10QSB/A

U.S. Securities and Exchange Commission

Washington, DC 20549

FORM 10-QSB/A-1

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

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

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

EXCHANGE ACT

For the transition period from __________ to __________

Commission File Number 000-13822

NAYNA NETWORKS, INC.

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

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

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

(Address of principal executive offices)

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

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

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

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

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

EXPLANATORY NOTE

This Form 10-Q/A-1 is being filed as an Amendment to our Form 10-Q, to restate our financial information for the quarter ending September 30, 2006 and the Cumulative Period from February 10, 2000 (date of inception) to September 30, 2006. The principal changes in the financials for quarter ending September 30, 2006 are:

1) To correct typographical errors in certain line headings and in the number of shares issued and outstanding on the Consolidated Balance Sheets;

2) To reclassify expenses on the Nine Month Consolidated Statement of Operations for 2005 to conform to the current year presentation;

3) To reclassify entries on the Nine Month Consolidated Statement of Cash Flows for 2006 and Cumulative from date of inception (the amount of increase/decrease in cash and cash equivalents is unchanged);

4) To delete an entry in the table in Note 6 under Bridge loans and other notes regarding Accrued salaries and benefits of $809 which was a duplicate of an entry shown correctly in the table above it under Accrued liabilities (the total amount of Bridge loans shown in the table is unchanged).

Except as otherwise stated, all financial information contained in this Form 10-Q/A-1 gives effect to these restatements.

This Form 10-Q/A-1 amends and restates only certain information in the following sections as a result of the current restatements described above:

Part I — Item 1. Financial Statements and Notes.

Part I — Item 2. Management’s Discussion and Analysis or Plan of Operation;

In addition, we are also including currently dated Sarbanes-Oxley Act Section 302 and Section 906 certifications of the Chief Executive Officer and Chief Financial Officer that are attached to this Form 10-Q/A-1 as Exhibits 31.1, 31.2, 32.1 and 32.2.

For the convenience of the reader, this Form 10-Q/A-1 sets forth the entire Form 10-Q which was prepared and relates to the Company as of September 30, 2006. However, this Form 10-Q/A-1 only amends and restates the Items described above to reflect the effects of the restatement and no attempt has been made to modify or update other disclosures presented in our original Form 10-Q. Accordingly, except for the foregoing amended information, this Form 10- Q/A-1 continues to speak as of September 30, and does not reflect events occurring after the filing of the Form 10-Q and does not modify or update those disclosures affected by subsequent events. Forward-looking statements made in the original Form 10-Q have not been revised to reflect events, results or developments that have become known to us after the date of the original filing (other than the current restatements described above), and such forward-looking statements should be read in their historical context. Unless otherwise stated, the information in this Form 10-Q/A-1 not affected by such current restatements is unchanged and reflects the disclosures made at the time of the original filing.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NAYNA NETWORKS, INC.

(a development stage enterprise)

CONSOLIDATED BALANCE SHEET

(in thousands, except share and per share data)

(Unaudited)

	September 30, 2006			September 30, 2005
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	(27	)	$	91
Restricted cash		44
Accounts receivable		455			63
Prepaid expenses and other current assets		91			79
Total current assets		563			233
Property and equipment, net		76			150
Intangible asset, net		2,741			0
Other assets
Deposits		256
Unamortized discount and fees		163
Total other assets		419			193
Total assets	$	3,799		$	576
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and current liabilities	$	6,508		$	2,120
Notes payable		2,464			1,328
Embedded derivative liability		4,736			2,372
Callable secured convertible debt and accrued interest		63
Warranty liability		48
Total current liabilities		13,819			5,820
Long term liabilities
Deferred gain, less current portion
Total long-term liabilities		0			0
Total liabilities		13,819			5,820
Stockholders’ equity:
Series D preferred stock, Auth shares 52,500,000, shares O/S 19,531,247 at 12/31/04
Common Stock: $0.001 par value, 1,000,000,000 shares authorized at September 30, 2006 and September 30, 2005 and 43,070,348 and 35,802,504 shares issued and outstanding as of September 30, 2006 and September 30, 2005		4			30
Additional paid-in-capital		60,709			51,981
Deferred compensation		(453	)		(-	)
Deficit accumulated during the development stage		(70,280	)		(57,255	)
Total stockholders’ (deficit) equity		(10,020	)		(5,244	)
Total liabilities and stockholders’ equity	$	3,799		$	576

See accompanied notes to these unaudited condensed consolidated financial statements

NAYNA NETWORKS, INC.

