**U.S.
        Securities and Exchange Commission**
 Washington,
        DC 20549
 
 **FORM
        10-QSB/A-1**
 
 **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
  
  **EXPLANATORY
        NOTE**
 
 This
        Form
        10-Q/A-1 is being filed as an Amendment to our Form 10-Q, to
        restate our financial information for the quarter ending June 30, 2006 and
        the
        Cumulative Period from February 10, 2000 (date of inception) to June 30,
        2006.
        The principal changes in the financials for quarter ending June 30, 2006
        are:
 
 1)
              To
                  recognize the derivative and warrant liability associated with
                  the
                  November issuance of convertible debentures (see Note 6 of the
                  financial
                  statements);
 2)
              To
                  reclassify the fair value of certain stock issued in consideration
                  for
                  legal services;
 3)
              To
                  reclassify certain convertible notes as debt from equity (see Note
                  6 of
                  the financial statements);
 4)
              To
                  defer the gain on sale and leaseback of certain equipment over
                  the term of
                  the lease (see Note 5 of the financial statements);
                  and
 5)
              To
                  include the pro forma information on net loss regarding stock based
                  compensation (see Note 1 of the financial
                  statements).
 
 Except
        as
        otherwise stated, all financial information contained in this Form 10-Q/A-1
        gives effect to these restatements.
 
 This
        Form
        10-Q/A-1 amends and restates only certain information in the following sections
        as a result of the current restatements described above:
 
 Part
        I —
Item 1. Financial Statements and Notes.
 
 Part
        I —
Item 2. Management’s Discussion and Analysis or Plan of Operation;
 
 In
        addition, we are also including currently dated Sarbanes-Oxley Act Section
        302
        and Section 906 certifications of the Chief Executive Officer and Chief
        Financial Officer that are attached to this Form 10-Q/A-1 as Exhibits 31.1,
        31.2, 32.1 and 32.2.
 
 For
        the
        convenience of the reader, this Form 10-Q/A-1 sets forth the entire Form
        10-Q
        which was prepared and relates to the Company as of June 30, 2006. However,
        this
        Form 10-Q/A-1 only amends and restates the Items described above to reflect
        the
        effects of the restatement and no attempt has been made to modify or update
        other disclosures presented in our original Form 10-Q. Accordingly, except
        for
        the foregoing amended information, this Form 10- Q/A-1 continues to speak
        as of
        June 30, and does not reflect events occurring after the filing of the Form
        10-Q
        and does not modify or update those disclosures affected by subsequent events.
        Forward-looking statements made in the original Form 10-Q have not been revised
        to reflect events, results or developments that have become known to us after
        the date of the original filing (other than the current restatements described
        above), and such forward-looking statements should be read in their historical
        context. Unless otherwise stated, the information in this Form 10-Q/A-1 not
        affected by such current restatements is unchanged and reflects the disclosures
        made at the time of the original filing.
  
  **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
              
              $
              52
              
              $
              130Restricted
                  cash
              
              
              44
              
              
              0Accounts
                  receivable
              
              
              478
              
              
              137Prepaid
                  expenses and other current assets
              
              
              95
              
              
              87Total
                  current assets
              
              
              668
              
              
              354Property
                  and equipment, net
              
              
              95
              
              
              251Intangible
                  asset, net
              
              
              3,046
              
              
              0Other
                  assets
              
              
              432
              
              
              324Total
                  assets
              
              $
              4,240
              
              $
              929**Liabilities
                  and stockholders’ equity**Current
                  liabilities:Accounts
                  payable and accrued liabilities
              
              $
              5,818
              
              $
              1,920Notes
                  payable
              
              
              2,322
              
              
              646Convertible
                  debt derivative
              
              
              2,895
              
              
              2,372Callable
                  secured convertible debt and accrued interest
              
              
              464
              
              
              -Warrant
                  liability
              
              
              87Total
                  current liabilities
              
              
              11,586
              
              
              4,939Deferred
                  gain, less current portionTotal
                  Long-term liabilitiesTotal
                  liabilities
              
              
              11,586
              
              
              4,939**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
              
              
              4
              
              
              10Additional
                  paid-in-capital
              
              
              60,709
              
              
              51,981Deferred
                  stock option compensation
              
              
              (530
              )Deficit
                  accumulated during the development stage
              
              
              (67,529
              )
              
              (56,021
              )Total
                  stockholders’ (deficit) equity
              
              
              (7,346
              )
              
              (4,010
              )Total
                  liabilities and stockholders’ equity
              
              $
              4,240
              
              $
              929
  See
        accompanied notes to these unaudited condensed consolidated financial
        statements
  
  **NAYNA
        NETWORKS, INC.**
 (a
        development stage enterprise)
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 (in
        thousands, except share and per share data)
 (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
              
              
              18Operating
                  expenses:Research
                  and development
              
              
              485
              
              
              1,184
              
              
              43,458Business
                  development
              
              
              115
              
              
              223
              
              
              3,652General
                  and administrative
              
              
              899
              
              
              339
              
              
              12,118Goodwill
                  impairment
              
              
              
              
              
              
              
              
              9,545Total
                  operating expenses
              
              
              1,499
              
              
              1,746
              
              
              68,773Loss
                  from operations
              
              
              (1,528
              )
              
              (1,746
              )
              
              (68,755
              )Unrealized
                  gain (loss) related to adjustment of derivative and warrant liability
                  to
                  fair value of underlying securities
              
              
              245
              
              
              
              
              
              (214
              )Interest
                  expense, net
              
              
              (97
              )
              
              (8
              )
              
              1,217Gain
                  (loss) on sale of assets
              
              
              53
              
              
              370
              
              
              223Net
                  loss
              
              $
              (1,328
              )
              $
              (1,384
              )
              $
              (67,529
              )Weighted
                  shares outstanding (1):Basic
                  and diluted
              
              
              42,497,198
              
              
              23,887,642Loss
                  per share available to common shareholderBasic
                  and diluted
              
              
              (0.03
              )
              
