**U.S.
      Securities and Exchange Commission**


Washington,
      DC 20549





**FORM
      10-QSB**





**x** **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
      SECURITIES**


**EXCHANGE
      ACT OF 1934**





For
      the
      quarterly period ended September 30, 2006





**o** **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE**


**EXCHANGE
      ACT**





For
      the
      transition period from __________ to __________





*Commission
      File Number 000-13822*





**NAYNA
      NETWORKS, INC.**


(Exact
      name of small business issuer as specified in its charter)





**Nevada**
            
            **83-0210455**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                No.)





4699
      Old Ironsides Drive, Suite 420, Santa Clara, California 95054


(Address
      of principal executive offices)





Registrant's
      telephone number, including area code (408) 956-8000





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. x Yes o No





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date.





Common
      stock, par value $0.0001, 43,070,348 shares outstanding as of September 30,
      2006.





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









**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**NAYNA
      NETWORKS, INC.**


(a
      development stage enterprise)


**CONSOLIDATED
      BALANCE SHEET**


(in
      thousands, except share and per share data)


(Unaudited)





**September
                30,**
              **2006**
            
            **September
                30,**
              **2005****(Unaudited)****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            (27
            )
            $
            91Restricted
                cash
            
            
            44Accounts
                receivable, net of allowances for doubtful accounts of $0 and
                $33
            
            
            455
            
            
            63Prepaid
                expenses and other current assets
            
            
            91
            
            
            79Total
                current assets
            
            
            563
            
            
            233Property
                and equipment, net
            
            
            76
            
            
            150Intangible
                asset, net
            
            
            2,741
            
            
            0Other
                assetsDeposits
            
            
            256Unamortized
                discount and fees
            
            
            163Total
                other assets
            
            
            419
            
            
            193Total
                assets
            
            $
            3,799
            
            $
            576**Liabilities
                and stockholders’ equity**Current
                liabilities:Accounts
                payable and current liabilities
            
            $
            6,508
            
            $
            2,120Notes
                payable
            
            
            2,464
            
            
            1,328Embedded
                derivative liability
            
            
            4,736
            
            
            2,372Warranty
                liability
            
            
            48Callable
                secured convertible note
            
            
            63Total
                current liabilities
            
            
            13,819
            
            
            5,820Long
                term liabilitiesDeferred
                gain, less current portionTotal
                long-term liabilities
            
            
            0
            
            
            0Total
                liabilities
            
            
            13,819
            
            
            5,820**Stockholders’
                equity:**Series
                D preferred stock, Auth shares 52,500,000, shares O/S 19,531,247
                at
                12/31/04Common
                Stock: $0.001 par value, 1,000,000,000 shares authorized at September
                30,
                2006 and September 30, 2005 and 43,078,348 and 35,802,504 shares
                issued
                and outstanding as of September 30, 2006 and September 30,
                2005
            
            
            4
            
            
            30Additional
                paid-in-capital
            
            
            60,709
            
            
            51,981Deferred
                compensation
            
            
            (453
            )
            
            (-
            )Deficit
                accumulated during the development stage
            
            
            (70,280
            )
            
            (57,255
            )Total
                stockholders’ (deficit) equity
            
            
            (10,020
            )
            
            (5,244
            )Total
                liabilities and stockholders’ equity
            
            $
            3,799
            
            $
            576




See
      accompanied notes to these unaudited condensed consolidated financial
      statements




2




**NAYNA
      NETWORKS, INC.**


(a
      development stage enterprise)


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(in
      thousands, except share and per share data)


(Unaudited)




**Three
                Months Ended September 30,**
            
            **Cumulative
                Period from February 10, 2000 (date of inception)
                to****2006**
            
            **2005**
            
            **September
                30, 2006**Revenues
            
            $
            0
            
            $
            0
            
            $
            336Cost
                of goods
            
            
            0
            
            
            0
            
            
            318Gross
                profit
            
            
            0
            
            
            0
            
            
            18Operating
                expenses:Research
                and development
            
            
            262
            
            
            693
            
            
            43,720Business
                development
            
            
            89
            
            
            304
            
            
            3,741General
                and administrative
            
            
            1,059
            
            
            52
            
            
            13,178Goodwill
                impairment
            
            
            
            
            
            
            
            
            9,545Total
                operating expenses
            
            
            1,410
            
            
            1,049
            
            
            70,183Loss
                from operations
            
            
            (1,410
            )
            
            (1,049
            )
            
            (70,165
            )Unrealized
                (loss) related to derivative and warrant liability
            
            
            (1,339
            )
            
            
            
            
            (1,552
            )Interest
                expense, net
            
            
            (55
            )
            
            1
            
            
            1,162Gain
                (loss) on sale of assets
            
            
            53
            
            
            
            
            
            276Net
                loss
            
            $
            (2,751
            )
            $
            (1,048
            )
            $
            (70,279
            )Weighted
                shares outstandingBasic
                and diluted
            
            
            42,586,732
            
            
            26,302,504Net
                loss per share:Basic
                and diluted
            
            $
            (0.06
            )
            $
            (0.04
            )




See
      accompanied notes to these unaudited condensed consolidated financial
      statements


3




**NAYNA
      NETWORKS, INC.**


(a
      development stage enterprise)


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(in
      thousands, except share and per share data)


(Unaudited)




**Nine
                Months Ended September 30,**
            
            **Cumulative
                Period from February 10, 2000 (date of inception)
                to****2006**
            
            **2005**
            
            **September
                30, 2006**Revenues
            
            $
            336
            
            $
            0
            
            $
            336Cost
                of goods
            
            
            318
            
            
            0
            
            
            318Gross
                profit
            
            
            180
            
            
            0
            
            
            18Operating
                expenses:Research
                and development
            
            
            1,462
            
            
            2,689
            
            
            43,720Business
                development
            
            
            377
            
            
            533
            
            
            3,741General
                and administrative
            
            
            3,345
            
            
            740
            
            
            13,178Goodwill
                impairment
            
            
            
            
            
            
            
            
            9,545Total
                operating expenses
            
            
            5,183
            
            
            3,962
            
            
            70,183Loss
                from operations
            
            
            (5,165
            )
            
            (3,962
            )
            
            (70,165
            )Unrealized
                (loss) related to derivative and warrant liability
            
            
            (555
            )
            
            
            
            
            (1,552
            )Interest
                expense, net
            
            
            (270
            )
            
            (40
            )
            
            1,162Gain
                (loss) on sale of assets
            
            
            158
            
            
            378
            
            
            276Merger
                related costs
            
            
            
            
            
            (243
            )
            
            0Net
                loss
            
            $
            (5,832
            )
            $
            (3,874
            )
            $
            (70,279
            )Weighted
                shares outstandingBasic
                and diluted
            
            
            42,586,732
            
            
            32,652,504Net
                loss per share:Basic
                and diluted
            
            $
            (0.14
            )
            $
            (0.119
            )




See
      accompanied notes to these unaudited condensed consolidated financial
      statements


4




**NAYNA
      NETWORKS, INC.**


(a
      development stage enterprise)


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(in
      thousands, except share and per share data)


(Unaudited)




**Nine
                Months Ended September 30,**
            
            **Cumulative
                Period from February 10, 2000 (date of inception)
                to****2006**
            
            **2005**
            
            **September
                30, 2006**Cash
                flows from operating activities:Net
                loss
            
            $
            (5,832
            )
            $
            (3,874
            )
            $
            (67,528
            )Adjustments
                to reconcile net loss to net cash used in operations:Depreciation
                and amortization
            
            
            981
            
            
            458
            
            
            5,190Loss
                (gain) on sale of property and equipment
            
            
            (158
            )
            
            
            
            
            838Impairment
                of goodwill related to acquisitions
            
            
            
            
            
            
            
            
            9,546Noncash
                charges related to stock options granted to consultants
            
            
            231
            
            
            
            
            
            398Noncash
                charges related to issuance of stock options for legal services
            
            
            24
            
            
            
            
            
            675Noncash
                interest expense related to issuance of convertible debt
            
            
            177
            
            
            
            
            
            256Unrealized
                (gain) loss related to adjustment of derivative andwarrant
                liability to fair value of underlying securities
            
            
            555
            
            
            
            
            
            1,552Amortization
                of financing costs
            
            
            57
            
            
            
            
            
            63Amortization
                of discount on warrants associated with equipment
                financing
            
            
            
            
            
            
            
            
            202Changes
                in operating assets and liabilities:Restricted
                cash
            
            
            
            
            
            49Accounts
                receivable
            
            
            (427
            )
            
            97
            
            
            (455
            )Prepaid
                expenses and other current assets
            
            
            (12
            )
            
            (44
            )
            
            (233Other
                assets
            
            
            81
            
            
            (177
            )
            
            (114
            )Accounts
                payable and accrued liabilities
            
            
            1,683
            
            
            930Net
                cash used in operating activities
            
            
            (2,639
            )
            
            (2,631
            )
            
            (49,610
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            
            
            
            
            
            
            (3,685
            )Proceeds
                from sale of property and equipment
            
            
            (12
            )
            
            260Costs
                associated with the acquisition of Xpeed, Inc.
            
            
            -
            
            
            -Net
                cash used in investing activities
            
            
            (12
            )
            
            260
            
            
            (3,865
            )Cash
                flows from financing activities:Proceeds
                from loan facility
            
            
            591
            
            
            610
            
            
            382Payments
                on capital lease obligations and loan facility
            
            
            231
            
            
            (1,229
            )Proceeds
                from issuance of common stock, net of repurchases
            
            
            16
            
            
            
            
            
            11,953Proceeds
                from issuance of Series A redeemable convertible preferred stock,
                net of
                issuance costs
            
            
            4
            
            
            
            
            
            35,897Proceeds
                from issuance of Series B redeemable convertible preferred stock,
                net of
                issuance costs
            
            
            
            
            
            
            
            
            3,399Proceeds
                from issuance of Series D redeemable convertible preferred stock,
                net of
                issuance costs
            
            
            
            
            
            
            
            
            2,974Issuance
                of convertible debt
            
            
            
            
            
            2,372
            
            
            52,454Proceeds
                from deferred stock option compensationProceeds
                from issuance of callable secured convertible notes, net of financing
                costs
            
            
            
            
            
            
            
            
            (0
            )Net
                cash provided (used) by financing activities
            
            
            842
            
            
            1,753
            
            
            107,057Net
                increase (decrease) in cash and cash equivalents
            
            
            (1,809
            )
            
            (618
            )
            
            (27
            )Cash
                and cash equivalents at beginning of period
            
            
            1,782
            
            
            709Cash
                and cash equivalents end of period
            
            $
            (27
            )
            $
            91
            
            $
            (27
            )Non-cash
                financing activities:Conversion
                of preferred stock into common
            
            $
            
            
            $
            
            
            
