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


Washington,
      DC 20549





**FORM
      10-QSB**





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


**EXCHANGE
      ACT OF 1934**





For
      the
      quarterly period ended March 31, 2007





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


**EXCHANGE
      ACT**





For
      the
      transition period from __________ to __________





*Commission
      File Number 000-13822*





**NAYNA
      NETWORKS, INC.**


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





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





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


(Address
      of principal executive offices)





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








Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. x Yes o No





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





Common
      stock, par value $0.0001, 47,829,463 shares outstanding as of March 31,
      2007.





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











**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**NAYNA
      NETWORKS, INC.**


(a
      development stage enterprise)


**CONSOLIDATED
      BALANCE SHEET**


(in
      thousands, except share and per share data)


(Unaudited)





**March
                31,**
              **2007**
            
            **March
                31,**
              **2006****(Unaudited)****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            447
            
            $
            424Restricted
                cash
            
            
            
            
            
            44Accounts
                receivable, net of allowances of $374 for bad debts
            
            
            725
            
            
            236Prepaid
                expenses and other current assets
            
            
            325
            
            
            62Total
                current assets
            
            
            1,497
            
            
            766Property
                and equipment, net
            
            
            915
            
            
            88Goodwill
            
            
            20,716
            
            
            3,350Other
                assets
            
            
            774
            
            
            492Total
                assets
            
            $
            23,903
            
            $
            4,697**Liabilities
                and stockholders’ equity**Current
                liabilities:Accounts
                payable and current liabilities
            
            $
            27,202
            
            $
            4,867Notes
                payable
            
            
            1,714
            
            
            860Notes
                payable to related parties
            
            
            815
            
            
            1,350Convertible
                debentures
            
            
            63Derivative
                liability related to acquisition
            
            
            
            
            
            3,263Convertible
                debt derivatives
            
            
            7,803
            
            
            32Warranty
                liability
            
            
            662
            
            
            395Total
                current liabilities
            
            
            38,259
            
            
            10,766Long
                term liabilitiesDeferred
                gain, less current portion
            
            
            
            
            
            29Long
                term capital lease, less current portion
            
            
            5Total
                long-term liabilities
            
            
            5
            
            
            29Total
                liabilities
            
            
            38,264
            
            
            10,794**Stockholders’
                equity:**Series
                D preferred stock, Auth shares 52,500,000, shares O/S 19,531,247
                at
                12/31/04Common
                Stock: $0.001 par value, 1,000,000,000 shares authorized at March
                31, 2007
                and 47,829,463 shares issued and outstanding as of March 31,
                2007
            
            
            5
            
            
            4Additional
                paid-in-capital
            
            
            61,146
            
            
            60,704Deferred
                stock option compensation
            
            
            
            
            
            (607
            )Deficit
                accumulated during the development stage
            
            
            (75,513
            )
            
            (66,199
            )Total
                stockholders’ (deficit) equity
            
            
            (14,362
            )
            
            (6,098
            )Total
                liabilities and stockholders’ equity
            
            $
            23,903
            
            $
            4,697




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 March 31,**
            
            **Cumulative
                Period from February 10, 2000 (date of inception)
                to****2006**
            
            **2005**
            
            **March
                31, 2007**Revenues
            
            $
            553
            
            $
            317
            
            $
            1,033Cost
                of goods
            
            
            200
            
            
            269
            
            
            525Gross
                profit
            
            
            353
            
            
            48
            
            
            508Operating
                expenses:Research
                and development
            
            
            111
            
            
            715
            
            
            44,101Business
                development
            
            
            134
            
            
            173
            
            
            3,935General
                and administrative
            
            
            905
            
            
            1,387
            
            
            13,292Goodwill
                impairment
            
            
            
            
            
            
            
            
            10,648Total
                operating expenses
            
            
            1,151
            
            
            2,274
            
            
            71,977Income
                (loss) from operations
            
            
            (798
            )
            
            (2,226
            )
            
            (71,468
            )Unrealized
                gain (loss) related to derivative and warrant liability to fair value
                of
                underlying securities
            
            
            9,832
            
            
            539
            
            
            (5,252
            )Interest
                expense, net
            
            
            99
            
            
            (117
            )
            
            1,077Gain
                (loss) on sale of assets
            
            
            
            
            
            52
            
            
            330Net
                income (loss)
            
            $
            8,934
            
            $
            (1,752
            )
            $
            (75,314
            )Weighted
                shares outstandingBasic
                and diluted
            
            
            47,580,746
            
            
            38,013,239Net
                income (loss) per share:Basic
                and diluted
            
            $
            0.188
            
            $
            (0.046
            )










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)







**Cumulative****Period
                from****February
                10,****2000
                (date of****inception)
                to****3
                Months Ended March 31,**
            
            **March
                31,****2007**
            
            **2006**
            
            **2007****Cash
                flows from operating activities:**Net
                income (loss)
            
            $
            8,934
            
            $
            (1,752
            )
            
            (75,512
            )Adjustments
                to reconcile net loss to net cash used in operations:Depreciation
            
            
            (2,021
            )
            
            353
            
            
            2,289Gain (loss) on sale of property and equipment
            
            
            
            
            
            (52
            )
            
