**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**




**FORM
      10-QSB**


(Mark
      One)


**þ******
            **Quarterly
                Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
                of 1934**




For
      the
      quarterly period ended September 30, 2006.




**o**
            **Transition
                Report pursuant to 13 or 15(d) of the Securities Exchange Act of
                1934**




For
      the
      transition period  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,
              including
                area code)**____________________________________________________________________________****(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 þ  NO 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




On
      November 13, 2006, the registrant had outstanding 14,994,667 shares of Common
      Stock, which is the registrant's only class of common equity.





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


-1-




**PART
                I — FINANCIAL INFORMATION**ITEM
                1.
            FINANCIAL
                STATEMENTSITEM
                2.
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONSITEM
                3.
            CONTROLS
                AND PROCEDURES**PART
                II — OTHER INFORMATION**ITEM
                1.
            LEGAL
                PROCEEDINGSITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIESITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM
                5.
            OTHER
                INFORMATIONITEM
                6.
            EXHIBITS


-2-





**PART
      I - FINANCIAL INFORMATION**


**ITEM
                1. FINANCIAL STATEMENTS****TELANETIX,
                INC. AND SUBSIDIARY****(A
                Development Stage Company)****(Formerly
                AER Ventures, Inc.)****Consolidated
                Balance Sheets****September
                30, 2006**
            
            **December
                31, 2005****(Unaudited)**
            
            **(Audited)**AssetsCurrent
                Assets:Cash
            
            $
            236,074
            
            $
            47,906Accounts
                receivable, less allowancefor
                doubtful accounts of $-0- and $-0-
            
            
            86,555
            
            
            49,305Prepaid
                expenses
            
            
            50,662
            
            
            271Total
                current assets
            
            
            373,291
            
            
            97,482Property
                and equipmentFurniture
                and fixtures
            
            
            30,008
            
            
            27,681Computers
                and conference equipment
            
            
            402,309
            
            
            373,278432,317
            
            
            400,959Less:
                accumulated depreciation
            
            
            (311,428
            )
            
            (248,653
            )120,889
            
            
            152,306Deposits
            
            
            15,632
            
            
            18,432Total
                assets
            
            $
            509,812
            
            $
            268,220Liabilities
                and Stockholders' DeficitCurrent
                liabilities:Accounts
                payable and accrued expenses
            
            $
            196,159
            
            $
            167,110Accrued
                salaries and wages
            
            
            126,440
            
            
            136,672Accrued
                payroll taxes
            
            
            2,872
            
            
            10,455Accrued
                vacation
            
            
            88,850
            
            
            72,014Accrued
                interest, stockholder
            
            
            117,933
            
            
            59,593Notes
                payable, stockholder
            
            
            1,300,000
            
            
            1,331,700Total
                current liabilities
            
            
            1,832,254
            
            
            1,777,544Deferred
                compensation
            
            
            963,384
            
            
            963,384Stockholders'
                DeficitPreferred
                stock, no par value,10,000,000
                share authorized,none
                issued and outstanding
            
            
            -
            
            
            -Common
                stock, $.0001 par value,200,000,000
                shares authorized,14,994,667
                and 13,482,001 sharesissued
                and outstanding
            
            
            1,499
            
            
            1,348Additional
                paid in capital
            
            
            7,437,003
            
            
            4,410,321Warrants
            
            
            10,000
            
            
            10,000Deficit
                accumulated during the development stage
            
            
            (9,734,328
            )
            
            (6,894,377
            )Total
                stockholders' deficit
            
            
            (2,285,826
            )
            
            (2,472,708
            )Total
                liabilities and stockholders' deficit
            
            $
            509,812
            
            $
            268,220The
                accompanying notes are in integral part of the consolidated financial
                statements.


-3-





**TELANETIX,
                INC. AND SUBSIDIARY****(A
                Development Stage Company)****(Formerly
                AER Ventures, Inc.)****CONSOLIDATED
                STATEMENTS OF OPERATIONS****For
                the three months ended**
              **September
                30, 2006 (Unaudited)**
            
            
            
            **For
                the three months ended**
              **September
                30, 2005 (Unaudited)**
            
            
            
            **For
                the nine months ended**
              **September
                30, 2006 (Unaudited)**
            
            
            
            **For
                the nine months ended**
              **September
                30, 2005 (Unaudited)**
            
            
            
            **For
                the period November 20, 2002 (Inception) through September 30, 2006
                (Unaudited)**Net
                sales:Product
            
            $
            525,955
            
            
            $
            2,412
            
            
            $
            542,893
            
            
            $
            24,119
            
            
            $
            613,614Services
            
            
            45,170
            
            
            
            8,138
            
            
            
            104,170
            
            
            
            8,138
            
            
            
            136,795571,125
            
            
            
            10,550
            
            
            
            647,063
            
            
            
            32,257
            
            
            
            750,409Cost
                of sales:Product
            
            
            126,177
            
            
            
            -
            
            
            
            142,369
            
            
            
            7,477
            
            
            
            168,224Services
            
            
            50,549
            
            
            
            7,828
            
            
            
            90,280
            
            
            
            7,828
            
            
            
            122,965176,726
            
            
            
            7,828
            
            
            
            232,649
            
            
            
            15,305
            
            
            
            291,189Gross
                profit
            
            
            394,399
            
            
            
            2,722
            
            
            
            414,414
            
            
            
            16,952
            
            
            
            459,220Operating
                expenses:Payroll
                and related benefits
            
            
            225,010
            
            
            
            299,687
            
            
            
            1,125,576
            
            
            
            756,673
            
            
            
            5,183,598Research
                and development
            
            
            3,328
            
            
            
            -
            
            
            
            3,328
            
            
            
            5,450
            
            
            
            205,289Consulting
                and subcontract
            
            
            1,256,287
            
            
            
            40,625
            
            
            
            1,471,586
            
            
            
            410,550
            
            
            
            2,170,420Travel
                and entertainment
            
            
            44,436
            
            
            
            40,263
            
            
            
            125,079
            
            
            
            71,764
            
            
            
            501,481Professional
                fees
            
            
            103,412
            
            
            
            40,540
            
            
            
            148,487
            
            
            
            73,981
            
            
            
            449,911Trade
                shows
            
            
            -
            
            
            
            5,540
            
            
            
            -
            
            
            
            28,264
            
            
            
            28,264Rent
            
            
            19,095
            
            
            
            12,057
            
            
            
            68,097
            
            
            
            53,711
            
            
            