            
            )Issuance
                of preferred stock for conversion of note payable
            
            $
            
            
            $Shares
                issued on conversion of debentures
            
            
            2,339Shares
                issued for purchase of intangibles
            
            $
            1,150
            
            $Shares issued for services or settlement of claims
            
            
            674





See
      accompanied notes to these unaudited condensed consolidated financial
      statements


5




**Notes
      to Condensed Consolidated Financial Statements
      (unaudited)**





**NOTE
      1: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**





***(a)
      The Company***





Nayna
      Networks, Inc., a development stage enterprise (the “Company” or “Nayna”), is
      engaged in the development of next-generation broadband access networking
      solutions, also known as Ethernet in the First Mile for the secure
      communications market and its principal product is ExpressSTREAM. The company,
      together with the companies it has acquired, has raised more than $65 million
      in
      venture capital investment over the five years of its existence, substantially
      all of which has been spent on research and development activities. The current
      company was formed in April 2005 as a result of a merger and plan of
      reorganization between Rescon Technology Corporation (“Rescon”), a Nevada
      corporation and publicly traded company and Nayna Networks, Inc., a Delaware
      corporation and a private company (“Nayna Delaware”). Following the merger,
      Rescon Technology Corporation changed its name to Nayna Networks, Inc.
      (“Nayna”)





The
      Company has incurred losses since its inception, and management believes that
      it
      will continue to do so for the foreseeable future because of additional costs
      and expenses related to continued development and expansion of the Company’s
      product offerings. The Company currently plans to generate revenues and reduce
      operating expenses to levels that will result in at least neutral cash flows
      from operations. However, until that stage is reached, the Company will continue
      to use its current cash on hand and require additional financing to support
      its
      operations. Failure to generate sufficient cash flows from operations, raise
      additional financing or reduce certain discretionary spending could have a
      material adverse effect on the Company’s ability to continue as a going concern
      and to achieve its intended business objectives. The accompanying financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.





***(b)
      Development Stage***





Since
      its
      inception although the Company has commenced its principal operations, it has
      not achieved a sufficient level of sales and market demand to become an
      established operating enterprise. Therefore, as per the Statement of Financial
      Accounting Standards (“SFAS”) No.7, “Accounting and Reporting by Development
      Stage Enterprises”, the Company is being classified as a development stage
      enterprise. The Company is in the development stage and accordingly, its
      financial statements are presented in accordance with Statement of Financial
      Accounting Standards (SFAS) No. 7, “Accounting and Reporting by Development
      Stage Enterprises”. Successful completion of the Company’s developmental program
      and, ultimately, the attainment of profitable operations are dependent upon
      future events, including future financing, successfully completing product
      development, and achieving a sufficient level of sales and market demand to
      become an established operating enterprise. However, there can be no assurance
      that the Company will be able to achieve profitable operations.





**Basis
      of Presentation**





The
      accompanying condensed consolidated financial statements are unaudited, as
      permitted pursuant to the rules and regulations of the Securities and Exchange
      Commission (the "Commission"). Certain information and disclosures normally
      included in financial statements prepared in accordance with accounting
      principals generally accepted in the United States have been condensed or
      omitted. These interim condensed consolidated financial statements include
      all
      adjustments, which in the opinion of management, are necessary in order to
      make
      the condensed consolidated financial statements not misleading. It is suggested
      that these condensed consolidated financial statements be read in conjunction
      with the consolidated financial statements and notes thereto included in the
      Company's Registration Statement Form SB-2/A-6 as amended October 27, 2006
      and
      other filings that the Company may make, from time to time, with the
      Commission.





The
      information contained herein has been prepared by the Company in accordance
      with
      the rules of the Commission. The financial information contained herein as
      of
      September 30, 2006, for the nine months ended September 30, 2006 and 2005,
      and
      for the cumulative period from February 10, 2000 (date of inception) to
      September 30, 2006 is unaudited. The condensed consolidated financial statements
      reflect all adjustments, consisting of only normal recurring accruals, which
      are, in the opinion of management, necessary for a fair statement of the results
      of the interim periods presented. The results of the Company's operations for
      any interim period are not necessarily indicative of the results of the
      Company's operations for any other interim period or for a full
      year.





***All
      amounts set forth in these Notes to the Condensed Consolidated Financial
      Statements are in thousands (`000s), except share and per share data (except
      where specifically noted otherwise*** *)* ***.***





**Principals
      of Consolidation**





The
      consolidated financial statements have been prepared in accordance with
      accounting policies generally accepted in the United States of America and
      include the Company and its wholly owned subsidiaries. All inter-company
      transactions have been eliminated.





**Use
      of Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions. These estimates and assumptions affect the reported
      amounts of assets, liabilities, revenues, expenses and disclosures of contingent
      assets and liabilities at the date of the financial statements. Significant
      estimates include revenue recognition, inventory valuation, useful lives and
      the
      valuation of long-lived assets. Actual results could differ from these
      estimates. Additionally, a change in the facts and circumstances surrounding
      these estimates could result in a change to the estimates and could impact
      future results.




6




**Inventory
      Valuation**





As
      a
      development stage enterprise, the Company expenses all inventories to research
      and development until such time as commercial revenues may
      commence.





**Impairment
      of Long-Lived Assets**





The
      Company evaluates its long-lived assets, including property and equipment,
      for
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable. When the sum of the present
      value of future net cash flows expected to result from the use of the asset
      and
      its eventual disposition is less than its carrying amount, an impairment loss
      would be measured based on the discounted cash flows compared to the carrying
      amount.





**Cash
      and Cash Equivalents**





For
      purposes of the statement of cash flows, the Company considers all instruments
      with an original maturity of three months or less to be cash
      equivalents.





**Property
      and Equipment**





Property
      and equipment are stated at cost less accumulated depreciation. Depreciation
      expense is determined using the straight-line method over the estimated useful
      lives of the respective assets, which are generally three to five years for
      computers, equipment and furniture. Depreciation on leasehold improvements
      is
      provided using the straight-line method over the shorter of the estimated useful
      lives of the improvements or the lease term. Expenditures for maintenance and
      repairs are charged to operating expense as incurred. Upon retirement or sale,
      the original cost and related accumulated depreciation are removed from the
      respective accounts, and the gains and losses are included in other income
      or
      expense.





**Business
      and Credit Risk**





Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist primarily of cash, cash equivalents invested in deposits and trade
      receivables. The Company has not experienced any losses on its deposits of
      cash
      and cash equivalents. Management believes that the institutions are financially
      sound and, accordingly, minimal credit risk exists. The carrying values reported
      in the balance sheets for cash, cash equivalents and trade receivables
      approximate their fair values.





**Research
      and Development**





The
      Company accounts for research and development costs in accordance with Statement
      of Financial Accounting Standards ("SFAS") No. 2, "Accounting for Research
      and
      development Costs," and, accordingly, the Company expenses research and
      development costs when incurred.





**Income
      Taxes**





The
      Company recognizes deferred tax assets and liabilities for operating loss
      carryforwards, tax credit carryforwards and the estimated future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      in effect for the year in which the temporary differences are expected to be
      recovered or settled. A valuation allowance is recorded to reduce the carrying
      amounts of net deferred tax assets if there is uncertainty regarding their
      realization.





**Stock-Based
      Compensation**


The
        Company adopted the provisions of SFAS 123(R), Share-Based Payments, on January
        1, 2006. Accordingly, compensation costs for all share-based awards to employees
        are measured based on the grant date fair value of those awards and recognized
        over the period during which the employee is required to perform service
        in
        exchange for the award (generally over the vesting period of the award).
        We have
        no awards with market or performance conditions. Effective January 1, 2006
        and
        for all periods subsequent to that date, SFAS 123(R) supersedes our previous
        accounting under Accounting Principles Board Opinion No. 25, "Accounting
        for
        Stock Issued to Employees" ("APB 25"). In March 2005, the Securities and
        Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB 107")
        relating to SFAS 123(R). The Company has applied the provisions of SAB 107
        in
        its adoption of SFAS 123(R).
  7




For
        the
        quarter ended September 30, 2006, the operating expenses included a charge
        of
        $77 for compensation cost related to stock options.
  **Goodwill
        and Purchased Intangible Assets**





In
      July
      2001, the FASB issued Statement of Financial Accounting Standards No. 142,
      "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires goodwill
      to be tested for impairment on an annual basis and between annual tests in
      certain circumstances, and written down when impaired, rather than being
      amortized as previous accounting standards required. Furthermore, SFAS 142
      requires purchased intangible assets other than goodwill to be amortized over
      their useful lives unless these lives are determined to be
      indefinite.





**Reclassifications**





Certain
      amounts relating to the prior year’s consolidated balance sheets have been
      reclassified to conform to the current year presentation.





**Recent
      Accounting Pronouncements**





In
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154,
“Accounting Changes and Error Corrections”—a replacement of APB Opinion No. 20
      and FASB Statement No. 3 (“SFAS 154”). SFAS 154 requires retrospective
      application to prior periods’ financial statements for changes in accounting
      principle, unless it is impracticable to determine either the period-specific
      effects or the cumulative effect of the change. SFAS 154 also requires that
      a
      change in depreciation, amortization, or depletion method for long-lived,
      non-financial assets be accounted for as a change in accounting estimate
      affected by a change in accounting principle. SFAS 154 is effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. The implementation of SFAS 154 is not expected to
      have
      a material impact on our consolidated resulting operations, financial position
      or cash flows.





In
      November 2005, FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1,
“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments” (“FSP 115-1”), which provides guidance on determining when
      investments in certain debt and equity securities are considered impaired,
      whether that impairment is other-than-temporary, and on measuring such
      impairment loss. FSP 115-1 also includes accounting considerations subsequent
      to
      the recognition of other-than-temporary impairment and requires certain
      disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. FSP 115-1 is effective for reporting periods
      beginning after December 15, 2005. The Company’s adoption of FSP 115-1 will not
      have a material impact on our results of operations or financial
      condition.




In
      February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments” *—* an
      amendment of FASB Statements No. 133 and 140 (“SFAS 155”). SFAS 155 permits fair
      value measurement for any hybrid financial instrument that contains an embedded
      derivative, clarifies which interest-only strips and principal-only strips
      are
      not subject to the requirement of Statement 133, establishes a requirement
      to
      evaluate interests in securitized financial assets, clarifies the concentrations
      of credit risk, and eliminates the prohibition on a qualifying special-purpose
      entity from holding a derivative financial instrument. The Statement improves
      financial reporting by eliminating the exemption from applying Statement 133
      to
      interest in securitized financial assets and allowing an entity to elect fair
      value measurement at acquisition, at issuance, or when a previously recognized
      financial instrument is subject to a measurement. SFAS 155 is effective for
      all
      financial instruments acquired or issued in fiscal years beginning after
      September 15, 2006. The implementation of SFAS 155 is not expected to have
      a
      material impact on the Company’s consolidated resulting operations, financial
      position or cash flows.




