UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



FORM 10-QSB

(Mark One)

|  |                                                                                  
|- | ---------------------------------------------------------------------------------
|þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2007



|  |                                                        
|- | -------------------------------------------------------
|o | TRANSITION REPORT UNDER 13 OR 15(d) OF THE EXCHANGE ACT



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) | 



|                                                                                  
|----------------------------------------------------------------------------------
|____________________________________________________________________________      
|(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



As of May 8, 2007, there were 15,634,251 shares of the issuer's common stock outstanding. The common stock is the issuer's only class of common equity currently outstanding.



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











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TABLE OF CONTENTS



FORWARD LOOKING STATEMENTS

1

PART I

FINANCIAL INFORMATION

2

ITEM 1.

FINANCIAL STATEMENTS

2

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

17

ITEM 3.

CONTROLS AND PROCEDURES

39

PART II

OTHER INFORMATION

41

ITEM 1.

LEGAL PROCEEDINGS

41

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

41

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

41

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

41

ITEM 5.

OTHER INFORMATION

41

ITEM 6.

EXHIBITS

42

SIGNATURES

43







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Table of Contents

FORWARD LOOKING STATEMENTS

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

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

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



1



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Table of Contents

PART I--FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

|                                                                 |  |                              |  |                            
|---------------------------------------------------------------- |  | ---------------------------- |  | ---------------------------
|TELANETIX, INC. AND SUBSIDIARY                                  
|Consolidated Balance Sheets                                     
|                                                                 |  |                              |  |                            
|                                                                 |  | March 31, 2007               |  | December 31, 2006          
|                                                                 |  | (Unaudited)                  |  | (Audited)                  
|Assets                                                           |  |                              |  |                            
|                                                                 |  |                              |  |                            
|Current Assets:                                                  |  |                              |  |                            
|Cash                                                             |  | $                 2,668,581  |  | $                3,198,200 
|Accounts receivable, less allowance                              |  |                              |  |                            
|for doubtful accounts of $30,230 and $-0-                        |  | 389,507                      |  | 699,985                    
|Prepaid expenses and other current assets                        |  | 24,969                       |  | 42,976                     
|Total current assets                                             |  | 3,083,057                    |  | 3,941,161                  
|                                                                 |  |                              |  |                            
|Property and equipment, net                                      |  | 108,587                      |  | 116,919                    
|                                                                 |  |                              |  |                            
|Other Assets:                                                    |  |                              |  |                            
|Deposits                                                         |  | 15,632                       |  | 15,632                     
|Deferred financing costs, net of accumulated                     |  |                              |  |                            
|amortization of $32,209 and $788                                 |  | 257,182                      |  | 206,658                    
|                                                                 |  |                              |  |                            
|Total assets                                                     |  | $                 3,464,458  |  | $                4,280,370 
|                                                                 |  |                              |  |                            
|Liabilities and Stockholders' Deficit                            |  |                              |  |                            
|                                                                 |  |                              |  |                            
|Current liabilities:                                             |  |                              |  |                            
|Accounts payable                                                 |  | $                    236,897 |  | $                   361,512
|Accrued expenses                                                 |  | 149,110                      |  | 404,007                    
|Deferred compensation, current portion                           |  | 481,692                      |  | 481,692                    
|Notes payable, stockholder                                       |  | -                            |  | 1,300,000                  
|Convertible debentures, current portion,                         |  |                              |  |                            
|net of discounts totaling $1,167,190 and $487,143                |  | 1,433,381                    |  | 731,905                    
|Warrant liabilities                                              |  | 5,065,376                    |  | 542,397                    
|Total current liabilities                                        |  | 7,366,456                    |  | 3,821,513                  
|                                                                 |  |                              |  |                            
|Convertible debentures, less current portion                     |  |                              |  |                            
|net of discounts totaling $1,167,190 and $974,285                |  | 1,433,381                    |  | 1,463,810                  
|Deferred compensation                                            |  | 481,692                      |  | 481,692                    
|Stockholders' Deficit                                            |  |                              |  |                            
|Preferred stock, no par value,                                   |  |                              |  |                            
|10,000,000 share authorized,                                     |  |                              |  |                            
|none issued and outstanding                                      |  | -                            |  | -                          
|Common stock, $.0001 par value,                                  |  |                              |  |                            
|200,000,000 shares authorized,                                   |  |                              |  |                            
|15,634,251and 15,557,166 shares                                  |  |                              |  |                            
|issued and outstanding                                           |  | 1,563                        |  | 1,556                      
|Additional paid in capital                                       |  | 9,656,701                    |  | 8,515,232                  
|Warrants                                                         |  | 10,000                       |  | 10,000                     
|Deficit accumulated during the development stage                 |  | (15,485,335)                 |  | (10,013,433)               
|Total stockholders' deficit                                      |  | (5,817,071)                  |  | (1,486,645)                
|                                                                 |  |                              |  |                            
|Total liabilities and stockholders' deficit                      |  | $                 3,464,458  |  | $                4,280,370 
|See accompanying notes to the consolidated financial statements.



2



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|                                                                                      |  |                                      |  |                   
|------------------------------------------------------------------------------------- |  | ------------------------------------ |  | ------------------
|TELANETIX, INC. AND SUBSIDIARY                                                       
|Consolidated Statements of Operations                                                
|                                                                                      |  |                                      |  |                   
|                                                                                      |  | For the three months ended March 31,
|                                                                                      |  | 2007                                 |  | 2006              
|                                                                                      |  | (Unaudited)                          |  | (Unaudited)       
|                                                                                      |  |                                      |  |                   
|Net sales:                                                                            |  |                                      |  |                   
|Product (including $248,500 to a related party)                                       |  | $     419,518                        |  | $                -
|Services                                                                              |  | 42,750                               |  | 27,500            
|                                                                                      |  | 462,268                              |  | 27,500            
|                                                                                      |  |                                      |  |                   
|Cost of sales:                                                                        |  |                                      |  |                   
|Product (including $66,503 to a related party)                                        |  | 102,051                              |  | -                 
|Services                                                                              |  | 39,654                               |  | 19,942            
|                                                                                      |  | 141,705                              |  | 19,942            
|                                                                                      |  |                                      |  |                   
|Gross profit                                                                          |  | 320,563                              |  | 7,558             
|                                                                                      |  |                                      |  |                   
|Operating expenses:                                                                   |  |                                      |  |                   
|Financing program costs with a related party                                          |  | 596,275                              |  | -                 
|Salaries and related expenses                                                         |  | 328,988                              |  | 268,730           
|Consulting and subcontract                                                            |  | 173,388                              |  | 85,141            
|Travel and entertainment                                                              |  | 39,380                               |  | 45,324            
|Professional fees                                                                     |  | 148,328                              |  | 31,792            
|Rent                                                                                  |  | 19,161                               |  | 21,735            
|Bad debt expense                                                                      |  | 30,230                               |  | -                 
|Telephone and internet                                                                |  | 26,493                               |  | 13,010            
|Depreciation                                                                          |  | 12,974                               |  | 27,028            
|Other operating expenses                                                              |  | 82,472                               |  | 36,862            
|Total operating expenses                                                              |  | 1,457,689                            |  | 529,622           
|                                                                                      |  |                                      |  |                   
|Operating loss                                                                        |  | (1,137,126)                          |  | (522,064)         
|                                                                                      |  |                                      |  |                   
|Other income (expense):                                                               |  |                                      |  |                   
|Interest expense                                                                      |  | (371,168)                            |  | (19,233)          
|Change in fair value of warrant liabilities                                           |  | (3,971,148)                          |  | -                 
|Gain (loss) on disposal of fixed assets                                               |  | -                                    |  | (4,153)           
|Interest income                                                                       |  | 7,540                                |  | 653               
|Total other income (expense)                                                          |  | (4,334,776)                          |  | (22,733)          
|                                                                                      |  |                                      |  |                   
|Loss before income taxes                                                              |  | (5,471,902)                          |  | (544,797)         
|                                                                                      |  |                                      |  |                   
|Provision for income taxes                                                            |  | -                                    |  | -                 
|                                                                                      |  |                                      |  |                   
|Net loss                                                                              |  | $ (5,471,902)                        |  | $    (544,797)    
|                                                                                      |  |                                      |  |                   
|Net loss per share - basic and diluted                                                |  | $          (0.35)                    |  | $          (0.04) 
|                                                                                      |  |                                      |  |                   
|Weighted average shares outstanding -                                                 |  |                                      |  |                   
|basic and diluted                                                                     |  | 15,575,640                           |  | 13,789,945        
|                                                                                      |  |                                      |  |                   
|The accompanying notes are an integral part of the consolidated financial statements.



