**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 June 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





180
      Rose
      Orchard Way, San Jose, California 95134


(Former
      name, former address and former fiscal year if hanged from last
      report)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. 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, 42,497,198 shares outstanding as of June 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)


**June
                  30,**
                **2006**
              
              **June
                  30,**
                **2005****(Unaudited)****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              48
              
              $
              130Restricted
                  cash
              
              
              44
              
              
              0Accounts
                  receivable, net of allowances for doubtful accounts of $0 and
                  $33
              
              
              478
              
              
              137Prepaid
                  expenses and other current assets
              
              
              19
              
              
              87Total
                  current assets
              
              
              589
              
              
              354Equipment
                  and improvements, net
              
              
              63
              
              
              251Purchased
                  intangibles
              
              
              0
              
              
              0Other
                  assets
              
              
              2,114
              
              
              324Total
                  assets
              
              $
              2,766
              
              $
              929**Liabilities
                  and stockholders’ equity**Current
                  liabilities:Accounts
                  payable
              
              $
              1,628
              
              $
              1,141Accrued
                  liabilities
              
              
              1,529
              
              
              298Accrued
                  payroll liabilities
              
              
              678
              
              
              481Notes
                  payable
              
              
              1,534
              
              
              646Total
                  current liabilities
              
              
              5,369
              
              
              2,566Derivative
                  liability related to callable secured convertible notes
              
              
              1,956
              
              
              -Warrant
                  liability related to callable secured convertible notes
              
              
              248
              
              
              2,372Callable
                  secured convertible notes
              
              
              1,139
              
              
              -Total
                  Long-term liabilities
              
              
              3,343
              
              
              2,372**Stockholders’
                  equity:******Series
                  D preferred stock, Auth shares 52,500,000, shares O/S 19,531,247
                  at
                  12/31/04
              
              
              -
              
              
              20Common
                  Stock: $0.001 par value, 1,000,000,000 shares authorized at June
                  30, 2006
                  and June 30, 2005 and 42,497,198 and 36,533,004 shares issued and
                  outstanding as of June 30, 2006 and June 30, 2005
              
              
              8
              
              
              10Additional
                  paid-in-capital
              
              
              61,351
              
              
              51,981Deferred
                  compensation
              
              
              (684
              )
              
              (-
              )Deficit
                  accumulated during the development stage
              
              
              (66,622
              )
              
              (56,020
              )Total
                  stockholders’ (deficit) equity
              
              
              (5,946
              )
              
              (4,009
              )Total
                  liabilities and stockholders’ equity
              
              $
              2,766
              
              $
              929




See
      accompanied notes to these unaudited condensed consolidated financial
      statements








**NAYNA
      NETWORKS, INC.**


(a
      development stage enterprise)


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(in
      thousands)


(Unaudited)




**Three
                Months Ended June 30,**
            
            **Cumulative
                Period from February 10, 2000 (date of inception) to****2006**
            
            **2005**
            
            **June
                30, 2006**Revenues
            
            $
            19
            
            $
            0
            
            $
            336Cost
                of goods
            
            
            48
            
            
            0
            
            
            317Gross
                profit
            
            
            (29
            )
            
            0
            
            
            19Operating
                expenses:Research
                and development
            
            
            457
            
            
            1,184
            
            
            39,455Business
                development
            
            
            115
            
            
            223
            
            
            2,726General
                and administrative
            
            
            522
            
            
            261
            
            
            8,055Total
                operating expenses
            
            
            1,094
            
            
            1,668
            
            
            50,236Loss
                from operations
            
            
            (1,123
            )
            
            (1,688
            )
            
            (50,217
            )Interest
                income
            
            
            0
            
            
            (0
            )
            
            2,390Interest
                expense
            
            
            (103
            )
            
            (8
            )
            
            (935
            )Merger
                related costs
            
            
            (0
            )
            
            370
            
            
            (11
            )Impairment
                of goodwill and other assets
            
            
            (0
            )
            
            (78
            )
            
            (5,833
            )Net
                loss
            
            $
            (1,226
            )
            $
            (1,384
            )
            $
            (54,606
            )Net
                loss per share:Basic
            
            $
            (0.03
            )
            $
            (0.04
            )Diluted
            
            $
            (0.02
            )
            $
            (0.04
            )Weighted
                shares outstanding (1)Basic
            
            
            38,175,739
            
            
            35,804,502Diluted
            
            
            57,991,701
            
            
            35,804,502





(1)
      June
      30, 2005 shares outstanding is based on the number of shares outstanding
      effective with the reverse merger into Rescon on April 4, 2005.