8




**NOTE
      2: ACQUISITIONS**





***Reverse
      takeover of Nayna Networks, Inc. (a Delaware
      corporation)***





In
      April
      2005, the Company purchased intangible assets in connection with the acquisition
      of Nayna Delaware, and as purchase consideration issued 32,249,947 shares of
      common stock. The results of operations of the acquired company have been
      included in the condensed consolidated financial statements since that
      date.





SFAS
      NO.
      141 requires that all business combinations be accounted for by the purchase
      method and accordingly, it requires acquisition cost to be determined and
      allocated to assets acquired and liabilities assumed. Subsequent to the
      acquisition, the acquisition has been valued, by a third party, using the
      time-based value of the stock of Rescon as a basis, at $3,712. Since the company
      did not acquire any assets or liabilities of Rescon, the value assigned to
      the
      acquisition was allocated to intangible asset.





Based
      on
      the impairment tests performed using present value of future cash flows, the
      value of intangible asset acquired in April 2005 was considered impaired as
      of
      December 31, 2005. Accordingly, the Statement of Operations for the year ended
      December 31, 2005, included a charge of $3,712 for impairment of intangible
      asset.





***Abundance***





On
      January 20, 2006, we completed the acquisition of substantially all of the
      assets, including all of its intellectual property and all outstanding capital
      stock of its wholly-owned subsidiary, Abundance Networks (India) Pvt. Ltd.,
      or
      ANI India, and certain of the liabilities, including approximately $600 of
      bank
      debt of ANI India, of Abundance Networks, LLC, or ANI, pursuant to the terms
      of
      an Asset Purchase Agreement. ANI India is now a wholly-owned subsidiary of
      the
      Company known as Nayna Networks Broadband, Inc. ANI had been a privately held
      company located in Shelton, Connecticut, that provided Ethernet over SONET/SDH,
      enterprise-class network products and services.





Under
      the
      terms of the Asset Purchase Agreement, substantially all of ANI's assets and
      certain of its liabilities were transferred to a wholly-owned subsidiary of
      the
      Company, and the Company issued shares of its common stock to ANI. At the
      closing, Nayna issued ANI 1,150,000 shares (the "Initial Issue") plus the number
      of shares obtained by dividing $500 by the average of the closing prices of
      the
      Company’s common stock during the twenty consecutive trading days ending one day
      prior to the closing date, as traded on the OTCBB, the actual shares issued
      were
      1,020,408 shares of common stock, or a total of 2,170,408. 350,000 of the shares
      (the "Indemnification Shares") are being held in escrow for fifteen months
      to
      satisfy any indemnification claims by the Company during such period (the
      "Indemnification Period"). Up to an additional 1,750,000 shares (the "Earnout
      Shares") may be issued to ANI, based on achievement of certain revenue and
      earnings milestones. If (a) on the one-year anniversary of the closing, the
      Original Issue shares do not have an average closing price of at least $2.00
      per
      share, or (b) on the conclusion of the Indemnification Period, the
      Indemnification Shares do not have an average closing price of at least $2.00
      per share, or (c) on the date that any of the Earnout Shares become due and
      issuable, any such Earnout Shares do not have an average closing price of at
      least $2.00 per share, such issuances are subject to a true-up calculation,
      whereby, the total number of shares issued may be adjusted by multiplying the
      original number of shares issued by $2.00 and dividing by the average of the
      closing prices of Nayna's common stock during the twenty consecutive trading
      days ending one day prior to the date of the adjustment , as traded on the
      OTCBB
      (or other national exchange) (each such adjustment, a "True-up").




9




To
      illustrate, the following table presents the number of shares of our common
      stock that we would be required to issue to True-up the shares originally issued
      to Abundance Networks and the maximum number of shares to be released from
      escrow and to be issued upon achievement of the earn-out milestones as of
      September 30, 2006 and the number of shares we would be required to issue if
      our
      common stock declined by 50% or 75%:




**As
                of**
              **Sept.
                30**
            
            **50%**
              **Decline**
            
            **75%**
              **Decline**Conversion
                price per share
            
            
            0.06
            
            
            0.03
            
            
            0.015Shares
                issuable upon True-up of Initial Issue
            
            
            37,183,333
            
            
            75,516,667
            
            
            152,183,333Shares
                Issuable upon True-up of Indemnification Shares
            
            
            11,316,667
            
            
            22,983,333
            
            
            46,316,667Max.
                No. of Earnout Shares issuable as adjusted for True-up
            
            
            56,583,333
            
            
            114,916,667
            
            
            231,583,333Total
                Additional Shares Potentially Issuable
            
            
            105,083,333
            
            
            213,416,667
            
            
            430,083,333





**NOTE
      3: PROPERTY AND EQUIPMENT**






Property
        and equipment consisted of the following at September 30, 2006 and December
        31,
        2005:
 
 **September
                  30,**
                **2006**
              
              **December
                  31,**
                **2005**Computer
                  equipment
              
              $
              692
              
              $
              692Computer
                  software
              
              
              1,360
              
              
              1,360Furniture
                  and fixtures
              
              
              2
              
              
              22,054
              
              
              2,042Accumulated
                  depreciation and amortization
              
              
              (1,959
              )
              
              (1,959
              )$
              76
              
              $
              95




**NOTE
      4: INTANGIBLE ASSETS**




On
      January 20, 2006, the Company completed the acquisition of substantially all
      of
      the assets and certain liabilities of Abundance Networks, Inc. (Abundance),
      including its wholly owned subsidiary, Abundance Networks (India) Pvt. Ltd.
      Abundance is a privately held company located in Shelton, Connecticut, that
      provides Ethernet over SONET/SDH, enterprise-class network solutions and
      services.




The
      acquisition involved issuance of 2,170,408 shares with market value of $1,150
      of
      the Company’s common stock on January 20, 2006 with guarantee of additional
      shares to be issued in future if shares are trading at less than an average
      price of $2.00 after one year of acquisition. The initial purchase consideration
      of $3.5 million is allocated as follows (in thousands):




Cash
                and receivables
            
            $
            362Intellectual
                property
            
            
            3,655Liabilities
                assumed
            
            
            (517
            )$
            3,500




For
      the
      quarter ended September 30, 2006, the operating expenses include a charge for
      amortization expense of $305 determined using the straight-line method over
      the
      estimated useful life of the asset.


10




In
      July
      2001, the FASB issued Statement of Financial Accounting Standards No. 142,
      "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires goodwill
      and other intangible assets to be tested for impairment on an annual basis
      and
      between annual tests in certain circumstances, and written down when impaired,
      rather than being amortized. No impairment charge has been recorded in the
      nine
      months ended September 30, 2006. Furthermore, SFAS 142 requires purchased
      intangible assets other than goodwill to be amortized over their useful lives
      unless these lives are determined to be indefinite.




The
      management has ascertained the useful life of the purchased intellectual
      property to be 3 years. The gross carrying value and accumulated amortization
      related to purchased intellectual property at September 30, 2006 is as presented
      below (in thousands):





**Three
                Months Ended**
              **Sept.
                30, 2006**
            
            **Nine
                Months Ended**
              **Sept.
                30, 2006**Gross
                Carrying Value of Intellectual property
            
            $
            3,655
            
            $
            3,655Accumulated
                amortization
            
            
            304
            
            
            913Intangible
                asset, net
            
            $
            3,351
            
            $
            2,742




Amortization
      expense for the three months and nine months ended September 30, 2006 was $304
      and $913, respectively. The Company estimates that aggregate amortization
      expense will be $1,218 for each of the years ending December 31, 2006, 2007
      and
      2008.





**NOTE
      5: LEASES**





On
      July
      31, 2005, the Company's lease on 180 Rose Orchard Way, San Jose, CA expired.
      The
      Company signed a six month lease for the premises located at 4699 Old Ironsides
      Drive, Santa Clara, California, which the Company now occupies as its primary
      headquarters. In February 2006 the Company extended that lease through April
      2007.





In
      June
      2005, the Company sold some equipment to a leasing company and immediately
      executed a 24 month operational lease. The sale and leaseback resulted in net
      sale proceeds of $631 and a gain of $422. Under the terms of the lease the
      Company has agreed to pay, on a quarterly basis, $179 over the term of the
      lease. At the end of the lease the Company has the right to return the
      equipment, negotiate a re-lease, or purchase the equipment at fair market
      value.





Gain
      of
      $422 is being recognized over the term of lease, with $52 being recognized
      in
      current period and $240 being deferred over the remaining term as of September
      30, 2006.





The
      company has defaulted in making the quarterly lease payments since April 1,
      2006
      and the matter is now in litigation. As of September 30, 2006, lease payments
      outstanding under this operating lease are $79, net of sale proceeds to be
      released at the end of lease term $771 and prepaid rent of $179.




11




**NOTE
      6: ACCRUED LIABILITIES AND DEBT**


***Accrued
        liabilities***
 
 Total
        accrued liabilities as of September 30, 2006 total $4,895. A breakdown of
        this
        amount is as follows:
 
 **September
                  30, 2006**Accrued
                  liabilities related to the acquisition of Abundance
                  Networks
              
              $
              2,458Accrued
                  liabilities related to the acquisition of Xpeed
              
              
              123Accrued
                  liabilities for expenses
              
              
              1,371Accrued
                  salaries and benefits
              
              
              809Provision
                  for deferred gain
              
              
              134Total
                  Accrued Liabilities
              
              $
              4,895
 
 The
        accrued liability related to the acquisition of Abundance Networks occurred
        in
        1Q 2006.
 
 ***Bridge
        loans and other notes***
 
 In
        connection with the notes issued in 2005, the Company issued 750,990 warrants
        to
        purchase shares of common stock to the bridge loan investors. The warrant
        prices
        are fixed and were determined by using the average volume weighted share
        price
        for the ten (10) trading days prior to the receipt of the funding and range
        from
        $0.71 per share to $2.08 per share and expire three years from the date of
        the
        note. The fair value of the warrants was estimated using the Black-Scholes
        option pricing model and was recorded as warrant liability in accordance
        with
        the guidance under EITF 00-19. Assumptions used to value these warrants included
        that all warrants would be exercised on their respective expiration dates,
        using
        annualized volatility rate of 100%, and using risk free interest rates ranging
        from 4% to 4.6%. As of September 30, 2006, warrant liability included the
        estimated fair value of these warrants of $8.
 
 Total
        notes payable as of September 30, 2006 total $2,464. A breakdown of this
        amount
        is as follows:
 
 **September
                  30, 2006**Short
                  term bridge loan from accredited investors due June 30, 2006 (unpaid
                  as of
                  September 30, 2006), interest payable at 8% per annum. In addition,
                  the
                  Company issued to the investors, warrants to purchase 283,325 shares
                  of
                  common stock, none of which were exercised up to September 30,
                  2006.
              