            784Impairment of goodwill and other intangible assets related to
                acquisitions
            
            
            
            
            
            
            
            
            10,649Noncash charges related to stock options
            
            
            566
            
            
            77
            
            
            1,244Noncash charges related to issuance of common stock for legal and
                professional services
            
            
            0
            
            
            24
            
            
            843Noncash interest expense related to issuance of convertible
                debt
            
            
            (99
            )
            
            122
            
            
            433Unrealized loss (gain) related to adjustment of derivative and warrant
                liability to fair value of underlying securities
            
            
            (9,832
            )
            
            (539
            )
            
            5,252Amortization of financing costs
            
            
            (100
            )
            
            19
            
            
            (19
            )Amortization of discount on warrants associated with equipment
                financing
            
            
            
            
            
            
            
            
            202Changes in operating assets and liabilities:Restricted
                cash
            
            
            44
            
            
            
            
            
            (121
            )Accounts
                receivable
            
            
            (490
            )
            
            (209
            )
            
            (533
            )Prepaid
                expenses and other current assets
            
            
            (263
            )
            
            31
            
            
            (354
            )Other
                assets
            
            
            (282
            )
            
            32
            
            
            (569
            )Accounts
                payable and accrued liabilities
            
            
            22,336
            
            
            54
            
            
            26,278Net cash used in operating activities
            
            $
            18,793
            
            $
            (1,841
            )
            $
            (29,134
            )**Cash
                flows from investing activities:**Purchase of property and equipment
            
            $
            882
            
            $
            (5
            )
            $
            (369
            )Proceeds from sale of property and equipment
            
            
            
            
            
            
            
            
            1,076Costs
                associated with acquisition of ProSAT.
            
            
            (19,652
            )
            
            
            
            
            (19,652
            )Costs
                associated with acquisition of Xpeed, Inc.
            
            
            
            
            
            
            
            
            (3,685
            )Net cash provided (used) in investing activities
            
            $
            (18,770
            )
            $
            (5
            )
            $
            (22,630
            )**Cash
                flows from financing activities:**Loan proceeds
            
            
            
            
            $
            $472
            
            $
            1,635Payments on capital lease obligations and loan facility
            
            
            
            
            
            
            
            
            (5,735
            )Proceeds from issuance of common stock, net of repurchases
            
            
            
            
            
            16
            
            
            249Proceeds 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
            
            
            
            
            
            
            
            
            1,467Proceeds from issuance of callable secured convertible notes, net
                of
                financing costs
            
            
            
            
            
            
            
            
            2,974Net cash provided (used) by financing activities
            
            
            
            
            $
            $488
            
            $
            51,788Net
                decrease in cash and cash equivalents
            
            $
            23
            
            $
            (1,358
            )Cash
                and cash equivalents at beginning of period
            
            $
            424
            
            $
            1,782Cash
                and cash equivalents at end of period
            
            $
            447
            
            $
            424**Non-cash
                financing activities**Conversion of preferred stock into commonShares issued upon conversion of debentures
            
            $
            19
            
            $
            2,339Shares issued for purchase of intangibles
            
            
            
            
            $
            1,150Shares issued for services or settlement of claims
            
            
            
            
            $
            24





*Accompanied
      notes are an integral part of these financial statements.*





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








**The
      Company**





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





The
      Company has incurred losses since its inception, however with the recent
      acquisition of ProSAT, the Company anticipates that it will be able to generate
      sufficient cash flows from operations to support its operations through November
      2007. In order to fund its operations and growth opportunities beyond November
      2007, the Company plans to raise additional capital during 2007. 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.





**Development
      Stage**





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 prior to the acquisition of ProSAT. Therefore, as per the Statement
      of Financial Accounting Standards (“SFAS”) No.7, “Accounting and Reporting by
      Development Stage Enterprises”, the Company was classified as a development
      stage enterprise. For this quarterly report, the Company is presenting its
      financial statements in accordance with Statement of Financial Accounting
      Standards (SFAS) No. 7, “Accounting and Reporting by Development Stage
      Enterprises”. Successful completion of the Company’s developmental program and,
      ultimately, the attainment of profitable operations are dependent upon future
      events, including future financing, successfully completing product development,
      and achieving a sufficient level of sales and market demand to become an
      established operating enterprise. The acquisition of ProSAT will cause an
      evaluation of the Company’s status as a development stage enterprise. However,
      there can be no assurance that the Company will be able to achieve and maintain
      profitable operations.





**Basis
      of Presentation**





The
      accompanying condensed consolidated financial statements are unaudited, as
      permitted pursuant to the rules and regulations of the Securities and Exchange
      Commission (the "Commission"). Certain information and disclosures normally
      included in financial statements prepared in accordance with accounting
      principals generally accepted in the United States have been condensed or
      omitted. These interim condensed consolidated financial statements include
      all
      adjustments, which in the opinion of management, are necessary in order to
      make
      the condensed consolidated financial statements not misleading.