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Table of Contents



|                                                                                      |  |                                      |  |                                
|------------------------------------------------------------------------------------- |  | ------------------------------------ |  | -------------------------------
|TELANETIX, INC. AND SUBSIDIARY                                                       
|Consolidated Statements of Cash Flows                                                
|                                                                                      |  |                                      |  |                                
|                                                                                      |  | For the three months ended March 31,
|                                                                                      |  | 2007                                 |  | 2006                           
|                                                                                      |  | (Unaudited)                          |  | (Unaudited)                    
|                                                                                      |  |                                      |  |                                
|Cash flows from operating activities:                                                 |  |                                      |  |                                
|Net loss                                                                              |  | $            (5,471,902)             |  | $               (544,797)      
|                                                                                      |  |                                      |  |                                
|Adjustments to net loss to cash                                                       |  |                                      |  |                                
|provided by operating activities:                                                     |  |                                      |  |                                
|Depreciation                                                                          |  | 12,974                               |  | 27,028                         
|Loss on disposal of fixed assets                                                      |  | -                                    |  | 4,153                          
|Amortization of deferred financing costs                                              |  | 31,421                               |  | -                              
|Amortization of fair value of stock options                                           |  | 38,985                               |  | 34,000                         
|Amortization of original issue discount                                               |  | 70,039                               |  | -                              
|Amortization of beneficial conversion feature                                         |  |                                      |  |                                
|associated with convertible debentures                                                |  | 86,317                               |  | -                              
|Amortization of detachable warrant discount                                           |  | 107,319                              |  | -                              
|Issuance of common stock for non-registration penalty                                 |  | 5,043                                |  | -                              
|Value of warrant issued for finance program agreement                                 |  | 596,275                              |  | -                              
|Change in fair value of warrant liabilities                                           |  | 3,971,148                            |  | -                              
|Changes in assets and liabilities:                                                    |  |                                      |  |                                
|Accounts receivable                                                                   |  | 310,478                              |  | 2,750                          
|Prepaid expenses and deposits                                                         |  | 18,007                               |  | (13,641)                       
|Accounts payable                                                                      |  | (124,615)                            |  | (35,852)                       
|Accrued expenses                                                                      |  | (254,897)                            |  | 170,331                        
|Net cash used by operating activities                                                 |  | (603,408)                            |  | (356,028)                      
|                                                                                      |  |                                      |  |                                
|Cash flows from investing activities:                                                 |  |                                      |  |                                
|Purchase of property and equipment                                                    |  | (4,642)                              |  | -                              
|Proceeds from disposal of fixed assets                                                |  | -                                    |  | 5,999                          
|Net cash used by investing activities                                                 |  | (4,642)                              |  | 5,999                          
|                                                                                      |  |                                      |  |                                
|Cash flows from financing activities:                                                 |  |                                      |  |                                
|Proceeds from sale of convertible debentures                                          |  | 1,351,000                            |  | -                              
|Deferred financing costs                                                              |  | (81,945)                             |  | -                              
|Issuance of common stock                                                              |  | 109,376                              |  | 1,406,500                      
|Payment of notes payable issued to a shareholder                                      |  | (1,300,000)                          |  | -                              
|Net cash provided by financing activities                                             |  | 78,431                               |  | 1,406,500                      
|                                                                                      |  |                                      |  |                                
|Net increase (decrease) in cash                                                       |  | (529,619)                            |  | 1,056,471                      
|                                                                                      |  |                                      |  |                                
|Cash at beginning of the period                                                       |  | 3,198,200                            |  | 47,906                         
|                                                                                      |  |                                      |  |                                
|Cash at end of the period                                                             |  | $              2,668,581             |  | $               1,104,377      
|                                                                                      |  |                                      |  |                                
|Interest paid                                                                         |  | $                 189,083            |  | $                             -
|                                                                                      |  |                                      |  |                                
|Income taxes paid                                                                     |  | $                             -      |  | $                             -
|                                                                                      |  |                                      |  |                                
|The accompanying notes are an integral part of the consolidated financial statements.



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Table of Contents

TELANETIX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1.

Summary of Business and Significant Accounting Policies

a.

Summary of Business

Telanetix, Inc. (the "Company") was initially incorporated as AER Ventures, Inc. as a Nevada Corporation. On August 15, 2005, the Company entered into a share exchange agreement with Telanetix, Inc., a private California corporation ("Telanetix-California"), engaged in the business of developing and selling advanced technology and services for remote digital conferencing. In connection with the share exchange agreement, 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 share exchange was accounted for as a reverse merger. Effective March 2006, the Company effected a reincorporation from Nevada to Delaware and changed its name from AER Ventures, Inc. to Telanetix, Inc.

b.

Principles of Consolidation

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

c.

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.

d.

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 shipped to the customer's location and collection of the sale is reasonably assured.

e.

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.

f.

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.

g.

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.



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h.

Accounts Receivable

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

i.

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.

j.

Deferred Financing Costs

Fees and expenses associated with debt financing are amortized over the terms of the agreements using the straight-line method.

k.

Advertising and Promotions

The Company expenses all advertising and promotion costs as incurred.

l.

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.

m.

Stock Based Compensation

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

n.

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.



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o.

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

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

|              |  |                |  |                  
|------------- |  | -------------- |  | -----------------
|              |  | March 31, 2007 |  | December 31, 2006
|              |  |                |  |                  
|Stock Options |  | 3,906,056      |  | 3,351,512        
|Warrants      |  | 2,109,280      |  | 1,531,157        
|Total         |  | 6,015,336      |  | 4,882,669        



2.

Property and Equipment

At March 31, 2007 and December 31, 2006, property and equipment consists of the following:

|                              |  |                        |  |                             
|----------------------------- |  | ---------------------- |  | ----------------------------
|                              |  | March 31, 2007         |  | December 31, 2006           
|                              |  |                        |  |                             
|Furniture and fixtures        |  | $               30,008 |  | $                     30,008
|Office equipment              |  | 16,824                 |  | 16,824                      
|Video conference equipment    |  | 321,065                |  | 316,423                     
|                              |  | 367,897                |  | 363,255                     
|Less accumulated depreciation |  | (259,310)              |  | (246,336)                   
|Property and equipment, net   |  | $             108,587  |  | $                   116,919 



Depreciation expense for the three months ended March 31, 2007 and 2006 was $12,974 and $27,028, respectively.

3.

Accrued Expenses

At March 31, 2007 and December 31, 2006, accrued expenses consisted of the following:



|                              |  |                        |  |                            
|----------------------------- |  | ---------------------- |  | ---------------------------
|                              |  | March 31, 2007         |  | December 31, 2006          
|                              |  |                        |  |                            
|Accrued salaries              |  | $               19,809 |  | $                   168,595
|Accrued payroll taxes         |  | 3,272                  |  | 5,369                      
|Accrued vacation              |  | 90,881                 |  | 88,204                     
|Accrued interest, stockholder |  | -                      |  | 137,593                    
|Accrued interest              |  | 25,696                 |  | 1,829                      
|Sales tax payable             |  | 9,452                  |  | 2,417                      
|                              |  | $             149,110  |  | $                   404,007





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4.

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 individuals deferred compensation paid each year. At March 31, 2007 and December 31, 2006, the deferred compensation was reported in the accompanying financial statements as follows:

|                                              |  |                       |  |                            
|--------------------------------------------- |  | --------------------- |  | ---------------------------
|                                              |  | March 31, 2007        |  | December 31, 2006          
|                                              |  |                       |  |                            
|Deferred compensation                         |  | $             963,384 |  | $                   963,384
|Less current portion of deferred compensation |  | (481,692)             |  | (481,692)                  
|Long-term portion of deferred compensation    |  | $             481,692 |  | $                   481,692



5.

Notes Payable, Stockholder

Stockholder notes payable consist of the following at March 31, 2007 and December 31, 2006:

|                                                                                                                                                                                     |  |                                 |  |                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- |  | -------------------------
|                                                                                                                                                                                     |  | March 31, 2007                  |  | December 31, 2006        
|                                                                                                                                                                                     |  |                                 |  |                          
|Note payable to Mainas Development Corporation, owned by an individual who is a stockholder of the Company, interest is being charged at 6%, the note is unsecured and due on demand |  | $                             - |  | $               1,300,000
|                                                                                                                                                                                     |  | $                             - |  | $               1,300,000



6.

Convertible Debentures

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

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

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



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The Company has the option, subject to compliance with certain equity conditions, to redeem the debentures before their maturity by payment in cash of 120% of the then outstanding principal amount of the debenture plus accrued interest and other charges.

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

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

The Company also entered into registration rights agreements with the institutional investors in both the December and February private placements, pursuant to which the Company agreed to file a registration statement covering the resale of the shares of common stock that may be issued to investors upon the conversion of the debentures, payment in kind, and the exercise of the warrants, and to maintain the effectiveness of that registration statement (subject to certain limitations) for a period of time until the holders can sell the underlying common stock without volume restrictions under Rule 144(k).

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

At March 31, 2007 and December 31, 2006, the debentures are included in the accompanying balance sheet as follows:

|                                          |  |                      |  |                           
|----------------------------------------- |  | -------------------- |  | --------------------------
|                                          |  | March 31, 2007       |  | December 31, 2006         
|                                          |  |                      |  |                           
|Convertible debentures                    |  | $          5,201,143 |  | $                3,657,143
|Less:                                     |  |                      |  |                           
|Original issue discount - 12.5%           |  | (650,143)            |  | (457,143)                 
|Detachable warrants discount              |  | (1,094,227)          |  | (542,396)                 
|Beneficial conversion discount            |  | (855,582)            |  | (463,785)                 
|Add:                                      |  |                      |  |                           
|Amortization of discounts                 |  | 265,571              |  | 1,896                     
|Convertible debentures, net of discounts  |  | 2,866,762            |  | 2,195,715                 
|Less current portion                      |  | (1,433,381)          |  | (731,905)                 
|Convertible debentures, long term portion |  | $          1,433,381 |  | $                1,463,810





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Maturities of convertible debentures are as follows:

|                                     |           |                     
|------------------------------------ | --------- | --------------------
|April 1, 2007 through March 31, 2008 |           | $          2,600,571
|April 1, 2008 to December 31, 2008   | 2,600,572
|                                     |           | $          5,201,143



Pursuant to Emerging Issues Task Force (EITF) No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company's Own Stock, the fair value of the warrants at the issuance was recorded as a warrant liability (See Note 7), as 1) the shares are required to be registered and 2) net cash settlement could occur. EITF 00-19 provides that contracts that include any provision that could require net cash settlement cannot be accounted for as equity of the Company.

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

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

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

7.

Warrants and Warrant Liabilities

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



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In November 2006, the Company issued 281,250 warrants in conjunction with the sale of its common stock. These warrants are convertible into common stock at $1.50 per share and expire, if not exercised, three years from issuance.

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

The warrants issued in December 2006 and February 2007 have registration rights for the underlying shares. EITF 00-19 provides that contracts that include any provision that could require net cash settlement cannot be accounted for as equity of the Company.  The warrant agreements related to these warrants gives the holder of the warrants the right to a net cash settlement anytime after one year from issuance of the warrants if there is no effective registration statement covering the resale of the shares underlying such warrants.  Pursuant to EITF 00-19, the fair value of the warrants at the issue date was recorded as a warrant liability.