              $
              580Short
                  term bridge loan from related parties due June 30, 2006, interest
                  payable
                  at 8% per annum. In addition, the Company issued to the investors,
                  warrants to purchase 467,665 shares of common stock, none of which
                  were
                  exercised up to September 30, 2006.
              
              
              680Accrued
                  interest on bridge loan ($55 and $43 due to related parties as
                  of
                  September 30, 2006 and June 30, 2006, respectively)
              
              
              116Accrued
                  salaries and benefits
              
              
              809Notes
                  payable in connection with unsettled claims from acquisition of
                  Xpeed in
                  April 2003, unsecured ($85 due to related parties).
              
              
              310Notes
                  payable in connection with assumption of liability upon acquisition
                  of
                  Abundance Networks, Inc., unsecured
              
              
              193Note
                  payable to a foreign bank in connection with assumption of liability
                  upon
                  acquisition of Abundance Networks, Inc. and its foreign subsidiary.
                  The
                  note accrues interest at the rate of 15% and is secured by all
                  the assets
                  of the foreign subsidiary.
              
              
              585Total
                  Notes Payable
              
              $
              2,464Less:
                  current maturity
              
              
              (2,464
              )
  12
  ***Callable
        Secured Convertible Notes***
 
 In
        November 2005, the company entered into a securities purchase agreement which
        provides for the purchase and sale of callable secured convertible notes
        and
        warrants. Under the securities purchase agreement, the company will receive
        up
        to $4,800 upon issuance of a corresponding amount of the company’s 8% callable
        secured convertible notes and warrants to purchase up to an aggregate of
        2,400,000 shares of common stock. The conversion of the debt to common stock
        of
        the Company is at the option of the holder and may be exercised at any time.
        The
        notes were accompanied by a Registration Rights Agreement.
 
 During
        2005, the Company received $2,974 ($3,200 net of financing costs) and issued
        1,600,000 five year $1.00 warrants, none of which have been exercised. The
        terms
        of the notes provide for full payment on or before the third anniversary
        date of
        issuance, with interest at the rate of 8% per annum. The company has the
        option
        to prepay (i) all of the outstanding principal and unpaid interest at any
        time
        if the common stock is trading at or below $0.75 per share and (ii) portion
        of
        the outstanding principal and unpaid interest at any time if the common stock
        is
        trading at or below $1.12 per share. The notes are convertible into common
        shares at the lesser of $0.68 or 55% of the market price of the Company’s common
        stock, as defined. Additionally, the notes are secured by intellectual
        properties owned by the company.
 
 The
        notes
        are potentially convertible into an unlimited number of common shares.
        Accordingly, the Company has accounted for the Notes under SFAS 133 and EITF
        00-19 which require the beneficial conversion feature to be treated as an
        embedded derivative, recording a liability equal to the estimated fair value
        of
        the conversion option. In addition, all non-employee warrants and options
        that
        are exercisable during the period that the Notes are outstanding are required
        to
        be recorded as liabilities at their fair value. As of September 30, 2006
        the
        Notes were convertible into 124,423,027 common shares and the conversion
        feature
        had an estimated fair value of $4,736. Non-employee warrants to acquire a
        total
        of 1,600,000 common shares were outstanding and had an estimated fair value
        of
        $32. The fair value of the conversion feature and the warrants were estimated
        using the Black-Scholes option pricing model. Assumptions used to value the
        warrants and options included assuming that all warrants would be exercised
        on
        their respective expiration dates, using annualized volatility of 100%, and
        using risk free  interest
        rate of 5.275%.
 
 The
        Company issued 360,000 warrants to purchase shares of common stock, 180,000
        warrants being issued on November 17, 2005 and another 180,000 warrants being
        issued on December 28, 2005 to two selling stockholders, Laidlaw & Company
        and Stonegate Securities, LLC, who helped to identify purchasers for callable
        secured convertible notes. The terms of the warrants entitle each selling
        stockholder to purchase shares of common stock before the fifth anniversary
        date
        of the issuance. All of these warrants are exercisable at $1.00 per share
        which
        price may be adjusted from time to time if the Company issues stock at less
        than
        $1.00 in the future. None of the warrants have been exercised as of September
        30, 2006. As per the agreed-upon exclusions no adjustment to the exercise
        price
        will be made ( i )
        upon
        the exercise of any warrants, options or convertible securities granted,
        issued
        and outstanding on the date of issuance of this Warrant; (ii) upon the grant
        or
        exercise of any stock or options which may hereafter be granted or exercised
        under any employee benefit plan, stock option plan or restricted stock plan
        of
        the Company now existing or to be implemented in the future, so long as the
        issuance of such stock or options is approved by a majority of the independent
        members of the Board of Directors of the Company or a majority of the members
        of
        a committee of independent directors established for such purpose; or (iii)
        upon
        the issuance of securities in connection with a merger, consolidation or
        purchase of assets, or in connection with any strategic partnership or joint
        venture (the primary purpose of which is not to raise equity capital), or
        in
        connection with the disposition or acquisition of a business, product or
        license
        by the Company, so long as the issuance of such securities is approved by
        a
        majority of the independent members of the Board of Directors of the Company
        or
        a majority of the members of a committee of independent directors established
        for such purpose; (iv) upon the exercise of the Warrants. Any of the warrants,
        stock or options, issued or granted subsequently, have not triggered an
        adjustment to the exercise price of these warrants.
 
 The
        fair
        value of the warrants issued was estimated using the Black-Scholes option
        pricing model and was recorded as warrant liability in accordance with the
        guidance in EITF 00-19. Assumptions used to value these warrants included
        that
        all warrants would be exercised on their respective expiration dates, using
        annualized volatility rate of 100%, and using risk free interest rate of
        5.275%.
        As of September 30, 2006, warrant liability included the estimated fair value
        of
        these warrants of $7.
  The
        estimated fair value of the conversion option and warrants exceeded the carrying
        value of the Notes; therefore the excess is recorded as a loss on derivative
        instruments in the Consolidated Statement of Operations in 2006. The change
        in
        their estimated fair value resulted in the recognition of loss of $1,339
        and
        $1,552 for the three months and nine months ended September 30, 2006. The
        fair
        value of the embedded derivatives, warrants and options will be estimated
        each
        reporting period with the change in fair value recorded as gain or loss on
        derivative instruments. As the Company’s common stock is highly volatile,
        material gains or losses for the change in estimated fair value are likely
        to
        occur in future periods.
  13
  Under
        the
        related registration rights agreement, the company agreed to register all
        of the
        shares underlying such convertible notes and warrants to allow the selling
        stockholders to sell them in a public offering or other
        distribution.
 
 Under
        the
        terms of the securities purchase agreement, the investors are obligated to
        purchase an additional $1,600 of our 8% notes and warrants to purchase 800,000
        shares of our common stock within five days following the date this registration
        statement is declared effective by the Securities and Exchange Commission
        and in
        each case upon satisfaction of additional conditions by the Company. The
        additional conditions that must be satisfied by the Company prior to the
        purchase by the investors of the remaining convertible notes and warrants
        consist of the following: (i) the Company's representations and warranties
        contained in the securities purchase agreement are true and correct in all
        material respects on the date of purchase; (ii) there is no litigation, statute,
        rule, regulation, executive order, decree, ruling or injunction that has
        been
        enacted, entered, promulgated or endorsed by or in any court or government
        authority of competent jurisdiction or any self-regulatory organization having
        requisite authority which prohibits the transactions contemplated by the
        securities purchase agreement; (iii) no event has occurred which could
        reasonably be expected to have a material adverse effect on the Company;
        (iv)
        the shares of common stock underlying the convertible notes and warrants
        have
        been authorized for quotation on the Over-The-Counter Bulletin Board, or
        OTCBB,
        and trading in our common stock on the OTCBB has not been suspended by the
        Securities and Exchange Commission or the OTCBB; (v) the Company shall provide
        a
        legal opinion to the investors; and (vi) the Company shall provide certain
        certificates of its officers to the investors regarding the Company's
        capitalization and the truth and correctness of its representations and
        warranties in the securities purchase agreement. If the registration statement
        is not declared effective, the investors have no obligation to purchase the
        remaining 8% convertible notes or the related warrants.
 
 The
        following table summarizes the various components of the embedded derivative
        and
        warrant liability for the three month period ended September 30,
        2006.
 
 **Three
                  Months Ended**
                **Sept.
                  30, 2006**Derivative
                  liability
              
              $
              4,736Warrant
                  liability related to convertible debt
              
              
              32Warrant
                  liability related to issuance of other non-employee warrants
              
              
              15Callable
                  secured debt and accrued interest
              
              
              0Total
                  callable secured convertible notes
              
              
              4,784Unrealized
                  gain related to the adjustment of derivative and warrant liability
                  to fair
                  value of underlying securities
              
              $
              (1,339
              )


**NOTE
      7: NET LOSS PER SHARE**





Basic
      Earnings (Loss) per Share ("EPS") excludes dilution and is computed by dividing
      net income or loss attributable to common stockholders by the weighted-average
      number of common shares outstanding for the period. Diluted EPS reflects the
      potential dilution that could occur if securities or other contracts to issue
      common stock (convertible notes, warrants to purchase common stock and common
      stock options using the treasury stock method) were exercised or converted
      into
      common stock. Potentially dilutive securities are excluded from the diluted
      EPS
      computation in loss periods as their effect would be anti-dilutive.





**NOTE
      8: COMMON STOCK (in actual amounts)**





As
      of
      September 30, 2006, there were 43,070,348 shares of Common Stock issued and
      outstanding.





**NOTE
      9 LEGAL MATTERS**





The
      Company is from time to time party to various legal proceedings, arising in
      the
      ordinary course of business. Based on evaluation of these matters and
      discussions with the Company's counsel, the Company believes that liabilities
      arising from or sums paid in settlement of these existing matters will not
      have
      a material adverse effect on the consolidated results of operations or financial
      position of the Company


14




**NOTE
      10: GOING CONCERN**





The
      accompanying financial statements have been prepared in conformity with
      generally accepted accounting principles in the United States of America, which
      contemplate continuation of the Company as a going concern. However, the Company
      has incurred losses since its inception and has current liabilities in excess
      of
      current assets. The Company does not have sufficient cash on hand to continue
      its operations in the manner they have historically been conducted. These
      factors raise substantial doubt about the ability of the Company to continue
      as
      a going concern. In this regard, management is proposing to raise any necessary
      additional funds not provided by operations through loans or through additional
      sales of its common stock. There is no assurance that the Company will be
      successful in raising this additional capital or in achieving profitable
      operations. The financial statements do not include any adjustments that might
      result from the outcome of these uncertainties.