See
      accompanied notes to these unaudited condensed consolidated financial
      statements








**NAYNA
      NETWORKS, INC.**


(a
      development stage enterprise)


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(in
      thousands)


(Unaudited)




**Three
                Months Ended June 30,**
            
            **Cumulative
                Period from February 10, 2000 (date of inception) to****2006**
            
            **2005**
            
            **June
                30, 2006**Cash
                flows from operating activities:Net
                loss
            
            $
            (1,226
            )
            $
            (1,385
            )
            $
            (54,608
            )Adjustments
                to reconcile net loss to net cash used in operations:Noncash
                charges related to stock options granted to consultants and accelerated
                vesting of employee stock options
            
            
            0
            
            
            0
            
            
            40Noncash
                interest expense related to issuance of convertible debt
            
            
            0
            
            
            0
            
            
            0Depreciation
                and amortization
            
            
            456
            
            
            137
            
            
            4,207Noncash
                issuance of common stock for services charged to
                operations
            
            
            0
            
            
            0
            
            
            0Amortization
                of discount on warrants associated with equipment
                financing
            
            
            0
            
            
            0
            
            
            202Impairment
                of goodwill related to acquisitions
            
            
            0
            
            
            0
            
            
            5,833Loss
                (gain) on sale of property and equipment
            
            
            0
            
            
            (370
            )
            
            1,126Changes
                in operating assets and liabilities:Restricted
                cash
            
            
            (44
            )
            
            (0
            )
            
            (258
            )Accounts
                receivable
            
            
            (341
            )
            
            (4
            )
            
            (501
            )Prepaid
                expenses and other current assets
            
            
            68
            
            
            48
            
            
            33Other
                assets
            
            
            (1,790
            )
            
            6
            
            
            (1,806
            )Accounts
                payable
            
            
            487
            
            
            496
            
            
            1,142Accrued
                liabilities
            
            
            1,231
            
            
            43
            
            
            1,471Accrued
                payroll liabilities
            
            
            197
            
            
            69
            
            
            492Net
                cash used in operating activities
            
            
            (961
            )
            
            (959
            )
            
            (42,626
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (0
            )
            
            (1
            )
            
            (1,238
            )Proceeds
                from sale of property and equipment
            
            
            -
            
            
            301
            
            
            445Costs
                associated with the acquisition of Xpeed, Inc.
            
            
            -
            
            
            -
            
            
            (3,685
            )Net
                cash used in investing activities
            
            
            (0
            )
            
            301
            
            
            (4,478
            )Cash
                flows from financing activities:Proceeds
                from loan facility
            
            
            0
            
            
            330
            
            
            327Payments
                on capital lease obligations and loan facility
            
            
            0
            
            
            (
            )
            
            (5,589
            )Proceeds
                from issuance of common stock, net of repurchases
            
            
            0
            
            
            0
            
            
            243Proceeds
                from issuance of Series A redeemable convertible preferred stock,
                net of
                issuance costs
            
            
            0
            
            
            0
            
            
            11,953Proceeds
                from issuance of Series B redeemable convertible preferred stock,
                net of
                issuance costs
            
            
            0
            
            
            0
            
            
            35,897Proceeds
                from issuance of Series D redeemable convertible preferred stock,
                net of
                issuance costs
            
            
            0
            
            
            0
            
            
            3,399Issuance
                of convertible debt, net of issuance costs
            
            
            0
            
            
            103
            
            
            622Proceeds
                from bridge loan
            
            
            0
            
            
            0
            
            
            0Payment
                on bridge loans
            
            
            (0
            )
            
            0
            
            
            (0
            )Net
                cash provided (used) by financing activities
            
            
            
            
            
            433
            
            
            46,852Net
                increase (decrease) in cash and cash equivalents
            
            
            (961
            )
            
            (225
            )
            
            (252
            )Cash
                and cash equivalents at beginning of period
            