            421,447Utilities
            
            
            4,870
            
            
            
            1,731
            
            
            
            9,275
            
            
            
            5,843
            
            
            
            42,571Telephone
                and internet
            
            
            12,990
            
            
            
            15,180
            
            
            
            31,734
            
            
            
            65,315
            
            
            
            316,562Depreciation
            
            
            12,854
            
            
            
            21,702
            
            
            
            70,389
            
            
            
            64,205
            
            
            
            325,970Other
            
            
            48,764
            
            
            
            12,092
            
            
            
            142,656
            
            
            
            34,085
            
            
            
            425,269Total
                operating expenses
            
            
            1,731,046
            
            
            
            489,417
            
            
            
            3,196,207
            
            
            
            1,569,841
            
            
            
            10,070,782Operating
                loss
            
            
            (1,336,647
            )
            
            
            (486,695
            )
            
            
            (2,781,793
            )
            
            
            (1,552,889
            )
            
            
            (9,611,562
            )Other
                income (expense):Gain
                (loss) on disposal of fixed assets
            
            
            -
            
            
            
            -
            
            
            
            (1,960
            )
            
            
            (5,694
            )
            
            
            (6,406
            )Interest
                income
            
            
            453
            
            
            
            93
            
            
            
            3,003
            
            
            
            583
            
            
            
            11,691Interest
                expense
            
            
            (19,660
            )
            
            
            (19,874
            )
            
            
            (59,201
            )
            
            
            (40,198
            )
            
            
            (122,451
            )Total
                other income (expense)
            
            
            (19,207
            )
            
            
            (19,781
            )
            
            
            (58,158
            )
            
            
            (45,309
            )
            
            
            (117,166
            )Loss
                before income taxes
            
            
            (1,355,854
            )
            
            
            (506,476
            )
            
            
            (2,839,951
            )
            
            
            (1,598,198
            )
            
            
            (9,728,728
            )Provision
                for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,600Net
                loss
            
            $
            (1,355,854
            )
            
            $
            (506,476
            )
            
            $
            (2,839,951
            )
            
            $
            (1,598,198
            )
            
            $
            (9,734,328
            )Net
                loss per share - basic and diluted
            
            $
            (0.09
            )
            
            $
            (0.06
            )
            
            $
            (0.20
            )
            
            $
            (0.25
            )
            
            $
            (1.33
            )Weighted
                average shares outstanding -basic
                and diluted
            
            
            14,730,537
            
            
            
            8,905,869
            
            
            
            14,322,439
            
            
            
            6,483,985
            
            
            
            7,316,449The
                accompanying notes are an integral part of the consolidated financial
                statements.





-4-





**TELANETIX,
                INC. AND SUBSIDIARY****(A
                Development Stage Company)****(Formerly
                AER Ventures, Inc.)****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****FOR
                THE PERIOD NOVEMBER 20, 2002 (INCEPTION)****THROUGH
                SEPTEMBER 30, 2006****For
                the nine months ended September 30, 2006
                (Unaudited)**
            
            
            
            **For
                the nine months ended September 30, 2005
                (Unaudited)**
            
            
            
            **For
                the period November 20, 2002 (Inception) through September 30, 2006
                (Unaudited)**Cash
                flows from operating activities:Net
                loss
            
            $
            (2,839,951
            )
            
            $
            (1,598,198
            )
            
            $
            (9,734,328
            )Adjustments
                to net loss to cashprovided
                by operating activities:Depreciation
            
            
            70,389
            
            
            
            64,205
            
            
            
            325,970Amortization
                of stock based compensation
            
            
            460,833
            
            
            
            -
            
            
            
            537,000Common
                stock issued for services
            
            
            1,107,000
            
            
            
            -
            
            
            
            1,227,000Company
                expenses paid directly by shareholders
            
            
            -
            
            
            
            2,932
            
            
            
            6,802Loss
                on disposal of fixed assets
            
            
            1,960
            
            
            
            5,694
            
            
            
            6,406Changes
                in assets and liabilitiesAccounts
                receivable
            
            
            (37,250
            )
            
            
            (5,500
            )
            
            
            (86,555
            )Inventory
            
            
            -
            
            
            
            (50,992
            )Prepaid
                expenses and deposits
            
            
            (47,591
            )
            
            
            (13,007
            )
            
            
            (66,294
            )Accounts
                payable and accrued expenses
            
            
            29,049
            
            
            
            8,473
            
            
            
            196,159Accrued
                salaries and wages
            
            
            (10,232
            )
            
            
            343,213
            
            
            
            126,440Accrued
                payroll taxes
            
            
            (7,583
            )
            
            
            (46,413
            )
            
            
            2,872Accrued
                vacation
            
            
            16,836
            
            
            
            26,315
            
            
            
            88,850Customer
                deposit
            
            
            -
            
            
            
            16,883
            
            
            
            -Accrued
                interest, stockholder
            
            
            58,340
            
            
            
            37,323
            
            
            
            117,933Deferred
                compensation
            
            
            -
            
            
            
            -
            
            
            
            963,384Net
                cash used by operating activities
            
            
            (1,198,200
            )
            
            
            (1,209,072
            )
            
            
            (6,288,361
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (54,199
            )
            
            
            (44,004
            )
            
            
            (482,494
            )Proceeds
                from disposal of fixed assets
            
            
            13,267
            
            
            
            1,935
            
            
            
            29,229Net
                cash used by investing activities
            
            
            (40,932
            )
            
            
            (42,069
            )
            
            
            (453,265
            )Cash
                flows from financing activities:Proceeds
                from notes payable issued to shareholders
            
            
            -
            
            
            
            1,300,000
            
            
            
            1,411,111Issuance
                of common stock
            
            
            1,459,000
            
            
            
            100,000
            
            
            
            5,699,400Payment
                of notes payable issued to a shareholder
            
            
            (31,700
            )
            
            
            (111,111
            )
            
            
            (142,811
            )Issuance
                of warrants
            
            
            -
            
            
            
            10,000
            
            
            
            10,000Net
                cash provided by financing activities
            
            
            1,427,300
            
            
            
            1,298,889
            
            
            
            6,977,700Net
                increase (decrease) in cash
            
            
            188,168
            
            
            
            47,748
            
            
            
            236,074Cash
                at beginning of the period
            
            
            47,906
            
            
            
            4,409
            
            
            
            -Cash
                at end of the period
            
            $
            236,074
            
            
            $
            52,157
            
            
            $
            236,074Interest
                paid
            
            $
            -
            
            
            $
            2,857
            
            
            $
            3,657Income
                taxes paid
            
            $
            -
            
            
            $
            800
            
            
            $
            3,200Liabilities
                assumed in acquisition of subsidiary
            
            $
            -
            
            
            $
            32,400
            
            
            $
            31,700The
                accompanying notes are an integral part of the consolidated financial
                statements.