(a development stage enterprise)

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(Unaudited)

	Three Months Ended September 30,						Cumulative Period from February 10, 2000 (date of inception) to  September 30,
	2006			2005			2006
Revenues	$	0		$	0		$	336
Cost of goods		0			0			318
Gross profit		0			0			18
Operating expenses:
Research and development		262			693			43,720
Business development		89			304			3,741
General and administrative		1,059			52			13,178
Goodwill impairment								9,545
Total operating expenses		1,410			1,049			70,183
Loss from operations		(1,410	)		(1,049	)		(70,165	)
Unrealized gain (loss) related to adjustment of derivative and warrant liability to fair value of underlying securities		(1,339	)					(1,552	)
Interest expense, net		(55	)		1			1,162
Gain (loss) on sale of assets		53						276
Net loss	$	(2,751	)	$	(1,048	)	$	(70,279	)
Weighted average number of common shares outstanding
Basic and diluted		42,586,732			26,302,504
Income (loss) per share available to common shareholder:
Basic and diluted	$	(0.06	)	$	(0.034	)

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)

	Nine Months Ended September 30,						Cumulative Period from February 10, 2000 (date of inception) to September 30,
	2006			2005			2006
Revenues	$	336		$	0		$	336
Cost of goods		318			0			318
Gross profit		18			0			18
Operating expenses:
Research and development		1,462			2,602			43,720
Business development		377			726			3,741
General and administrative		3,345			713			13,178
Goodwill impairment								9,545
Total operating expenses		5,183			4,041			70,183
Loss from operations		(5,164	)		(4,041	)		(70,165	)
Unrealized gain (loss) related to adjustment of derivative and warrant liability to fair value of underlying securities		(555	)					(1,552	)
Interest expense, net		(269	)		(16	)		1,162
Gain (loss) on sale of assets		158			371			276
Net loss	$	(5,831	)	$	(3,686	)	$	(70,279	)
Weighted average number of common shares outstanding
Basic and diluted		41,032,390			25,035,189
Income (loss) per share available to common shareholder:
Basic and diluted	$	(0.14	)	$	(0.15	)

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)  

	Nine Months Ended September 30,						Cumulative Period from February 10, 2000 (date of inception) to September 30,
	2006			2005			2006
Cash flows from operating activities:
Net loss	$	(5,832	)	$	(3,874	)	$	(70,279	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization		1,001			458			5,210
(Gain) loss on sale of property and equipment		(158	)					838
Impairment of goodwill related to acquisitions								9,546
Noncash charges related to stock options granted to consultants		231						398
Noncash charges related to issuance of stock options for legal services		24						675
Noncash interest expense related to issuance of convertible debt		177						256
Unrealized (gain) loss related to adjustment of derivative and
warrant liability to fair value of underlying securities		555						1,553
Amortization of financing costs		38						44
Amortization of discount on warrants associated with equipment financing								202
Changes in operating assets and liabilities:
Restricted cash					49			(209	)
Accounts receivable		(428	)		97			(455	)
Prepaid expenses and other current assets		(12	)		(44	)		233
Other assets		81			(177	)		(113	)
Accounts payable and accrued liabilities		1,683			930			3,829
Net cash used in operating activities		(2,640	)		(2,631	)		(48,740	)
Cash flows from investing activities:
Purchase of property and equipment								1,251
Proceeds from sale of property and equipment		(11	)		260			1,076
Costs associated with the acquisition of Xpeed, Inc.		-			-			(3,685	)
Net cash used in investing activities		(11	)		260			(3,860	)
Cash flows from financing activities:
Proceeds from loan facility		822			610			2,357
Payments on capital lease obligations and loan facility					(1,229	)		(5,735	)
Proceeds from issuance of common stock, net of repurchases		20						263
Proceeds from issuance of Series A redeemable convertible preferred stock, net of issuance costs								11,953
Proceeds from issuance of Series B redeemable convertible preferred stock, net of issuance costs								35,897
Proceeds from issuance of Series D redeemable convertible preferred stock, net of issuance costs								3,399
Issuance of convertible debt					2,372			1,467
Proceeds from deferred stock option compensation
Proceeds from issuance of callable secured convertible notes, net of financing costs								2,974
Net cash provided (used) by financing activities		842			1,753			52,573
Net increase (decrease) in cash and cash equivalents		(1,809	)		(618	)		(27	)
Cash and cash equivalents at beginning of period		1,782			709
Cash and cash equivalents end of period	$	(27	)	$	91		$	(27	)
Non-cash financing activities:
Conversion of preferred stock into common	$			$
Issuance of preferred stock for conversion of note payable	$			$
Shares issued on conversion of debentures		2,339
Shares issued for purchase of intangibles	$	1,150		$
Shares issued for services or settlement of claims		674