              (0.06
              )
 
 (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 OPERATIONS**
 (in
        thousands, except share and per share data)
 (Unaudited)
  **Six
                  Months Ended June 30,**
              
              **Cumulative
                  Period from February 10, 2000 (date of inception)
                  to****2006**
              
              **2005**
              
              **June
                  30, 2006**Revenues
              
              $
              336
              
              $
              0
              
              $
              336Cost
                  of goods
              
              
              317
              
              
              0
              
              
              317Gross
                  profit
              
              
              19
              
              
              0
              
              
              18Operating
                  expenses:Research
                  and development
              
              
              1,200
              
              
              1,909
              
              
              43,458Business
                  development
              
              
              288
              
              
              422
              
              
              3,652General
                  and administrative
              
              
              2,286
              
              
              661
              
              
              12,118Goodwill
                  impairment
              
              
              
              
              
              
              
              
              9,545Total
                  operating expenses
              
              
              3,773
              
              
              2,992
              
              
              68,773Loss
                  from operations
              
              
              (3,754
              )
              
              (2,992
              )
              
              (68,755
              )Unrealized
                  gain (loss) related to adjustment of derivative and warrant liability
                  to
                  fair value of underlying securities
              
              
              784
              
              
              
              
              
              (214
              )Interest
                  expense, net
              
              
              (214
              )
              
              (16
              )
              
              1,217Gain
                  (loss) on sale of assets
              
              
              105
              
              
              370
              
              
              223Net
                  loss
              
              $
              (3,080
              )
              $
              (2,638
              )
              $
              (67,529
              )Weighted
                  shares outstanding (1):Basic
                  and diluted
              
              
              40,255,219
              
              
              24,401,531Net
                  loss per shareBasic
                  and diluted
              
              
              (0.08
              )
              
              (0.11
              )
 
 (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, except share and per share data)
 (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
              
              $
              (1,328
              )
              $
              (1,384
              )
              $
              (67,528
              )Adjustments
                  to reconcile net loss to net cash used in operations:Depreciation
                  and amortization
              
              
              324
              
              
              137
              
              
              4,886Loss
                  (gain) on sale of property and equipment
              
              
              (53
              )
              
              (370
              )
              
              891Impairment
                  of goodwill related to acquisitions
              
              
              
              
              
              
              
              
              9,546Noncash
                  charges related to stock options granted to consultants
              
              
              77
              
              
              
              
              
              321Noncash
                  charges related to issuance of stock options for legal services
              
              
              
              
              
              
              
              
              675Noncash
                  interest expense related to issuance of convertible debt
              
              
              
              
              
              
              
              
              201Unrealized
                  (gain) loss related to adjustment of derivative andwarrant
                  liability to fair value of underlying securities
              
              
              (245
              )
              
              
              
              
              214Amortization
                  of financing costs
              
              
              
              
              
              
              
              
              25Amortization
                  of discount on warrants associated with equipment
                  financing
              
              
              
              
              
              
              
              
              202Changes
                  in operating assets and liabilities:Restricted
                  cash
              
              
              
              
              
              
              
              
              (209
              )Accounts
                  receivable
              
              
              (242
              )
              
              (4
              )
              
              (478
              )Prepaid
                  expenses and other current assets
              
              
              (46
              )
              
              48
              
              
              (236
              )Other
                  assets
              
              
              55
              
              
              6
              
              
              (107
              )Accounts
                  payable and accrued liabilities
              
              
              856
              
              
              608
              
              
              3,056Net
                  cash used in operating activities
              
              
              (601
              )
              
              (958
              )
              
              (48,542
              )Cash
                  flows from investing activities:Purchase
                  of property and equipment
              
              
              (6
              )
              
              
              
              
              (1,251
              )Proceeds
                  from sale of property and equipment
              
              
              
              
              
              301
              
              
              1,076Costs
                  associated with the acquisition of Xpeed, Inc.
              
              
              -
              
              
              -
              
              
              (3,685
              )Net
                  cash used in investing activities
              
              
              (6
              )
              
              301
              
              
              (3,860
              )Cash
                  flows from financing activities:Loan
                  proceeds
              
              
              231
              
              
              330
              
              
              2,238Payments
                  on capital lease obligations and loan facility
              
              
              
              
              
              
              
              
              (5,735
              )Proceeds
                  from issuance of common stock, net of repurchases
              
              
              4
              
              
              
              
              
              263Proceeds
                  from issuance of Series A redeemable convertible preferred stock,
                  net of
                  issuance costs
              
              
              
              
              
              
              
              
              11,953Proceeds
                  from issuance of Series B redeemable convertible preferred stock,
                  net of
                  issuance costs
              
              
              
              
              
              
              
              
              35,897Proceeds
                  from issuance of Series D redeemable convertible preferred stock,
                  net of
                  issuance costs
              
              
              
              
              
              
              
              
              3,399Issuance
                  of convertible debt
              
              
              
              
              
              103
              
              
              1,467Proceeds
                  from deferred stock option compensationProceeds
                  from issuance of callable secured convertible notes, net of financing
                  costs
              
              
              
              
              
              
              
              
              2,974Net
                  cash provided (used) by financing activities
              
              
              235
              
              
              433
              
              
              52,454Net
                  increase (decrease) in cash and cash equivalents
              
              
              (372
              )
              
              (225
              )
              
              52Cash
                  and cash equivalents at beginning of period
              
              
              424
              
              
              355Cash
                  and cash equivalents end of period
              
              $
              52
              
              $
              130
              
              $
              52Non-cash
                  financing activities:Conversion
                  of preferred stock into common
              
              
              
              
              $
              214Issuance
                  of preferred stock for conversion of note payable
              
              
              
              
              $
              250Shares
                  issued on conversion of debenturesShares
                  issued for purchase of intangibles
              
              
              
              
              $
              9Shares issued for services or settlement of claims
              
              $
              650
 
 See
        accompanied notes to these unaudited condensed consolidated financial
        statements
 