-5-





TELANETIX,
      INC. AND SUBSIDIARY


(A
      Development Stage Company)


(Formerly
      AER Ventures, Inc.)





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




1.
            Summary
                of Business and Significant Accounting Policies




a.
            Summary
                of Business





The
      Company was initially incorporated as AER Ventures, Inc. as a Nevada
      corporation. On August 15, 2005, the Company entered into an Exchange Agreement
      (" *Exchange
      Agreement* ")
      with
      Telanetix, Inc., a California corporation (" *Telanetix-California* "),
      a
      company in the business of developing and selling advanced technology and
      services for remote digital conferencing, and certain stockholders of
      Telanetix-California. In connection with the Exchange, Telanetix-California
      became a subsidiary of the Company and the former stockholders of
      Telanetix-California obtained a controlling interest in the Company’s common
      stock. The Exchange was accounted for as a reverse merger.





Effective
      March 2006, the Company effected a reincorporation from Nevada to Delaware
      and
      changed is name from "AER Ventures, Inc." to "Telanetix, Inc."





The
      Company is considered a "Development Stage Company" as defined by Statement
      of
      Financial Accounting Standards No. 7.





b.
            Basis
                of Presentation







The
      accompanying unaudited condensed interim consolidated financial statements
      have
      been prepared in accordance with accounting principles generally accepted in
      the
      United States of America for interim financial information and with the
      instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly,
      they do not include all of the information and footnotes required by accounting
      principles generally accepted in the United States of America for complete
      financial statements. These condensed consolidated financial statements
      should be read in conjunction with the consolidated financial statements and
      notes for the years ended December 31, 2005, and 2004.




The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the amounts reported in the financial statements and accompanying
      notes. Actual results could differ from those estimates. In the
      opinion of management, all adjustments (consisting solely of normal recurring
      adjustments) considered necessary for a fair presentation have been
      included. Operating results for the three months and the nine months ended
      September 30, 2006 are not necessarily indicative of the results that may be
      expected for the full fiscal year ending December 31, 2006.




The
      Company reported a net loss of $2,839,951 for the nine month period ended
      September 30, 2006. The net loss from date of inception, November 20,
      2002 to September 30, 2006, totaled $9,734,328. These losses raise
      substantial doubt about the Company’s ability to continue as a going concern
      unless the Company continues to increase sales and profit contribution as it
      has
      in the three months ended September 30, 2006.




The
      Company gained three new customers during the three month period ended September
      30, 2006, revenues and gross margin were significantly higher than in any
      previous quarter, and the Company moved closer to covering its cash operating
      costs with the gross profit from its revenue stream. At September 30, 2006
      the
      Company's cash balance was $236,074. Continued operations will depend on whether
      the Company is able to continue to add customers and revenue in order to cover
      its cash operating costs. If the Company is unsuccessful in adding additional
      customers and revenue, then the Company will need to raise additional funds
      through various potential sources, such as equity and debt financing. Such
      additional funds may not become available on acceptable terms, and there can
      be
      no assurance that any additional funding that the Company obtains will be
      sufficient to meet its needs in the long term. The Company will continue to
      fund
      operations from cash on hand and through the sources of capital previously
      described. The Company can give no assurance that any additional capital that
      it
      is able to obtain will be sufficient to meet future needs.




The
      financial statements do not include any adjustments to reflect the possible
      future effects on the recoverability and classification of assets or the amounts
      and classification of liabilities that may result from the possible inability
      of
      the Company to continue as a going concern.





c.
            Principles
                of Consolidation





-6-


The
      consolidated financial statements contain the accounts of the Company and its
      wholly-owned subsidiary Telanetix-California. All significant intercompany
      balances and transactions have been eliminated.




d.
            Cash
                Flows





For
      purposes of the statement of cash flows, the Company considers all highly liquid
      investments purchased with a maturity of three months or less to be cash or
      cash
      equivalents.




e.
            Accounts
                Receivable





Accounts
      receivable is recorded net of an allowance for expected losses. The allowance
      is
      estimated from historical performance and projections of trends.




f.
            Property
                and Equipment





Property
      and equipment are stated at cost less accumulated depreciation. Depreciation
      is
      provided using straight-line methods based on estimated useful lives of three
      to
      seven years. Major replacements which extend the useful lives of equipment
      are
      capitalized and depreciated over the remaining useful life. Normal maintenance
      and repair items are charged to expenses as incurred.




g.
            Income
                Taxes





The
      Company accounts for income taxes under the provisions of Statement of Financial
      Accounting Standards No. 109 - Accounting for Income Taxes, which provides
      for an asset and liability approach in accounting for income taxes. Under this
      approach, deferred tax assets and liabilities are recognized based on
      anticipated future tax consequences, using currently enacted tax laws,
      attributable to differences between financial statement carrying amounts of
      assets and liabilities and their respective tax bases.




h.
            Advertising
                and Promotions





The
      Company expenses all advertising and promotion costs as incurred.




i.
            Shipping
                and Handling Costs





Shipping
      and handling costs include costs associated with delivery of video conferencing
      equipment from the Company’s sole location to each customer’s designated
      location. The Company’s policy is to classify shipping and handling costs as
      part of cost of goods sold in the statements of operations.




j.
            Basic
                and Diluted Net Loss Per Share





Net
      loss
      per share is calculated in accordance with the Statement of Financial Accounting
      Standards No. 128 - Earnings 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 dilutive 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 September
      30, 2006 and 2005 which were excluded from the calculation since the effect
      is
      anti-dilutive.





**September
                30,****2006**
            
            **2005**Stock
                Options
            
            3,351,512
            
            4,251,512Warrants
            
            300,000
            
            300,000Total
            
            3,651,512
            
            4,551,512





k.
            Revenue
                Recognition





Revenue
      is recognized on the accrual basis of accounting when earned. The Company’s
      primary business generates revenue from selling video conferencing equipment
      and
      servicing the systems. Revenue is recognized only after the systems have been
      installed at the customer’s location and after services have been provided to
      customers and collection of the sale is reasonably assured.




l.
            Stock
                Based Compensation





Prior
      to
      and including the fiscal 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," or SFAS
      No. 123(R), the Company is now required, beginning in the quarter ending
      March 31, 2006, 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.




m.
            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.




n.
            Fair
                Value of Financial Instruments




The
      amounts reported for cash, accounts receivable, accounts payable, and other
      financial instruments, none of which are held for trading purposes, are
      considered to approximate fair values based upon comparable market information
      available at the respective balance sheet date.




o.
            Concentration
                of Risks




The
      Company transacts its business with primarily one financial institution. From
      time to time the amount on deposit in this institution may exceed the $100,000
      federally insured limit. The balances are maintained in demand accounts to
      minimize risk.