The fair value of warrants was estimated at the issue date and revalued at March 31, 2007, using a Black Scholes option pricing model with the following assumptions: a risk free interest rate of approximately 4.72% to 4.84% at the issuance dates and 4.58% on March 31, 2007, no dividend yield, volatility factors of 39.53% to 40.83% at the issuance dates and 39.61% to 39.86% at March 31, 2007, contractual terms of 5 years and expected terms based upon the formula prescribed in SEC Staff Accounting Bulletin 107 of 2.37 years to 2.44 years. These assumptions use the interest rate prevailing at the time of issuance, volatility factors calculated as the weighted average of the stock price volatility of ranked comparable public companies, and contractual terms equal to the exercise periods of the respective warrants. The change in fair value of the warrants for the three months ended March 31, 2007 of $3,971,148 was reported as a non-operating expense in the financial statements.

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

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

The following table summarizes the activity for warrants issued during the three month period ended March 31, 2007.

|                            |  |                                      |  |                                
|--------------------------- |  | ------------------------------------ |  | -------------------------------
|                            |  | Number of Shares
Subject to Warrants |  | Weighted Average
Exercise Price
|                            |  |                                      |  |                                
|Balance - December 31, 2006 |  | 1,531,157                            |  | $         1.64                 
|Granted                     |  | 651,040                              |  | 1.81                           
|Exercised                   |  | (72,917)                             |  | 1.50                           
|Forfeited                   |  | -                                    |  | -                              
|Expired                     |  | -                                    |  | -                              
|Balance - March 31, 2007    |  | 2,109,280                            |  | $         1.70                 





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The following table summarizes information about warrants outstanding as of March 31, 2007.

|                     |  |                                                                  |  |                                                    
|-------------------- |  | ---------------------------------------------------------------- |  | ---------------------------------------------------
|Exercise Prices      |  | Number of Shares
Subject to Outstanding
Warrants and Exercisable |  | Weighted Average
Remaining
Contractual
Life (years)
|                     |  |                                                                  |  |                                                    
|$               1.25 |  | 100,000                                                          |  | 1.00                                               
|$               1.50 |  | 208,333                                                          |  | 2.67                                               
|$               1.80 |  | 200,000                                                          |  | 1.25                                               
|$               1.69 |  | 1,350,947                                                        |  | 4.79                                               
|$               2.00 |  | 250,000                                                          |  | 2.93                                               
|                     |  | 2,109,280                                                        |  |                                                    



8.

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 with similar terms were granted under the 2005 Plan.

The compensation cost that has been charged against income for the 2005 Plan was $38,985 and $34,000 for the three months ended March 31, 2007 and 2006, respectively. The total income tax benefit recognized in the statements of operations for share-based compensation arrangements was $-0- for 2006 and 2005 due to a valuation allowance to reduce deferred tax assets.

The 2005 Plan permits the grant of share options and shares to the Company's 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 approximates the market price of the Company's stock at the date of grant; those option awards generally vest based on 3 years of continuous service and have 10-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 incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on historical volatility of the Company's stock and other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from estimates and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

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



A summary of option activity under the 2005 Plan as of March 31, 2007 and December 31, 2006, and changes during the periods then ended is presented below:



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|                                 |            |  |           |      |              |           |           |   |           
|-------------------------------- | ---------- |  | --------- | ---- | ------------ | --------- | --------- | - | ----------
|                                 |            |  |           |      |              | Weighted- |           |   |           
|                                 |            |  | Weighted- |      | Average      |           |           |  
|                                 | Shares     |  | Average   |      | Remaining    |           | Aggregate
|                                 | Subject    |  | Exercise  |      | Contractual  |           | Intrinsic
|                                 | to Options |  | Price     |      | Term (Years) |           | Value    
|                                 |            |  |           |      |              |           |           |   |           
|Outstanding at January 1, 2006   | 3,651,512  |  | $         | 0.29 |              | 7.2       |           | $ | -         
|Granted                          | 10,000     |  | $         | 1.50 |              |           |           |   |           
|Exercised                        | -          |  | $         | -    |              |           |           |   |           
|Forfeited or expired             | (310,000)  |  | $         | 0.24 |              |           |           |   |           
|Outstanding at December 31, 2006 | 3,351,512  |  |           |      |              | 6.9       |           | $ | -         
|Granted                          | 585,500    |  | $         | 3.50 |              |           |           |   |           
|Exercised                        | -          |  | $         | -    |              |           |           |   |           
|Forfeited or expired             | (30,956)   |  | $         | 0.20 |              |           |           |   |           
|Outstanding at March 31, 2007    | 3,906,056  |  | $         | 0.78 |              | 7.1       |           | $ | 16,692,222
|                                 |            |  |           |      |              |           |           |   |           
|Exercisable at March 31, 2007    | 3,070,556  |  | $         | 1.00 |              | 7.1       |           | $ | 14,572,197



The weighted-average grant-date fair value of options granted during the three months ended March 31, 2007 and 2006 was $2.17 and $-0- per share, respectively. No options were exercised during either of the three months ended March 31, 2007 and 2006.

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

|                               |           |  |            |     
|------------------------------ | --------- |  | ---------- | ----
|                               |           |  | Weighted- 
|                               |           |  | Average   
|                               |           |  | Grant-Date
|                               | Shares    |  | Fair Value
|Nonvested at January 1, 2006   | 1,232,987 |  | $          | 0.44
|Granted                        | 10,000    |  | $          | -   
|Vested                         | (778,193) |  | $          | 0.60
|Forfeited                      | (179,794) |  | $          | -   
|Nonvested at December 31, 2006 | 285,000   |  | $          | 0.20
|Granted                        | 585,500   |  | $          | 2.17
|Vested                         | (35,000)  |  | $          | 0.20
|Forfeited                      | -         |  | $          | -   
|Nonvested at March 31, 2007    | 835,500   |  | $          | 1.53





As of March 31, 2007, there was $1,289,263 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2005 Plan. That cost is expected to be recognized over a weighted-average period of 3.83 years. The total fair value of options vested during the three months ended March 31, 2007 and 2006 was $6,750 and $34,000, respectively.



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9.

Lease Commitment

The Company leases its office space under a long-term operating lease agreement. Rent expense for the three months ended March 31, 2007 and 2006 was $19,161 and $21,735, respectively.

The following is a schedule of future noncancellable minimum rental payments required under operating leases that have initial or remaining lease terms in excess of one year at March 31, 2007:

|                          |  |                              
|------------------------- |  | -----------------------------
|April 2007 to March 2008  |  | $                      85,616
|April 2008 to August 2008 |  | 36,510                       
|                          |  | $                    122,126 



10.

Preferred Stock

The Company has been authorized to issue 10,000,000 shares of preferred stock of which no preferred shares have been issued as of March 31, 2007. The preferences, if any, to be given to preferred shares shall be determined at the time of issuance.

11.

Income Taxes

The Company has had no taxable income under federal or state tax laws. As of December 31, 2006, the Company had loss carryforwards totaling $7.4 million that may be offset against future federal income taxes. If not used, the carryforwards will expire between 2021 and 2026. 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.

12.

Going Concern and Operating Deficits

As shown in the accompanying financial statements, the Company incurred a net loss of $5,471,902 during the three months ended March 31, 2007, and $3,119,056 during the year ended December 31, 2006, and has accumulated losses of $15.5 million since opening for business. These factors create an uncertainty as to the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the success of raising additional capital through the issuance of common stock and the ability to generate operating revenue. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

13.

Related Party Transactions

In March 2007, the Company entered into an agreement with Aequitas Capital Management, Inc., in order to provide the Company's prospective customers with a leasing alternative for the Company's videoconferencing systems.  In connection with this agreement, the Company issued Aequitas Capital an immediately exercisable warrant to purchase 250,000 shares of common stock at an exercise price of $2.00 per share.  As a result of such issuance, Aequitas Capital beneficially owns, together with its affiliates, more than 5% of the Company's outstanding common stock.  The fair value of the warrant of $596,275 was expensed as financing program costs (See Note 7.)



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Under the terms of the agreement with Aequitas Capital, qualifying customers will be able to lease one of the Company's systems through private label leasing provided by Aequitas Capital.  Once the qualifying customer accepts the terms and conditions of the approved leasing arrangement and executes the documents, the Company will sell the videoconferencing system to Aequitas Capital who in turn will lease it to the customer on the terms and conditions agreed to by Aequitas Capital and the customer.  The Company agreed to provide Aequitas Capital with a right of first refusal for providing prospective customers with the leasing arrangement.

Also in March 2007, the Company sold seven of its Digital Presence Systems to Aequitas Commercial Finance, an affiliate of Aequitas Capital, for $248,500.

14.

Subsequent Events

Effective April 1, 2007, the Company acquired from Robert Leggio and Elbert E. Layne, Jr. (together, the "Sellers") all of the stock of two corporations which own all of the membership interests in AVS Installation Limited Liability Company and Union Labor Force One Limited Liability Company (together, "AVS"), pursuant to the terms of a Stock Purchase Agreement entered into on March 30, 2007 (the "Acquisition Agreement"). The purchase price paid by the Company to the Sellers was $1,253,000.  The Company paid the purchase price through the issuance of 248,119 shares of the Company's common stock.  The number of shares issued to the Sellers was calculated by dividing the $1,253,000 purchase price by $5.05, which was the closing sales price per share of the Company's common stock on March 30, 2007 as quoted on the OTC Bulletin Board.

Prior to the transactions described in the Acquisition Agreement, and the employment and option agreements referenced below, neither the Company nor any of its affiliates, or any officer or director of the Company or any associate of such officer or director, had a material relationship with the Sellers.  The Company does have a channel partner agreement with AVS pursuant to which AVS is a distributor of the Company's products in New York, New Jersey and nearby regions of the United States.