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
      March 31, 2007, for the three months ended March 31, 2007 and 2006, and for
      the
      cumulative period from February 10, 2000 (date of inception) to March 31, 2007
      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*** *)* ***.***





**Revenue
      Recognition**





The
      Company’s revenue recognition policy is consistent with applicable revenue
      recognition guidance and interpretations, including the requirements of Emerging
      Issues Task Force Issue No. 00-21 (“EITF 00-21”), Revenue Arrangements with
      Multiple Deliverables, Statement of Position 97-2 (“SOP 97-2”), Software Revenue
      Recognition, Statement of Position 81-1 (“SOP 81-1”) Accounting for Performance
      of Construction-Type and Certain Production Type Contracts, Staff Accounting
      Bulletin No. 104 (“SAB 104”), Revenue Recognition, and other applicable revenue
      recognition guidance and interpretations.




The
      Company records revenue when all four of the following criteria are met: (i)
      persuasive evidence that an arrangement exists; (ii) delivery of the products
      and/or services has occurred; (iii) the selling price is fixed or determinable,
      and (iv) collectibility is reasonably assured. Cash received in advance of
      revenue recognition is recorded as deferred revenue.







Revenue
      arrangements with multiple deliverables are evaluated to determine if the
      deliverables can be divided into more than one unit of accounting. An item
      can
      generally be considered a separate unit of accounting if all of the following
      criteria are met:




The
      delivered item(s) has value to the customer on a standalone basis; there is
      objective and reliable evidence of the fair value of the undelivered item(s);
      and if the arrangement includes a general right of return relative to the
      delivered item(s), delivery or performance of the undelivered item(s) is
      considered probable and substantially in the control of the
      Company.




Items
      which do not meet these criteria are combined into a single unit of accounting.
      If there is objective and reliable evidence of fair value for all units of
      accounting, the arrangement consideration is allocated to the separate units
      of
      accounting based on their relative fair values. In cases where there is
      objective and reliable evidence of the fair value(s) of the undelivered item(s)
      in an arrangement but no such evidence for one or more of the delivered item(s),
      the residual method is used to allocate the arrangement consideration. In cases
      in which there is not objective and reliable evidence of the fair value(s)
      of
      the undelivered item(s), the Company defers all revenue for the arrangement
      until the period in which the last item is delivered.




For
      revenue arrangements with multiple deliverables, upon shipment, devices, the
      Company has fair value for all remaining undelivered elements and recognizes
      the
      residual amount within the arrangement as revenue for the delivered items as
      prescribed in EITF 00-21. Revenues for the Company’s arrangements that include
      multiple elements are allocated to each undelivered element based on the fair
      value of each element. Fair value is determined based on the price charged
      when
      each element is sold separately and/or the price charged by third parties for
      similar services.




Net
      revenues from services such as customer support are initially deferred and
      then
      recognized on a straight-line basis over the term of the contract. Net revenues
      from services such as installations, equipment repairs, refurbishment
      arrangements, training and consulting are recognized as the services are
      rendered.





**Allowance
      for doubtful accounts**





The
      Company records its allowance for doubtful accounts based upon its assessment
      of
      various factors. The Company considers historical experience, the age of the
      accounts receivable balances, the credit quality of its customers, current
      economic conditions and other factors that may affect customers’ ability to pay
      to determine the level of allowance required. ******





**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. 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.





**Goodwill
      and other 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.




Intangible
      assets other than goodwill are carried at cost less accumulated amortization.
      Intangible assets are generally amortized on a straight-line basis over the
      useful lives of the respective assets, generally two to seven years. Long-lived
      assets and certain identifiable intangible assets to be held and used are
      reviewed for impairment whenever events or changes in circumstances indicate
      that the carrying amount of such assets may not be recoverable. Determination
      of
      recoverability is based on an estimate of undiscounted future cash flows
      resulting from the use of the asset and its eventual disposition. Measurement
      of
      any impairment loss for long-lived assets and certain identifiable intangible
      assets that management expects to hold and use is based on the amount the
      carrying value exceeds the fair value of the asset.




Goodwill
      is carried at cost. Goodwill is not amortized but is subject to an annual test
      for impairment at the reporting unit level (operating segment) and between
      annual tests in certain circumstances. The performance of the test involves
      a
      two-step process. The first step of the impairment test involves comparing
      the
      fair value of the Company’s reporting units with the reporting unit’s carrying
      amount, including goodwill. The Company generally determines the fair value
      of
      its reporting units using the expected present value of future cash flows,
      giving consideration to the market valuation approach. If the carrying amount
      of
      a reporting unit exceeds the reporting unit’s fair value, the Company performs
      the second step of the goodwill impairment test to determine the amount of
      impairment loss, if any.





**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**





Prior
      to
      January 1, 2006, the Company accounted for employee stock-based compensation
      using the intrinsic value method supplemented by pro forma disclosures in
      accordance with Accounting Principles Board Opinion No. 25, “Accounting for
      Stock Issued to Employees” (“APB 25”) and SFAS No. 123, “Accounting for
      Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accounting
      for Stock-Based Compensation - Transition and Disclosure - an amendment of
      FASB
      Statement No. 123” (“SFAS 148”). Under the intrinsic value method, the recorded
      stock-based compensation expense was related to the amortization of the
      intrinsic value of stock options and other stock-based awards issued by the
      Company. Options granted with exercise prices equal to the grant date fair
      value
      of the Company’s stock have no intrinsic value and therefore no expense was
      recorded for these options under APB 25.





