-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N6SoJptpDM9VxUoZM6XbtAgelvi7+03dO+NyqcYyjjh/w+TJm3BmgfLUGEAG/7HN pDnx26SlJZjKtK+n2Q3giQ== 0001144204-07-060915.txt : 20071114 0001144204-07-060915.hdr.sgml : 20071114 20071114103144 ACCESSION NUMBER: 0001144204-07-060915 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070930 FILED AS OF DATE: 20071114 DATE AS OF CHANGE: 20071114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Nayna Networks, Inc. CENTRAL INDEX KEY: 0000769591 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 830210455 STATE OF INCORPORATION: WY FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-13822 FILM NUMBER: 071241382 BUSINESS ADDRESS: STREET 1: 5525 SOUTH 900 EAST SUITE 110 CITY: SALT LAKE CITY STATE: UT ZIP: 84117 BUSINESS PHONE: 8012628844 MAIL ADDRESS: STREET 1: 5525 SOUTH 900 EAST SUITE 110 CITY: SALT LAKE CITY STATE: UT ZIP: 84117 FORMER COMPANY: FORMER CONFORMED NAME: RESCON TECHNOLOGY CORP DATE OF NAME CHANGE: 19990629 10QSB 1 v094138_10qsb.htm Unassociated Document

Washington, DC 20549

FORM 10-QSB

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

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

For the transition period from __________ to __________

Commission File Number 000-13822

(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, 91,662,663 shares outstanding as of September 30, 2007.

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

 
PART I - FINANCIAL INFORMATION


(a development stage enterprise)
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
(Unaudited)

 
  
Sept. 30,
2007
  
Sept. 30,
2006
  
 
  
  (Unaudited)
  
Assets
  
 
  
 
  
Current assets:
  
 
  
 
  
Cash and cash equivalents
  
$
(40
)
$
(27
)
Restricted cash
          
44
  
Accounts receivable, net of allowances of $374 for bad debts
    
713
    
455
  
Prepaid expenses and other current assets
    
99
    
91
  
Total current assets
    
772
    
563
  
 
          
Property and equipment, net
    
790
    
76
  
Goodwill
    
20,656
    
2,741
  
Other assets
    
400
    
419
  
               
Total assets
  
$
22,619
  
$
3,799
  
 
          
Liabilities and stockholders’ equity
          
Current liabilities:
          
Accounts payable and current liabilities
  
$
21,982
  
$
6,508
  
Notes payable
    
1,020
    
2,464
  
Notes payable to related parties
    
927
        
Secured notes payable
    
2,536
        
Callable secured convertible debt and accrued interest
          
63
  
Convertible debt derivatives
    
1,110
    
4,736
  
Warranty liability
    
13
    
48
  
Total current liabilities
    
27,588
    
13,819
  
 
          
Long term liabilities
              
Deferred gain, less current portion
              
Long term capital lease, less current portion
    
5
        
Total long-term liabilities
    
5
        
               
Total liabilities
    
27,593
    
13,819
  
 
          
Stockholders’ equity:
          
Common Stock: $0.001 par value, 1,000,000,000 shares authorized at September 30, 2007 and 91,662,663 shares issued and outstanding as of September 30, 2007
    
9
    
4
  
Additional paid-in-capital
    
67,975
    
60,709
  
Deferred stock option compensation
          
(453
)
Deficit accumulated during the development stage
    
(72,959
)
  
(70,280
)
Total stockholders’ (deficit) equity
    
(4,974
)
  
(10,020
)
 
          
Total liabilities and stockholders’ equity
  
$
22,619
  
$
3,799
  
 
See accompanied notes to these unaudited condensed consolidated financial statements
 
 
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)
 
 
  
Three Months Ended Sept. 30,
  
Cumulative Period from February 10, 2000 (date of inception) to
  
 
  
2007
  
2006
  
Sept. 30, 2007
  
Revenues
  
$
956
  
$
0
  
$
6,768
  
Cost of goods
    
357
    
0
    
2,666
  
Gross profit
    
599
    
0
    
4,102
  
 
              
Operating expenses:
                  
Research and development
    
154
    
262
    
44,336
  
Business development
    
829
    
89
    
6,765
  
General and administrative
    
415
    
1,059
    
14,717
  
Goodwill impairment
                
10,648
  
Total operating expenses
    
1,398
    
1,410
    
76,466
  
                     
Income (loss) from operations
    
(799
)
  