In connection with the Acquisition Agreement, effective April 1, 2007, the Company entered into an employment agreement with each of Mr. Leggio and Mr. Layne for a term commencing on April 1, 2007, and ending on September 30, 2008, subject to certain early termination provisions.  Under the terms of the employment agreements, Mr. Leggio will serve as the Company's Vice President of Sales, and Mr. Layne will serve as the Company's Vice President of Integration Services. Each employment agreement provides for an annual base salary of $175,000, and eligibility for an annual bonus up to $25,000.  In connection with the employment agreements, effective April 1, 2007, the Company issued each of Mr. Leggio and Mr. Layne options to purchase 200,000 shares of the Company's common stock at the exercise price of $5.05 per share.  The option grants provide that, subject to continued employment with the Company, 50,000 of the options will vest on April 1, 2008, and the remaining 150,000 options will vest monthly over a three year period thereafter. The options are to vest earlier in the event of a change of control of the Company, or the termination of the employment agreements without cause prior to September 30, 2008.  The options were granted pursuant to the Company's 2005 Equity Incentive Plan and related stock option grant notice and agreement.

The Company recorded net sales to AVS of $28,500 and $-0- during the three months ended March 31, 2007 and 2006, respectively. The Company's accounts receivable at March 31, 2007 and December 31, 2006 include amounts receivable from AVS of $223,367 and $198,705, respectively.



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15.

Recent Accounting Pronouncements

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

On July 13, 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires recognition in the financial statements of the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions are effective for the first quarter 2007 financial statements with the cumulative effect, if any, of the change in accounting principle recorded as an adjustment to the opening balance of retained earnings. The Company is currently evaluating the impact of adopting FIN48 on its consolidated financial statements but does not expect the impact to be material.

In September 2006, the FASB issued No. 157, "Fair Measurements" (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expends disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact that SFAS No. 157 will have on its consolidated financial statements.



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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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

Overview

Telanetix, Inc., a Delaware corporation (the "Company," "our," "we," or "us"), is engaged in the business of developing and selling high definition videoconferencing solutions.  We were a development stage company through 2005.  We began selling our first videoconference products in 2005.  During 2005, we established channel partner relationships with three of the largest audio visual integrators in the United States.  After establishing our channel partner relationships, we devoted a substantial portion of our business efforts to establishing customer sales through those channels.  At the beginning of 2006 our primary business objectives were to develop channel partner relationships with audio video resellers and systems integrators and to secure working capital to fund operations.  During the third quarter of 2006, we also began selling our videoconferencing systems directly to end-users, and we secured our first significant customer accounts.

From November 2006 to February 2007, we raised net proceeds of $6.47 million from the private placement of securities. We raised such amount in three significant financing transactions.  In November 2006, we sold in private placements to three accredited investors an aggregate of 562,499 shares of our common stock at $1.20 per share and issued warrants to purchase 281,250 shares of our common stock at $1.50 per share.  We refer to this as our November 2006 Private Placements.  In December 2006, we issued in a private placement with four institutional investors an aggregate of $3.66 million principal amount of debentures at an original issue discount of 12.5% and warrants to purchase an aggregate of 949,907 shares of our common stock.  We refer to this as our December 2006 Private Placement.  In February 2007, we issued in a private placement with the same four institutional investors from our December 2006 private placement an aggregate of $1.544 million principal amount of debentures at an original issue discount of 12.5% and warrants to purchase an aggregate of 401,040 shares of our common stock.  We refer to this as our February 2007 Private Placement, and together with our December 2006 Private Placement as our December/February Private Placements.  As further discussed under "Liquidity and Capital Resources," below, we believe our cash balance at March 31, 2007 is sufficient to fund our operations through at least March 31, 2008.  If cash reserves are not sufficient to sustain operations, we plan to raise additional capital by selling shares of capital stock or other debt or equity securities.  However, there are no commitments or arrangements for future financings in place at this time, and there can be no assurance that such capital will be available on favorable terms to us or at all.

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



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Going Concern Issue

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

Critical Accounting Policies Involving Management Estimates and Assumptions

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

Revenue Recognition. Revenue is recognized on the accrual basis of accounting when earned. We generate revenue from selling our videoconferencing systems and servicing the systems. Revenue is recognized only after the systems have been shipped to the customer's location and collection of the sale is reasonably assured.

The Securities and Exchange Commission, or SEC, Staff Accounting Bulletin, or SAB, No. 104, "Revenue Recognition," provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues.  We believe that our revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 104.

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

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

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



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

Results of Operations

Fluctuations in Operating Results

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

Quarter ended March 31, 2007 Compared with Quarter ended March 31, 2006

Net Sales

Our net sales for the quarter ended March 31, 2007 were $462,268 compared to $27,500 for the quarter ended March 31, 2006.  Of our net sales in 2007, $419,518 reflects revenue from sales of our videoconferencing systems, and $42,750 reflects revenue from sales of our services, consisting of monthly billings to our channel partners and customers for network service access.  We had no product sales in the first quarter of 2006.  All $27,500 of our revenue during such time period was derived from sales of our services. A substantial portion of our product sales for the quarter ended March 31, 2007 was attributable to a $248,500 sale to Aequitas Capital Management, Inc.  Aequitas Capital and its affiliates are stockholders of the Company and own in excess of 5% of our outstanding common stock.  The remaining increase in revenues for the quarter ended March 31, 2007 when compared to the quarter ended March 31, 2006 is primarily attributable to our sales and marketing efforts later in 2006 and early in 2007, which generated positive results as our videoconferencing systems gained market acceptance.

Effective April 1, 2007, we acquired AVS as our wholly-owned subsidiary.  AVS provides integration, consultation and implementation services for customers desiring audio-visual and videoconferencing systems and products.  AVS was one of our channel partners who distributed our videoconferencing systems and related services in New York, New Jersey and nearby regions of the United States.  The operations of AVS as our wholly-owned subsidiary will remain the same as it did before the acquisition except that we will no longer have a channel partner relationship with AVS, though it will continue to distribute and integrate our videoconferencing systems.  See "Overview," above.  Based on historical financial performance, including through the quarter ended March 31, 2007, we anticipate that this acquisition will add $5 million to our 2007 annual revenue and contribute positively to our operating income, though we can give no assurances in this regard.



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We are devoting a significant portion of our management resources and efforts to the development of our channel partner network and to the direct sales of our videoconferencing products and services.  While we anticipate that sales volume will increase as a result of these efforts, we are selling our products and services through a developing network of sales channels, and our products are relatively new.  Furthermore, selling our products and services often require several customer meetings and demonstrations.  Consequently, sales cycles, closure rates, and the timing and amount of future revenues are necessarily difficult to predict.  Because of our limited size and resources, our revenues for the foreseeable future will be impacted significantly by our success or failure in securing significant sales transactions with a limited target customer base.  We anticipate revenues will be inconsistent through at least March 2008, if not longer.

Cost of Sales

Cost of sales for the quarter ended March 31, 2007 were $141,705, or 30.7% of net sales, compared to $19,942, or 72.5% of net sales, for the quarter ended March 31, 2006.  Cost of sales for products, which was $102,051 for the quarter ended March 31, 2007, consists primarily of cost of computers, monitors and other equipment purchased from third parties.  Equipment costs are variable based on the prevailing market rates for these items.  We had zero cost of sales for products for the quarter ended March 31, 2006.  Cost of sales for services was $39,654 for the quarter ended March 31, 2007 as compared to $19,942 for the quarter ended March 31, 2006, and consists primarily of charges from third party network providers.

Gross Profit

Gross profit for the quarter ended March 31, 2007 was $320,563, or 69.3% of net sales, compared to $7,558, or 27.5% of net sales for the quarter ended March 31, 2006. Gross profit margin for 2007 was higher than for 2006 due to the higher margins we receive on product revenues than we receive on service revenues. Based on historical financial performance, we currently expect the gross margin percentage on AVS revenues in future quarters to range from 25% to 30%.  Gross profit margin will be affected in any period by several factors, including the ratio of product sales to service sales, the mix of products sold (including the amount and nature of components and peripherals sold), our pricing for our products and services, and our ability to acquire computers and components from third parties on favorable terms.

Operating Expenses

Total operating expenses for the quarter ended March 31, 2007 were $1.5 million as compared to $529,622 for the quarter ended March 31, 2006.  The net increase in the current period of $928,067 (175.2%) over the prior period consists of the following items. We recorded $596,275 of expense in the quarter ended March 31, 2007 related to the issuance of a warrant to purchase 250,000 shares of our common stock that we issued to Aequitas Capital Management, Inc., in connection with our lease financing program.  We did not have a comparable transaction in the quarter ended March 31, 2006.  Our salaries and related expenses increased from $268,730 to $328,988, or $60,258 (22.4%), primarily due to the addition of two new sales employees during the first quarter in 2007. Our consulting and subcontract expenses increased from $85,141 to $173,388, or $88,247 (103.6%), primarily due our increased use of technical consultants as we expanded our market presence and improved our products and services. Our professional fees increased from $31,792 to $148,328, or $116,536 (366.6%), primarily as a result of our financing transactions and registration statement filings that were made during the quarter ended March 31, 2007.  Subsequent to the quarter ended March 31, 2007, we acquired AVS, including 16 additional employees.  The addition of AVS will result in an increase in operating expenses commensurate with the increase in gross profit.



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Interest Expense



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

Interest expense for the quarter ended March 31, 2007 was $371,168 as compared to $19,233 for the quarter ended March 31, 2006, an increase of $351,935 (1829.8%).  Interest expense in the current quarter consists primarily of the following: $66,694 of interest on the debentures we issued in our December/February Private Placements that was paid or is payable in cash; $263,676 in amortization of discounts related to such debentures; $31,421 in amortization of deferred financing costs relating to our December/February Private Placements; and $4,332 of interest on the note payable to shareholder that was paid in cash.  The $1.3 million note payable to shareholder was paid off in February 2007 with the proceeds from our February 2007 Private Placement.  Interest expense for the quarter ended March 31, 2006 consisted of interest on that note payable to shareholder.