See accompanied notes to these unaudited condensed consolidated financial statements

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE 1: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) The Company

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

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

(b) Development Stage

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

Basis of Presentation

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

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

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

Principals of Consolidation

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

Use of Estimates

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

Inventory Valuation

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

Impairment of Long-Lived Assets

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

Cash and Cash Equivalents

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

Property and Equipment

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

Business and Credit Risk

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

Research and Development

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

Income Taxes

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

Stock-Based Compensation

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

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

Goodwill and Purchased Intangible Assets

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

Reclassifications

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

Recent Accounting Pronouncements

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

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

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

NOTE 2: ACQUISITIONS

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

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

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

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

Abundance

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

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

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

	As of Sept. 30		50% Decline		75% Decline
Conversion price per share		0.053		0.0265		0.0133
Shares issuable upon True-up of Initial Issue		42,246,226		85,642,453		172,434,906
Shares Issuable upon True-up of Indemnification Shares		12,857,547		26,065,094		52,480,189
Max. No. of Earnout Shares issuable as adjusted for True-up		64,287,736		130,325,472		262,400,943
Total Additional Shares Potentially Issuable		119,391,509		242,033,019		487,316,038

NOTE 3: PROPERTY AND EQUIPMENT

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

	September 30, 2006			December 31, 2005
Computer equipment		692			692
Computer software		1,360			1,360
Furniture and fixtures		2			2
		2,054			2,054
Accumulated depreciation and amortization		(1,959	)		(1,959	)
	$	76		$	95

NOTE 4: INTANGIBLE ASSETS

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

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

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

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

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

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

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

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

NOTE 5: LEASES

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

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

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

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

NOTE 6: ACCRUED LIABILITIES AND DEBT

Accrued liabilities

Total accrued liabilities as of September 30, 2006 total $4,895. A breakdown of this amount is as follows:

	September 30, 2006
Accrued liabilities related to the acquisition of Abundance Networks	$	2,458
Accrued liabilities related to the acquisition of Xpeed		123
Accrued liabilities for expenses		1,371
Accrued salaries and benefits		809
Provision for deferred gain		134
Total Accrued Liabilities	$	4,895

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

Bridge loans and other notes

In connection with the notes issued in 2005, the Company issued 750,990 warrants to purchase shares of common stock to the bridge loan investors. The warrant prices are fixed and were determined by using the average volume weighted share price for the ten (10) trading days prior to the receipt of the funding and range from $0.71 per share to $2.08 per share and expire three years from the date of the note. The fair value of the warrants was estimated using the Black-Scholes option pricing model and was recorded as warrant liability in accordance with the guidance under EITF 00-19. Assumptions used to value these warrants included that all warrants would be exercised on their respective expiration dates, using annualized volatility rate of 100%, and using risk free interest rates ranging from 4% to 4.6%. As of September 30, 2006, warrant liability included the estimated fair value of these warrants of $8.