2.
            Notes
                Payable, Stockholders





Stockholder
      notes payable consist of the following at September 30, 2006 and
      December 31, 2005.




**September
                30, 2006**
            
            **December
                31, 2005**Note
                payable to a stockholder of the Company; the note is non-interest
                bearing,
                is unsecured, and is due on demand.
            
            $
            -
            
            $
            31,700Note
                payable to Mainas Development Corporation, which is owned by an individual
                who is a stockholder of the Company; the note bears 6% interest,
                is
                unsecured, and is due on demand.
            
            
            1,300,000
            
            
            1,300,000$
            1,300,000
            
            $
            1,331,700




3.
            Deferred
                Compensation




On
      August 12, 2005, five of the Company’s key employees entered into deferred
      compensation agreements for unpaid salaries from 2003 and 2004. The agreements
      stipulate that the unpaid salaries will be deferred until 2007 and 2008 with
      50%
      of the individual’s deferred compensation paid in each of those years. At
      September 30, 2006 and December 31, 2005, $963,384 of unpaid salaries are
      recorded as deferred compensation and reported as a long-term liability in
      the
      accompanying financial statements.




4.
            Income
                Taxes




The
      Company has had no taxable income under Federal or State tax laws. As of
      December 31, 2005, the Company had loss carryforwards totaling $4.3 million
      that
      may be offset against future federal income taxes. If not used, the
      carryforwards will expire between 2021 and 2024. Due to the Company incurring
      large net operating losses, a valuation allowance has been provided to reduce
      the deferred tax assets from the net operating losses to zero. Therefore, no
      tax
      benefits are recognized in the accompanying statement of
      operations.





5.
            Warrants




In
      July
      2005, the Company sold warrants to two individuals for a total of $10,000.
      The
      agreements allow each of the individuals to purchase up to 150,000 shares each
      of the Company’s common stock. The warrant to purchase the first 100,000
      shares may be exercised at $1.80 per share and expire, if not exercised, on
      June 30, 2008 and the warrant to purchase up to 50,000 additional
      shares may be exercised at $1.25 per share and expire, if not exercised, on
      March 31, 2008. The warrants outstanding at September 30,
      2006 are exercisable for a total of 300,000 shares of  the
      Company’s common stock .


-7-






6.
            Lease
                Commitment




The
      Company leases its office space under a long-term operating lease. Rent expense
      for the nine months ended September 30, 2006 and 2005 was $68,097 and $53,711,
      respectively. Rent expense for the three months ended September 30, 2006 and
      2005 was $19,095 and $12,057, respectively.





The
      following is a schedule of future non-cancelable minimum rental payments
      required under operating leases that have initial or remaining lease terms
      in
      excess of one year at September 30, 2006.




October
                2006 to September 2007
            
            $
                84,344October
                2007 to August 2008
            
            79,530$
                163,874




7.
            Stock
                Based Compensation




On
      August 15, 2005, in connection with the Exchange Agreement discussed in
      Note 1, the Company adopted the AER Ventures, Inc. 2005 Equity Incentive Plan
      (the " *2005
      Plan* ").
      Under
      the terms of the Exchange Agreement, all outstanding options under
      Telanetix-California's 2001 Equity Incentive Plan were cancelled and new
      options were issued and granted with similar terms under the 2005
      Plan.





The
      compensation cost that has been charged against income for the 2005 Plan was
      $460,833 and $-0- for the nine months ended September 30, 2006 and 2005,
      respectively. The compensation cost that has been charged against income for
      the
      2005 Plan was $6,750 and $-0- for the three months ended September30, 2006
      and
      2005, respectively.





The
      total
      income tax benefit recognized in the statements of operations for share-based
      compensation arrangements was $-0- for the nine months ended September 30,
      2006
      and 2005 due to a valuation allowance to reduce deferred tax assets. See Note
      4.





The
      2005
      Plan, permits the grant of share options and shares to its employees for up
      to
      5 million shares of common stock. The Company believes that such awards
      better align the interests of its employees with those of its shareholders.
      Option awards are generally granted with an exercise price that is at least
      equal to the fair market price of the Company’s stock at the date of grant;
      those option awards generally vest based on three years of continuous service
      and have ten year contractual terms.




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. Because the Black Scholes option valuation model incorporates ranges
      of
      assumptions for inputs, those ranges are disclosed. Expected volatilities are
      based on implied volatilities from traded options on the Company’s stock,
      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.





**2006**
            
            **2005**Expected
                volatility
            
            .1%
            
            .1%Weighted-average
                volatility
            
            .1%
            
            .1%Expected
                dividends
            
            0%
            
            0%Expected
                terms (in years)
            
            5-8
            
            5-8Risk-free
                rate
            
            5.0%
            
            3.5%-6%





-8-





A
      summary
      of option activity under the 2005 Plan from January 1, 2005 through September
      30, 2006, and changes during the periods then ended is presented
      below:





**Shares**
            
            **Weighted-Average
                Exercise Price**
            
            **Weighted-Average
                Remaining Contractual Term (Years)**
            
            **Aggregate
                Intrinsic Value**Outstanding
                at January 1, 2005
            
            2,851,512
            
            $
                0.20Granted
            
            1,500,000
            
            0.41Exercised
            
            (480,000)
            
            0.20Forfeited
                or expired
            
            (220,000)
            
            0.20Outstanding
                at December 31, 2005
            
            3,651,512
            
            0.17
            
            7.6
            
            $
                620,000Granted
            
            10,000
            
            1.50Exercised
            
            -
            
            -Forfeited
                or expired
            
            (310,000)
            
            0.24Outstanding
                at September 30, 2006
            
            3,351,512
            
            0.30
            
            6.7
            
            600,000Exercisable
                at September 30, 2006
            
            3,031,512
            
            0.31
            
            6.7
            
            537,000




The
      weighted-average grant-date fair value of options granted during the years
      2006
      and 2005 was $0.99 and $0.41, respectively. The total intrinsic value of options
      exercised during the nine months ended September 30, 2006 and the year ended
      December 31, 2005 was $-0- and $120,000, respectively.