The $5.2 million worth of debentures we issued in our December/February Private Placements accrue interest at the rate of 6% per annum.  Assuming these debentures are not prepaid before maturity and interest payments are made in cash, during 2007 we anticipate paying $267,000 in interest expense on these debentures. We have the option of paying the interest in shares of our common stock, subject to, among other things, meeting certain equity conditions, including having a currently effective registration statement covering the shares of common stock issued in lieu of making such interest payment.  We can also force the holders of these debentures to convert the outstanding principal and accrued interest into common stock subject to compliance with certain equity conditions, including having a currently effective registration statement covering the shares of common stock issuable upon conversion of the debentures and subject to a 4.99% cap on the beneficial ownership of our shares of common stock by the holder and its affiliates following such conversion.  See "Liquidity and Capital Resources," below.

Change in Fair Value of Warrant Liabilities

The warrants we issued in our December/February Private Placements have registration rights for the underlying shares.  Emerging Issues Task Force (EITF) No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company's Own Stock provides that contracts that include any provision that could require net cash settlement cannot be accounted for as equity.  The warrant agreements related to these warrants gives the holder of the warrants the right to a net cash settlement anytime after one year from issuance of the warrants if there is no effective registration statement covering the resale of the shares underlying such warrants.  Pursuant to EITF 00-19, the fair value of the warrants at the issue date was recorded as a warrant liability.

The fair value of warrants was estimated at the issue date and revalued at March 31, 2007, using a Black Scholes option pricing model with the following assumptions: a risk free interest rate of approximately 4.72% to 4.84% at the issuance dates and 4.58% on March 31, 2007, no dividend yield, volatility factors of 39.53% to 40.83% at the issuance dates and 39.61% to 39.86% at March 31, 2007, contractual terms of 5 years and expected terms based upon the formula prescribed in SEC Staff Accounting Bulletin 107 of 2.37 years to 2.44 years. These assumptions use the interest rate prevailing at the time of issuance, volatility factors calculated as the weighted average of the stock price volatility of ranked comparable public companies, and contractual terms equal to the exercise periods of the respective warrants.

The change in fair value of the warrants for the three months ended March 31, 2007 of $3,971,148 was reported as a non-operating expense in our financial statements. There was no such transaction during the three months ended March 31, 2006.



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Net Loss

Net loss for the quarter ended March 31, 2007 was $5.47 million as compared to a net loss of $544,797 for the quarter ended March 31, 2006, an increase of $4.93 million or 904.4%. The increase was primarily due to the $3.97 million non-operating expense for the change in fair value of the warrants issued with the debentures in our December/February Private Placements. Operating expenses increased $928,067 (175.2%) as described above. Any decrease in operating losses and net losses in the next 12 months will depend upon our ability to continue to increase net sales and correspondingly gross profit.

Liquidity and Capital Resources

Our cash balance as of March 31, 2007 was $2.67 million and we had a working capital deficit of $4.28 million, which includes a warrant liability of $5.07 million. Our cash balance as of December 31, 2006 was $3.20 million and we had working capital of $119,648.

Cash used in operations during the quarter ended March 31, 2007 was $603,408. This was primarily the result of a net loss of $5.47 million offset by non-cash charges for the change in fair value of the warrants of $3.97 million; finance program expense of $596,275 related to the warrant granted in connection with the lease financing program agreement we entered into with Aequitas Capital Management, Inc., in March 2007; amortization of note discounts and deferred financing charges of $295,906; and amortization of stock based compensation of $38,985.  Our net decrease in assets and liabilities of $51,027 also contributed to the cash used in operations. Our revenue and gross profit for the previous three consecutive quarters have been higher than any previous quarters, and we continue to move closer to covering our cash operating expenses with our gross profit.  However, we anticipate that our operations will continue to use cash through at least December 31, 2007, if not longer.

Net cash provided by financing activities was $78,431 during the quarter ended March 31, 2007.  During this period, in our February 2007 Private Placement we sold an aggregate of $1.544 million of principal amount of debentures at an original issue discount of 12.5% and 401,040 warrants for net proceeds of $1.3 million, which we used to pay off a note payable to shareholder of $1.3 million. We also received proceeds of $109,376 from the exercise of a warrant to purchase 72,917 shares of common stock at $1.50 per share that was issued in our November 2006 Private Placements.

Interest payments on the debentures we issued in our December/February Private Placements began April 1, 2007, and accrued interest is thereafter generally payable along with monthly principal payments.  Monthly principal payments in the aggregate of $288,954 begin in July 2007.  We have the right to pay interest and monthly principal payments in cash, or upon notice to the holders and compliance with certain equity conditions, including having a currently effective registration statement covering the shares of common stock issuable upon conversion of the debentures, we can pay all or a portion of any such payment in common stock valued at a price equal to the lesser of the then effective conversion price (initially $1.54) or 85% of the average of the volume weighted average price, or VWAP, per share as reported on Bloomberg for our common stock for the 10 consecutive trading days immediately prior to the applicable payment date.  On the other hand, if the holders voluntarily elect to convert all or a portion of the debentures into common stock, the conversion price will be $1.54, subject to adjustment including full-ratchet and anti-dilution protection.  This could result in substantial dilution to our existing stockholders.



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The closing market price of our common stock was $6.80 on May 4, 2007.  Subject to compliance with certain equity conditions, including having a currently effective registration statement covering the shares of common stock issuable upon conversion of the debentures and subject to a 4.99% cap on the beneficial ownership of our shares of common stock by the holder and its affiliates following such conversion, we have the right to force conversion of the entire amount of principal and accrued interest of the debentures if the average of the VWAP for our common stock exceeds 200% of the effective conversion price for 20 trading days out of a consecutive 30 trading day period. The current conversion price is $1.54, and therefore 200% of the conversion price is $3.08.  Since February 16, 2007, the closing market price of our common stock has exceeded $3.08.  Accordingly, assuming we meet the relevant equity conditions, the most significant of which is having a registration statement covering the resale of the shares of common stock issued upon conversion declared effective and subject to the 4.99% cap on the beneficial ownership, we intend to force the holders of the debentures to convert the maximum amount of principal and accrued interest into shares of our common stock at a conversion price of $1.54.

If the price of our common stock falls below $3.08 per share but remains substantially above $1.54 per share, we anticipate that the holders of the debentures will elect to convert monthly payments of interest and principal into shares of common stock rather than receive cash.  If the price of our common stock were to fall to a level below $1.54, the current conversion price, we intend to make principal and interest payments in cash to the extent that our cash flows from operations provide sufficient ability to do so.  We have initially budgeted $1 million of the proceeds from our December/February Private Placements to make initial payments under the debentures.  In addition, we expect income from operations to increase in connection with our future operations due in part to our acquisition of AVS.  We will also evaluate other equity financing opportunities, the proceeds of which could be used to repay the debentures.  If we are unable to pay the principal and interest in cash, we will make the payments in our common stock pursuant to the terms of the agreements including a conversion price based on the lower of $1.54 or 85% of the average of the VWAP per share as reported on Bloomberg for our common stock for the 10 consecutive trading days immediately prior to the applicable payment date.

We believe our cash balance is sufficient to fund our operations through at least March 31, 2008.  If cash reserves are not sufficient to sustain operations, we plan to raise additional capital by selling shares of capital stock or other securities.  However, there are no commitments or arrangements for future financings in place at this time, and we can give no assurance that such capital will be available on favorable terms or at all.  We may need additional financing thereafter until we can achieve profitability.  If we cannot, we will be forced to curtail our operations or possibly be forced to evaluate a sale or liquidation of our assets.  Even if we are successful in raising additional funds, there is no assurance regarding the terms of any additional investment.  Any future financing may involve substantial dilution to existing investors.

Recent Financings

The table below provides the following information relative to our November 2006 Private Placement and our December/February Private Placements: (i) the gross proceeds to us from each of the private placements, (ii) each payment we made or may be required to make to the investors, any affiliate of the investors or any person with whom the investors have a contractual relationship regarding the private placements (other than principal and interest payments we will be required to make under the terms of the debentures issued in our December/February Private Placements, which are discussed below), and (iii) the net proceeds to us from each of the private placements.

|                                                 |  |                   |  |                     |  |                        
|------------------------------------------------ |  | ----------------- |  | ------------------- |  | -----------------------
|                                                 |  | Private Placement
|Investor Name                                    |  | November 2006     |  | December 2006       |  | February 2007 (3)      
|                                                 |  |                   |  |                     |  |                        
|Thomas A. Packer                                 |  | $        175,000  |  | $                 - |  | $                     -
|Aequitas Hybrid Fund QP, LLC                     |  | 368,914           |  | -                   |  | -                      
|Aequitas Hybrid Fund, LLC                        |  | 131,086           |  | -                   |  | -                      
|Enable Growth Partners LP                        |  | -                 |  | 1,700,000           |  | 717,500                
|Enable Opportunity Partners LP                   |  | -                 |  | 200,000             |  | 84,875                 
|Pierce Diversified Strategy Master Fund LLC, ena |  | -                 |  | 100,000             |  | 42,000                 
|Crescent International Ltd.                      |  |                   |  | 1,200,000           |  | 506,625                
|                                                 |  |                   |  |                     |  |                        
|Gross proceeds                                   |  | 675,000           |  | 3,200,000           |  | 1,351,000              



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|                                                                                      |  |                  |  |                 |  |                    
|------------------------------------------------------------------------------------- |  | ---------------- |  | --------------- |  | -------------------
|                                                                                      |  |                  |  |                 |  |                    
|Less fees and expenses:                                                               |  |                  |  |                 |  |                    
|Payment to Salzwedel Financial Communications (1)                                     |  | (47,250)         |  | -               |  | -                  
|Payment to Aequitas funds (2)                                                         |  | (19,958)         |  | -               |  | -                  
|Payment to Kaufman Bros., L.P. (1)                                                    |  | -                |  | (80,000)        |  | (33,775)           
|Payment to Enable funds (2)                                                           |  | -                |  | (30,000)        |  | -                  
|Payment to Feldman Weinstein & Smith (2)                                              |  | -                |  | -               |  | (5,000)            
|                                                                                      |  | (67,208)         |  | (110,000)       |  | (38,775)           
|                                                                                      |  |                  |  |                 |  |                    
|Net proceeds                                                                          |  | $        607,792 |  | $     3,090,000 |  | $         1,312,225
|                                                                                      |  |                  |  |                 |  |                    
|                                                                                      |  |                  |  |                 |  |                    
|(1) Salzwedel and Kaufman Bros. acted as our advisors on the respective transactions.
|(2) Reimbursement of legal fees and due diligence costs incurred by the investor.    
|(3) We used $1,309,492 of the proceeds to payoff a note held by a stockholder.       