            
            130
            
            
            355
            
            
            0Cash
                and cash equivalents end of period
            
            $
            (831
            )
            $
            130
            
            $
            (252
            )Non-cash
                financing activities:Conversion
                of preferred stock into common
            
            $
            0
            
            $
            214Issuance
                of preferred stock for conversion of note payable
            
            $
            0
            
            $
            250Shares
                issued for purchase of intangibles
            
            $
            0
            
            $
            9Shares issued for services or settlement of claims
            
            
            650





See
      accompanied notes to these unaudited condensed consolidated financial
      statements








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





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





**Background**





Nayna
      Networks, Inc., a development stage enterprise (the "Company" or "Nayna"),
      is
      engaged in the development of next-generation broadband access networking
      solutions. Nayna was incorporated in Delaware on February 10, 2000 and is
      located in Santa Clara, California.





During
      2003, the Company expanded its business development focus as a result of an
      acquisition of another company, to develop and market passive optical networks
      ("PON") equipment and digital subscriber line ("DSL") equipment. PON equipment
      delivers high performance broadband access over fiber cable, linking business
      and residential subscribers to the local central office. DSL technology provides
      high-speed data transmission using the local telephone company's existing
      infrastructure.





During
      2004, the Company shifted its focus in its development efforts in the Ethernet
      in the First Mile ("EFM") segment of the broadband access market. The Company
      has introduced a new platform that builds upon the Company's PON expertise
      through its support for the latest generation Gigabit Ethernet.





On
      April
      4, 2005, Nayna merged into Rescon Technology Corporation ("Rescon"), a publicly
      traded company, and became a wholly owned subsidiary of Rescon. Following the
      merger, Rescon Technology Corporation changed its name to Nayna Networks, Inc.





The
      Company is in the development stage and, since inception, has devoted
      substantially all of its efforts to the development of its products, raising
      capital, and recruiting personnel. 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,
      and if, 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.





The
      Company's common stock is traded on the Nasdaq OTC Bulletin Board under the
      trading symbol: NAYN.OB.





**Development
      Stage Enterprise**





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, the Company is currently classified
      as a development stage enterprise under the Statement of Financial Accounting
      Standards ("SFASB") No. 7, "Accounting and Reporting by Development Stage
      Enterprises." Successful completion of the Company's development program and
      the
      attainment of profitable operations are dependent on future events, including,
      among other things, the receipt of adequate financing to continue its operations
      and fulfill its development activities and the achievement of a level of sales
      adequate to support the Company's cost structure. There can be no assurance
      that
      the Company will successfully accomplish these events.





The
      Company has experienced net losses since its inception and had an accumulated
      deficit of $66.6 million as of June 30, 2006. Such losses are attributable
      to
      cash and non-cash expenses resulting from costs incurred in the development
      of
      the Company's products and infrastructure. The Company expects operating losses
      to continue for the foreseeable future as it continues to develop and market
      its
      products. However, the Company's ability to continue its operations as a going
      concern is in doubt (See Note 9 - Going Concern). Regardless of when or if
      the
      Company is able to commercialize its products, the Company will require
      additional funding and may sell additional shares of its common stock or
      preferred stock through private placement or public offerings. There can be
      no
      assurance that the Company will be able to obtain additional debt or equity
      financing, if and when needed, on terms acceptable to the Company or at all.
      Any
      additional equity or convertible debt financing may involve substantial dilution
      to the Company's stockholders, restrictive covenants, or high interest costs.
      The failure to raise needed funds on sufficiently favorable terms could have
      a
      material adverse effect on the Company's business, operating results, and
      financial condition. The Company's long-term liquidity also depends upon its
      ability to increase revenues from the sale of its products and achieve
      profitability. The failure to achieve these goals could have a material adverse
      effect on the operating results and financial condition of the Company.





The
      successful accomplishment of future activities and initiatives cannot be
      determined at this time due to, among other things, current market conditions,
      the volatility of the Company's business and the industry in which it competes
      and other factors as are set forth herein under the caption "Risk Factors"
      and
      in other filings made, from time to time, with the Commission. There can be
      no
      assurance that the Company will have sufficient funds to execute its intended
      business plan or generate positive operating results.





**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-3 as amended July 31, 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
      June 30, 2006, for the six months ended June 30, 2006 and 2005, and for the
      cumulative period from February 10, 2000 (date of inception) to June 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 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.