Effective
      January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective
      approach and accordingly prior periods have not been restated to reflect the
      impact of SFAS 123(R). Under SFAS 123(R), stock-based awards granted prior
      to
      its adoption are expensed over the remaining portion of their service period.
      These awards are expensed under an accelerated amortization approach using
      the
      same fair value measurements which were used in calculating the expense under
      SFAS 123. For stock-based awards granted on or after January 1, 2006, the
      Company records stock-based compensation expense on a straight-line basis over
      the requisite service period, generally one to four years. SFAS 123(R) required
      that the deferred stock-based compensation on the consolidated balance sheet
      on
      the date of adoption be netted against additional paid-in-capital. As of
      December 31, 2005, there was a balance of $684 of deferred stock-based
      compensation that was netted against additional paid-in-capital on January
      1,
      2006.





SFAS
      123R
      requires forfeitures to be estimated at the time of grant and revised, if
      necessary, in subsequent periods if actual forfeitures differ from initial
      estimates. Stock-based compensation expense was recorded net of estimated
      forfeitures for the three months ended March 31, 2007 such that expense was
      recorded only for those stock-based awards that are expected to vest. Total
      stock-based compensation for the three months ended March 31, 2007 was
      $566.





**Income
      (loss) per common share**





Income
      (loss) per common share is calculated based on the consolidated net income
      (loss) for the period divided by the weighted average number of common shares
      outstanding as of March 31, 2007 and 2006. Common stock equivalents are not
      included, as their effect would be antidilutive.





**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 FASB issued Statement of Financial Accounting Standards (SFAS) No.
      154,
      "Accounting Changes and Error Corrections, a replacement of APB Opinion No.
      20
      and FASB Statement No. 3." SFAS 154 requires retrospective application to prior
      periods' unaudited 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 retrospective
      application of a change in accounting principle be limited to the direct effects
      of the change. Indirect effects of a change in accounting principle, such as
      a
      change in non-discretionary profit-sharing payments resulting from an accounting
      change, should be recognized in the period of the accounting 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. Early adoption is permitted for accounting changes
      and
      corrections of errors made in fiscal years beginning after the date this
      Statement is issued. The Company does not expect the adoption of this SFAS
      to
      have a material impact on its consolidated financial position, results of
      operations or cash flows.




On
      February 16, 2006 the FASB issued SFAS 155, "Accounting for Certain Hybrid
      Instruments," which amends SFAS 133, "Accounting for Derivative Instruments
      and
      Hedging Activities," and SFAS 140, "Accounting for Transfers and Servicing
      of
      Financial Assets and Extinguishments of Liabilities." SFAS 155 allows financial
      instruments that have embedded derivatives to be accounted for as a whole
      (eliminating the need to bifurcate the derivative from its host) if the holder
      elects to account for the whole instrument on a fair value basis. SFAS 155
      also
      clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This
      statement is effective for all financial instruments acquired or issued in
      fiscal years beginning after September 15, 2006. The Company does not expect
      its
      adoption of this new standard to have a material impact on its financial
      position, results of operations or cash flows.





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes— an
      Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
      accounting for uncertainty in income tax positions. This Interpretation requires
      that the Company recognize in its financial statements the impact of a tax
      position if that position is more likely than not of being sustained on audit,
      based on the technical merits of the position. The provisions of FIN 48 became
      effective for the Company on January 1, 2007, with the cumulative effect of
      the
      change in accounting principle, if any, recorded as an adjustment to opening
      retained earnings. The Company is currently evaluating the impact of adopting
      FIN 48 and its impact on its financial position, cash flows, and results of
      operations.







In
      September 2006, the Securities and Exchange Commission (“SEC”) released SAB No.
      108, “Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108
      provides interpretive guidance on the SEC’s views on how the effects of the
      carryover or reversal of prior year misstatements should be considered in
      quantifying a current year misstatement. The Company adopted SAB 108 during
      the
      fourth quarter of 2006. The adoption did not have a material impact on the
      Company’s financial position, cash flows, or results of operations.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”), which clarifies the definition of fair value, establishes guidelines for
      measuring fair value, and expands disclosures regarding fair value measurements.
      SFAS 157 does not require any new fair value measurements and eliminates
      inconsistencies in guidance found in various prior accounting pronouncements.
      SFAS 157 will be effective for the Company on January 1, 2008. The Company
      is
      currently evaluating the impact of adopting SFAS 157 but does not believe that
      the adoption of SFAS 157 will have a material impact on its financial position,
      cash flows, or results of operations.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS 159”) which permits entities
      to choose to measure many financial instruments and certain other items at
      fair
      value that are not currently required to be measured at fair value. SFAS 159
      will be effective for the Company on January 1, 2008. The Company is currently
      evaluating the impact of adopting SFAS 159 on its financial position, cash
      flows, and results of operations.





**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.







***Acquisition
      of Depthcom 7, Inc. (“DC7”)***




In
      March
      2005, the Company acquired DC7, a privately owned shell company with no assets
      and liabilities. The merger was part of a fund-raising transaction structured
      to
      get private investment in Nayna Delaware. The Company issued 9,250,000 shares
      of
      common stock in anticipation of receiving funding promptly after the
      acquisition. As of the date of this report, the company and the defendants
      are
      negotiating a settlement and release agreement.