Total notes payable as of September 30, 2006 total $4,895. A breakdown of this amount is as follows:

	September 30, 2006
Short term bridge loan from accredited investors due June 30, 2006 (unpaid as of September 30, 2006), interest payable at 8% per annum. In addition, the Company issued to the investors, warrants to purchase 283,325 shares of common stock, none of which were exercised up to September 30, 2006.	$	580
Short term bridge loan from related parties due June 30, 2006, interest payable at 8% per annum. In addition, the Company issued to the investors, warrants to purchase 467,665 shares of common stock, none of which were exercised up to September 30, 2006.		680
Accrued interest on bridge loan ($55 and $43 due to related parties as of September 30, 2006 and June 30, 2006, respectively)		116
Notes payable in connection with unsettled claims from acquisition of Xpeed in April 2003, unsecured ($85 due to related parties).		310
Notes payable in connection with assumption of liability upon acquisition of Abundance Networks, Inc., unsecured		193
Note 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.		585
Total Notes Payable	$	2,464
Less: current maturity		(2,464	)

Callable Secured Convertible Notes

In November 2005, the company entered into a securities purchase agreement which provides for the purchase and sale of callable secured convertible notes and warrants. Under the securities purchase agreement, the company will receive up to $4,800 upon issuance of a corresponding amount of the company’s 8% callable secured convertible notes and warrants to purchase up to an aggregate of 2,400,000 shares of common stock. The conversion of the debt to common stock of the Company is at the option of the holder and may be exercised at any time. The notes were accompanied by a Registration Rights Agreement.

During 2005, the Company received $2,974 ($3,200 net of financing costs) and issued 1,600,000 five year $1.00 warrants, none of which have been exercised. The terms of the notes provide for full payment on or before the third anniversary date of issuance, with interest at the rate of 8% per annum. The company has the option to prepay (i) all of the outstanding principal and unpaid interest at any time if the common stock is trading at or below $0.75 per share and (ii) portion of the outstanding principal and unpaid interest at any time if the common stock is trading at or below $1.12 per share. The notes are convertible into common shares at the lesser of $0.68 or 55% of the market price of the Company’s common stock, as defined. Additionally, the notes are secured by intellectual properties owned by the company.

The notes are potentially convertible into an unlimited number of common shares. Accordingly, the Company has accounted for the Notes under SFAS 133 and EITF 00-19 which require the beneficial conversion feature to be treated as an embedded derivative, recording a liability equal to the estimated fair value of the conversion option. In addition, all non-employee warrants and options that are exercisable during the period that the Notes are outstanding are required to be recorded as liabilities at their fair value. As of September 30, 2006 the Notes were convertible into 124,423,027 common shares and the conversion feature had an estimated fair value of $4,736. Non-employee warrants to acquire a total of 1,600,000 common shares were outstanding and had an estimated fair value of $32. The fair value of the conversion feature and the warrants were estimated using the Black-Scholes option pricing model. Assumptions used to value the warrants and options included assuming that all warrants would be exercised on their respective expiration dates, using annualized volatility of 100%, and using risk freeinterest rate of 5.275%.

The Company issued 360,000 warrants to purchase shares of common stock, 180,000 warrants being issued on November 17, 2005 and another 180,000 warrants being issued on December 28, 2005 to two selling stockholders, Laidlaw & Company and Stonegate Securities, LLC, who helped to identify purchasers for callable secured convertible notes. The terms of the warrants entitle each selling stockholder to purchase shares of common stock before the fifth anniversary date of the issuance. All of these warrants are exercisable at $1.00 per share which price may be adjusted from time to time if the Company issues stock at less than $1.00 in the future. None of the warrants have been exercised as of September 30, 2006. As per the agreed-upon exclusions no adjustment to the exercise price will be made (i) upon the exercise of any warrants, options or convertible securities granted, issued and outstanding on the date of issuance of this Warrant; (ii) upon the grant or exercise of any stock or options which may hereafter be granted or exercised under any employee benefit plan, stock option plan or restricted stock plan of the Company now existing or to be implemented in the future, so long as the issuance of such stock or options is approved by a majority of the independent members of the Board of Directors of the Company or a majority of the members of a committee of independent directors established for such purpose; or (iii) upon the issuance of securities in connection with a merger, consolidation or purchase of assets, or in connection with any strategic partnership or joint venture (the primary purpose of which is not to raise equity capital), or in connection with the disposition or acquisition of a business, product or license by the Company, so long as the issuance of such securities is approved by a majority of the independent members of the Board of Directors of the Company or a majority of the members of a committee of independent directors established for such purpose; (iv) upon the exercise of the Warrants. Any of the warrants, stock or options, issued or granted subsequently, have not triggered an adjustment to the exercise price of these warrants.