**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 accounts for its stock-based employee compensation using the intrinsic
      value method in accordance with Accounting Principles Board (APB) Opinion No.
      25, "Accounting for Stock Issued to Employees," and Financial Accounting
      Standards Board ("FASB") Interpretation ("FIN") No. 44, "Accounting for Certain
      Transactions Involving Stock Compensation."





Stock
      and
      other equity instruments issued to non-employees are accounted for in accordance
      with SFAS No. 123, "Accounting for Stock-Based Compensation," and EITF Issue
      No.
      96-18, "Accounting for Equity Instruments That Are Issued to Other Than
      Employees for Acquiring, or in Conjunction with Selling, Goods or Services,"
      and
      are valued using the Black-Scholes model.





No
      stock-based employee compensation cost related to stock options is reflected
      in
      net income (loss), as all options granted under the Company's stock-based
      compensation plans had an exercise price equal to fair value of the underlying
      common stock on the applicable grant date.





**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.





**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 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 "Original 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 t he
      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").










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 June
      30, 2006 and the number of shares we would be required to issue if our common
      stock declined by 50% or 75%:





**As
                of**
              **June
                30**
            
            **50%**
              **Decline**
            
            **75%**
              **Decline**Conversion
                price per share
            
            
            0.10
            
            
            0.05
            
            
            0.025Shares
                issuable upon True-up of Original Issue
            
            
            21,850,000
            
            
            44,850,000
            
            
            90,850,000Shares
                Issuable upon True-up of Escrow Shares
            
            
            6,650,000
            
            
            13,650,000
            
            
            27,650,000Max.
                No. of Earnout Shares issuable as adjusted for True-up
            
            
            35,000,000
            
            
            70,000,000
            
            
            140,000,000Total
                Additional Shares Potentially Issuable
            
            
            63,500,000
            
            
            128,500,000
            
            
            258,500,000





The
      purchase price was allocated as follows:





Cash
                and receivables
            
            
            210Net
                liabilities assumed
            
            $
            (155
            )Purchased
                Technology
            
            
            992$
            1,047




**NOTE
      3: PROPERTY AND EQUIPMENT**





Property
      and equipment consisted of the following at June 30, 2006 and December 31,
      2005:





**June
                30,**
              **2006**
            
            **December
                31,**
              **2005**Computer
                equipment
            
            $
            692
            
            $
            686Computer
                software
            
            
            1,360
            
            
            1,354Furniture
                and fixtures
            
            
            2
            
            
            22,054
            
            
            2,042Accumulated
                depreciation and amortization
            
            
            (1,991
            )
            
            (1,911
            )$
            63
            
            $
            131





**NOTE
      4: 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.





On
      June
      1, 2005, the Company completed the sale of certain equipment to TFG-California,
      L.P. ("TFG"). Subsequent to such sale, the Company leased the equipment back
      from TFG through an operating lease having a term of 24 months. Under the terms
      of the lease agreement, the Company received approximately $700. Such amount
      is
      being held, on the Company's behalf, by TFG, and will be released upon the
      Company meeting certain conditions.





**NOTE
      5: DEBT**





Beginning
      in late 2004 and during this fiscal year, the Company has continued to fund
      its
      operations through debt. As of June 30, 2006 and December 31, 2005, the
      following amounts are outstanding:





**June
                30,**
              **2006**
            
            **December
                31,**
              **2005****Notes
                payable - bridge loans**
            
            $
            1,534
            
            $
            1,567Less:
                Current Maturity
            
            
            (1,534
            )
            
            (1,567
            )**Convertible
                Debentures**
            
            
            0
            
            
            2,339Less:
                Current Maturity
            
            
            0
            
            
            (2,339
            )**Callable
                Secured Convertible Notes:**Derivative
                liability
            
            
            1,956
            
            
            4,754Warrant
                liability
            
            
            248
            
            
            803Callable
                secured convertible notes incl int
            
            
            1,139
            
            
            80Total
                debt (current and long term)
            
            $
            4,877
            
            $
            9,543





***Bridge
      loans***





A
      short
      term bridge loan of $630 from accredited investors due December 31, 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
      have been exercised.





A
      short
      term bridge loan of $580 from related parties due December 31, 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 have been
      exercised.