The
      shares issued have been recorded in accordance with the principles outlined
      in
      SFAS 123. The fair value of services received in this share-based transaction
      is
      more reliably measurable than the fair value of the shares issued. The
      management’s estimate of the fair value of services received is $0.93. However,
      as of the date of issue of this report, the Company has not received any funds
      and has filed a complaint against the representatives of DC7 requiring
      cancellation of these shares.





***Acquisition
      of*** ***Abundance
      Networks, LLC***





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





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







On
      April
      17, 2007, the Company and Abundance entered into Amendment
      No. 2 to the Asset Purchase Agreement by and among us, Abundance Networks,
      Inc.,
      a Delaware corporation and wholly-owned subsidiary, Abundance Networks, LLC,
      a
      Delaware limited liability company and Abundance Networks (India) Pvt Ltd,
      an
      India private limited company which provides that we will issue 4,500,000 shares
      to Abundance in full satisfaction of all remaining obligations to issues stock
      under the original Asset Purchase Agreement. In
      that
      second amendment, the Parties agreed to delete the section in the Agreement
      that
      called for Nayna to issue more shares to Abundance in order to true up the
      Initial shares if the Average Closing Price of Nayna Common Stock for the
      twenty-day period prior to January 20, 2007 was not $2.00. The Parties also
      agreed to delete the section in the Agreement that called for Nayna to issue
      more shares to Abundance in order to true up the Indemnification shares if
      the
      Average Closing Price of Nayna Common Stock for the twenty-day period prior
      to
      April 20, 2007 was not $2.00. The Parties also agreed to delete the section
      in
      the Agreement that called for Nayna to issue more shares to Abundance if certain
      revenue and margin targets were met for the period January 20, 2006 through
      March 31, 2007. The Parties agreed that, in return, Nayna would issue Abundance
      4,500,000 shares of Nayna Common Stock on or before April 30, 2007.





In
      connection with acquisition of Abundance **,** as
      of
      December 31, 2006, the Company recorded an additional $573 liability attributed
      to the changes in the fair market value for the True-Up shares that may be
      potentially issued, resulting in aggregate value of goodwill of $4,228. As
      of
      December 31, 2006, the company also recorded a charge of $1,103 in its
      Consolidated Statement of Operations for impairment of goodwill.





***Acquisition
      of ProSAT, LLC***





On
      March
      23, 2007, pursuant to the terms of a Membership Purchase Agreement, Nayna
      acquired all of the outstanding membership interests of Professional Satellite
      & Communications, LLC, (“ProSAT”), a privately held California limited
      liability company. Under the terms of the Membership Purchase Agreement, the
      Company agreed to issue 18 million restricted shares of common stock to the
      members of ProSAT. 2 million of which are being held in escrow for fifteen
      months to satisfy any indemnification claims by the Company during such period.
      The Company will also issue 2 million shares in the form of stock options to
      current ProSAT employees.





As
      a
      result of the acquisition the Company has booked $21 million of goodwill and
      a
      liability of $2.2 million related to the issuance of the 20 million shares
      of
      common stock.





***Acquisition
      of Alarmco, LLC***





On
      March
      23, 2007, pursuant to the terms of a Membership Interest Purchase Agreement,
      Nayna acquired all of the outstanding membership interests of Alarmco, LLC,
      a
      privately held California limited liability closely associated with ProSAT.
      Under the terms of the Membership Purchase Agreement, the Company agreed to
      issue one thousand restricted shares of common stock to the members of Alarmco.





**NOTE
      3: PROPERTY AND EQUIPMENT**





Property
      and equipment consisted of the following at March 31, 2007 and March 31,
      2006:





**March
                31,**
              **2007**
            
            **March
                31,**
              **2006**Computer
                equipment
            
            
            1,118
            
            
            686Computer
                software
            
            
            1,360
            
            
            1,360Furniture
                and fixtures
            
            
            2
            
            
            22,936
            
            
            2,048Accumulated
                depreciation and amortization
            
            
            (2,021
            )
            
            (1,959
            )$
            915
            
            $
            88





**NOTE**  **4:
      ACCRUED LIABILITIES AND NOTES PAYABLE**





***Accrued
      liabilities***





Total
      accrued liabilities as of March 31, 2007 total $16,702. A breakdown of this
      amount is as follows:





**March
                31, 2007**Derivative
                liability related to the acquisition of Abundance Networks
            $
            2,955Accrued
                liabilities related to the acquisition of Xpeed
            
            123Accrued
                liabilities for expenses
            
            12,448Accrued
                salaries and benefits
            
            1,041Accrued
                liabilities for unsecured loans
            
            133Short
                term capital lease
            
            3Total
                Accrued Liabilities
            $
            16,702







The
      accrued liability related to the acquisition of Abundance Networks occurred
      in
      1Q 2006.




***Notes
      Payable - Bridge loan***




Notes
      payable at March 31, 2007 and 2006 consist of the following:




Mar.
                31, 2007
            
            Mar.
                31, 2006


Short
                term bridge loan from accredited investors due June 30, 2007 (unpaid
                as of
                December 31, 2006), interest payable at 8% per annum. In addition,
                the
                Company issued to the investors warrants to purchase 283,325 shares
                of
                common stock, none of which were exercised up to March 31,
                2007.
            