December 2006 Private Placement

The following table sets forth the (i) gross proceeds we received from each investor in our December 2006 Private Placement and (ii) amount of payments that we may be required to make under the terms of the debentures issued in our December 2006 Private Placement assuming all such payments are made in cash when due.

|                                                                                                                                                                                                                                                                                                                                                             |                |           |             |                    |          |                   |           |           |             |   |           |  |           |        |        |   |         |  |   |         |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------- | --------- | ----------- | ------------------ | -------- | ----------------- | --------- | --------- | ----------- | - | --------- |  | --------- | ------ | ------ | - | ------- |  | - | ------- |  | 
|                                                                                                                                                                                                                                                                                                                                                             |                |           |             | Principal Payments |          | Interest Payments
|Investor Name                                                                                                                                                                                                                                                                                                                                                |                |           |             |                    |          |                   | Due in    |           |             |   |           |  |           |        | Due in |   |         | 
|                                                                                                                                                                                                                                                                                                                                                             | Gross Proceeds |           | Monthly (1) |                    | 2007 (2) |                   | Total (3) |           | Monthly (4) |   | 2007 (2)  |  | Total (3)
|                                                                                                                                                                                                                                                                                                                                                             |                |           |             |                    |          |                   |           |           |             |   |           |  |           |        |        |   |         |  |   |        
|Enable Growth Partners LP                                                                                                                                                                                                                                                                                                                                    | $              | 1,700,000 |             | $                  | 107,937  |                   | $         | 647,622   |             | $ | 1,942,857 |  | $         | 6,754  |        | $ | 99,733  |  | $ | 141,829
|Enable Opportunity Partners LP                                                                                                                                                                                                                                                                                                                               |                | 200,000   |             |                    | 12,698   |                   |           | 76,188    |             |   | 228,571   |  |           | 795    |        |   | 11,733  |  |   | 16,686 
|Pierce Diversified Strategy Master Fund LLC, ena                                                                                                                                                                                                                                                                                                             |                | 100,000   |             |                    | 6,349    |                   |           | 38,094    |             |   | 114,286   |  |           | 397    |        |   | 5,867   |  |   | 8,342  
|Crescent International Ltd.                                                                                                                                                                                                                                                                                                                                  |                | 1,200,000 |             |                    | 76,191   |                   |           | 457,146   |             |   | 1,371,429 |  |           | 4,767  |        |   | 70,400  |  |   | 100,114
|                                                                                                                                                                                                                                                                                                                                                             |                |           |             |                    |          |                   |           |           |             |   |           |  |           |        |        |   |         |  |   |        
|                                                                                                                                                                                                                                                                                                                                                             | $              | 3,200,000 |             | $                  | 203,175  |                   | $         | 1,219,050 |             | $ | 3,657,143 |  | $         | 12,713 |        | $ | 187,733 |  | $ | 266,971
|                                                                                                                                                                                                                                                                                                                                                             |                |           |             |                    |          |                   |           |           |             |   |           |  |           |        |        |   |         |  |   |        
|(1) Monthly principal payments begin July 1, 2007 and end December 31, 2008, for a total of 18 monthly payments.                                                                                                                                                                                                                                            
|(2) Reflects the total amount of principal or interest payments, as the case may be, due in 2007.                                                                                                                                                                                                                                                           
|(3) Reflects the total amount of principal or interest payments, as the case may be, due over the term of the debenture.                                                                                                                                                                                                                                    
|(4) The first interest payment was due and paid on April 1, 2007 (aggregate payment of $56,686); the second interest payment is due July 1, 2007 (aggregate amount of $54,857); thereafter, we will make monthly interest payments. These figures represent the amount of monthly interest we would pay if we paid interest monthly beginning April 1, 2007.





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The closing market price of our common stock per share was $1.48 on December 28, 2006, the date we entered into the securities purchase agreement pursuant to which we sold the debentures and warrants in our December 2006 Private Placement.  The initial conversion price for these debentures is $1.54 per share and the exercise price of these warrants is $1.69 per share.  As of December 28, 2006, there was no discount to the closing market price for the conversion of the debentures or the exercise of the warrants.

Assuming that we pay all principal and interest payments due under these debentures in cash on their respective due dates, the total principal and interest payments for such debentures aggregate to $3,924,114 over their respective terms.  We received net proceeds of $3,090,000 from our December 2006 Private Placement.  The ratio of (i) the total amount of payments over the term of the debentures to (ii) net proceeds is 127%.

February 2007 Private Placement

The following table sets forth the (i) gross proceeds we received from each investor in our February 2007 Private Placement and (ii) amount of payments that we may be required to make under the terms of the debentures issued in our February 2007 Private Placement assuming all such payments are made in cash when due.



|                                                                                                                                                                                                                                                                                                                                                             |                |           |             |                    |          |                   |           |         |             |   |           |  |           |       |        |   |        |  |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------- | --------- | ----------- | ------------------ | -------- | ----------------- | --------- | ------- | ----------- | - | --------- |  | --------- | ----- | ------ | - | ------ |  | - | ------- | 
|                                                                                                                                                                                                                                                                                                                                                             |                |           |             | Principal Payments |          | Interest Payments
|Investor Name                                                                                                                                                                                                                                                                                                                                                |                |           |             |                    |          |                   | Due in    |         |             |   |           |  |           |       | Due in |   |        | 
|                                                                                                                                                                                                                                                                                                                                                             | Gross Proceeds |           | Monthly (1) |                    | 2007 (2) |                   | Total (3) |         | Monthly (4) |   | 2007 (2)  |  | Total (3)
|                                                                                                                                                                                                                                                                                                                                                             |                |           |             |                    |          |                   |           |         |             |   |           |  |           |       |        |   |        |  |   |        
|Enable Growth Partners LP                                                                                                                                                                                                                                                                                                                                    | $              | 717,500   |             | $                  | 45,556   |                   | $         | 273,336 |             | $ | 820,000   |  | $         | 2,545 |        | $ | 35,670 |  | $ | 53,437 
|Enable Opportunity Partners LP                                                                                                                                                                                                                                                                                                                               |                | 84,875    |             |                    | 5,389    |                   |           | 32,334  |             |   | 97,000    |  |           | 301   |        |   | 4,220  |  |   | 6,321  
|Pierce Diversified Strategy Master Fund LLC, ena                                                                                                                                                                                                                                                                                                             |                | 42,000    |             |                    | 2,667    |                   |           | 16,002  |             |   | 48,000    |  |           | 149   |        |   | 2,088  |  |   | 3,128  
|Crescent International Ltd.                                                                                                                                                                                                                                                                                                                                  |                | 506,625   |             |                    | 32,167   |                   |           | 193,002 |             |   | 579,000   |  |           | 1,797 |        |   | 25,187 |  |   | 37,732 
|                                                                                                                                                                                                                                                                                                                                                             |                |           |             |                    |          |                   |           |         |             |   |           |  |           |       |        |   |        |  |   |        
|                                                                                                                                                                                                                                                                                                                                                             | $              | 1,351,000 |             | $                  | 85,779   |                   | $         | 514,674 |             | $ | 1,544,000 |  | $         | 4,792 |        | $ | 67,165 |  | $ | 100,618
|(1) Monthly principal payments begin July 1, 2007 and end December 31, 2008, for a total of 18 monthly payments.                                                                                                                                                                                                                                            
|(2) Reflects the total amount of principal or interest payments, as the case may be, due in 2007.                                                                                                                                                                                                                                                           
|(3) Reflects the total amount of principal or interest payments, as the case may be, due over the term of the debenture.                                                                                                                                                                                                                                    
|(4) The first interest payment was due and paid on April 1, 2007 (aggregate payment of $11,837); the second interest payment is due July 1, 2007 (aggregate amount of $23,160); thereafter, we will make monthly interest payments. These figures represent the amount of monthly interest we would pay if we paid interest monthly beginning April 1, 2007.



The closing market price of our common stock per share was $2.49 on February 12, 2007, the date we entered into the securities purchase agreement pursuant to which we sold the debentures and warrants in our February 2007 Private Placement.  The initial conversion price for these debentures is $1.54 per share and the exercise price of these warrants is $1.69 per share.  The table below provides information about the possible discount to the closing market price as of the date of sale of these debentures and warrants.  The possible discount was calculated by subtracting the total conversion price on the date of sale (February 12, 2007) from the combined market price of the total number of shares underlying the debentures (assuming all interest payments are made in stock) and warrants on that date.  The conversion price of the debentures adjusts in relation to our stock price at the time of conversion only if the conversion is in response to our election to pay any amount due under the debentures in stock.  In this case the conversion price will be the lesser of the then effective conversion price (initially $1.54) or 85% of the average of the volume weighted average price, or VWAP, per share as reported on Bloomberg for our common stock for the 10 consecutive trading days immediately prior to the applicable payment date.  The conversion price of the debentures does not adjust in relation to our stock price if the holders voluntarily elect to convert the debentures.  The exercise price of the warrants remains the same regardless of our stock price at the time of exercise.