Two
      other
      short term notes to Siemens for obligations previously assumed of $225 and
      a
      note to Tsunami for $85.





***Convertible
      Notes***





Beginning
      in November 2004, Nayna Delaware entered into a convertible debt agreement.
      The
      debt is convertible into shares of common stock of the public corporation at
      a
      conversion price of $1.00 per share upon the filing of the first registration
      statement in connection with the debt or equity financing. The total debt was
      converted into 2,338,786 shares on March 27, 2006.





***Callable
      secured convertible notes***





In
      November 2005, the company entered into a securities purchase agreement, which
      provides for the purchase and sale of convertible notes and warrants. Under
      the
      securities purchase agreement, the company will receive up to $4,800 from the
      convertible note holders, and they will receive in return 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.





In
      addition, the company also issued 100,000 shares of common stock and under
      the
      terms of the agreement will issue warrants to purchase up to 540,000 shares
      of
      common stock to two convertible note holders, Laidlaw & Company and
      Stonegate Securities, LLC who helped to find purchasers for the November 2005
      private placement.





The
      terms
      of the notes provide for full payment on or before the third anniversary date
      of
      issuance, with interest of 8% per annum, which may be converted at any time
      at
      the lesser of (i) $0.68 or (ii) 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 terms of the
      warrants entitle each convertible note holder to purchase shares of common
      stock
      at a price equal to $1.00 per share before the fifth anniversary date of the
      issuance. Under the related registration rights agreement, the Company agreed
      to
      register all of the shares underlying such convertible notes and warrants to
      allow the convertible note holders to sell them in a public offering or other
      distribution.





On
      November 17, 2005, the investors purchased (i) $1,600 of the 8% convertible
      notes, none of which have been converted, and (ii) warrants to purchase up
      to
      800,000 shares, none of which have been exercised. In addition, the Company
      issued 100,000 shares of common stock and warrants to purchase up to an
      additional 180,000  shares  of
      common
      stock to two convertible note holders, Laidlaw & Company and Stonegate
      Securities, LLC, who helped to identify purchasers for private placement.





On
      December 28, 2005, as a result of filing the registration statement, the
      investors purchased (i) $1,600 of the 8% convertible notes, none of which have
      been converted, and (ii) warrants to purchase up to 800,000 shares, none of
      which have been exercised. In addition, the Company issued warrants to purchase
      up to an additional 180,000 shares of common stock to two convertible note
      holders, Laidlaw & Company and Stonegate Securities, LLC.





We
      determined that the transaction included embedded derivatives. Accordingly,
      we
      valued each element of the transaction and the total value was determined to
      be
      $5,204 for the face value of $4,800. Since during 2005 the company only received
      $3,200 funding from the issue of these notes, $5 was charged to the statement
      of
      operations and $223 has been deferred to be expensed over three years, which
      is
      the life of the note. During the three months ended March 31, 2006, $19 was
      charged to the statement of operations.





Under
      the
      terms of the securities purchase agreement, subject to the satisfaction of
      additional conditions by the Company, 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 on which the registration
      statement covering the securities issued to the convertible note holders is
      declared effective by the Securities and Exchange Commission. 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.





**NOTE
      6: 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
      7: COMMON STOCK (in actual amounts)**





As
      of
      June 30, 2006, there were 42,497,198 shares of Common Stock issued and
      outstanding.





**NOTE
      8 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





**NOTE
      9: 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.





**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 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).





**RESULTS
      OF OPERATIONS**





**Revenues,
      Cost of Sales and Gross Profit**





The
      Company continued to ship the first commercial products in the three months
      ended June 30, 2006 and recognized revenue of $19 and cost of goods of $48.
      During the six months ended June 30, 2005, the Company shipped $336 in
      commercial products and incurred $317 in cost of goods sold.





**Operating
      Expenses**





Operating
      expenses include research and development, business development and general
      and
      administrative expenses. Total operating expenses for three months ended June
      30, 2006 and June 30, 2005 were $1.1 million and $1.7 million, respectively.
      The
      decrease of $0.6 million resulted primarily from the following:





Decreased
      research and development expenditures of $0.7 million as a result of a decrease
      in salaries and wages and and other associated expenses.