            $
            580
            
            $
            580Short
                term bridge loan from related parties due June 30, 2007, interest
                payable
                at 8% per annum. In addition, the Company issued to the investors
                warrants
                to purchase 467,665 shares of common stock, none of which were exercised
                up to March 31, 2007.
            
            
            680
            
            
            680Accrued
                interest on bridge loan
            
            
            168
            
            
            70Notes
                payable in connection with unsettled claims from acquisition of Xpeed
                in
                April 2003, unsecured ($85 due to related parties).
            
            
            310
            
            
            310Notes
                payable in connection with assumption of liability upon acquisition
                of
                Abundance Networks, Inc., unsecured
            
            
            100
            
            
            100Note
                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.
            
            
            691
            
            
            570Total
                notes payable
            
            
            2,529
            
            
            2,210Less:
                current maturity
            
            
            (2,529
            )
            
            (2,210
            )$
            -
            
            $




In
      connection with above 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 rate of 4.71%. As of March 31, 2007, warrant liability included the
      estimated fair value of these warrants of $10.





***Convertible
      Debentures***




On
      March
      27, 2006, the Company converted its convertible debt of $2,339 into 2,338,786
      shares of common stock at the conversion price of $1.00 per share. The
      conversion price exceeded the fair market value of the shares; therefore, the
      excess of $1,731 was recorded as a gain on conversion of debt in additional
      paid-in capital. Of the total shares issued 888,786 shares of common stock
      were
      issued to a related party.




***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
      Company is negotiating satisfaction and Release Agreements (“Agreements”) with
      the holders of the callable secured convertible notes and warrants. The Company
      cannot assure that these negotiations will be successful.





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 March 31, 2007 the Notes
      were convertible into 70,438,981 common shares and the conversion feature had
      an
      estimated fair value of $18,255. Non-employee warrants and options to acquire
      a
      total of 1,600,000 common shares were outstanding and had an estimated fair
      value of $85. The fair value of the conversion feature and the warrants and
      options were estimated using the Black-Scholes option pricing model. Assumptions
      used to value the warrants 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 4.71%. The estimated fair value of the conversion option exceeded the
      carrying value of the notes; therefore, the excess was recorded as a loss on
      derivative instruments in the Consolidated Statements of Operations. For the
      three months ended March 31, 2007, the net difference in fair value versus
      carrying value from December 31, 2006 was a gain of $9,850. The fair value
      of
      the beneficial conversion option, 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.







During
      2006, the company issued 3,003,730 shares of common stock upon receipt of
      conversion notices from note holders. The Company issued an additional 1,710,455
      shares in the three months ended March 31, 2007.




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. However,
      the company is currently in default under the Convertible Notes and in January
      2007 entered into a waiver of default agreement with a majority of these note
      holders and is currently negotiating a settlement with them. The Company cannot
      assure that these negotiations will be successful.




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 the 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
      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 December
      31,
      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 4.71%.
      As of March 31, 2007, warrant liability included the estimated fair value of
      these warrants of $19.




**NOTE
      4: RELATED PARTY TRANSACTIONS**




Prior
      to
      the reverse merger in April 2005, the Company settled liabilities of $906
      assumed in connection with an acquisition in 2003 to a member of the Board
      of
      Directors of the Company and his affiliates, by paying $334 in cash in 2004
      and
      issuing convertible notes of $589 in 2005. The Company also borrowed $300 in
      2004 from the same related party upon issuance of convertible debt and $580
      in
      2005 as a part of bridge loan.




As
      of
      March 31, 2007 and 2006, the following debts were owed to the related
      party:








March
                31, 2007
            
            March
                31, 2006Notes
                payable
            
            $
            815
            
            $
            685Convertible
                debentures
            
            
            -
            
            
            889




**NOTE
      5: LEASES**





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





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





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





The
      company has defaulted in making the quarterly lease payments since April 1,
      2006
      and the matter is now in litigation. As of March 31, 2007, 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.





On
      April
      12, 2007, the Company entered into a Settlement Agreement and Release (the
      Agreement’) with the leasing company. Under the terms of the Agreement, the
      Company agreed to pay the sum of $30 to satisfy all outstanding amounts due
      under the term of the lease.





**NOTE
      6: NET EARNINGS (LOSS) PER SHARE**





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





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





As
      of
      March 31, 2007, there were 47,829,463 shares of Common Stock issued and
      outstanding.





**NOTE
      8: LEGAL MATTERS**





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








**NOTE
      9: SUBSEQUENT EVENTS**





***Settlement
      with Abundance Networks, Inc.***




As
      of
      April 18, 2007, the Company and Abundance Networks have entered into an
      agreement to amend the terms of the original asset purchase agreement. Under
      the
      new agreement the Company will issue to the original stockholders of Abundance
      Networks, Inc., 4.5 million shares in full satisfaction of True-Up and Earn-out
      shares.