A
      summary
      of the status of the Company’s non-vested options as of September 30, 2006, and
      changes during the year ended December 31, 2005 and the nine months ended
      September 30, 2006 is presented below:




**Shares**
            
            **Weighted-Average
                Grant-Date Fair Value**Nonvested
                at January 1, 2005
            
            2,182,712
            
            $
                -Granted
            
            1,500,000
            
            0.41Vested
            
            (2,229,725)
            
            0.03Forfeited
            
            (220,000)
            
            -Nonvested
                at December 31, 2005
            
            1,232,987
            
            0.44Granted
            
            10,000
            
            0.99Vested
            
            (743,193)
            
            0.62Forfeited
            
            (179,794)
            
            0.06Nonvested
                at September 30, 2006
            
            320,000
            
            0.20




As
      of
      September 30, 2006, there was $63,000 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 2.0 years. The total fair value of shares vested during the nine
      months ended September 30, 2006 and 2005 was $460,833 and $-0-, respectively.
      The total fair value of shares vested during the three months ended September
       30, 2006 and 2005 was $6,750 and $-0-, respectively.





8.
            Investor
                Relations Agreement





The
      Company entered into an independent consulting agreement for investors'
      communication and public relations services with Salzwedel Financial
      Communications ("SFC") on August 14, 2006. Pursuant to terms of the one-year
      agreement, the Company agreed to issue an aggregate of 540,000 shares of common
      stock to SFC and to pay SFC $5,000 per month for services provided under the
      agreement. The Company agreed to file a registration statement that includes
      SFC's shares by January, 2007.





As
      of
      September 30, 2006, the Company recorded an expense of $1,107,000 related to
      the
      issuance of the 540,000 shares of common stock to SFC, and has been included
      in
      consulting and subcontract expense in the accompanying consolidated statement
      of
      operations.


-9-





9.
            Subsequent
                event





On
      November 13, 2006, the Company sold 145,833 shares of common stock at $1.20
      per
      share for a total of $175,000 to an accredited investor. In addition, warrants
      were issued to purchase up to 72,917 shares of Common Stock at $1.50 per share
      and are exercisable until November 3, 2009.  -10-





**ITEM 2.**
            **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OR************PLAN
                OF OPERATIONS**




**FORWARD
      LOOKING STATEMENTS**




*This
      quarterly report on Form 10-QSB includes "forward-looking statements" within
      the
      meaning of the "safe-harbor" provisions of the Private Securities Litigation
      Reform Act of 1995. 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 included
      in this report, including without limitation, statements under "Plan of
      Operation", regarding our financial position, business strategy, and plans
      and
      objectives of management for the future operations, 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. Important factors that could
      cause
      actual results to differ materially from the Company’s expectations include, but
      are not limited to, those items discussed under the heading "Risk Factors"
      below. The discussion and analysis of our plan of operation should be read
      in
      conjunction with the financial statements and the related notes in our filing
      on
      Form 10-KSB for the year ended December 31, 2005.*




**OVERVIEW**




We
      develop and market high end video conferencing solutions that enable users
      to
      more effectively communicate across geographic boundaries. Our video
      conferencing solutions utilize high speed internet technology to allow users
      to
      interact in a fully immersive real-time video conferencing environment that
      integrates audio, video, and data from multiple locations. Our Digital Presence TM technology delivers full size, face-to-face images of real-time video, audio,
      and data in high quality resolution at 30 frames per second. Our solutions
      are
      based on next generation standards. We have developed our own high resolution
      video compression and decompression algorithms implementing advanced MPEG-4
      compression on a Linux platform. We also take advantage of decentralized IP
      multicasting in lieu of legacy conferencing bridges. Our solutions are designed
      to be simple to use, and allow customers to set up a conference with an
      intuitive touch screen interface.




We
      have
      been a development stage company and are now making the transition to
      operations. During 2005 we completed development of our initial video
      conferencing solution and commenced initial product sales. Our revenues are
      principally derived from the sale of videoconferencing products and services.
      Our product sales are related to our video conferencing solutions, and include
      computers, monitors, speakers, cameras and microphones and related hardware
      devices. Service revenue is derived from the provision of network connectivity
      and related services. Generally, services are offered under the terms of one
      year agreements, which call for payment on a monthly basis.




Our Digital Presence TM systems
        differ from traditional video conferencing in several important ways. Our
        Digital Presence TM systems
        provide a complete immersive environment where meeting participants appear
        life
        sized and audio is of studio quality. All of the underlying technology, cameras
        and microphones are hidden from the user. Systems are installed so that meeting
        participants maintain eye contact and interact naturally (as if in the same
        room), as opposed to speaking into a camera and microphone. The transmission
        quality may help eliminate jitter, poor video quality and interruptions.
        Conferences are established with a simple “point and click” user interface. The
        system requires no expert assistance and no training to establish a connection.
        The system has an easy to use document collaboration feature to allow for
        the
        joint review, drafting and editing of documents and presentations.


At
      the
      beginning of 2006 our primary business objectives were to secure working capital
      to fund operations and to develop channel sales relationships with audio video
      resellers and systems integrators. During the nine month period ended September
      30, 2006, we raised $1,459,000 from a private placement of common stock at
      $1.50
      per share. We also established our initial distributor relationships, focusing
      on partnerships with a very limited number of resellers or channel partners,
      each of which will be responsible for all the business in an exclusive
      territory. In connection with those relationships we have established five
      demonstration centers across the country. A substantial portion of our business
      efforts for the balance of 2006 will be devoted to establishing customer sales
      through those channels.





During
      the three months ended September 30, 2006, we secured our first significant
      customer accounts resulting in significantly increased sales transactions in
      the
      marketplace and significant gross profit contribution towards our cash operating
      expenses.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




Our
      discussion and analysis of our financial condition and results of operations
      is
      based on our consolidated financial statements. We have identified the
      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 actual results may differ substantially from these estimates under
      different assumptions or conditions. Our significant accounting policies are
      described in more detail in the notes to consolidated financial statements
      included elsewhere in this filing. We believe that the following accounting
      policies require the application of significant judgments and
      estimates.





*Revenue
      Recognition*





Revenue
      is recognized on the accrual basis of accounting when earned. The Company’s
      primary business generates revenue from selling video conferencing equipment
      and
      servicing the systems. Revenue is recognized only after the systems have been
      installed at the customer’s location and after services have been provided to
      customers and collection of the sale is reasonably assured.