 
  **NAYNA
        NETWORKS, INC.**
 (a
        development stage enterprise)
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 (in
        thousands, except share and per share data)
 (Unaudited)
  **Six
                  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
              
              $
              (3,080
              )
              $
              (2,638
              )
              $
              (67,528
              )Adjustments
                  to reconcile net loss to net cash used in operations:Depreciation
                  and amortization
              
              
              677
              
              
              286
              
              
              4,866Loss
                  (gain) on sale of property and equipment
              
              
              (105
              )
              
              (370
              )
              
              891Impairment
                  of goodwill related to acquisitions
              
              
              
              
              
              
              
              
              9,546Noncash
                  charges related to stock options granted to consultants
              
              
              154
              
              
              
              
              
              321Noncash
                  charges related to issuance of stock options for legal services
              
              
              24
              
              
              
              
              
              675Noncash
                  interest expense related to issuance of convertible debt
              
              
              122
              
              
              
              
              
              201Unrealized
                  (gain) loss related to adjustment of derivative andwarrant
                  liability to fair value of underlying securities
              
              
              (784
              )
              
              
              
              
              214Amortization
                  of financing costs
              
              
              19
              
              
              
              
              
              25Amortization
                  of discount on warrants associated with equipment
                  financing
              
              
              
              
              
              
              
              
              202Changes
                  in operating assets and liabilities:Restricted
                  cash
              
              
              
              
              
              
              
              
              (209
              )Accounts
                  receivable
              
              
              (451
              )
              
              22
              
              
              (478
              )Prepaid
                  expenses and other current assets
              
              
              (15
              )
              
              (52
              )
              
              (236
              )Other
                  assets
              
              
              87
              
              
              22
              
              
              (107
              )Accounts
                  payable and accrued liabilities
              
              
              910
              
              
              736
              
              
              3,056Net
                  cash used in operating activities
              
              
              (2,442
              )
              
              (1,945
              )
              
              (48,542
              )Cash
                  flows from investing activities:Purchase
                  of property and equipment
              
              
              (11
              )
              
              (1
              )
              
              (1,251
              )Proceeds
                  from sale of property and equipment
              
              
              
              
              
              301
              
              
              1,076Costs
                  associated with the acquisition of Xpeed, Inc.
              
              
              -
              
              
              -
              
              
              (3,685
              )Net
                  cash used in investing activities
              
              
              (11
              )
              
              300
              
              
              (3,860
              )Cash
                  flows from financing activities:Loan
                  proceeds
              
              
              703
              
              
              (386
              )
              
              2,238Payments
                  on capital lease obligations and loan facility
              
              
              
              
              
              
              
              
              (5,735
              )Proceeds
                  from issuance of common stock, net of repurchases
              
              
              20
              
              
              
              
              
              263Proceeds
                  from issuance of Series A redeemable convertible preferred stock,
                  net of
                  issuance costs
              
              
              
              
              
              
              
              
              11,953Proceeds
                  from issuance of Series B redeemable convertible preferred stock,
                  net of
                  issuance costs
              
              
              
              
              
              
              
              
              35,897Proceeds
                  from issuance of Series D redeemable convertible preferred stock,
                  net of
                  issuance costs
              
              
              
              
              
              
              
              
              3,399Issuance
                  of convertible debt
              
              
              
              
              
              1,450
              
              
              1,467Proceeds
                  from deferred stock option compensationProceeds
                  from issuance of callable secured convertible notes, net of financing
                  costs
              
              
              
              
              
              
              
              
              2,974Net
                  cash provided (used) by financing activities
              
              
              723
              
              
              1,064
              
              
              52,454Net
                  increase (decrease) in cash and cash equivalents
              
              
              (1,138
              )
              
              (581
              )
              
              52Cash
                  and cash equivalents at beginning of period
              
              
              1,782
              
              
              709Cash
                  and cash equivalents end of period
              
              $
              52
              
              $
              130
              
              $
              52Non-cash
                  financing activities:Conversion
                  of preferred stock into common
              
              
              
              
              $
              214Issuance
                  of preferred stock for conversion of note payable
              
              
              
              
              $
              250Shares
                  issued on conversion of debentures
              
              
              2,339Shares
                  issued for purchase of intangibles
              
              
              1,150
              
              $
              9Shares issued for services or settlement of claims
              
              $
              674
 
 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 $67.5 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
        Annual Report on Form 10-KSB/A-2 for the year ended December 31, 2005 filed
        with
        the Commission on April 3, 2006 and amended on May 1, 2006 and on December
        22,
        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 share and per share data (except
        where specifically noted otherwise)*** **.**
 
 **Principals
        of Consolidation**
 
 The
        consolidated financial statements have been prepared in accordance with
        accounting policies generally accepted in the United States of America and
        include the Company and its wholly owned subsidiaries. All inter-company
        transactions have been eliminated.
 
 **Use
        of Estimates**
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions. These estimates and assumptions affect the reported
        amounts of assets, liabilities, revenues, expenses and disclosures of contingent
        assets and liabilities at the date of the financial statements. Significant
        estimates include revenue recognition, inventory valuation, useful lives
        and the
        valuation of long-lived assets. Actual results could differ from these
        estimates. Additionally, a change in the facts and circumstances surrounding
        these estimates could result in a change to the estimates and could impact
        future results.
  
  **Inventory
        Valuation**
 
 As
        a
        development stage enterprise, the Company expenses all inventories to research
        and development until such time as commercial revenues may
        commence.
 
 **Impairment
        of Long-Lived Assets**
 
 The
        Company evaluates its long-lived assets, including property and equipment,
        for
        impairment whenever events or changes in circumstances indicate that the
        carrying amount of an asset may not be recoverable. When the sum of the present
        value of future net cash flows expected to result from the use of the asset
        and
        its eventual disposition is less than its carrying amount, an impairment
        loss
        would be measured based on the discounted cash flows compared to the carrying
        amount.
 
 **Cash
        and Cash Equivalents**
 
 For
        purposes of the statement of cash flows, the Company considers all instruments
        with an original maturity of three months or less to be cash
        equivalents.
 