The fair value of the warrants issued was estimated using the Black-Scholes option pricing model and was recorded as warrant liability in accordance with the guidance in EITF 00-19. Assumptions used to value these warrants included that all warrants would be exercised on their respective expiration dates, using annualized volatility rate of 100%, and using risk free interest rate of 5.275%. As of September 30, 2006, warrant liability included the estimated fair value of these warrants of $7.

The estimated fair value of the conversion option and warrants exceeded the carrying value of the Notes; therefore the excess is recorded as a loss on derivative instruments in the Consolidated Statement of Operations in 2006. The change in their estimated fair value resulted in the recognition of loss of $1,339 and $1,552 for the three months and nine months ended September 30, 2006. The fair value of the embedded derivatives, warrants and options will be estimated each reporting period with the change in fair value recorded as gain or loss on derivative instruments. As the Company’s common stock is highly volatile, material gains or losses for the change in estimated fair value are likely to occur in future periods.

Under the related registration rights agreement, the company agreed to register all of the shares underlying such convertible notes and warrants to allow the selling stockholders to sell them in a public offering or other distribution.

Under the terms of the securities purchase agreement, the investors are obligated to purchase an additional $1,600 of our 8% notes and warrants to purchase 800,000 shares of our common stock within five days following the date this registration statement is declared effective by the Securities and Exchange Commission and in each case upon satisfaction of additional conditions by the Company. The additional conditions that must be satisfied by the Company prior to the purchase by the investors of the remaining convertible notes and warrants consist of the following: (i) the Company's representations and warranties contained in the securities purchase agreement are true and correct in all material respects on the date of purchase; (ii) there is no litigation, statute, rule, regulation, executive order, decree, ruling or injunction that has been enacted, entered, promulgated or endorsed by or in any court or government authority of competent jurisdiction or any self-regulatory organization having requisite authority which prohibits the transactions contemplated by the securities purchase agreement; (iii) no event has occurred which could reasonably be expected to have a material adverse effect on the Company; (iv) the shares of common stock underlying the convertible notes and warrants have been authorized for quotation on the Over-The-Counter Bulletin Board, or OTCBB, and trading in our common stock on the OTCBB has not been suspended by the Securities and Exchange Commission or the OTCBB; (v) the Company shall provide a legal opinion to the investors; and (vi) the Company shall provide certain certificates of its officers to the investors regarding the Company's capitalization and the truth and correctness of its representations and warranties in the securities purchase agreement. If the registration statement is not declared effective, the investors have no obligation to purchase the remaining 8% convertible notes or the related warrants.

The following table summarizes the various components of the embedded derivative and warrant liability for the three month period ended September 30, 2006.

	Three Months Ended Sept. 30, 2006
Derivative liability	$	4,736
Warrant liability related to convertible debt		32
Warrant liability related to issuance of other non-employee warrants		15
Callable secured debt and accrued interest		0
Total callable secured convertible notes		4,784
Unrealized gain related to the adjustment of derivative and warrant liability to fair value of underlying securities	$	(1,339	)

NOTE 7: NET LOSS PER SHARE

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

NOTE 8: COMMON STOCK (in actual amounts)

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

NOTE 9 LEGAL MATTERS

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

NOTE 10: GOING CONCERN

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

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

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

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

The following discussion should be read in conjunction with the condensed financial statements and notes thereto included elsewhere in this report, as well as, the financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2005 filed with the Commission on April 3, 2006 and amended on May 1, 2006 and October 26, 2006, and other filings that the Company may make, from time to time, with the Commission.

OVERVIEW

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

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

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

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2005

Revenues, Cost of Sales and Gross Profit

The Company did not ship any of its products in the three months ended September 30, 2006 and thus had no revenue nor cost of goods for the period. There was no revenue or cost of goods for the three months ended September 30, 2005.

Operating Expenses

Operating expenses include research and development, business development, general and administrative, and goodwill impairment expenses. Total operating expenses for three months ended September 30, 2006 and September 30, 2005 were $1.41 million and $1.05 million, respectively. This increase of $0.36 million resulted primarily from the following:

Research and development expenditures decreased $0.43 million as a result of a decrease in salaries and wages and other associated expenses.