*Stock
      Based Compensation*





Prior
      to
      and including the fiscal 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


-11-


adoption
      by the Financial Accounting Standards Board of SFAS No. 123 (revised 2004)
      "Share-Based Payment," or SFAS No. 123(R), the Company is now required,
      beginning in the quarter ending March 31, 2006, 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.




*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.





**RESULTS
      OF OPERATIONS**





**Net
      Sales**





Net
      sales
      for the three months ended September 30, 2006 were $571,125 as compared to
      $10,550 for the three months ended September 30, 2005, an increase of $560,575
      (5,314%).  Net sales for the nine months ended September 30, 2006 were
      $647,063 as compared to $32,257 for the nine months ended September 30, 2005,
      and increase of $614,806 (1,906%). Our sales for both periods in 2006 represent
      equipment sales to our channel partners and three new customers, as well as
      our
      monthly billings to our channel partners and customers for network service
      access. We did not introduce our video conferencing solutions for sale until
      the
      second quarter of 2005, when we had product sales to one of our channel
      partners.





We
      are
      devoting a significant portion of our management resources and efforts to the
      establishment of our Channel Partner network and establishing sales of our
      video conferencing products and services. While we anticipate that sales volume
      will increase as a result of these efforts, we are selling our video
      conferencing solutions through a new and continually emerging network of sales
      channels. Furthermore, our sales 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. We anticipate
      revenues will be inconsistent for at least the next twelve months.





**Cost
      of Sales**





Cost
      of
      sales for the three months ended September 30, 2006 were $176,726, or 31% of
      net
      sales, as compared $7,828, or 74% of net sales, for the three months ended
      September 30, 2005. Cost of sales for the nine months ended September 30, 2006
      were $232,649, or 36% of net sales, as compared to $15,305, or 47% of net sales,
      for the nine month period ended September 30, 2005. Cost of sales for products
      consists primarily of equipment costs, and is variable based on the prevailing
      market rates for these items. Cost of sales for services consists primarily
      of
      charges from third party network providers.





**Gross
      Profit**





Gross
      profit for the period was $394,399 or 69% of net sales. Gross profit
      contribution significantly offset cash operating expenses for the first time.
      Gross profit for the three months ending September 30, 2006 were higher than
      anticipated primarily due to cost reduction benefits realized through
      enhancements to our software, which decreased the hardware requirements of
      our
      product.





**Operating
      Expenses**





Operating
      expenses for the three months ended September 30, 2006 were $1,731,046 as
      compared to $489,417 for the three months ended September 30, 2005. The net
      increase in the current year period of $1,241,629 (254%) over the prior year
      period consists of the following items. Consulting and subcontractor expenses
      increased during the current year period by $1,215,662 (2992%) because of a
      non-cash expense of $1,107,000 for the issuance of 540,000 shares of common
      stock to our new investor relations firm, and we are using more technical
      consultants as we attempt to expand our market presence and improve our products
      and services. Our payroll and related benefits decreased during the current
      year
      period by $74,677 (25%) because we had more employees in the prior year period,
      and we rely more on consultants in the current year period than we did in the
      prior year period. Professional fees increased during the current year period
      by
      $62,872 (155%) primarily because of our preparation and filing of a registration
      statement during the current year period and due to other one-time legal fees.
      Other expenses, which include office, insurance and marketing related expenses,
      increased during the current year period by $36,672 (303%) as a result of our
      increased business activity.





Operating
      expenses for the nine months ended September 30, 2006 were $3,196,207 as
      compared to $1,569,841 for the nine months ended September 30, 2005. The net
      increase in the current year period of $1,626,366 (104%) over the prior year
      period consists of the following items. Our payroll and related benefits
      increased during the current year period by $368,903 (49%) because we had a
      non-cash expense of $413,333 related to the accelerated vesting on options
      to
      purchase 466,667 shares of common stock held by Richard M. Ono, our Chief
      Operating Officer and our Chief Financial Officer. Consulting and subcontractor
      expenses increased during the current year period by $1,061,036 (258%) because
      we had a non-cash expense of $1,107,000 for the issuance of 540,000 shares
      of
      common stock to our new investor relations firm. In addition, other expenses
      increased $108,571 (319%); professional fees increased $74,506 (101%), and
      travel and


-12-


entertainment
      expense increased $53,315 (74%). These increases were offset by decreased
      expenses for, telephone and internet expense $33,581 (51%); and trade shows
      $28,264 (100%).





**Interest
      Expense**





Interest
      expense for the three months ended September 30, 2006 was $19,660 as compared
      to
      $19,874 for the three months ended September 30, 2005, a decrease of $214 or
      1%.
      Interest expense for the nine months ended September 30, 2006 was $59,201 as
      compared to $40,198 for the nine months ended September 30, 2005, an increase
      of
      $19,003 or 47%.





The
      increase in interest expense for the nine month period as compared to the
      comparable period last year is attributable to interest accruing on our 6%
      promissory notes that were issued in a private placement transaction in the
      second quarter of 2005.





**Net
      Loss**





Net
      loss
      for the three months ended September 30, 2006 was $1,355,854 as compared to
      a
      net loss of $506,476 for the three months ended September 30, 2005, an increase
      of $849,378 or 168%. Net loss for the nine months ended September 30, 2006
      was
      $2,839,951 as compared to a net loss of $1,598,198 for the nine months ended
      September 30, 2005, an increase of $1,241,753 or 78%.




We
      expect
      to continue to incur net losses for at least the next twelve months as we
      attempt to build our business. With the exception of the non-cash salary expense
      for the second quarter and the non-cash investor relations expense for the
      third
      quarter, discussed above, we currently intend to maintain our operating expenses
      consistent with current levels, and hope to increase net sales. Any decrease
      in
      net losses in the next twelve months will depend upon our ability to increase
      net sales and correspondingly gross profit.





**LIQUIDITY
      AND CAPITAL RESOURCES**




As
      of
      September 30, 2006, we had $236,074 of cash on hand and a working capital
      deficit of $1,458,963. At December 31, 2005, we had cash on hand of $47,906
      and
      a working capital deficit of $1,680,062.