 **Property
        and Equipment**
 
 Property
        and equipment are stated at cost less accumulated depreciation. Depreciation
        expense is determined using the straight-line method over the estimated useful
        lives of the respective assets, which are generally three to five years for
        computers, equipment and furniture. Depreciation on leasehold improvements
        is
        provided using the straight-line method over the shorter of the estimated
        useful
        lives of the improvements or the lease term. Expenditures for maintenance
        and
        repairs are charged to operating expense as incurred. Upon retirement or
        sale,
        the original cost and related accumulated depreciation are removed from the
        respective accounts, and the gains and losses are included in other income
        or
        expense.
 
 **Business
        and Credit Risk**
 
 Financial
        instruments that potentially subject the Company to concentrations of credit
        risk consist primarily of cash, cash equivalents invested in deposits and
        trade
        receivables. The Company has not experienced any losses on its deposits of
        cash
        and cash equivalents. Management believes that the institutions are financially
        sound and, accordingly, minimal credit risk exists. The carrying values reported
        in the balance sheets for cash, cash equivalents and trade receivables
        approximate their fair values.
 
 **Research
        and Development**
 
 The
        Company accounts for research and development costs in accordance with Statement
        of Financial Accounting Standards ("SFAS") No. 2, "Accounting for Research
        and
        development Costs," and, accordingly, the Company expenses research and
        development costs when incurred.
 
 **Income
        Taxes**
 
 The
        Company recognizes deferred tax assets and liabilities for operating loss
        carryforwards, tax credit carryforwards and the estimated future tax
        consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and their respective
        tax
        bases. Deferred tax assets and liabilities are measured using enacted tax
        rates
        in effect for the year in which the temporary differences are expected to
        be
        recovered or settled. A valuation allowance is recorded to reduce the carrying
        amounts of net deferred tax assets if there is uncertainty regarding their
        realization.
 
 **Stock-Based
        Compensation**
 
 The
        Company adopted the provisions of SFAS 123(R), Share-Based Payments, on January
        1, 2006. Accordingly, compensation costs for all share-based awards to employees
        are measured based on the grant date fair value of those awards and recognized
        over the period during which the employee is required to perform service
        in
        exchange for the award (generally over the vesting period of the award).
        We have
        no awards with market or performance conditions.
  
  Effective
        January 1, 2006 and for all periods subsequent to that date, SFAS 123(R)
        supersedes our previous accounting under Accounting Principles Board Opinion
        No.
        25, "Accounting for Stock Issued to Employees *"* ("APB
        25"). In March 2005, the Securities and Exchange Commission issued Staff
        Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company
        has
        applied the provisions of SAB 107 in its adoption of SFAS 123(R).
 
 **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 "Initial Shares") plus the
        number of shares obtained by dividing $500 by the average of the closing
        prices
        of the Company’s common stock during the twenty consecutive trading days ending
        one day prior to the closing date, as traded on the OTCBB, the actual shares
        issued were 1,020,408 shares of common stock, or a total of 2,170,408. 350,000
        of the shares (the "Indemnification Shares") are being held in escrow for
        fifteen months to satisfy any indemnification claims by the Company during
        such
        period (the "Indemnification Period"). Up to an additional 1,750,000 shares
        (the
        "Earnout Shares") may be issued to ANI, based on achievement of certain revenue
        and earnings milestones. If (a) on the one-year anniversary of the closing,
        the
        Original Issue shares do not have an average closing price of at least $2.00
        per
        share, or (b) on the conclusion of the Indemnification Period, the
        Indemnification Shares do not have an average closing price of at least $2.00
        per share, or (c) on the date that any of the Earnout Shares become due and
        issuable, any such Earnout Shares do not have an average closing price of
        at
        least $2.00 per share, such issuances are subject to a true-up calculation,
        whereby, the total number of shares issued may be adjusted by multiplying
        the
        original number of shares issued by $2.00 and dividing by the average of
        the
        closing prices of Nayna's common stock during the twenty consecutive trading
        days ending one day prior to the date of the adjustment , as traded on the
        OTCBB
        (or other national exchange) (each such adjustment, a "True-up").
  
  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
              
              
              0.0995
              
              
              0.0498
              
              
              0.0249Shares
                  issuable upon True-up of Initial Shares
              
              
              21,965,578
              
              
              45,081,156
              
              
              91,312,312Shares
                  issuable upon True-up of Indemnification Shares
              
              
              6,685,176
              
              
              13,720,352
              
              
              27,790,704Max.
                  No. of Earnout Shares issuable as adjusted for True-up
              
              
              33,425,879
              
              
              68,601,759
              
              
              138,953,518Total
                  Additional Shares Potentially Issuable
              
              
              62,076,633
              
              
              127,403,266
              
              
              258,056,533
 
 **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
              )Net
                  Property and equipment
              
              $
              95
              
              $
              131
 
 **NOTE
        4: INTANGIBLE ASSETS**
  On
        January 20, 2006, the Company completed the acquisition of substantially
        all of
        the assets and certain liabilities of Abundance Networks, Inc. (Abundance),
        including its wholly owned subsidiary, Abundance Networks (India) Pvt. Ltd.
        Abundance is a privately held company located in Shelton, Connecticut, that
        provides Ethernet over SONET/SDH, enterprise-class network solutions and
        services.
  The
        acquisition involved issuance of 2,170,408 shares with market value of $1,150
        of
        the Company’s common stock on January 20, 2006 with guarantee of additional
        shares to be issued in future if shares are trading at less than an average
        price of $2.00 after one year of acquisition. The initial purchase consideration
        of $3.5 million is allocated as follows (in thousands):
  Cash
                  and receivables
              
              $
              362Intellectual
                  property
              
              
              3,655Liabilities
                  assumed
              
              
              (517
              )$
              3,500
  For
        the
        quarter ended June 30, 2006, the operating expenses include a charge for
        amortization expense of $305 determined using the straight-line method over
        the
        estimated useful life of the asset.
  