(1,410
)
  
(72,364
)
                     
Unrealized gain (loss) related to derivative and warrant liability
          
(1,339
)
  
(2,669
)
Interest expense, net
    
19
    
(55
)
  
1,114
  
Gain (loss) on sale of assets
          
53
    
330
  
                     
Net income (loss)
  
$
(818
)
$
(2,751
)
$
(73,590
)
                     
Weighted shares outstanding
             
Basic and diluted
    
91,662,663
    
42,586,732
      
                     
Net income (loss) per share:
              
Basic and diluted
  
$
(0.009
)
$
(0.065
)
    


 
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 Sept. 30,
  
Cumulative Period from February 10, 2000 (date of inception) to
  
 
  
2007
  
2006
  
Sept. 30, 2007
  
Revenues
  
$
6,288
  
$
336
  
$
6,768
  
Cost of goods
    
2,342
    
317
    
2,666
  
Gross profit
    
3,946
    
19
    
4,102
  
 
              
Operating expenses:
                  
Research and development
    
347
    
1,462
    
44,336
  
Business development
    
2,964
    
377
    
6,765
  
General and administrative
    
2,330
    
3,345
    
14,717
  
Goodwill impairment
                
10,648
  
Total operating expenses
    
5,640
    
5,183
    
76,466
  
                     
Income (loss) from operations
    
(1,694
)
  
(5,164
)
  
(72,364
)
                     
Unrealized gain (loss) related to derivative and warrant liability
    
12,414
    
(555
)
  
(2,669
)
Interest expense, net
    
137
    
(269
)
  
1,114
  
Gain (loss) on sale of assets
          
158
    
330
  
                     
Net income (loss)
  
$
10,857
  
$
(5,831
)
$
(73,590
)
                     
Weighted shares outstanding
             
Basic and diluted
    
70,062,672
    
41,032,390
      
                     
Net income (loss) per share:
              
Basic and diluted
  
$
0.155
  
$
(0.14
)
    


 
See accompanied notes to these unaudited condensed consolidated financial statements
 
 
NAYNA NETWORKS, INC.
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
(Unaudited)
 

 
  
 
  
  
  
Cumulative
  
 
  
 
  
  
  
Period from
  
 
  
 
  
  
  
February 10,
  
 
  
 
  
  
  
2000 (date of
  
 
  
 
  
  
  
inception) to
  
 
  
Nine Months Ended Sept. 30,
  
Sept. 30,
  
 
  
2007
  
  2006
  
2007
  
               
Cash flows from operating activities:
  
 
  
  
  
 
  
Net loss
  
$
10,870
  
$
(5,832
)
  
(73,576
)
Adjustments to reconcile net loss to net cash used in operations:
              
  Depreciation
    
(1,974
)
  
1,001
    
2,335
  
  Gain (loss) on sale of property and equipment
          
(158
)
  
784
  
  Impairment of goodwill and other intangible assets related to acquisitions
    
(286
)
        
10,362
  
  Noncash charges related to stock options
    
566
          
1,244
  
  Noncash charges related to issuance of common stock for legal and professional services
          
255
    
843
  
  Noncash interest expense related to issuance of convertible debt
    
(137
)
  
177
    
396
  
  Unrealized loss (gain) related to adjustment of derivative and warrant liability to fair value of underlying securities
    
(12,414
)
  
555
    
2,669
  
  Amortization of financing costs
    
(358
)
  
38
    
(276
)
  Amortization of discount on warrants associated with equipment financing
                
202
  
  Changes in operating assets and liabilities:
                    
Restricted cash
    
44
          
(121
)
Accounts receivable
    
(478
)
  
(428
)
  
(521
)
Prepaid expenses and other current assets
    
(37
)
  
(12
)
  
(128
)
Other assets
    
92
    
81
    
(194
)
Accounts payable and accrued liabilities
    
27,555
    
1,683
    
25,605
  
  Net cash used in operating activities
  
$
23,444
  
$
(2,640
)
$
(30,377
)
                     
Cash flows from investing activities:
                  
  Purchase of property and equipment
  
$
882
  
$
(11
)
$
(369
)
  Proceeds from sale of property and equipment
                
1,076
  
  Costs associated with acquisition of ProSAT
    
(20,945
)
        
(20,945
)
Costs associated with acquisition of Xpeed, Inc.
                