Business development expenditures decreased $0.21 million as a result of a decrease in the number of sales and marketing employees and a focus on large partners and channels.

General and administration expenditures increased $1.0 million as a result of legal, accounting and other expenses related to the Company's increased disclosure obligations following the reverse merger in April 2005 and expenses related to the acquisition of certain assets, liabilities and technology of Abundance Networks, LLC in January 2006.

There was no impairment of goodwill in either reporting period.

Other Expenses

Other expenses include the unrealized gain or loss related to the adjustment of derivative and warrant liability to the fair value of the underlying securities, net interest expense and any gain or loss on the sale of assets. Other expenses for the three months ended September 30, 2006 and September 30, 2005, were ($1,341) and $1 respectively.

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

For the three months ended September 30, 2006, we had unrealized losses related to derivative and warrant liabilities of ($1,339) as compared to $0 for the same period in 2005. These losses resulted from the November 2005 securities purchase agreement which provides for the purchase and sale of convertible notes and warrants. This agreement and its accounting treatment for the three months ending September 30, 2006 are described below under Liquidity and Capital Resources.

Net Interest Expense

Net interest expense for the three months ended September 30, 2006 and September 30, 2005, was ($55) and $1, respectively. This increase of $56 was primarily due to interest expense on convertible debentures, notes payable and bridge loans.

Gain (loss) on sale of assets

Gain (loss) on sale of assets for the three months ended September 30, 2006 and September 30, 2005, was $53 and $0, respectively. This gain of $53 was due to the sale and lease back of certain Company assets as described in Note 5.

Net Loss

As a result of the foregoing factors, for the three months ended September 30, 2006 and September 30, 2005, the Company incurred a net loss of $2.75 million and $1.05 million, respectively.

During the Company's continuing development phase, it has consistently sustained operating losses and expects such losses to continue through the rest of fiscal 2006 and for the foreseeable future.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2005

Revenues, Cost of Sales and Gross Profit

During the nine months ended September 30, 2006, the Company shipped $336 in commercial products and incurred $317 in cost of goods sold versus no revenue and no cost of goods for the nine months ended September 30, 2005.

Operating Expenses

Operating expenses include research and development, business development, general and administrative, and goodwill impairment expenses. Total operating expenses for nine months ended September 30, 2006 and September 30, 2005 were $5.18 million and $4.04 million, respectively. This increase of $1.14 million resulted primarily from the following:

Research and development expenditures decreased $1.14 million as a result of a decrease in salaries and wages and other associated expenses.

Business development expenditures decreased $0.35 million as a result of a decrease in the number of sales and marketing employees and a focus on large partners and channels; and

General and administration expenditures increased $2.63 million as a result of legal, accounting and other expenses related to the Company's increased disclosure obligations following the reverse merger in April 2005 and expenses related to the acquisition of certain assets, liabilities and technology of Abundance Networks, LLC in January 2006..

There was no impairment of goodwill in either reporting period.

Other Expenses

Other expenses include the unrealized gain or loss related to the adjustment of derivative and warrant liability to the fair value of the underlying securities, net interest expense and any gain or loss on the sale of assets. Other expenses for the nine months ended September 30, 2006 and September 30, 2005, were ($666) and $355 respectively.

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

For the nine months ended September 30, 2006, we had unrealized losses related to derivative and warrant liabilities of $555 as compared to $0 for the same period in 2005. These gains resulted from the November 2005 securities purchase agreement which provides for the purchase and sale of convertible notes and warrants. This agreement and its accounting treatment for the nine months ending September 30, 2006 are described below under Liquidity and Capital Resources.

Net Interest Expense

Net interest expense for the nine months ended September 30, 2006 and September 30, 2005, was ($269) and ($16), respectively. This increase of $230 was primarily due to interest expense on convertible debentures, notes payable and bridge loans.

Gain (loss) on sale of assets

Gain (loss) on sale of assets for the nine months ended September 30, 2006 and September 30, 2005, was $158 and $371, respectively. This decrease in gain of $213 was due to the sale and lease back of certain Company assets as described in Note 5.

Net Loss

As a result of the foregoing factors, for the nine months ended September 30, 2006 and September 30, 2005, the Company incurred a net loss of $5.83 million and $3.69 million, respectively.

