
            /s/
              Richard M. OnoRichard
              M. OnoChief
                Financial Officer
              (Principal
                Financial Officer)












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