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For purposes of this disclosure, we calculated the possible discount under two scenarios with respect to the debentures and assumed that the debentures are being converted in response to our election to pay the amount due in stock.  Under the first scenario we assume that the conversion price at the time of conversion remains at the initial conversion price of $1.54, which it currently is.  Under the second scenario we assume that the conversion price is adjusted to reflect an average VWAP for our common stock of $0.80 for the 10 consecutive trading days immediately before the applicable payment date (in which case the conversion price would be $0.68 (85% of $0.80)).  We chose $0.80 because it is the lowest trading price of our common stock since its first trading date in April 2006.In each case, we assume that all principal and interest as to the debentures will be converted into shares of our common stock and the debentures will be outstanding for their entire term.



|                                                 |  |                                  |  |               
|------------------------------------------------ |  | -------------------------------- |  | --------------
|                                                 |  | Discount to Closing Market Price
|Investor Name                                    |  | Scenario No. 1                   |  | Scenario No. 2
|                                                 |  |                                  |  |               
|Enable Growth Partners LP                        |  | $      709,198                   |  | $    2,495,273
|Enable Opportunity Partners LP                   |  | 83,894                           |  | 295,173       
|Pierce Diversified Strategy Master Fund LLC, ena |  | 41,514                           |  | 146,064       
|Crescent International Ltd.                      |  | 500,763                          |  | 1,761,904     
|                                                 |  |                                  |  |               
|                                                 |  | $   1,335,369                    |  | $    4,698,414



Assuming that we pay all principal and interest payments due under these debentures in cash on their respective due dates, the total principal and interest payments aggregate to $1,644,618 over their respective terms.  The possible discount to the market price for such debentures and related warrants aggregates to $1,335,369 assuming the conversion price is the initial conversion price of $1.54 per share, which it currently is.  We received net proceeds of $1,312,225 from our February 2007 Private Placement.  The ratio of (i) the total amount of payments over the term of the debentures and the total possible discount to the market price of the shares underlying the debentures and warrants (ii) to the net proceeds is 227%.

December/February Private Placements in the Aggregate

The following table sets forth the (i)gross proceeds we received from each investor in our December/February Private Placements and (ii)amount of payments that we may be required to make under the terms of the debentures issued in our December/February Private Placements assuming all such payments are made in cash when due.

|                                                 |          |           |             |                    |          |        |           |           |                   |   |           |  |           |        |  |   |         |  |   |        
|------------------------------------------------ | -------- | --------- | ----------- | ------------------ | -------- | ------ | --------- | --------- | ----------------- | - | --------- |  | --------- | ------ |  | - | ------- |  | - | -------
|                                                 |          |           |             | Principal Payments |          |        |           |           | Interest Payments
|Investor Name                                    | Gross    |           |             |                    |          | Due in |           |           |                   |   |           |  |           | Due in |  |   |        
|                                                 | Proceeds |           | Monthly (1) |                    | 2007 (2) |        | Total (3) |           | Monthly (4)       |   | 2007 (2)  |  | Total (3)
|                                                 |          |           |             |                    |          |        |           |           |                   |   |           |  |           |        |  |   |         |  |   |        
|Enable Growth Partners LP                        | $        | 2,417,500 |             | $                  | 153,493  |        | $         | 920,958   |                   | $ | 2,762,857 |  | $         | 9,299  |  | $ | 135,403 |  | $ | 195,266
|Enable Opportunity Partners LP                   |          | 284,875   |             |                    | 18,087   |        |           | 108,522   |                   |   | 325,571   |  |           | 1,096  |  |   | 15,953  |  |   | 23,007 
|Pierce Diversified Strategy Master Fund LLC, ena |          | 142,000   |             |                    | 9,016    |        |           | 54,096    |                   |   | 162,286   |  |           | 546    |  |   | 7,955   |  |   | 11,470 
|Crescent International Ltd.                      |          | 1,706,625 |             |                    | 108,358  |        |           | 650,148   |                   |   | 1,950,429 |  |           | 6,564  |  |   | 95,587  |  |   | 137,846
|                                                 |          |           |             |                    |          |        |           |           |                   |   |           |  |           |        |  |   |         |  |   |        
|                                                 | $        | 4,551,000 |             | $                  | 288,954  |        | $         | 1,733,724 |                   | $ | 5,201,143 |  | $         | 17,505 |  | $ | 254,898 |  | $ | 367,589



|                                                                                                                                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) Monthly principal payments begin July 1, 2007 and end December 31, 2008, for a total of 18 monthly payments.                                                                                                                                                                                                                                            
|(2) Reflects the total amount of principal or interest payments, as the case may be, due in 2007.                                                                                                                                                                                                                                                           
|(3) Reflects the total amount of principal or interest payments, as the case may be, due over the term of the debenture.                                                                                                                                                                                                                                    
|(4) The first interest payment was due and paid on April 1, 2007 (aggregate payment of $68,523); the second interest payment is due July 1, 2007 (aggregate amount of $78,017); thereafter, we will make monthly interest payments. These figures represent the amount of monthly interest we would pay if we paid interest monthly beginning April 1, 2007.





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Assuming that we pay all principal and interest payments due under the debentures that we sold in our December/February Private Placements in cash on their respective due dates, the total principal and interest payments for such debentures aggregate to $5,568,732 over their respective terms. The possible net discount to the market price for such debentures and related warrants aggregates to $983,001 assuming the conversion price is the initial conversion price of $1.54 per share, which it currently is.  We received net proceeds of $4,402,225 from our December/February Private Placements.  The ratio of (i) the total amount of payments over the term of the debentures and the total possible discount to the market price of the shares underlying the debentures and warrants (ii) to the net proceeds is 149%.

Other Matters Relating to Future Amortizable Charges

As of March 31, 2007, we have $2.33 million of debt discount and $257,182 of deferred debt issuance costs on our balance sheet, which will be amortized to interest expense using the straight-line method over the life of the related debt.

Recent Accounting Pronouncements

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

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

In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  We are currently evaluating the impact that SFAS No. 157 will have on our future consolidated financial statements.

Off-Balance Sheet Arrangements

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

RISK FACTORS

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



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Risks Related To Our Financial Condition

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

We have a limited operating history from which to evaluate our business and prospects.  We incurred a net loss of $5.47 million for the three months ended March 31, 2007 and $3.12 million for the year ended December 31, 2006.  We have an accumulated deficit of $15.49 million and a stockholders' deficit of $5.82 million at March 31, 2007.  We cannot assure you that our future planned operations will be implemented successfully or that we will ever have profits.  We have yet to establish significant customer demand for our product and may not for a significant period of time, if ever, which may result in our inability to continue operations.  Furthermore, we are experiencing the initial costs and uncertainties of a young operating company, including start-up expenditures, unforeseen costs and difficulties, complications, and delays, all of which must be resolved and/or paid without the benefit of a predictable revenue stream.  We cannot be sure that we will be successful in meeting these challenges and addressing these risks and uncertainties.  If we are unable to do so, our business will not be successful.

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

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

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

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

We have increased the amount of our indebtedness and undertaken certain restrictions as a result of our recent private placement of convertible debentures.

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



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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|·
we pay interest and other charges on the debentures;                                                                                                                                                                                                                                                                                                                                                                                                                        
|·
we use the proceeds from the sale of the debentures only for permitted purposes;                                                                                                                                                                                                                                                                                                                                                                                            
|·
while the debentures are outstanding, if we issue equity or equity linked securities at a price lower than the conversion price of the debentures, then the conversion price of the debentures will be reduced to the same price of the equity or equity linked securities so issued;                                                                                                                                                                                       
|·
we keep reserved out of our authorized shares of common stock sufficient shares to satisfy our obligation to issue shares on conversion of the debentures and the exercise of the related warrants issued in connection with the sale of the debentures;                                                                                                                                                                                                                    
|·
we must file a registration statement with the SEC registering the shares of common stock issuable upon the conversion of the debentures and the exercise of the related warrants on a timely basis, and it must be declared effective within a certain period of time, or else we are required to pay to each investor partial liquidated damages (see "Our failure to secure registration of the common stock could result in substantial liquidated damages," below); and
|·
we may not, directly or indirectly, redeem, purchase or otherwise acquire any capital stock or set aside any monies for such redemption, purchase or other acquisition.                                                                                                                                                                                                                                                                                                     





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

While we received net proceeds of $4.4 million in our December/February Private Placements, we owe the investors $5.2 million.

Because the debentures we issued in our December/February Private Placements were issued at a discount, in the aggregate, we received net proceeds of $4.4 million but we issued $5.2 million worth of debentures.  In other words, we received 12.5% less money than we owe.  In addition, the debentures accrue interest at the rate of 6% per annum on the full amount of $5.2 million.  Assuming the debentures and accrued interest are not repaid with or converted into common stock, we will have to pay the investors the full $5.2 million, plus interest, in accordance with the payment terms of the debentures.

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

The debentures we issued in our December/February Private Placements impose significant covenants on us, some of which may impair our ability to issue additional debt or equity, if necessary.  Also impairing our ability to issue additional debt or equity, if necessary, is the right of the investors in our December/February Private Placements to participate in up to 100% of any debt or equity financing we propose to undertake through the date that is the 12 month anniversary of the effectiveness of the registration statement we must file related to our February 2007 Private Placement.