***Settlement
      with TFG***




In
      June
      2005, the Company sold some equipment to a leasing company and immediately
      executed a 24 month operational lease. Subsequently, both the parties defaulted
      and filed claims against each other for breach of contract. In April 2007,
      the
      Company entered into a settlement agreement with the leasing company, the terms
      of which provide for termination of all claims that exist between them. The
      Company is required to make three equal payments of $10 each to be made before
      January 1, 2008.





**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. As a result of the ProSAT acquisition, the Company does have
      sufficient cash on hand to continue its operations in the manner they have
      historically been conducted. There is, nevertheless, substantial doubt about
      the
      ability of the Company to continue as a going concern. In this regard,
      management is proposing to raise any necessary additional funds not provided
      by
      operations through loans or through additional sales of its common stock. There
      is no assurance that the Company will be successful in raising this additional
      capital or in achieving profitable operations. The financial statements do
      not
      include any adjustments that might result from the outcome of these
      uncertainties.





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





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





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





The
      following discussion should be read in conjunction with the condensed financial
      statements and notes thereto included elsewhere in this report, as well as,
      the
      financial statements and notes thereto included in the Company's Annual Report
      on Form 10-KSB for the year ended December 31, 2006 filed with the Commission
      on
      April 27, 2007, and amended on April 30, 2007, 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. The acquisition of
      Professional Satellite & Communications, LLC, (“ProSAT”) will provide a new
      line of products and services that Nayna expects will complement its existing
      terrestrial based offerings. ProSAT is a leading third party marketing and
      customer acquisition vehicle for DirecTVTM throughout the United States. ProSAT
      offers standard and high definition television equipment installation. It is
      an
      authorized reselling partner of DirecTV’s satellite TV services including
      premium channel offerings. DirecTV is one of the top two leading satellite
      services providers in the United States.





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





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





On
      March
      23, 2007, pursuant to the terms of a Membership Purchase Agreement, Nayna
      acquired all of the outstanding membership interests of Professional Satellite
      & Communications, LLC, (“ProSAT”), a privately held California limited
      liability company and Alarmco, LLC, a privately held California limited
      liability closely associated with ProSAT. The businesses formally operated
      by
      ProSAT and Alarmco are now operated as subsidiaries of Nayna. These financial
      statements for the period ended March 31, 2007 include financials for ProSAT
      from March 24, 2007 to March 31, 2007.





**RESULTS
      OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AS COMPARED TO THE
      THREE
      MONTHS ENDED MARCH 31, 2006**





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





The
      Company recognized revenue of $553 in the three months ended March 31, 2007
      and
      $317 in the three months ended March 31, 2006. Cost of Goods for the three
      months ended March 31, 2007 was $200 versus $269 for the same period in 2006.
      Gross profit for the three months ended March 31, 2007 and March 31, 2006 was
      $353 and $48, respectively. The revenue, cost of goods and net profit were
      primarily from the Nayna’s newly acquired subsidiary, ProSAT.










**Operating
      Expenses**





Operating
      expenses include research and development, business development, general and
      administrative, and goodwill impairment expenses. Total
      operating expenses for three months ended March
      31 ,
      2007
      and March
      31 ,
      2006
      were $1.2 million and $2.3 million, respectively. This decrease of $1.1 million
      resulted primarily from the following:





Research
      and development expenditures decreased $604 from $715 in the first quarter
      of
      2006 to $111 in the first quarter of 2007 as a result of a decrease in salaries
      and wages and other associated expenses.





Business
      development expenditures decreased $39 from $173 in the first quarter of 2006
      to
      $134 in the first quarter of 2007 as a result of a decrease in the number of
      sales and marketing employees and a focus on large partners and
      channels.





General
      and administration expenditures decreased $481 from $1,387 in the first quarter
      of 2006 to $905 in the first quarter of 2007 as a result of a decrease in
      salaries and wages and other associated expenses.





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 March 31, 2007 and March 31, 2006, were $8.934 and
      ($1,752) respectively.





**Unrealized
      Gain or Loss Related to the Adjustment of Derivative and Warrant
      Liability**





For
      the
      three months ended March 31, 2007, we had unrealized gains related to derivative
      and warrant liabilities of $9,832 as compared to $539 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,
      and
      is the result of a rise in the average price of the Company’s stock over the
      period. This agreement and its accounting treatment for the three months ending
      September 30, 2006 are described below under Liquidity and Capital
      Resources.





**Net
      Interest Expense**





Net
      interest expense for the three months ended March 31, 2007 and March 31, 2006,
      was $99 and ($117), respectively. This change of $216 was primarily due to
      increased interest from outstanding loans and notes from the Abundance
      acquisition.





**Gain
      (loss) on sale of assets**





There
      was
      no gain or loss on the sale of assets during three months ended March 31, 2007.
      There was a gain of $52 in the three months ended March 31, 2006. This gain
      was
      from the sale and lease back of certain equipment in 2005.





**Net
      Income (Loss)**





As
      a
      result of the foregoing factors, for the three months ended March 31, 2007,
      the
      Company incurred net income of $8.9 million versus a net loss of ($1,752) for
      the three months ended March 31, 2006. Factoring out the gain resulting from
      the
      derivative and warrant liability, net loss for the three months ended March
      31,
      2007 is ($897), which equates to a net loss per share of ($0.02).