Decreased
      business development expenditures of $0.1 million as a result of a decrease
      in
      the number of sales and marketing employees and a focus on large partners and
      channels; and





Increased
      general and administration expenditures of $0.3 million as a result of legal,
      accounting and other expenses related to the Company's increased obligations
      upon becoming a reporting enterprise.





**Other
      Expenses**





Other
      expenses include interest expense and impairment of goodwill and other
      intangible assets. Other expense for the three months ended June 30, 2006 and
      June 30, 2005, was $103 and $86 respectively.





**Other
      Income**





Other
      income includes interest income and gain on sale of assets. Other income for
      the
      six months ended June 30, 2006 and June 30, 2005 was $0 and $370, respectively.
      The difference was the recording a gain on sale of assets of $370.





**Net
      Loss**





As
      a
      result of the foregoing factors, for the six months ended June 30, 2006 and
      June
      30, 2005, the Company incurred a net loss of $1.2 million and $1.4 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.





**Liquidity
      and Capital Resources**





In
      November 2005, the company entered into a securities purchase agreement, which
      provides for the purchase and sale of convertible notes and warrants. Under
      the
      securities purchase agreement, the company will receive up to $4.8 million
      from
      the convertible note holders, and they will receive in return 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. In addition,
      the company also issued 100,000 shares of common stock and under the terms
      of
      the agreement will issue warrants to purchase up to 540,000 shares of common
      stock to two convertible note holders, Laidlaw & Company and Stonegate
      Securities, LLC who helped to find purchasers for the November 2005 private
      placement. The terms of the notes provide for full payment on or before the
      third anniversary date of issuance, with interest of 8% per annum, which may
      be
      converted at any time at the lesser of (i) $0.68 or (ii) 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 terms of the warrants entitle each convertible note holder to
      purchase shares of common stock at a price equal to $1.00 per share before
      the
      fifth anniversary date of the issuance. Under the related registration rights
      agreement, the Company agreed to register all of the shares underlying such
      convertible notes and warrants to allow the convertible note holders to sell
      them in a public offering or other distribution.





On
      November 17, 2005, the investors purchased (i) $1.6 million of the 8%
      convertible notes, none of which have been converted, and (ii) warrants to
      purchase up to 800,000 shares, none of which have been exercised. In addition,
      the Company issued 100,000 shares of common stock and warrants to purchase
      up to
      an additional 180,000  shares  of
      common
      stock to two convertible note holders, Laidlaw & Company and Stonegate
      Securities, LLC, who helped to identify purchasers for private placement.





On
      December 28, 2005, as a result of filing the registration statement, the
      investors purchased (i) $1.6 million of the 8% convertible notes, none of which
      have been converted, and (ii) warrants to purchase up to 800,000 shares, none
      of
      which have been exercised. In addition, the Company issued warrants to purchase
      up to an additional 180,000 shares of common stock to two convertible note
      holders, Laidlaw & Company and Stonegate Securities, LLC.





Under
      the
      terms of the securities purchase agreement, subject to the satisfaction of
      additional conditions by the Company, the investors are obligated to purchase
      an
      additional $1.6 million of our 8% notes and warrants to purchase 800,000 shares
      of our common stock within five days following the date on which the
      registration statement covering the securities issued to the convertible note
      holders is declared effective by the Securities and Exchange Commission. 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.





During
      2005, we borrowed $1.2 million from accredited investors. In connection with
      these loans, we issued warrants to purchase 750,990 shares of our common stock
      and agreed to register shares obtained upon exercise of these warrants with
      the
      Securities and Exchange Commission. The notes accrue interest at 8% per annum
      and have effective dates that range from April 27, 2005 to November 2, 2005.
      The
      warrants terminate three years from the date of issuance and the exercise prices
      were determined by using the average volume
      weighted share price for the ten (10) trading days prior to the issuance of
      the
      related notes and range from $0.71 per share to $2.08 per share. The notes
      had
      original maturity dates 120 days from date of issuance but all have been
      modified to extend the maturity dates to December 31, 2006





We
      believe the cash and cash equivalents of $48 on hand at June 30, 2006 will
      be
      sufficient to support the Company’s growth operations through August 2006,
      without relying on income revenue from sales. We expect that the additional
      $1.6
      million of funds to be received when the registration statement becomes
      effective will support the operations of the Company for an additional six
      months.