Cash
      used
      in operations for the nine month period ended September 30, 2006 was $1,198,200.
      This was primarily the result of a net loss of $2,839,951 offset by stock for
      services compensation of $1,107,000, amortization of stock based compensation
      of
      $460,833, depreciation expense of $70,389, and a net increase in assets and
      liabilities $1,569. Our revenue and gross profit for the three months ended
      September 30, 2006 were higher than any previous quarter, and we moved closer
      to
      covering our cash operating expenses with our gross profit. We anticipate that
      our gross profit will continue to increase, covering an increasingly larger
      portion of our cash operating expenses. However, we anticipate that our
      operations will continue to use cash during the next twelve months.





Cash
      used
      by investment activities was $40,932 for the nine month period ended September
      30, 2006, which is comprised of purchases of fixed assets totaling $54,199
      and
      proceeds from the sale of fixed assets totaling $13,267.





Cash
      provided by financing activities was $1,427,300 for the nine month period ended
      September 30, 2006. We sold 972,666 shares of Common Stock in a private
      placement transaction during the period for total proceeds of $1,459,000. We
      also paid off a note payable to shareholder of $31,700 during the period.
      Substantially all of our cash prior to this period has been derived from our
      financing activities, however, we expect a decrease in this trend for the next
      twelve months as we continue to increase sales and gross profit
      contribution.





Our
      cash
      balance was $236,074 at September 30, 2006, and we will need to increase
      revenues and gross profit in order to fund future operations. On November 13,
      2006, we sold 145,833 shares of common stock and warrants to purchase 72,917
      shares of common stock at $1.50 per share to an accredited investor for
      $175,000, and will use the proceeds to increase cash reserves and fund future
      operating expenses. If cash reserves are not sufficient to sustain operations,
      we plan to raise additional capital by selling shares of capital stock or other
      securities.There are no commitments or arrangements for future financings in
      place at this time. There can be 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 ever. 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





As
      reported in the Report of Independent Registered Public Accounting Firm on
      our
      December 31, 2005 financial statements, we have incurred losses from
      inception and have yet to establish profitable operations. These factors, among
      others, raise substantial doubt about our ability to continue as a going
      concern.





**RISK
      FACTORS**




-13-


*Investment
      in our common stock involves a high degree of risk. You should carefully
      consider the risks described below together with all of the other information
      included in this prospectus before making an investment decision. If any of
      the
      following risks actually occur, our business, financial condition or results
      of
      operations could suffer. In that case, the market price of our common stock
      could decline, and you may lose all or part of your investment.*





***Risks
      Related To Our Financial Condition***




***We
      Have A Limited Operating History and We are Currently In An Early Stage of
      Operations, We Have Experienced Significant Expenditures Related To Funding
      Our
      Initial Development, And We Are Currently Carrying a Net Loss. If Our Business
      Model Is Not Successful, Or 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
      have generated $750,409 in revenue from our inception to September 30, 2006,
      and
      we had a cumulative net loss of $9,734,328 for the period since inception at
      November 20, 2002 to September 30, 2006. We cannot assure you that our
      future operations will be implemented successfully or that we will ever have
      profits. We have yet to establish significant customer demand for our products
      and may not for a significant period of time, which may result in our inability
      to continue our operations. If we are unable to sustain our operations, we
      will
      be forced to cease operations entirely. Furthermore, we are experiencing the
      initial costs and uncertainties of development stage companies, including
      additional 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.




***To
      Satisfy Our Capital Requirements, We Will Seek To Raise Funds In The Public
      or
      Private Capital Markets, Which May Not Be Given on Terms Favorable To Us, Or
      We
      May Not Be Able To Raise Funds At All. In The Event That We Receive Funds on
      Undesirable Terms, Or Are Unable To Receive Additional Funds, We May Not Be
      Able
      To Fund Our Operations and Will Not Be Able to Continue As A Going Concern.
      The
      Additional Funding May Have Terms Which Will Dilute The Value of Your
      Investment.***




We
      will
      be required to seek additional funding through the sale of debt or equity
      securities in order to continue our operations. We cannot assure you that any
      such funding will be available to us, or if available, that it will be available
      on terms favorable to us. If adequate funds are not available, we may not be
      able to continue our operations or implement our planned additional research
      and
      development activities. As a result, we may be required to discontinue our
      operations or curtail our planned sales and research and development plans,
      thereby reducing or eliminating the value of our equity. If we are successful
      in
      obtaining additional funds, the terms of the financing may have the effect
      of
      diluting your interest in our Company.




***Our
      Auditors Have Expressed Substantial Doubt Regarding Our Ability To Continue
      As A
      Going Concern. If We Are Unable To Continue As A Going Concern, We May Be
      Required To Substantially Revise Our Business Plan or Cease Operations.***




As
      of the
      date of our most recent audit, which included the fiscal years ended
      December 31, 2005 and December 31, 2004, 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 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.




***Risks
      Related to Our Business***




***We
      Face Competition From Much Larger and Well-Established Companies.***




We
      face
      competition in the video conferencing 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
      substantial financial resources and production, marketing, engineering and
      other
      capabilities with which to develop, manufacture, market and sell their products.
      In addition, other established or new companies may develop or market products
      competitive with our video conferencing system.




***Lower
      Than Expected Market Acceptance Of Our Video Conferencing System and Price
      Competition Would Negatively Impact Our Business.***




We
      have
      yet to establish significant customer acceptance of our products. If the market
      does not accept our products or services, our ability to achieve any level
      of
      profitability would be harmed. Our profitability could also be negatively
      affected in the future as a result of competitive price pressures in the sale
      of
      video conferencing systems, which could cause us to reduce the prices for our
      system. Any such reduction could have an adverse impact on our product margins
      and profitability.


-14-




***The
      Sales Cycle For Our Video Conferencing System Can Be Long and Unpredictable.***




The
      time
      from introduction to sale of our system can take months as end-users educate
      themselves on the benefits of our video conferencing system. Our quarterly
      revenues and operating results depend upon the timing of channel partner 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.
      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
      significantly negatively impact end-user orders, which could in turn negatively
      affect orders from our channel partners in any given quarter.




***We
      Face Risks Related To Our Dependence On Channel Partners To Sell Our Products.***




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
      video
      conferencing system. We will need to continue to devote significant resources
      to
      educate and train our channel partners about the benefits of our product. Our
      channel partners carry videoconferencing products of our competitors from whom
      they derive significant revenues, and although we have received a commitment
      of
      minimum sales levels, and each channel partner has purchased systems from us,
      our channel partners will be selling our competitor’s products as well as our
      products. These sales may be to customers who would otherwise purchase our
      videoconferencing system and result in reduced sales and profits.