  In
        July
        2001, the FASB issued Statement of Financial Accounting Standards No. 142,
        "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires goodwill
        and other intangible assets to be tested for impairment on an annual basis
        and
        between annual tests in certain circumstances, and written down when impaired,
        rather than being amortized. No impairment charge has been recorded in the
        six
        months ended June 30, 2006. Furthermore, SFAS 142 requires purchased intangible
        assets other than goodwill to be amortized over their useful lives unless
        these
        lives are determined to be indefinite.
  The
        management has ascertained the useful life of the purchased intellectual
        property to be 3 years. The gross carrying value and accumulated amortization
        related to purchased intellectual property at June 30, 2006 is as presented
        below (in thousands):
 
 **Three
                  Months Ended**
                **June
                  30, 2006**
              
              **Six
                  Months Ended**
                **June
                  30, 2006**Gross
                  Carrying Value of Intellectual property
              
              $
              3,655
              
              $
              3,655Accumulated
                  amortization
              
              
              304
              
              
              609Intangible
                  asset, net
              
              $
              3,351
              
              $
              3,046
  Amortization
        expense for the three months and six months ended June 30, 2006 was $304
        and
        $609, respectively. The Company estimates that aggregate amortization expense
        will be $1,218 for each of the years ending December 31, 2006, 2007 and
        2008.
 
 **NOTE
        5: LEASES**
 
 On
        July
        31, 2005, the Company's lease on 180 Rose Orchard Way, San Jose, CA expired.
        The
        Company signed a six month lease for the premises located at 4699 Old Ironsides
        Drive, Santa Clara, California, which the Company now occupies as its primary
        headquarters. In February 2006 the Company extended that lease through April
        2007.
 
 In
        June
        2005, the Company sold some equipment to a leasing company and immediately
        executed a 24 month operational lease. The sale and leaseback resulted in
        net
        sale proceeds of $631 and a gain of $422. Under the terms of the lease the
        Company has agreed to pay, on a quarterly basis, $179 over the term of the
        lease. At the end of the lease the Company has the right to return the
        equipment, negotiate a re-lease, or purchase the equipment at fair market
        value.
 
 Gain
        of
        $422 is being recognized over the term of lease, with $53 being recognized
        in
        current period and $187 being deferred over the remaining term as of June
        30,
        2006.
 
 The
        company has defaulted in making the quarterly lease payments since April
        1, 2006
        and the matter is now in litigation. As of June 30, 2006, lease payments
        outstanding under this operating lease are $79, net of sale proceeds to be
        released at the end of lease term $771 and prepaid rent of $179.
  
  **NOTE
        6: ACCRUED LIABILITIES AND DEBT**
 
 ***Accrued
        liabilities***
 
 Total
        accrued liabilities as of June 30, 2006 total $4,187. A breakdown of this
        amount
        is as follows:
 
 **June
                  30, 2006**Accrued
                  liabilities related to the acquisition of Abundance
                  Networks
              
              $
              2,458Accrued
                  liabilities related to the acquisition of Xpeed
              
              
              123Accrued
                  liabilities for expenses
              
              
              741Accrued
                  salaries and benefits
              
              
              677Provision
                  for deferred gain
              
              
              187Total
                  Accrued Liabilities
              
              $
              4,187
 
 The
        accrued liability related to the acquisition of Abundance Networks occurred
        in
        1Q 2006.
 
 ***Bridge
        loans and other notes***
 
 In
        connection with the notes issued in 2005, the Company issued 750,990 warrants
        to
        purchase shares of common stock to the bridge loan investors. The warrant
        prices
        are fixed and were determined by using the average volume weighted share
        price
        for the ten (10) trading days prior to the receipt of the funding and range
        from
        $0.71 per share to $2.08 per share and expire three years from the date of
        the
        note. The fair value of the warrants was estimated using the Black-Scholes
        option pricing model and was recorded as warrant liability in accordance
        with
        the guidance under EITF 00-19. Assumptions used to value these warrants included
        that all warrants would be exercised on their respective expiration dates,
        using
        annualized volatility rate of 100%, and using risk free interest rates ranging
        from 4% to 4.6%. As of June 30, 2006, warrant liability included the estimated
        fair value of these warrants of $13.
 
 Total
        notes payable as of June 30, 2006 total $2,322. A breakdown of this amount
        is as
        follows:
 
 **June
                  30, 2006**Short
                  term bridge loan from accredited investors due June 30, 2006 (unpaid
                  as of
                  June 30, 2006), interest payable at 8% per annum. In addition,
                  the Company
                  issued to the investors, warrants to purchase 283,325 shares of
                  common
                  stock, none of which was exercised up to June 30, 2006.
              
              $
              580Short
                  term bridge loan from related parties due June 30, 2006, interest
                  payable
                  at 8% per annum. In addition, the Company issued to the investors,
                  warrants to purchase 467,665 shares of common stock, none of which
                  was
                  exercised up to June 30, 2006.
              
              
              580Accrued
                  interest on bridge loan ($55 and $43 due to related parties as
                  of June 30,
                  2006 and June 30, 2006, respectively)
              
              
              93Notes
                  payable in connection with unsettled claims from acquisition of
                  Xpeed in
                  April 2003, unsecured ($85 due to related parties).
              
              
              310Notes
                  payable in connection with assumption of liability upon acquisition
                  of
                  Abundance Networks, Inc., unsecured
              
              
              179Note
                  payable to a foreign bank in connection with assumption of liability
                  upon
                  acquisition of Abundance Networks, Inc. and its foreign subsidiary.
                  The
                  note accrues interest at the rate of 15% and is secured by all
                  the assets
                  of the foreign subsidiary.
              