15




**Item
      2. Management's Discussion and Analysis or Plan of
      Operations**





This
      Quarterly Report on Form 10-QSB, including the following sections, contains
      forward-looking statements. Any statements contained in this Form 10-QSB that
      are not statements of historical fact may be deemed to be forward-looking
      statements. Without limiting the foregoing, words such as "may," "will,"
      "expect," "believe," "anticipate," "estimate" or "continue" or comparable
      terminology are intended to identify forward-looking statements. These
      statements, by their nature, involve substantial risks and uncertainties, and
      the cautionary statements set forth below and those set forth herein under
      the
      caption entitled "Risk Factors" identify important factors that could cause
      actual results to differ materially from those predicted in any such
      forward-looking statements. Investors should not place any undue reliance on
      any
      such forward looking statements and are cautioned that actual results may differ
      materially from those projected in the forward-looking statements as a result
      of
      certain risk factors identified in this Quarterly Report on Form 10-QSB and
      other filings we have made, and may make, with the Securities and Exchange
      Commission.





Any
      forward-looking statements made by us do not reflect the potential impact of
      any
      future acquisitions, mergers, dispositions, joint ventures or investments the
      Company may make. The Company does not assume, and specifically disclaims,
      any
      obligation to update any forward-looking statements, and these statements
      represent the Company's current outlook only as of the date given.





The
      following discussion should be read in conjunction with the condensed financial
      statements and notes thereto included elsewhere in this report, as well as,
      the
      financial statements and notes thereto included in the Company's Annual Report
      on Form 10-KSB for the year ended December 31, 2005 filed with the Commission
      on
      April 3, 2006 and amended on May 1, 2006 and November 20, 2006, and other
      filings that the Company may make, from time to time, with the
      Commission.





**OVERVIEW**





Headquartered
      in Santa Clara, CA, Nayna Networks, Inc., ("Nayna" or the "Company") is a
      hardware and software development company that designs, develops and markets
      next generation broadband access solutions, also known as Ethernet in the First
      Mile ("EFM") for the secure communications market.





Nayna
      was
      formed as a result of a merger and plan of reorganization (the "Merger") between
      ResCon Technology Corporation ("Rescon") and Nayna Networks, Inc. ("NNI").
      On
      April 1, 2005, NNI merged into Rescon in a stock-for-stock transaction. As
      a
      result of the Merger, Rescon continued as the surviving corporation, assumed
      the
      operations and business plan of NNI, the stockholders of NNI became stockholders
      of Rescon, and Rescon changed its name to Nayna Networks, Inc. (trading symbol
      NAYN.OB).





On
      January 20, 2006, pursuant to the terms of an Asset Purchase Agreement, Nayna
      completed the acquisition of substantially all of the assets (including all
      tangible assets, intellectual property, contractual rights and employees and
      all
      outstanding capital stock of its wholly-owned subsidiary, Abundance Networks
      (India) Pvt. Ltd.) and certain of the liabilities (including approximately
      $600
      of bank debt of its India subsidiary) of Abundance Networks, LLC, a privately
      held company that had been located in Shelton, Connecticut, that had provided
      Ethernet over SONET/SDH, enterprise-class network products and services. The
      business formerly operated by Abundance Networks is now operated as a subsidiary
      of Nayna named Nayna Networks Broadband, Inc. Abundance Networks Indian
      subsidiary has been renamed Nayna Networks (India) Private Limited and is now
      a
      wholly-owned subsidiary of Nayna Networks Broadband, Inc.




**RESULTS
        OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO
        THE
        THREE MONTHS ENDED SEPTEMBER 30, 2005**
 
 **Revenues,
        Cost of Sales and Gross Profit**
 
 The
        Company did not ship any of its products in the three months ended September
        30,
        2006 and thus had no revenue nor cost of goods for the period. There was
        no
        revenue or cost of goods for the three months ended September 30,
        2005.
 
 **Operating
        Expenses**
 
 Operating
        expenses include research and development, business development, general
        and
        administrative, and goodwill impairment expenses. Total
        operating expenses for three months ended September
        30 ,
        2006
        and September
        30 ,
        2005
        were $1.4 million and $1.1 million, respectively. This increase of $0.3 million
        resulted primarily from the following:
  Research
        and development expenditures decreased $0.4 million as a result of a decrease
        in
        salaries and wages and other associated expenses.
 
 Business
        development expenditures decreased $0.2 million as a result of a decrease
        in the
        number of sales and marketing employees and a focus on large partners and
        channels.
  General
        and administration expenditures increased $0.9 million as a result of legal,
        accounting and other expenses related to the Company's increased disclosure
        obligations following the reverse merger in April 2005 and expenses related
        to
        the acquisition of certain assets, liabilities and technology of Abundance
        Networks, LLC in January 2006.
 
 There
        was
        no impairment of goodwill in either reporting period.
  16
  **Other
        Expenses**
 
 Other
        expenses include the unrealized gain or loss related to the adjustment of
        derivative and warrant liability to the fair value of the underlying securities,
        net interest expense and any gain or loss on the sale of assets. Other expenses
        for the three months ended September 30, 2006 and September 30, 2005, were
        ($1,341) and $1 respectively.
 
 **Unrealized
        Gain or Loss Related to the Adjustment of Derivative and Warrant
        Liability**
 
 For
        the
        three months ended September 30, 2006, we had unrealized losses related to
        derivative and warrant liabilities of ($1,339) as compared to $0 for the
        same
        period in 2005. These losses resulted from the November 2005 securities purchase
        agreement which provides for the purchase and sale of convertible notes and
        warrants. This agreement and its accounting treatment for the three months
        ending September 30, 2006 are described below under Liquidity and Capital
        Resources.
 
 **Net
        Interest Expense**
 
 Net
        interest expense for the three months ended September 30, 2006 and September
        30,
        2005, was ($55) and $1, respectively. This increase of $56 was primarily
        due to
        interest expense on convertible debentures, notes payable and bridge
        loans.
 
 **Net
        Loss**
 
 As
        a
        result of the foregoing factors, for the three months ended September 30,
        2006
        and September 30, 2005, the Company incurred a net loss of $2.8 million and
        $1.1
        million, respectively.
 
 During
        the Company's continuing development phase, it has consistently sustained
        operating losses and expects such losses to continue through the rest of
        fiscal
        2006 and for the foreseeable future.
 
 **RESULTS
        OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO
        THE
        NINE MONTHS ENDED SEPTEMBER 30, 2005**
 
 **Revenues,
        Cost of Sales and Gross Profit**
 
 During
        the nine months ended September 30, 2006, the Company shipped $336 in commercial
        products and incurred $317 in cost of goods sold versus no revenue and no
        cost
        of goods for the nine months ended September 30, 2005.
 
 **Operating
        Expenses**
 
 Operating
        expenses include research and development, business development, general
        and
        administrative, and goodwill impairment expenses. Total
        operating expenses for nine months ended September
        30 ,
        2006
        and September
        30 ,
        2005
        were $5.2 million and $4.0 million, respectively. This increase of $1.2 million
        resulted primarily from the following:
 
 Research
        and development expenditures decreased $1.2 million as a result of a decrease
        in
        salaries and wages and other associated expenses.
  17
  Business
        development expenditures decreased $0.2 million as a result of a decrease
        in the
        number of sales and marketing employees and a focus on large partners and
        channels; and General
        and administration expenditures increased $2.6 million as a result of legal,
        accounting and other expenses related to the Company's increased disclosure
        obligations following the reverse merger in April 2005 and expenses related
        to
        the acquisition of certain assets, liabilities and technology of Abundance
        Networks, LLC in January 2006..
 
 There
        was
        no impairment of goodwill in either reporting period.
 
 **Other
        Expenses**
 
 Other
        expenses include the unrealized gain or loss related to the adjustment of
        derivative and warrant liability to the fair value of the underlying securities,
        net interest expense and any gain or loss on the sale of assets. Other expenses
        for the nine months ended September 30, 2006 and September 30, 2005, were
        ($667)
        and ($95) respectively.
 
 **Unrealized
        Gain or Loss Related to the Adjustment of Derivative and Warrant
        Liability**
 
 For
        the
        nine months ended September 30, 2006, we had unrealized losses related to
        derivative and warrant liabilities of $555 as compared to $0 for the same
        period
        in 2005. These gains resulted from the November 2005 securities purchase
        agreement which provides for the purchase and sale of convertible notes and
        warrants. This agreement and its accounting treatment for the nine months
        ending
        September 30, 2006 are described below under Liquidity and Capital
        Resources.
 
 **Net
        Interest Expense**
 
 Net
        interest expense for the nine months ended September 30, 2006 and September
        30,
        2005, was ($270) and ($40), respectively. This increase of $230 was primarily
        due to interest expense on convertible debentures, notes payable and bridge
        loans.
 
 **Gain
        (loss) on sale of assets**
 
 Gain
        (loss) on sale of assets for the nine months ended September 30, 2006 and
        September 30, 2005, was ($279) and ($40), respectively. This loss increase
        of
        $239 was due to gain on the sale and lease back of certain Company assets
        as
        described in Note 5.
 
 **Merger
        related costs**
 
 Merger
        related costs for the nine months ended September 30, 2006 and September
        30,
        2005, was ($0) and ($243), respectively. Merger related costs in 2005 were
        a
        result of the reverse merger with Rescon Technology.
 
 **Net
        Loss**
 
 As
        a
        result of the foregoing factors, for the nine months ended September 30,
        2006
        and September 30, 2005, the Company incurred a net loss of $5.8 million and
        $3.9
        million, respectively.
 
 During
        the Company's continuing development phase, it has consistently sustained
        operating losses and expects such losses to continue through the rest of
        fiscal
        2006 and for the foreseeable future.


**WE
      ARE A DEVELOPMENT STAGE COMPANY AND HAVE ONLY A LIMITED OPERATING HISTORY ON
      WHICH TO EVALUATE OUR POTENTIAL FOR FUTURE SUCCESS.**





We
      have
      launched many of our products and services within the last two years and
      potential customers, such as service providers, routinely take many months
      to
      more than a year to evaluate a product before beginning limited field trials.
      Therefore, we have a limited operating history upon which you can evaluate
      our
      business and future prospects. In addition, since we are a development stage
      company, we have yet to develop sufficient experience in forecasting the actual
      revenues to be received from the sale of our products and services. If we are
      unsuccessful in addressing the risks and uncertainties commonly faced by
      development stage companies we may be unable to build a sustainable business
      model that will operate profitably.




18




**WE
      EXPECT TO INCUR OPERATING LOSSES FOR THE FORESEEABLE
      FUTURE.**





We
      continue to incur operating losses due primarily to product development costs
      and increasing sales and marketing expenses. In addition, we plan to invest
      heavily in marketing and promotion, the hiring of additional employees and
      to
      enhance our products and technologies through both internal development efforts
      and strategic acquisitions. As a result of these expenditures, we expect to
      incur net losses for a significant period of time. We believe these expenditures
      are necessary to build and maintain hardware and software technologies related
      to our products and to penetrate our target markets. If our revenue growth
      is
      slower than we anticipate or our operating expenses exceed our expectations,
      our
      losses will be significantly greater than they are at the present time and
      we
      may never achieve profitability. Because we have incurred losses since our
      inception, have current liabilities in excess of our current assets and have
      sufficient cash on hand to continue our operations for only a short period
      of
      time, our auditors have expressed substantial doubt about our ability to
      continue as a going concern.