Our
      agreements with our channel partners are only for one year, and we cannot be
      certain as to future order levels from our channel partners or renewal of such
      agreements. In the event of one of our channel partners does not renew our
      agreement, we will lose that distribution channel and will need to identify
      and
      secure another source. If we were unable to timely find a replacement channel
      partner or alternative distribution source it would harm our results of
      operations.




***Risks
      Relating to Our Industry***




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




The
      video
      conferencing 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. 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.




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




***We
      have experienced, and may continue to experience, significant fluctuations
      in
      the market price of our common stock.***




The
      market price of our common stock has from time to time experienced significant
      fluctuations. The market price of our common stock may be significantly affected
      by a variety of factors, including:




·the
                announcement of new products or product enhancements by us or 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;
                and





·domestic
                and international macroeconomic factors.




-15-





***Our
      board of director has the right to issue additional shares of common stock
      or
      preferred stock, without shareholder 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, the board of directors was to determine
      that a takeover proposal was not in our best interest, shares could be issued
      by
      the 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.




***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 and 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 may preclude us from paying these dividends. As a result, capital
      appreciation, if any, of our common stock will be your sole source of gain
      for
      the foreseeable future.




***Recently
      Enacted And Proposed Changes In Securities Laws And Regulations Are Likely
      To
      Increase Our Costs.***




The
      Sarbanes-Oxley Act of 2002 that became law in July 2002 requires changes in
      some
      of our corporate governance, public disclosure and compliance practices.
      Compliance with portions of the Act has been phased in over time for smaller
      issuers like us, so we have not yet taken all actions or incurred all expenses
      that will be necessary to comply with the Act. The Act also requires the SEC
      to
      promulgate new rules on a variety of subjects, and the SEC is continuing in
      that
      process. We expect these developments to increase our legal and financial
      compliance costs, and to make some activities more difficult, such as
      stockholder approval of new option plans. We expect these developments to make
      it more difficult and more expensive for us to obtain director and officer
      liability insurance, and we may be required to accept reduced coverage or incur
      substantially higher costs to obtain coverage. These developments could make
      it
      more difficult for us to attract and retain qualified members of our board
      of
      directors, particularly to serve on our audit committee, and qualified executive
      officers. We are presently evaluating and monitoring regulatory developments
      and
      cannot estimate the timing or magnitude of additional costs we may incur as
      a
      result.




***Our
      Common Stock Is Traded On The OTC Bulletin Board, Which May Be Detrimental
      To
      Investors.***




Our
      shares of common stock are 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.




***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 (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 net worths in excess of $1,000,000 or annual incomes exceeding
      $200,000 (or $300,000 together with their spouses)). 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


-16-


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.





**ITEM 3.**
            **CONTROLS
                AND 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 Securities Exchange Act of 1934, as amended
      (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 the Company’s management,
      including its 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.




Under
      the
      supervision 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 of the end of the period covered by this report.
      Based upon that evaluation, our Chief Executive Officer and Chief Financial
      Officer concluded that as of September 30, 2006, the design and operation of
      such disclosure controls and procedures were effective.




**CHANGES
      IN INTERNAL CONTROLS OVER FINANCIAL REPORTING**




During
      the most recent fiscal quarter, we did not experience any changes to our
      internal control over financial reporting (as defined in Rules 13a-15(f) and
      15d-15(f) of the Exchange Act) that has materially affected, or is likely to
      materially affect, our internal control over financial reporting.




**LIMITATIONS
      ON DISCLOSURE CONTROLS AND PROCEDURES**




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.




**PART
      II- OTHER INFORMATION**





**ITEM 1.**
            **LEGAL
                PROCEEDINGS**




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.**
            **UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS**




In
      September, 2006, we issued 540,000 shares of our common stock to a financial
      communications company in a private placement transaction pursuant to terms
      of
      an independent consulting agreement. We recorded a charge of $1,107,000 related
      to the issuance, and did not receive any proceeds from the issuance. This
      transaction was exempt from registration pursuant to Section 4(2) of the
      Securities Act. This transaction was not conducted in connection with a public
      offering, and no public solicitation or advertisement was made or relied upon
      by
      any investors in connection with this offering.





In
      November, 2006, we sold 145,833 shares of common stock and warrants to purchase
      72,917 shares of common stock at $1.50 per share to an accredited investor
      for
      proceeds of $175,000. The proceeds will be used to increase cash reserves and
      fund future operating expenses. This
      transaction was exempt from registration pursuant to Section 4(2) of the
      Securities Act. This transaction was not conducted in connection with a public
      offering, and no public solicitation or advertisement was made or relied upon
      by
      any investors in connection with this offering.





**ITEM 3.**
            **DEFAULTS
                UPON SENIOR SECURITIES**




None.





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





On
      August
      14, 2006, the Company held its Annual Meeting of the Stockholders (the "Annual
      Meeting") to vote on the following two proposals:





1.
            To
                elect a board of two (2) directors to hold the office during the
                ensuing
                year or until their respective successors are elected and qualified;
                and




2.
            To
                approve the Company's 2005 Equity Incentive Plan.




At
      the
      Annual Meeting, Thomas A. Szabo and Stephen Spalding were elected to the
      Company’s Board of Directors to serve until the 2007 Annual Meeting of
      Stockholders and until their successors are elected and have qualified, as
      follows:





NAME
            FOR
            WITHHELDMr.
                Thomas Szabo
            7,435,980
            0Mr.
                Stephen Spalding
            7,435,980
            0





The
      proposal to adopt the Company's 2005 Equity Incentive Plan was approved by
      the
      following vote of the Stockholders at the Annual Meeting:





For
            Against
            Abstain7,410,980
            0
            25,000





The
      foregoing actions are described in further detail in the Company's Definitive
      Proxy Statement on Schedule 14-A filed with the Securities and Exchange
      Commission on July 25, 2006.





**ITEM 5.**
            **OTHER
                INFORMATION**




Effective
      October 14, 2006, Mr. Stephen Spalding resigned as a member of our Board of
      Directors.





**ITEM 6.**
            **EXHIBITS**





**Exhibit**
              **Number**
            
            **Description**4.1
            
            Form
              of Subscription Agreement for November 2006 private placement4.2
            
            Form
              of Warrant Agreement for November 2006 private placement31.1
            
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                200231.2
            
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                200232.1
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 200232.2
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002










-18-


**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:
      November 14, 2006


By: /s/
      Richard M. Ono


Mr.
      Richard M. Ono


Chief
      Financial Officer




-19-