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

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

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

Under the terms of the registration rights agreements we entered into with the investors in connection with our December/February Private Placements, we agreed to file two separate registration statements covering the resale of the shares of common stock that may be issued to investors upon the conversion of the debentures and the exercise of the warrants, and to maintain the effectiveness of the registration statements (subject to certain limitations) for a period of time until the holders can sell the underlying common stock without volume restrictions under Rule 144(k) of the Securities Act of 1933, as amended, or the Securities Act.  If we fail to file a registration statement on a timely basis, or if it is not declared effective by the SEC within a specified time frame, or if we fail to maintain the effectiveness of the registration statement, we are required to pay to the investors partial liquidated damages.

We previously had to pay partial liquidated damages, which was paid with shares of our common stock, in connection with a sale of shares of our common stock in our November 29, 2006 private placement where we agreed to file a registration statement covering those shares no later than 30 days after the closing date and to cause such registration statement to be declared effective by the SEC within 120 days of filing.  Because we failed to timely file that registration statement, we were obligated to pay as partial liquidated damages an amount equal to one-half percent (.5%) of the portion of the purchase price paid by such holder attributed to any common stock then held by such holder.  If we continue to fail to secure such registration, we are obligated to pay as partial liquidated damages an amount equal to one-half percent (.5%) of the portion of the purchase price paid by such holder attributed to any common stock then held by such holder for each subsequent 30 day period.

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

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



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

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

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

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

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

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

Actual sales or the prospect of future sales of shares of our common stock under Rule 144 may have a depressive effect upon the price of, and market for, our common stock.  As of May 8, 2007, 15,882,370 shares of our common stock were issued and outstanding. 11,394,688 of these shares are "restricted securities" and under some circumstances may, in the future, be under a registration under the Securities Act or in compliance with Rule 144 adopted under the Securities Act.  In general, under Rule 144, subject to the satisfaction of other conditions, a person who has beneficially owned restricted shares of common stock for at least one year is entitled to sell, within any three month period, a number of shares that:

·

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

·

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



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



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In addition to the 11,394,688 shares of "restricted securities" that were issued and outstanding as of April 30, 2007, an aggregate of 4,936,647 shares of common stock which will be issuable upon the conversion and exercise of outstanding debentures and warrants will be registered for resale in registration statements.  The additional overhang represented by these registered and to-be registered securities could also have a depressive effect on the public trading price of our common stock.

Risks Related to Our Business

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

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

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

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

·

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

·

effectiveness of our sales and marketing efforts;

·

capital equipment budgets of our targeted end-users;

·

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

·

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

·

development of new products and technologies by our competitors.



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

Price competition would negatively impact our business.

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



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

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

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

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

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

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

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



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

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



·

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

·

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

·

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

·

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

·

changes in a customer's financial condition.



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

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

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

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

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

Risks Relating to Our Industry



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

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

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

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

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

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

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

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



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

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

Risks Related to the Market for Our Common Stock

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

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

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

·

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

·

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

·

technological innovations by us or our competitors;

·

quarterly variations in our results of operations;

·

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

·

general market conditions or market conditions specific to technology industries;

·

sales of large blocks of our common stock; and

·

domestic and international macroeconomic factors.



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

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

·

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

·

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

·

effecting an acquisition that might complicate or preclude the takeover.





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

In our December/February Private Placements, in the aggregate, we issued a total of $5.2 million principal amount of original issue discount 6% convertible debentures and warrants to purchase 1,350,947 shares of our common stock.  Both the debentures and the warrants contain provisions that will require us to reduce the conversion price of the debentures (currently $1.54 per share) and the exercise price of the warrants (currently $1.69 per share) if we issue additional securities while the debentures and warrants are outstanding which contain purchase prices, conversion prices or exercise prices less than the conversion price of the debentures or the exercise price of the warrants issued in our December/February Private Placements.  If this were to occur, current investors, other than the investors in our December/February Private Placements, would sustain material dilution in their ownership interest.

If the holders of our outstanding convertible debentures, warrants and options convert and exercise their securities into common stock, we will issue up to 10,023,659 shares, which will materially dilute the voting power of our currently outstanding common stock and possibly result in a change of control of our company.

As of May 8, 2007, we had 15,882,370 shares of common stock outstanding.  We also have convertible debentures which convert into 3,377,367 shares of common stock (assuming conversion at the current conversion price of $1.54, which it is now; and assuming payment of all accrued interest in cash), warrants which are exercisable for 2,109,280 shares of common stock and stock options exercisable for 4,537,012 shares of common stock.  Additionally, we may elect to pay principal or interest on our convertible debentures in shares of common stock, or holders thereof may elect to convert all or any portion of such convertible debentures into shares of common stock.  As discussed in the risk factor above, the conversion price and exercise price, respectively, of convertible debentures and related warrants we issued in our December/February Private Placements is subject to adjustment.  If such conversion price or exercise price is adjusted, this would lead to the issuance of additional shares upon conversion or exercise, as applicable.  If the holders of our convertible debentures, warrants, and stock options convert and exercise their securities into common stock, it will materially dilute the voting power of our outstanding common stock and may result in a change of control of our company.

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

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

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

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



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

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

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

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

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

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

Our directors, executive officers and 5% stockholders beneficially own approximately 33.38% of our outstanding common stock, which could limit your ability to influence the outcome of key transactions, including changes of control.

Our directors, executive officers, and current holders of 5% or more of our outstanding common stock, beneficially own, in the aggregate, approximately 33.38% of our outstanding common stock.  As a result, a small number of shareholders will have voting control and would be able to control the election of directors and the approval of significant corporate transactions.  This concentration of ownership may also delay, deter or prevent a change of control of our company and will make some transactions more difficult or impossible without the support of these shareholders.

The debentures and warrants we issued in our December/February Private Placements contain conversion or exercise caps that limit the number of shares acquirable upon conversion or exercise to 4.99% of the total number of shares of our common stock then outstanding.  In light of these conversion and exercise caps, none of the holders of these debentures and warrants are included as current holders of 5% or more of our outstanding common stock.



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Our common stock is subject to penny stock rules.

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

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

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

As of the end of the period covered by this report, under the supervision and with the participation of our chief executive officer and our chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.  Based upon that evaluation, our chief executive officer and chief financial officer concluded that as of March 31, 2007, the design and operation of our disclosure controls and procedures are effective in timely communicating to them the material information relating to us required to be included in our periodic SEC filings.

Changes in Internal Controls over Financial Reporting

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



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Limitations on Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to provide reasonable assurances that material information related to our company is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.  Our chief executive officer and chief financial officer have determined that as of March 31, 2007, our disclosure controls were effective at that "reasonable assurance" level.  Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  Because of the small size of our current operations, supervision of financial controls is concentrated in a few individuals and we have limited opportunity to segregate duties or implement checks and balances.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.  Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.





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PART II--OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 6, 2007, we entered into an agreement with Aequitas Capital Management, Inc., in order to provide prospective customers with a leasing alternative for our videoconferencing systems.  In connection with this agreement, we issued Aequitas Capital an immediately exercisable warrant to purchase 250,000 shares of our common stock at an exercise price of $2.00 per share. The warrant has a three-year term and expires in March 2010.  As a result of such issuance, Aequitas Capital beneficially owns, together with its affiliates, more than 5% of our outstanding common stock.

The transaction described above was exempt from registration under the Securities Act pursuant to Section 4(2) thereof.  The transaction was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the investor in connection with this offering.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.

OTHER INFORMATION

None.



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ITEM 6.

EXHIBITS

|            |  |                                                                                                                                                            
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                
|4.1         |  | Form of original issue discount 6% senior convertible debenture issued in connection with the 
February 12, 2007 financing (1)                             
|4.2         |  | Form of common stock purchase warrant issued in connection with the February 12, 2007 financing (1)                                                        
|4.3         |  | Form of common stock purchase warrant issued to Aequitas Capital Management, Inc. (2)                                                                      
|10.1        |  | Securities Purchase Agreement by and among Telanetix, Inc., a Delaware corporation, and the purchasers identified therein dated as of February 12, 2007 (1)
|10.2        |  | Registration Rights Agreement by and among Telanetix, Inc., a Delaware corporation, and the purchasers identified therein dated as of February 12, 2007 (1)
|10.3        |  | Waiver and Amendment Agreement by and among Telanetix, Inc., a Delaware corporation, and the purchaser identified therein dated as of February 12, 2007 (1)
|10.4        |  | Letter Agreement between Telanetix, Inc., a Delaware corporation, and Aequitas Capital Management
dated March 6, 2007 (2)                                  
|10.5        |  | Stock Purchase Agreement between Telanetix, Inc., a Delaware corporation, and the sellers identified therein dated as of
March 30, 2007 (3)                
|10.6        |  | Employment Agreement between Telanetix, Inc., a Delaware corporation, and Robert Leggio dated April 1, 2007 (3)                                            
|10.7        |  | Employment Agreement between Telanetix, Inc., a Delaware corporation, and Elbert E. Layne, Jr. dated April 1, 2007 (3)                                     
|31.1*       |  | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, by Chief Executive Officer                                  
|31.2*       |  | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, by Chief Financial Officer                                  
|32.1*       |  | Certification pursuant to 18 U.S.C. §1350 by Chief Executive Officer                                                                                       
|32.2*       |  | Certification pursuant to 18 U.S.C. §1350 by Chief Financial Officer                                                                                       
|*           |  | Filed as an exhibit to this report                                                                                                                         
|(1)         |  | Incorporated herein by reference to the registrant's Form 8-K filed on February 14, 2007                                                                   
|(2)         |  | Incorporated herein by reference to the registrant's Form 10-KSB filed on March 29, 2007                                                                   
|(3)         |  | Incorporated herein by reference to the registrant's Form 8-K filed on April 4, 2007                                                                       







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SIGNATURES

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



|                    |     |                              
|------------------- | --- | -----------------------------
|                    |     | TELANETIX, INC.              
|Dated: May 14, 2007 |     |                              
|                    | By: | /s/ Richard M. Ono           
|                    |     | Mr. Richard M. Ono           
|                    |     | Chief Financial Officer      
|                    |     | (Principal Financial Officer)





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