**FAILURE
      TO RAISE ADDITIONAL CAPITAL WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY
      TO OPERATE AS A GOING CONCERN.**





We
      anticipate that our currently available funds, including the proceeds from
      our
      most recent financing, are sufficient to meet our needs for working capital,
      capital expenditures and business expansion until the middle of 2007.
      Thereafter, we will need to raise additional funds. If any of our assumptions
      are incorrect, we may need to raise capital before the end of nine months.
      We do
      not currently have any arrangement in place to raise additional funding. We
      cannot assure you that additional capital will be available on terms acceptable
      to us, or at all. Failure to raise sufficient additional capital would have
      a
      material adverse effect on our ability to operate as a going concern or to
      achieve our business objectives.





**ACQUISITIONS
      MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR
      BUSINESS.**





We
      may
      make additional acquisitions or investments in complementary businesses,
      products, services or technologies on an opportunistic basis when we believe
      they will assist us in carrying out our business strategy. Growth through
      acquisitions has been a successful strategy used by other networking equipment
      companies. We plan to use this as a strategy to grow our business and are in
      discussions with a number of parties relating to any such acquisition or
      investment. If we buy a company, then we could have difficulty in assimilating
      that company's personnel and operations. In addition, the key personnel of
      the
      acquired company may decide not to work for us. An acquisition could distract
      our management and employees and increase our expenses. Furthermore, we may
      have
      to incur debt or issue equity securities to pay for any future acquisitions,
      the
      issuance of which could be dilutive to our existing stockholders.





Past
      Nayna acquisitions include Abundance Networks for its SONET/SDH products and
      Xpeed Networks for its Passive Optical Networking (PON) products. In both cases
      the purpose was to expand Nayna’s product offerings within the broadband access
      market place. In connection with the acquisitions, we have encountered some
      difficulties including, combining infrastructures (such as email systems),
      changing work flows (such as project management and reviews of products under
      development) and need for simplification of management reporting. Future
      acquisitions may present greater difficulties relating to the integration of
      newly acquired companies.





**OUR
      COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND THE CURRENT MARKET FOR
      OUR COMMON STOCK IS LIMITED.**





The
      market price of our common stock will likely be highly volatile as the stock
      market in general, and the market for small cap and micro cap technology
      companies in particular, has been highly volatile. You may not be able to resell
      your shares of our common stock following periods of volatility because of
      the
      market's adverse reaction to volatility. We cannot assure you that our stock
      will trade at the same levels of other stocks in our industry or that our
      industry stocks in general will sustain their current market
      prices.





Factors
      that could cause such volatility may include, among other things:




·
            actual
                or anticipated fluctuations in our quarterly operating
                results;·
            announcements
                of technological innovations;




19




·
            changes
                in financial estimates by securities analysts;·
            conditions
                or trends in the network control and management
                industry;·
            changes
                in the market valuations of other such industry related companies;
                and·
            the
                acceptance of market makers and institutional investors of the Company
                and
                our stock.





In
      addition, our stock is currently traded on the NASD O-T-C Bulletin Board and
      it
      is uncertain that we will be able to successfully apply for listing on the
      American Stock Exchange or the NASDAQ National or Small Cap Markets in the
      foreseeable future due to our inability to satisfy their respective listing
      criteria. Failure to list our shares on any of the American Stock Exchange
      or
      the NASDAQ National or Small Cap Markets will impair the liquidity of our common
      stock.





**THE
      APPLICATION OF THE "PENNY STOCK REGULATION" COULD ADVERSELY AFFECT THE MARKET
      PRICE OF OUR COMMON STOCK.**





Our
      securities may be deemed a penny stock. Penny stocks generally are equity
      securities with a price of less than $5.00 per share other than securities
      registered on certain national securities exchanges or quoted on the NASDAQ
      Stock Market, provided that current price and volume information with respect
      to
      transactions in such securities is provided by the exchange or system. Our
      securities may be subject to "penny stock rules" that impose additional sales
      practice requirements on broker-dealers who sell such securities to persons
      other than established customers and accredited investors (generally those
      with
      assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000
      together with their spouse). For transactions covered by these rules, the
      broker-dealer must make a special suitability determination for the purchase
      of
      such securities and have received the purchaser's written consent to the
      transaction prior to the purchase. Additionally, for any transaction involving
      a
      penny stock, unless exempt, the "penny stock rules" require the delivery, prior
      to the transaction, of a disclosure schedule prescribed by the Commission
      relating to the penny stock market. The broker-dealer also must disclose the
      commissions payable to both the broker-dealer and the registered representative
      and current quotations for the securities. Finally, monthly statements must
      be
      sent disclosing recent price information on the limited market in penny
      stocks.





Consequently,
      the "penny stock rules" may restrict the ability of broker-dealers to sell
      our
      securities and may have the effect of reducing the level of trading activity
      of
      our common stock in the secondary market. The foregoing required penny stock
      restrictions will not apply to our securities if such securities maintain a
      market price of $5.00 or greater. We can give no assurance that the price of
      our
      securities will reach or maintain such a level.





**SALES
      OF OUR COMMON STOCK BY THE HOLDERS OF THE CONVERTIBLE NOTES AND WARRANTS MAY
      LOWER THE MARKET PRICE OF OUR COMMON STOCK AND PURCHASERS OF COMMON STOCK MAY
      EXPERIENCE SUBSTANTIAL DILUTION.**





We
      are
      authorized to issue up to 1,000,000,000 shares of common stock. As of November
      20, 2006, 8,779,399 shares of common stock were reserved for issuance upon
      exercise of our outstanding warrants and options other than those issued in
      connection with the notes, and an additional 562,939,534 shares of common stock
      (representing two times the actual number of shares issuable upon full
      conversion and exercise of the notes and warrants) were reserved for issuance
      upon conversion of the notes and debentures and exercise of the warrants issued
      in connection with the notes and bridge loans. As of November 20, 2006, there
      were 43,070,348 shares of common stock outstanding. Of these outstanding shares,
      7,196,757 shares were freely tradable without restriction under the Securities
      Act of 1933, as amended, unless held by affiliates.





As
      of
      November 20, 2006, $3.2 million principal amount of callable secured convertible
      notes were issued and outstanding. Within 5 days of the effectiveness of the
      date the registration statement filed December 19, 2005 as most recently amended
      October 26, 2006 on Form SB-2/A-6, we will issue an additional $1,600,000 in
      convertible notes to the investors for an aggregate total of $4,800,000 in
      convertible notes. The notes are convertible into such number of shares of
      common stock as is determined by dividing the principal amount thereof by the
      lesser of the (a) then current variable conversion price and (b) $0.68 per
      share. If converted on November 20, 2006, the $4.8 million principal amount
      of
      notes would have been convertible into 282,009,737 shares of our common stock
      (or 279,069,767 shares if the warrants to purchase 2,940,000 shares were also
      exercised in full), but this number of shares could prove to be significantly
      greater in the event of a decrease in the trading price of the common
      stock.





As
      of
      November 20, 2006, warrants to purchase 1,600,000 shares of common stock issued
      to the purchasers of the notes were outstanding. Within 5 days of the
      effectiveness of the registration statement on Form SB-2/A-6 filed with the
      Securities & Exchange Commission on December 19, 2005 and most recently
      amended October 26, 2006, we will issue warrants to purchase an additional
      800,000 shares to the investors for an aggregate total of warrants to purchase
      2,400,000 shares. We have also issued warrants to purchase 360,000 of common
      stock to brokers involved with the financing. Within 5 days of the effectiveness
      of date the registration statement filed December 19, 2005 as amended October
      26, 2006 on Form SB-2/A-6, we will issue warrants to purchase an additional
      180,000 shares to the brokers for an aggregate total of warrants to purchase
      540,000 shares. All of these warrants are exercisable at $1.00 per share which
      price may be adjusted from time to time if we issue stock at less than $1.00
      in
      the future. Warrants to purchase 980,000 shares of common stock expire on
      November 17, 2010, warrants to purchase 980,000 shares of common stock expire
      on
      December 28, 2010 and the remaining warrants to purchase 980,000 shares of
      common stock will expire five years from the date on which they are issued.
      The
      shares of common stock issuable upon exercise of these warrants are being
      registered pursuant to the registration statement on Form SB-2/A-6 filed with
      the Securities & Exchange Commission on December 19, 2005 and most recently
      amended October 26, 2006.




20




Purchasers
      of common stock will experience substantial dilution of their investment upon
      conversion by the investors of a material portion of the notes. The notes are
      not registered and may be sold only if registered under the Securities Act
      of
      1933, as amended, or sold in accordance with an applicable exemption from
      registration, such as Rule 144.





**THE
      RATE AT WHICH THE NOTES MAY BE CONVERTED MAY RESULT IN THE NOTE HOLDERS
      ACQUIRING A SUBSTANTIALLY GREATER NUMBER OF SHARES THAN CURRENTLY ANTICIPATED,
      RESULTING IN FURTHER DILUTION TO PURCHASERS OF COMMON
      STOCK.**





Because
      the notes are convertible at a floating rate based on a substantial discount,
      equal to the average of the lowest three inter-day trading prices during the
      twenty trading days immediately prior to the date the conversion notice is
      sent,
      discounted by forty-five percent, the lower the stock price at the time the
      holder converts, the more common shares the holder will receive. Furthermore,
      there is no limit on how low the conversion price can be, which means that
      there
      is no limit on the number of shares that we may be obligated to issue. This
      will
      result in further dilution to the purchasers of our common stock. To the extent
      the convertible note holders convert and then sell their common stock upon
      conversion of the notes, the common stock price may decrease due to the
      additional shares in the market, allowing the convertible note holders to
      convert their convertible notes into even greater amounts of common stock,
      the
      sales of which would further depress the stock price.





**ALTHOUGH
      THE CONVERTIBLE NOTE HOLDERS MAY NOT RECEIVE SHARES OF COMMON STOCK TOTALLING
      MORE THAN 4.99% OF THE THEN-OUTSTANDING SHARES OF COMMON STOCK AT ONE TIME,
      THEY
      MAY EFFECTIVELY RECEIVE A GREATER NUMBER BY SELLING A PORTION OF THEIR HOLDINGS
      AND SUBSEQUENTLY RECEIVE MORE SHARES, RESULTING IN FURTHER DILUTION TO
      PURCHASERS OF OUR COMMON STOCK.**





The
      conversion of the notes may result in substantial dilution to the interests
      of
      other holders of common stock, since the investors may ultimately convert and
      sell the full amount issuable on conversion under the notes. Even though the
      convertible note holders may not receive more than 4.99% of the then-outstanding
      common stock at one time, this restriction does not prevent them from selling
      some of their holdings and then receiving additional shares. In this way, the
      convertible note holders could sell more than these limits while never holding
      more than the limits. If this occurs, the holdings of purchasers of our common
      stock would be further diluted.