              
              580Total
                  Notes Payable
              
              $
              2,322Less:
                  current maturity
              
              
              (2,322
              )
 
 ***Callable
        Secured Convertible Notes***
 
 In
        November 2005, the company entered into a securities purchase agreement which
        provides for the purchase and sale of callable secured convertible notes
        and
        warrants. Under the securities purchase agreement, the company will receive
        up
        to $4,800 upon issuance of a corresponding amount of the company’s 8% callable
        secured convertible notes and warrants to purchase up to an aggregate of
        2,400,000 shares of common stock. The conversion of the debt to common stock
        of
        the Company is at the option of the holder and may be exercised at any time.
        The
        notes were accompanied by a Registration Rights Agreement.
 
 During
        2005, the Company received $2,974 ($3,200 net of financing costs) and issued
        1,600,000 five year $1.00 warrants, none of which have been exercised. The
        terms
        of the notes provide for full payment on or before the third anniversary
        date of
        issuance, with interest at the rate of 8% per annum. The company has the
        option
        to prepay (i) all of the outstanding principal and unpaid interest at any
        time
        if the common stock is trading at or below $0.75 per share and (ii) portion
        of
        the outstanding principal and unpaid interest at any time if the common stock
        is
        trading at or below $1.12 per share. The notes are convertible into common
        shares at the lesser of $0.68 or 55% of the market price of the Company’s common
        stock, as defined. Additionally, the notes are secured by intellectual
        properties owned by the company.
  
  The
        notes
        are potentially convertible into an unlimited number of common shares.
        Accordingly, the Company has accounted for the Notes under SFAS 133 and EITF
        00-19 which require the beneficial conversion feature to be treated as an
        embedded derivative, recording a liability equal to the estimated fair value
        of
        the conversion option. In addition, all non-employee warrants and options
        that
        are exercisable during the period that the Notes are outstanding are required
        to
        be recorded as liabilities at their fair value. As of June 30, 2006 the Notes
        were convertible into 55,512,561 common shares and the conversion feature
        had an
        estimated fair value of $2,895. The actual carrying amount of principal and
        accrued interest due as of June 30, 2006 is $3,359, which exceeds the estimated
        fair value of the embedded derivative by $464. Consequently this amount is
        shown
        under the caption “Callable secured convertible debt and accrued interest” in
        the Consolidated Balance Sheet. Non-employee warrants to acquire a total
        of
        1,600,000 common shares were outstanding and had an estimated fair value
        of $58.
        The fair value of the conversion feature and the warrants were estimated
        using
        the Black-Scholes option pricing model. Assumptions used to value the warrants
        and options included assuming that all warrants would be exercised on their
        respective expiration dates, using annualized volatility of 100%, and using
        risk
        free  interest
        rate of 5.125%.
 
 The
        Company issued 360,000 warrants to purchase shares of common stock, 180,000
        warrants being issued on November 17, 2005 and another 180,000 warrants being
        issued on December 28, 2005 to two selling stockholders, Laidlaw & Company
        and Stonegate Securities, LLC, who helped to identify purchasers for callable
        secured convertible notes. The terms of the warrants entitle each selling
        stockholder to purchase shares of common stock before the fifth anniversary
        date
        of the issuance. All of these warrants are exercisable at $1.00 per share
        which
        price may be adjusted from time to time if the Company issues stock at less
        than
        $1.00 in the future. None of the warrants have been exercised as of June
        30,
        2006. As per the agreed-upon exclusions no adjustment to the exercise price
        will
        be made ( i )
        upon
        the exercise of any warrants, options or convertible securities granted,
        issued
        and outstanding on the date of issuance of this Warrant; (ii) upon the grant
        or
        exercise of any stock or options which may hereafter be granted or exercised
        under any employee benefit plan, stock option plan or restricted stock plan
        of
        the Company now existing or to be implemented in the future, so long as the
        issuance of such stock or options is approved by a majority of the independent
        members of the Board of Directors of the Company or a majority of the members
        of
        a committee of independent directors established for such purpose; or (iii)
        upon
        the issuance of securities in connection with a merger, consolidation or
        purchase of assets, or in connection with any strategic partnership or joint
        venture (the primary purpose of which is not to raise equity capital), or
        in
        connection with the disposition or acquisition of a business, product or
        license
        by the Company, so long as the issuance of such securities is approved by
        a
        majority of the independent members of the Board of Directors of the Company
        or
        a majority of the members of a committee of independent directors established
        for such purpose; (iv) upon the exercise of the Warrants. Any of the warrants,
        stock or options, issued or granted subsequently, have not triggered an
        adjustment to the exercise price of these warrants.
 
 The
        fair
        value of the warrants issued was estimated using the Black-Scholes option
        pricing model and was recorded as warrant liability in accordance with the
        guidance in EITF 00-19. Assumptions used to value these warrants included
        that
        all warrants would be exercised on their respective expiration dates, using
        annualized volatility rate of 100%, and using risk free interest rate of
        5.125%.
        As of June 30, 2006, warrant liability included the estimated fair value
        of
        these warrants of $13.
 
 The
        estimated fair value of the conversion option and warrants exceeded the carrying
        value of the Notes; therefore the excess is recorded as a loss on derivative
        instruments in the Consolidated Statement of Operations in 2005. The estimated
        fair value of the embedded derivatives and the non-employee warrants and
        options
        declined during the three and six months ending June 30, 2006, resulting
        in a
        gain on derivative instruments of $244 and $785 for the respective periods
        reported in the Consolidated Statement of Operations. The fair value of the
        embedded derivatives, warrants and options will be estimated each reporting
        period with the change in fair value recorded as gain or loss on derivative
        instruments. As the Company’s common stock is highly volatile, material gains or
        losses for the change in estimated fair value are likely to occur in future
        periods.
 
 Under
        the
        related registration rights agreement, the company agreed to register all
        of the
        shares underlying such convertible notes and warrants to allow the selling
        stockholders to sell them in a public offering or other
        distribution.
 