During the Company's continuing development phase, it has consistently sustained operating losses and expects such losses to continue through the rest of fiscal 2006 and for the foreseeable future.

Liquidity and Capital Resources

In November 2005, the company entered into a securities purchase agreement which provides for the purchase and sale of callable secured convertible notes and warrants. A complete discussion of this agreement is discussed in Note 6 above under Callable Secured Convertible Notes. From a capital resources perspective, in 2005 the Company received $2,974 ($3,200 net of financing costs) from this agreement. The investors are obligated to purchase an additional $1,600 of our 8% notes and warrants to purchase 800,000 shares of our common stock within five days following the date the Company’s current SB-2A filing is declared effective by the Securities and Exchange Commission and in each case upon satisfaction of additional conditions by the Company.

While the cash and cash equivalents on hand on September 30, 2006 were ($27), the Company has collected nearly $50 in Accounts Receivable since that date. The balance of $23 will be sufficient to support the Company’s operations through the end of December 2006, without relying on income revenue from sales. We expect that the additional $1.6 million of funds to be received when the registration statement becomes effective will support the operations of the Company for an additional six months. The Company expects to raise additional funds over the next six months either in debt or equity in order to support our operations through the end of 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.

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

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

WE EXPECT TO INCUR OPERATING LOSSES FOR THE FORESEEABLE FUTURE.

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

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

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

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

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

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

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

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

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

· actual or anticipated fluctuations in our quarterly operating results;

· announcements of technological innovations;

· changes in financial estimates by securities analysts;

· conditions or trends in the network control and management industry;

· changes in the market valuations of other such industry related companies; and

· the acceptance of market makers and institutional investors of the Company and our stock.

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

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

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

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

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

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

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

As of November 20, 2006, warrants to purchase 1,600,000 shares of common stock issued to the purchasers of the notes were outstanding. Within 5 days of the date of effectiveness of the registration statement on Form SB-2/A initially filed with the Securities & Exchange Commission on December 19, 2005, 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 date of 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 and the remaining warrants to purchase 980,000 shares of common stock will expire five years from the date on which they are issued.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

· significant warranty and repair costs;

· diverting the attention of our engineering personnel from new product development efforts;

· delaying the recognition of revenue; and

· significant customer relations problems.

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

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

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

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

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

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

· competitive global pricing pressures;

· discounting in the sales/distribution channels; and

· new product introductions by us or our competitors.

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

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

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

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

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

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

In addition, many of our sales channel partners also carry products they make themselves or that are made by our competitors. We cannot assure you that our sales channel partners will continue to market or sell our products effectively or continue to devote the resources necessary to provide us with effectivesales, 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 September 30, 2006, we had 43,070,348 shares of our common stock issued and outstanding of which 35,873,591 shares are restricted shares. Rule 144 provides, in essence, that a person holding "restricted securities" for a period of one year may sell only an amount every three months equal to the greater of (a) one percent of a company's issued and outstanding shares, or (b) the average weekly volume of sales during the four calendar weeks preceding the sale.

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

Item 3. Controls and Procedures

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

The Certifying Officers have also indicated that no change in the Company’s internal control over financial reporting occurred during the third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

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

Item 6. Exhibits

Exhibits.

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

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

SIGNATURES

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

	Nayna Networks, Inc.
Dated: December 22, 2006	By:	/s/ Naveen S. Bisht
		Naveen S. Bisht, CEO

Dated: December 22, 2006	By:	/s/ William Wong
		William Wong, Acting CFO

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Pursuant To 18 U.S.C. Section 1350

As Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act Of 2002

In connection with the Quarterly Report of Nayna Networks, Inc. (formerly ResCon Technology Corp.), on Form 10-QSB/A-1 for the period ended September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Naveen S. Bisht, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: December 22, 2006	By:	/S/ Naveen S. Bisht
		Naveen S. Bisht, Principal Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant To 18 U.S.C. Section 1350

As Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act Of 2002

In connection with the Quarterly Report Nayna Networks, Inc. (formerly ResCon Technology Corp.), on Form 10-QSB/A-1 for the period ended September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, William Wong, Principal Financial Officer of the Company, herby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: December 22, 2006	By:	/S/ William Wong
		William Wong, Principal Financial Officer