21




Each
      holder of these notes has agreed not to own more than 4.99% of our common stock
      at any one time; however, the number of shares into which the convertible notes
      can convert could prove to be significantly greater in the event of a decrease
      in the trading price of our common stock. The following table presents the
      number of shares of our common stock that we would be required to issue as
      of
      November 20, 2006 and the number of shares we would be required to issue if
      our
      common stock declined by 50% or 75% **:**





**As
                of**
              **November
                20, 2006**
            
            **50%**
              **Decline**
            
            **75%**
              **Decline**Conversion
                price per share:
            
            $
            0.0172
            
            $
            0.0086
            
            $
            0.0043Total
                shares issuable upon conversion of notes and exercise of
                warrants
            
            
            282,009,767
            
            
            561,079,535
            
            
            1,119,219,070Percentage
                of total outstanding Shares
            
            
            4.99
            %
            
            4.99
            %
            
            4.99
            %Percentage
                of total outstanding Shares (not taking into account the 4.99% ownership
                limitation)
            
            
            86.75
            %
            
            92.87
            %
            
            96.29
            %




**IF
      THE PRICE OF OUR COMMON STOCK DECLINES AS THE CONVERTIBLE NOTE HOLDERS CONVERT
      AND SELL THEIR SHARES INTO THE MARKET, THE CONVERTIBLE NOTE HOLDERS OR OTHERS
      MAY BE ENCOURAGED TO ENGAGE IN SHORT SELLING OUR STOCK, FURTHER DEPRESSING
      THE
      PRICE OF OUR COMMON STOCK.**





The
      significant downward pressure on the price of the common stock as the
      convertible note holders convert and sell material amounts of common stock
      could
      encourage short sales by the convertible note holders or others. Short selling
      is the selling of a security that the seller does not own, or any sale that
      is
      completed by the delivery of a security borrowed by the seller. Short sellers
      assume that they will be able to buy the stock at a lower amount than the price
      at which they sold it short. Significant short selling of a company’s stock
      creates an incentive for market participants to reduce the value of that
      company’s common stock. If a significant market for short selling our common
      stock develops, the market price of our common stock could be further and
      significantly depressed.





**A
      DEFAULT BY US UNDER OUR 8% NOTES WOULD ENABLE THE HOLDERS OF OUR 8% NOTES TO
      TAKE CONTROL OF SUBSTANTIALLY ALL OF OUR ASSETS.**





Our
      8%
      notes are secured by a security agreement under which we pledged substantially
      all of our assets, including our goods, fixtures, equipment, inventory, contract
      rights and receivables. A default by us under the 8% notes would enable the
      holders to take control of substantially all of our assets. The holders of
      our
      8% notes have no operating experience in the industry that could force us to
      substantially curtail or cease our operations.





**OUR
      FAILURE TO COMPLY WITH THE TERMS OF THE CONVERTIBLE NOTES COULD LEAD TO AN
      ASSESSMENT OF LIQUIDATED DAMAGES BY THE HOLDERS OF THE CONVERTIBLE NOTES AND
      WARRANTS.**





Under
      the
      registration rights agreement, since the registration statement relating to
      the
      convertible notes and warrants was not declared effective by the Securities
      and
      Exchange Commission on or before March 17, 2006 or the investors cannot make
      sales under the registration statement for any period of time after the
      registration statement is declared effective, we are obligated to pay a
      registration default fee to the 8% note holders equal to the principal of the
      note outstanding multiplied by .02 multiplied by the sum of the number of
      additional months required for the registration statement to become effective
      (or on a pro rata basis). For example, for the first month after March 31,
      2006
      that the registration statement becomes effective, we were required to pay
      $5,000 for each $250,000 of outstanding note principal amount. Thereafter,
      for
      each month that sales could not be made pursuant to the registration statement,
      we are required to pay an additional $5,000 for each $250,000 of outstanding
      note principal amount. Accordingly, our failure to have the registration
      statement declared effective by March 17, 2006 has resulted in the assessment
      of
      liquidated damages in the amount of $512,000 and will continue to result in
      the
      assessment of $64,000 per month for each additional month until the registration
      statement is declared effective.





In
      addition, we have agreed to have authorized a sufficient number of shares of
      our
      common stock to provide for the full conversion of the notes and exercise of
      the
      warrants then outstanding and to register and have reserved at all times for
      issuance at least two times the number of shares that is the actually issuable
      upon full conversion of the notes and full exercise of the warrants.
      Accordingly, our failure to comply with this covenant could result in the
      assessment of additional liquidated damages against us.




22




Moreover,
      we are required to pay a penalty of $1,000 per day to the investors if we fail
      to deliver shares of our common stock upon conversion of the notes within five
      business days upon receipt of the conversion notice. In the event we default
      under the 8% notes, we have the ability to pay the resulting liquidated damages
      detailed above in shares of stock based on the conversion price of the notes.
      If
      we pay such liquidated damages in shares of stock, this may result in further
      dilution to our current investors. ****





**WE
      MAY BE REQUIRED TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES OF OUR COMMON
      STOCK IN CONNECTION WITH OUR PURCHASE OF SUBSTANTIALLY ALL OF THE ASSETS OF
      ABUNDANCE NETWORKS LLC, RESULTING IN FURTHER DILUTION TO PURCHASERS OF COMMON
      STOCK.**





We
      may be
      required to issue up to 1,750,000 additional shares to Abundance Networks based
      on the achievement of certain revenue and earnings milestones. These shares
      are
      known as the earnout shares. In addition, if our stock has an average price
      of
      $2.00 on the one year anniversary of the closing or the date(s) on which earnout
      shares are issued or shares are released from escrow, the total number of shares
      issued will be adjusted through a True-up calculation by multiplying the
      original number of shares issued by $2.00 and dividing by the average of the
      closing prices of our common stock during the twenty consecutive trading days
      ending one day prior to the date of the adjustment. For a more complete
      discussion of the additional shares we may be required to issue to Abundance
      Networks, including the Escrow Shares, and the True-Up calculations, see Note
      2
      to the financial statements included with this report. As a result of this
      True-up, the lower our stock price at the time of such adjustment, the more
      shares of common stock we will be required to issue.





**IF
      WE LOSE THE SERVICES OF OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, NAVEEN BISHT,
      OR OTHER KEY PERSONNEL, WE MAY NOT BE ABLE TO EXECUTE OUR BUSINESS STRATEGY
      EFFECTIVELY.**





Our
      future success depends in large part upon the continued services of Naveen
      Bisht, our President and Chief Executive Officer. The loss of Mr. Bisht could
      harm our ability to implement our business strategy and respond to the rapidly
      changing needs of our customers. In addition, we believe we will need to
      attract, retain and motivate talented management and other highly skilled
      employees to be successful. We may be unable to retain our key employees or
      attract, assimilate and retain other highly qualified employees in the
      future.




23




**THE
      MARKET IN WHICH WE COMPETE IS SUBJECT TO RAPID TECHNOLOGICAL PROGRESS AND TO
      COMPETE SUCCESSFULLY WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE
      BROAD MARKET ACCEPTANCE.**





The
      network equipment market is characterized by rapid technological progress,
      frequent new product introductions, changes in customer requirements and
      evolving industry standards. If we do not regularly introduce new products
      in
      this dynamic environment, our product lines will become obsolete. Developments
      in routers and routing software could also significantly reduce demand for
      our
      products. Alternative technologies could achieve widespread market acceptance
      and displace the technology on which we have based our product architecture.
      We
      cannot assure you that our technological approach will achieve broad market
      acceptance or other technologies or devices will not supplant our own products
      and technology.




**OUR
      PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND COMPLEX GOVERNMENT
      REGULATIONS OR ELSE OUR PRODUCTS MAY NOT BE WIDELY ACCEPTED, WHICH MAY PREVENT
      US FROM GROWING OUR NET REVENUE OR ACHIEVING
      PROFITABILITY.**





The
      market for network equipment is characterized by the need to support industry
      standards as different standards emerge, evolve and achieve acceptance. We
      will
      not be competitive unless we continually introduce new products and product
      enhancements that meet these emerging standards. Our products must comply with
      various United States federal government regulations and standards defined
      by
      agencies such as the Federal Communications Commission, as well as standards
      established by various foreign governmental authorities and recommendations
      of
      the International Telecommunication Union (ITU) and the Institute of Electrical
      and Electronics Engineers (IEEE). If we do not comply with existing or evolving
      industry standards or if we fail to obtain timely domestic or foreign regulatory
      approvals or certificates, we will not be able to sell our products where these
      standards or regulations apply, which may prevent us from sustaining our net
      revenue or achieving profitability.





**OUR
      FUTURE PERFORMANCE WILL DEPEND ON THE SUCCESSFUL DEVELOPMENT, INTRODUCTION
      AND
      MARKET ACCEPTANCE OF NEW AND ENHANCED PRODUCTS.**





Our
      new
      and enhanced products must address customer requirements in a timely and
      cost-effective manner. In the past, we have experienced delays in product
      development and such delays may occur in the future. The introduction of new
      and
      enhanced products may cause our customers to defer or cancel orders for existing
      products. Therefore, to the extent customers defer or cancel orders in the
      expectation of new product releases, any delay in the development or
      introduction of new products could cause our operating results to suffer. The
      inability to achieve and maintain widespread levels of market acceptance for
      our
      current and future products may significantly impair our revenue
      growth.





**OUR
      LIMITED ABILITY TO PROTECT OUR PROPRIETARY INTELLECTUAL PROPERTY RIGHTS MAY
      ADVERSELY AFFECT OUR ABILITY TO COMPETE.**





We
      rely
      on a combination of patent, copyright, trademark and trade secret laws and
      restrictions on disclosure to protect our proprietary intellectual property
      rights. We cannot assure you that we have adequately protected our proprietary
      intellectual property or that other parties will not independently develop
      similar or competing products that do not infringe on our patents. We also
      enter
      into confidentiality or license agreements with our employees, consultants
      and
      corporate partners to protect our intellectual property. In addition, we control
      access to and limit the distribution of our software, documentation and other
      proprietary information. Despite our efforts to protect our proprietary
      intellectual property rights, unauthorized parties may attempt to copy or
      otherwise misappropriate or use our products or technology. If we are
      unsuccessful in protecting our proprietary intellectual property rights, our
      ability to compete may be adversely affected, thereby limiting our ability
      to
      operate our business profitably.