 Under
        the
        terms of the securities purchase agreement, the investors are obligated to
        purchase an additional $1,600 of our 8% notes and warrants to purchase 800,000
        shares of our common stock within five days following the date this registration
        statement is declared effective by the Securities and Exchange Commission
        and in
        each case upon satisfaction of additional conditions by the Company. The
        additional conditions that must be satisfied by the Company prior to the
        purchase by the investors of the remaining convertible notes and warrants
        consist of the following: (i) the Company's representations and warranties
        contained in the securities purchase agreement are true and correct in all
        material respects on the date of purchase; (ii) there is no litigation, statute,
        rule, regulation, executive order, decree, ruling or injunction that has
        been
        enacted, entered, promulgated or endorsed by or in any court or government
        authority of competent jurisdiction or any self-regulatory organization having
        requisite authority which prohibits the transactions contemplated by the
        securities purchase agreement; (iii) no event has occurred which could
        reasonably be expected to have a material adverse effect on the Company;
        (iv)
        the shares of common stock underlying the convertible notes and warrants
        have
        been authorized for quotation on the Over-The-Counter Bulletin Board, or
        OTCBB,
        and trading in our common stock on the OTCBB has not been suspended by the
        Securities and Exchange Commission or the OTCBB; (v) the Company shall provide
        a
        legal opinion to the investors; and (vi) the Company shall provide certain
        certificates of its officers to the investors regarding the Company's
        capitalization and the truth and correctness of its representations and
        warranties in the securities purchase agreement. If the registration statement
        is not declared effective, the investors have no obligation to purchase the
        remaining 8% convertible notes or the related warrants.
  
  The
        following table summarizes the various components of the embedded derivative
        and
        warrant liability for the three month period ended June 30, 2006.
 
 **Three
                  Months Ended**
                **June
                  30, 2006**Derivative
                  liability
              
              $
              2,895Warrant
                  liability related to convertible debt
              
              
              58Warrant
                  liability related to issuance of other non-employee warrants
              
              
              29Callable
                  secured debt and accrued interest
              
              
              464Total
                  callable secured convertible notes
              
              
              3,445Unrealized
                  gain related to the adjustment of derivative and warrant liability
                  to fair
                  value of underlying securities
              
              $
              245
  **NOTE
        7: NET LOSS PER SHARE**
 
 Basic
        Earnings (Loss) per Share ("EPS") excludes dilution and is computed by dividing
        net income or loss attributable to common stockholders by the weighted-average
        number of common shares outstanding for the period. Diluted EPS reflects
        the
        potential dilution that could occur if securities or other contracts to issue
        common stock (convertible notes, warrants to purchase common stock and common
        stock options using the treasury stock method) were exercised or converted
        into
        common stock. Potentially dilutive securities are excluded from the diluted
        EPS
        computation in loss periods as their effect would be anti-dilutive.
 
 **NOTE
        8: COMMON STOCK (in actual amounts)**
 
 As
        of
        June 30, 2006, there were 42,497,198 shares of Common Stock issued and
        outstanding.
 
 **NOTE
        9: LEGAL MATTERS**
 
 The
        Company is from time to time party to various legal proceedings, arising
        in the
        ordinary course of business. Based on evaluation of these matters and
        discussions with the Company's counsel, the Company believes that liabilities
        arising from or sums paid in settlement of these existing matters will not
        have
        a material adverse effect on the consolidated results of operations or financial
        position of the Company
  
  **NOTE
        10: GOING CONCERN**
 
 The
        accompanying financial statements have been prepared in conformity with
        generally accepted accounting principles in the United States of America,
        which
        contemplate continuation of the Company as a going concern. However, the
        Company
        has incurred losses since its inception and has current liabilities in excess
        of
        current assets. The Company does not have sufficient cash on hand to continue
        its operations in the manner they have historically been conducted. These
        factors raise substantial doubt about the ability of the Company to continue
        as
        a going concern. In this regard, management is proposing to raise any necessary
        additional funds not provided by operations through loans or through additional
        sales of its common stock. There is no assurance that the Company will be
        successful in raising this additional capital or in achieving profitable
        operations. The financial statements do not include any adjustments that
        might
        result from the outcome of these uncertainties.
  
  **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/A for the year ended December 31, 2005 filed with the Commission
        on April 3, 2006 and amended on December 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 FOR THE THREE MONTHS ENDED JUNE 30, 2006 AS COMPARED TO THE
        THREE
        MONTHS ENDED JUNE 30, 2005**
 
 **Revenues,
        Cost of Sales and Gross Profit**
 
 The
        Company continued to ship its commercial products in the three months ended
        June
        30, 2006 and recognized revenue of $19 and cost of goods of $48.
 
 **Operating
        Expenses**
 
 Operating
        expenses include research and development, business development, general
        and
        administrative, and goodwill impairment expenses.  Total
        operating expenses for the three months ended June 30, 2006 and June 30,
        2005
        were $1.5 million and $1.7 million, respectively. The decrease of $0.2 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 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.
  
  Increased
        general and administration expenditures of $0.6 million as a result of legal,
        accounting and other expenses related to the Company's increased disclosure
        obligations following the reverse merger in April 2005 and expenses related
        to
        the acquisition of certain assets, liabilities and technology of Abundance
        Networks, LLC in January 2006.
 
 There
        was
        no impairment of goodwill in either reporting period.
 
 **Other
        Expenses**
 
 Other
        expenses include the unrealized gain or loss related to the adjustment of
        derivative and warrant liability to the fair value of the underlying securities,
        net interest expense and any gain or loss on the sale of assets. Other expenses
        for the three months ended June 30, 2006 and June 30, 2005, were $201 and
        $362
        respectively.
 
 **Unrealized
        Gain or Loss Related to the Adjustment of Derivative and Warrant
        Liability**
 
 For
        the
        three months ended June 30, 2006, we had unrealized gains related to derivative
        and warrant liabilities of $245 as compared to $0 for the same period in
        2005.
        These gains resulted from the November 2005 securities purchase agreement
        which
        provides for the purchase and sale of convertible notes and warrants. This
        agreement and its accounting treatment for the three months ending June 30,
        2006
        are described above in Note 6 under Callable Secured Convertible
        Notes.
 