**Liquidity
      and Capital Resources**





As
      of
      March 31, 2007, the Company has cash and cash equivalents on hand of $447.
      The
      Company expects that this amount and funds received from operations will be
      sufficient to support the Company’s present operations through November 2007.
      The Company does intend to raise additional capital in 2007 to fund its
      operations and growth opportunities after November 2007.





**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.





**FAILURE
      TO RAISE ADDITIONAL CAPITAL WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY
      TO FUND OUR GROWTH OPPORTUNITIES.**




We
      anticipate that our currently available funds are sufficient to meet our needs
      for working capital, capital expenditures and business expansion until the
      end
      of November 2007. Thereafter, we will need to raise additional funds. We have
      also been in discussions with investment advisors in an effort to raise
      additional funds. We cannot assure you that that additional capital will be
      available on terms acceptable to us, or at all. If we are unable to raise
      sufficient capital we will not be able to continue operations 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 Xpeed Networks for its Passive Optical Networking
      (PON) products, Abundance Networks for its SONET/SDH products and ProSAT for
      its
      residential broadband satellite solutions. In these 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 April
      17,
      2007, 5,967,480 shares of common stock were reserved under the 2000 Stock Option
      Plan, 5,000,000 shares of common stock were reserved under the 2006 Executive
      Stock Option Plan, 755,565 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 70,892,808 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 April 17, 2007, there were 65,829,463 shares of common
      stock
      outstanding. Of these outstanding shares, 10,240,115 shares were freely tradable
      without restriction under the Securities Act of 1933, as amended, unless held
      by
      affiliates.




As
      of
      April 17, 2007, $3,200,000 principal amount of callable secured convertible
      notes were issued and outstanding. Within 5 days of the effectiveness of our
      currently filed registration statement, 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 April 17, 2007, the $4,800,000 principal amount of notes
      would have been convertible into 87,272,727 shares of our common stock (or
      100,212,727 shares if the warrants to purchase 12,940,000 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
      April 17, 2007, warrants to purchase 1,600,000 shares of common stock issued
      to
      the purchasers of the notes were outstanding. Within 5 days of the effectiveness
      of the registration statement, we will issue warrants to purchase an additional
      800,000 shares to the investors for an aggregate total of warrants to purchase
      2,400,000 shares. We have also issued warrants to purchase 360,000 of common
      stock to brokers involved with the financing. Within 5 days of the effectiveness
      of the registration statement, 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, warrants to purchase 10,000,000 shares of common stock expire
      on January 10, 2014 and the remaining warrants to purchase 980,000 shares of
      common stock will expire five years from the date on which they are issued.
      The
      shares of common stock issuable upon exercise of these warrants are not being
      registered pursuant to the currently filed registration statement.









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 shares of common stock into which the notes
      may be converted are being registered pursuant to the currently filed
      registration statement.


**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
      April 17, 2007and the number of shares we would be required to issue if our
      common stock declined by 50% or 75%:




As
                of
              April
                  17
            
            
            50%
              Decline
            
            
            75%
              DeclineConversion
                price per share:
            
            $
            0.055
            
            $
            0.0275
            
            $
            0.01375Total
                shares issuable upon conversion of notes and exercise of
                warrants
            
            
            90,212,727
            
            
            177,485,455
            
            
            352,030,909Percentage
                of total outstanding Shares
            
            
            4.99
            %
            
            4.99
            %
            
            4.99
            %Percentage
                of total outstanding Shares (not taking into account the 4.99% ownership
                limitation)
            
            
            152.23
            %
            
            284.80
            %
            
            549.95
            %





**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, if the registration statement became
      effective one (1) month after March 17, 2006, we would pay $5,000 for each
      $250,000 of outstanding note principal amount. If thereafter, sales could not
      be
      made pursuant to the registration statement for an additional period of one
      (1)
      month, we would pay an additional $5,000 for each $250,000 of outstanding note
      principal amount. Accordingly, failure to have the registration statement
      declared effective by March 17, 2006 has resulted in the assessment of
      liquidated damages in the amount of $768,000 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.





**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.





From
      time-to-time DirecTV adjusts its offerings, the market acceptance of which
      can
      affect ProSAT's revenue stream.





**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





**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
      March 31, 2007, we had 47,829,463 shares of our common stock issued and
      outstanding of which 10,240,115 shares are freely tradable shares. Rule 144
      provides, in essence, that a person holding "restricted securities" for a period
      of one year may sell only an amount every three months equal to the greater
      of
      (a) one percent of a company's issued and outstanding shares, or (b) the average
      weekly volume of sales during the four calendar weeks preceding the
      sale.




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





**Item
      3. Controls and Procedures**





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





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





**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**







From
      time
      to time, we may be involved in litigation relating to claims arising out of
      our
      operations. As of the date of this report, we are not engaged in any legal
      proceedings that are expected, individually or in the aggregate, to have a
      material adverse effect on our business, financial condition or results of
      operations.




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




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





**Item
      6. Exhibits**




**Exhibits.**





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





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








**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.***Date:* *May
              15, 2007*
            By:
            /s/ *Naveen
              S. Bisht**Naveen
                S. Bisht, CEO*


*Date:* *May
              15, 2007*
            By:
            /s/ *Thomas
              Richtarich**Thomas
                Richtarich, Interim CFO*