**OUR
      LIMITED ABILITY TO DEFEND OURSELVES AGAINST INTELLECTUAL PROPERTY INFRINGEMENT
      CLAIMS MADE BY OTHERS MAY ADVERSELY AFFECT OUR ABILITY TO
      COMPETE.**





Our
      industry is characterized by the existence of a large number of patents and
      frequent claims and related litigation regarding patent and other intellectual
      property rights. If we are found to infringe the proprietary rights of others,
      or if we otherwise settle such claims, we could be compelled to pay damages
      or
      royalties and either obtain a license to those intellectual property rights
      or
      alter our products so that they no longer infringe upon such proprietary rights.
      Such a license could be very expensive to obtain or may not be available at
      all.
      Similarly, changing our products or processes to avoid infringing the rights
      of
      others may be costly or impractical. Litigation resulting from claims that
      we
      are infringing the proprietary rights of others could result in substantial
      costs and a diversion of resources, and may limit our ability to operate our
      business profitably.




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**OUR
      DEPENDENCE ON CONTRACT MANUFACTURERS FOR SUBSTANTIALLY ALL OF OUR MANUFACTURING
      REQUIREMENTS COULD HARM OUR OPERATING RESULTS.**





We
      rely
      on independent contractors to manufacture our products, such as Flextronics,
      which manufactures hardware (such as printed circuit boards - PCB(s) and
      mechanicals) for us. We do not have long-term contracts with any of these
      manufacturers. Delays in product shipments from contract manufacturers are
      not
      unusual. Similar or other problems may arise in the future, such as inferior
      quality, insufficient quantity of products or the interruption or discontinuance
      of operations of a manufacturer, any of which may limit our ability to operate
      our business profitably.





We
      do not
      know whether we will effectively manage our contract manufacturers or that
      these
      manufacturers will meet our future requirements for timely delivery of products
      of sufficient quality and quantity. We will continue to monitor the performance
      of our current contract manufacturers and if they are unable to meet our future
      requirements, we will need to transition to other manufacturers. We also intend
      to regularly introduce new products and product enhancements, which will require
      that we rapidly achieve volume production by coordinating our efforts with
      those
      of our suppliers and contract manufacturers. The inability of our contract
      manufacturers to provide us with adequate supplies of high-quality products
      or a
      reduction in the number of contract manufacturers may cause a delay in our
      ability to fulfill orders and may limit our ability to operate our business
      profitably.





**IF
      OUR PRODUCTS CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS, WE COULD INCUR
      SIGNIFICANT UNEXPECTED EXPENSES AND LOSE SALES.**





Network
      equipment products frequently contain undetected software or hardware errors
      when new products, versions or updates of existing products are first released
      to the marketplace. We have experienced such errors in connection with prior
      product releases. We expect that such errors or component failures will be
      found
      from time to time in the future in new or existing products, including the
      components incorporated therein, after the commencement of commercial
      shipments.





These
      errors may have a material adverse effect on our business and may result in
      the
      following, among other things:




·
            significant
                warranty and repair costs;·
            diverting
                the attention of our engineering personnel from new product development
                efforts;·
            delaying
                the recognition of revenue; and·
            significant
                customer relations problems.





In
      addition, if our product is not accepted by customers due to defects, and such
      returns exceed the amount we accrued for defect returns based on our historical
      experience, our ability to operate our business profitably may be
      inhibited.





**IF
      PROBLEMS OCCUR IN A COMPUTER OR COMMUNICATIONS NETWORK, EVEN IF UNRELATED TO
      OUR
      PRODUCTS, WE COULD INCUR UNEXPECTED EXPENSES AND LOSE
      SALES.**





Our
      products must successfully interoperate with products from other vendors. As
      a
      result, when problems occur in a computer or communications network, it may
      be
      difficult to identify the sources of these problems. The occurrence of hardware
      and software errors, whether or not caused by our products, could result in
      the
      delay or loss of market acceptance of our products and any necessary revisions
      may cause us to incur significant expenses. The occurrence of any such problems
      would likely limit our ability to operate our business profitably.




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**WE
      EXPECT THE AVERAGE SELLING PRICES OF OUR PRODUCTS TO DECREASE, WHICH MAY INHIBIT
      OUR ABILITY TO OPERATE OUR BUSINESS PROFITABLY.**





The
      network equipment industry has experienced a rapid erosion of average selling
      prices due to a number of factors, including competitive pricing pressures,
      promotional pricing, technological progress and lower selling prices as
      companies liquidated excess inventory resulting from the industry slowdown
      that
      began in the later part of 2000 and continued into 2004/2005. The industry
      slowdown has abated and we see the technological progress and global outsourcing
      as the main price drivers for looking into the future.





We
      anticipate that the average selling prices of our products will decrease in
      the
      future in response to the following, among other things:




·
            competitive
                global pricing pressures;·
            discounting
                in the sales/distribution channels; and·
            new
                product introductions by us or our
                competitors.





We
      may
      experience substantial decreases in future operating results due to the erosion
      of our average selling prices. We expect competitive pressures to remain high
      due to outsourcing and technological progress and uncertainty of the broader
      economy. To mitigate the effects of price erosion, we are implementing
      outsourcing plans to reduce our costs. Our acquisition of Abundance Networks,
      which offices in Mumbai India, directly addresses the globalization trend,
      provides us with direct access to lower cost engineering talent and a lower
      cost
      sales channel to greater India. Furthermore, we use contract manufacturers
      for
      the production of our products and thus we are well positioned to meet customer
      demand at market prices by building in low cost off shore
      locations.





**FAILURE
      TO SUCCESSFULLY EXPAND OUR SALES AND SUPPORT TEAMS OR EDUCATE THEM IN REGARD
      TO
      TECHNOLOGIES AND OUR PRODUCT FAMILIES MAY HARM OUR BUSINESS, FINANCIAL CONDITION
      AND OPERATING RESULTS.**





The
      sale
      of our products and services requires a sophisticated sales effort that
      frequently involves several levels within a prospective customer's organization.
      We may not be able to increase net revenue unless we expand our sales and
      support teams in order to address all of the customer requirements necessary
      to
      sell our products.





We
      cannot
      assure you that we will be able to successfully integrate new employees into
      our
      company or to educate current and future employees in regard to rapidly evolving
      technologies and our product families. A failure to do so may hurt our business,
      financial condition and operating results.





**WE
      MUST CONTINUE TO DEVELOP AND INCREASE THE PRODUCTIVITY OF OUR SALES AND
      DISTRIBUTION CHANNELS TO INCREASE NET REVENUE AND IMPROVE OUR OPERATING
      RESULTS.**





Our
      sales
      channel includes our own direct sales people, large original equipment
      manufacturer, system integrators, agents, resellers and distributors. Outside
      sales channels require us to develop and cultivate strategic relationships
      and
      allocate substantial internal resources for the maintenance of such
      relationships. We may not be able to increase gross revenues unless we expand
      our sales channel and support teams to handle all of our customer requirements
      in a professional manner. If we are unable to expand our sales channel and
      support teams in a timely manner, and/or manage them in all cases, our business,
      financial condition and operating results may be hurt.





In
      addition, many of our sales channel partners also carry products they make
      themselves or that are made by our competitors. We cannot assure you that our
      sales channel partners will continue to market or sell our products effectively
      or continue to devote the resources necessary to provide us with
      effective  sales,
      marketing and technical support. Their failure to do so may hurt our revenue
      growth and operating results.




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**SHARES
      OF OUR TOTAL OUTSTANDING SHARES THAT ARE RESTRICTED FROM IMMEDIATE RESALE BUT
      MAY BE SOLD INTO THE MARKET IN THE FUTURE COULD CAUSE THE MARKET PRICE OF OUR
      COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING
      WELL.**





As
      of
      September 30, 2006, we had 43,070,348 shares of our common stock issued and
      outstanding of which 35,873,591 shares are restricted shares. Rule 144 provides,
      in essence, that a person holding "restricted securities" for a period of one
      year may sell only an amount every three months equal to the greater of (a)
      one
      percent of a company's issued and outstanding shares, or (b) the average weekly
      volume of sales during the four calendar weeks preceding the sale.





The
      amount of "restricted securities" which a person who is not an affiliate of
      our
      company may sell is not so limited, since non-affiliates may sell without volume
      limitation their shares held for two years if there is adequate current public
      information available concerning our company. In such an event, "restricted
      securities" would be eligible for sale to the public at an earlier date. The
      sale in the public market of such shares of Common Stock may adversely affect
      prevailing market prices of our Common Stock and could impair our ability to
      raise capital.





**Item
      3. Controls and Procedures**





The
      Company's principal executive officer and principal financial officer (the
      "Certifying Officers") are responsible for establishing and maintaining
      disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
      and 15d-15(e). Such officers have concluded (based upon their evaluations of
      these controls and procedures as of the end of the period covered by this
      report) that the Company's disclosure controls and procedures are effective
      to
      ensure that information required to be disclosed by it in this report is
      accumulated and communicated to management, including the Certifying Officers
      as
      appropriate, to allow timely decisions regarding required
      disclosure.





The
      Certifying Officers have also indicated that there were no changes in the
      Company's internal controls over financial reporting or other factors during
      the
      period covered by this report, that has materially affected or is reasonably
      likely to materially affect, such controls subsequent to the date of their
      evaluation.




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**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**





On
      November 17, 2005, Siemens Shared Services, LLC filed a law suit with the
      Superior Court of New Jersey in Middlesex County against us claiming damages
      of
      $216,000 plus interest and legal fees in connection with the non-payment of
      a
      portion of the debt we assumed in connection with our acquisition of Xpeed
      Communications, Inc.





On
      August
      18, 2006, Anthony Vassallo filed an application for entry of judgment on
      sister-state judgment against us for $349,000 in the Superior Court of the
      State
      of California, County of Santa Clara, based on a default entered against us
      in
      the Supreme Court of the State of New York, county of Nassau on August 3, 2004,
      prior to the reverse merger between Rescon Technologies Corporation and Nayna
      Networks, Inc. a Delaware corporation. On September 19, 2006 we filed a motion
      to vacate the entry of judgment, which was denied on November 2, 2006. We are
      currently negotiating a settlement with Mr. Vassallo. In addition, we are
      pursuing indemnification claims against Christian Nigohossian and Northeast
      Development Corporation, both of whom are contractually committed to indemnify
      us for such a liability based on agreements entered into at the time of the
      reverse merger.





**Item
      6. Exhibits**




**Exhibits.**





The
      following exhibits are included as part of this Quarterly Report on Form
      10-QSB:





Exhibit
                31.1
            
            Certification
                of Principal Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.Exhibit
                31.2
            
            Certification
                of Principal Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.Exhibit
                32.1
            
            Certification
                of Principal Executive Officer Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.Exhibit
                32.2
            
            Certification
                of Principal Financial Officer Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.




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**SIGNATURES**





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




**Nayna
                Networks, Inc.***Dated:
                November 20, 2006*
            *By:*
            */s/
                Naveen S. Bisht**Naveen
                S. Bisht, CEO*




*Dated:
                November 20, 2006*
            *By:*
            */s/
                William Wong**William
                Wong, Acting CFO*




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