 **Net
        Interest Expense**
 
 Net
        interest expense for the three months ended June 30, 2006 and June 30, 2005,
        was
        ($97) and ($8), respectively. This increase of $89 was primarily due to interest
        expense on convertible debentures, notes payable and bridge loans.
 
 **Gain
        (loss) on sale of assets**
 
 Gain
        (loss) on sale of assets for the three months ended June 30, 2006 and June
        30,
        2005, was $53 and $370, respectively. This decrease of $317 was due to the
        sale
        and lease back of certain Company assets as described in Note 5.
 
 **Net
        Loss**
 
 As
        a
        result of the foregoing factors, for the three months ended June 30, 2006
        and
        June 30, 2005, the Company incurred a net loss of $1.3 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.
 
 **RESULTS
        OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AS COMPARED TO THE SIX
        MONTHS ENDED JUNE 30, 2005**
 
 **Revenues,
        Cost of Sales and Gross Profit**
 
 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, general
        and
        administrative, and goodwill impairment expenses.  Total
        operating expenses for three months ended June 30, 2006 and June 30, 2005
        were
        $3.8 million and $3.0 million, respectively. The increase of $0.8 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 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.
  
  Increased
        general and administration expenditures of $1.6 million as a result of legal,
        accounting and other expenses related to the Company's increased disclosure
        obligations following the reverse merger in April 2005 and expenses related
        to
        the acquisition of certain assets, liabilities and technology of Abundance
        Networks, LLC in January 2006.
 
 There
        was
        no impairment of goodwill in either reporting period.
 
 **Other
        Expenses**
 
 Other
        expenses include the unrealized gain or loss related to the adjustment of
        derivative and warrant liability to the fair value of the underlying securities,
        net interest expense and any gain or loss on the sale of assets. Other expenses
        for the six months ended June 30, 2006 and June 30, 2005, were $675 and $355
        respectively.
 
 **Unrealized
        Gain or Loss Related to the Adjustment of Derivative and Warrant
        Liability**
 
 For
        the
        six months ended June 30, 2006, we had unrealized gains related to derivative
        and warrant liabilities of $784 as compared to $0 for the same period in
        2005.
        These gains resulted from the November 2005 securities purchase agreement
        which
        provides for the purchase and sale of convertible notes and warrants. This
        agreement and its accounting treatment for the three months ending June 30,
        2006
        are described above in Note 6 under Callable Secured Convertible
        Notes.
 
 **Net
        Interest Expense**
 
 Net
        interest expense for the six months ended June 30, 2006 and June 30, 2005,
        was
        ($214) and ($16), respectively. This increase of $198 was primarily due to
        interest expense on convertible debentures, notes payable and bridge
        loans.
 
 **Gain
        (loss) on sale of assets**
 
 Gain
        (loss) on sale of assets for the six months ended June 30, 2006 and June
        30,
        2005, was $105 and $370, respectively. This decrease of $265 was due to the
        sale
        and lease back of certain Company assets as described in Note 5.
 
 **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 $3.1 million and $2.6 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 callable secured convertible notes
        and
        warrants. A complete discussion of this agreement is discussed in Note 6
        above
        under Callable Secured Convertible Notes. From a capital resources perspective,
        in 2005 the Company received $2,974 ($3,200 net of financing costs) from
        this
        agreement. The investors are obligated to purchase an additional $1,600 of
        our
        8% notes and warrants to purchase 800,000 shares of our common stock within
        five
        days following the date the Company’s current SB-2A filing is declared effective
        by the Securities and Exchange Commission and in each case upon satisfaction
        of
        additional conditions by the Company.
  
  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. On
        December 19, 2005, we filed a registration statement with the Securities
        and
        Exchange Commission covering the shares of stock issuable upon conversion
        of
        these convertible notes. Within 5 days of the date the registration statement
        is
        declared effective by the Securities and Exchange Commission, ,
        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. On
        December 19, 2005, we filed a registration statement with the Securities
        and
        Exchange Commission covering the shares of stock issuable upon exercise of
        these
        warrants. Within 5 days of the date the registration statement is declared
        effective by the Securities and Exchange Commission, 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 date the registration statement is effective, 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.
  
  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, since the registration statement relating
        to the
        convertible notes and warrants was not declared effective by the Securities
        and
        Exchange Commission on or before March 17, 2006 or the investors cannot make
        sales under the registration statement for any period of time after the
        registration statement is declared effective, we are obligated to pay a
        registration default fee to the 8% note holders equal to the principal of
        the
        note outstanding multiplied by .02 multiplied by the sum of the number of
        additional months required for the registration statement to become effective
        (or on a pro rata basis). For example, for the first month after March 31,
        2006
        that the registration statement becomes effective, we were required to pay
        $5,000 for each $250,000 of outstanding note principal amount. Thereafter,
        for
        each month that sales could not be made pursuant to the registration statement,
        we are required to pay an additional $5,000 for each $250,000 of outstanding
        note principal amount. Accordingly, our failure to have the registration
        statement declared effective by July 17, 2006 has resulted in the assessment
        of
        liquidated damages in the amount of $192,000 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 Initial Shares
              
              
              21,850,000
              
              
              44,850,000
              
              
              90,850,000Shares
                  Issuable upon True-up of Indemnification Shares
              
              
              6,650,000
              
              
              13,650,000
              
              
              27,650,000Maximum
                  Number of Earnout Shares issuable as adjusted for True-up
              
              
              33,250,000
              
              
              68,250,000
              
              
              138,250,000Total
                  additional shares potentially issuable
              
              
              61,750,000
              
              
              126,750,000
              
              
              256,750,000
  **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 no change in the Company’s internal
        control over financial reporting occurred during the second fiscal quarter
        that
        has materially affected, or is reasonably likely to materially affect, the
        Company’s internal control over financial reporting.
  
  **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:
                  December 22, 2006*
              *By:*
              */s/
                  Naveen S. Bisht**Naveen
                  S. Bisht, CEO*
  *Dated:
                  December 22, 2006*
              *By:*
              */s/
                  William Wong**William
                  Wong, Acting CFO*