**Significant
      Events**





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.





**Risk
      Factors**





Our
      business is subject to certain risks and uncertainties, each of which could
      materially adversely affect our business, financial condition, cash flows and
      results of operations.





**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.





**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 do
      not
      have sufficient cash on hand to continue our operations for more than
      approximately seven months, 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 for the next seven months.
      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 seven 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;





·
            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 June
      30,
      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 debentures, and an additional 354,970,909 shares of common
      stock 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 June 30, 2006, there were 42,497,198 shares of common stock outstanding.
      Of these outstanding shares, 10,777,438 shares were freely tradable without
      restriction under the Securities Act of 1933, as amended, unless held by
      affiliates.





As
      of
      July 31, 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
      July 31, 2006 on Form SB-2/A-3, 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 July 31, 2006, the $4.8 million principal amount of
      notes
      would have been convertible into 174,545,455 shares of our common stock (or
      177,485,455 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
      July 31, 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-3 filed with the Securities &
Exchange Commission on December 19, 2005 and most recently amended July 31,
      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 July 31, 2006 on
      Form
      SB-2/A-3, 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-3 filed with the Securities & Exchange
      Commission on December 19, 2005 and most recently amended July 31, 2006.





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.










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
      July 31, 2006 and the number of shares we would be required to issue if our
      common stock declined by 50% or 75% **:**




**As
                  of**
                **July
                  31,**
            ****
            **50%****Decline**
            ****
            **75%****Decline**Conversion
                price per share:
            
            $
            0.0275
            
            $
            0.013250
            
            $
            0.006875Total
                shares issuable upon conversion of notes and exercise of
                warrants
            
            
            177,485,455
            
            
            352,030,909
            
            
            701,121,818Percentage
                of total outstanding Shares
            
            
            4.99
            %
            
            4.99
            %
            
            4.99
            %Percentage
                of total outstanding Shares (not taking into account the 4.99% ownership
                limitation)
            
            
            80.68
            %
            
            89.23
            %
            
            94.29
            %




**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 t he
      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 vale 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, if the registration statement relating to the
      convertible notes and warrants is 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, if the registration statement becomes
      effective one (1) month after March 17, 2006, we would pay $5,000 for each
      $250,000 of outstanding note principal amount. If thereafter, sales could not
      be
      made pursuant to the registration statement for an additional period of one
      (1)
      month, we would 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 $320,000 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.





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, the lower
      our stock price at the time of such adjustment, the more shares of common stock
      we will be required to issue. 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 earnout milestones as of June 30, 2006 and the number of shares we would
      be
      required to issue if our common stock declined by 50% or 75%:





**As
                of**
              **June
                30**
            
            **50%**
              **Decline**
            
            **75%**
              **Decline**Conversion
                price per share:
            
            $
            0.10
            
            $
            0.05
            
            $
            0.025Shares
                issuable upon True-up of Original Issue
            
            
            21,850,000
            
            
            44,850,000
            
            
            90,850,000Shares
                Issuable upon True-up of Escrow Shares
            
            
            6,650,000
            
            
            13,650,000
            
            
            27,650,000Maximum
                Number of Earnout Shares issuable as adjusted for True-up
            
            
            35,000,000
            
            
            70,000,000
            
            
            140,000,000Total
                additional shares potentially issuable
            
            
            63,500,000
            
            
            128,500,000
            
            
            258,500,000




**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.










**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 .





**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.





**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.





**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
      June 30, 2006, we had 42,497,198 shares of our common stock issued and
      outstanding of which 31,719,760 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 significant 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, and there were no significant deficiencies and material
      weaknesses.





**PART
      II - OTHER INFORMATION**





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**





On
      January 22, 2006 the Company issued an aggregate of 2,170,408 shares of its
      common stock, $.001 par value per share (the “Shares “) to Abundance Networks,
      LLC, or ANI, pursuant to the terms of an Asset Purchase Agreement for the
      acquisition of certain assets, technology, and liabilities.





**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.







**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:
              August
              18, 2006*
            *By:*
            */s/
              Naveen S. Bisht**Naveen
              S. Bisht, CEO*




*Dated:
              August 18, 2006*
            *By:*
            */s/
              William Wong**William
              Wong, Acting CFO*