(3,685
)
  Net cash provided (used) in investing activities
  
$
(20,063
)
$
(11
)
$
(23,923
)
                     
Cash flows from financing activities:
                  
  Loan proceeds
  
$
(580
)
$
822
  
$
1,005
  
  Payments on capital lease obligations and loan facility
                
(5,735
)
  Proceeds from issuance of common stock, net of repurchases
    
5
    
20
    
254
  
  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
  
  Proceeds from (payments to) issuance of convertible debt
    
(5,742
)
        
(4,276
)
  Proceeds from (payments to) issuance of secured notes
    
2,473
          
5,447
  
  Net cash provided (used) by financing activities
  
$
(3,844
)
$
842
  
$
47,944
  
                     
Net decrease in cash and cash equivalents
  
$
(464
)
$
(1,809
)
 $    
                     
Cash and cash equivalents at beginning of period
  
$
424
  
$
1,782
   $    
Cash and cash equivalents at end of period
  
$
(40
)
$
(27
)
 $    
                     
Non-cash financing activities
              
  Conversion of preferred stock into common
   $     $          
  Shares issued upon conversion of debentures
   $    
$
$2,339
        
  Shares issued for purchase of intangibles
   $    
$
$1,150
        
  Shares issued for services or settlement of claims
   $    
$
$674
        

Accompanied notes are an integral part of these financial statements.
 


NOTE 1: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


The Company

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

The Company has incurred losses since its inception, however, the recent acquisition of ProSAT has allowed the Company to achieve profitability in the second quarter. The loss of ProSAT’s major contract in July has resulted in a loss for the current quarter and the Company does not anticipate that it will be able to generate sufficient cash flows from operations to support its operations in the immediate future. Therefore, the Company plans to raise additional capital during the remainder of 2007 and in the first quarter of 2008. Failure to generate sufficient cash flows from operations, raise additional financing or reduce certain discretionary spending could have a material adverse effect on the Company’s ability to continue as a going concern and to achieve its intended business objectives. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Development Stage

Although the Company has commenced its principal operations, it has not achieved a sufficient level of sales and market demand to become an established operating enterprise prior to the acquisition of ProSAT. Therefore, as per the Statement of Financial Accounting Standards (“SFAS”) No.7, “Accounting and Reporting by Development Stage Enterprises”, the Company was classified as a development stage enterprise. For this quarterly report, the Company is presenting its financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 7, “Accounting and Reporting by Development Stage Enterprises”. Successful completion of the Company’s developmental program and, ultimately, the attainment of profitable operations are dependent upon future events, including future financing, successfully completing product development, and achieving a sufficient level of sales and market demand to become an established operating enterprise.

Basis of Presentation

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

The information contained herein has been prepared by the Company in accordance with the rules of the Commission. The financial information contained herein as of September 30, 2007, for the three months and nine months ended September 30, 2007 and 2006, and for the cumulative period from February 10, 2000 (date of inception) to September 30, 2007 is unaudited. The condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods presented. The results of the Company's operations for any interim period are not necessarily indicative of the results of the Company's operations for any other interim period or for a full year.

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

Revenue Recognition

The Company’s revenue recognition policy is consistent with applicable revenue recognition guidance and interpretations, including the requirements of Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”), Revenue Arrangements with Multiple Deliverables, Statement of Position 97-2 (“SOP 97-2”), Software Revenue Recognition, Statement of Position 81-1 (“SOP 81-1”) Accounting for Performance of Construction-Type and Certain Production Type Contracts, Staff Accounting Bulletin No. 104 (“SAB 104”), Revenue Recognition, and other applicable revenue recognition guidance and interpretations.
 
The Company records revenue when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable, and (iv) collectibility is reasonably assured. Cash received in advance of revenue recognition is recorded as deferred revenue.
 
 
Revenue arrangements with multiple deliverables are evaluated to determine if the deliverables can be divided into more than one unit of accounting. An item can generally be considered a separate unit of accounting if all of the following criteria are met:
 
The delivered item(s) has value to the customer on a standalone basis; there is objective and reliable evidence of the fair value of the undelivered item(s); and if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.
Items which do not meet these criteria are combined into a single unit of accounting. If there is objective and reliable evidence of fair value for all units of accounting, the arrangement consideration is allocated to the separate units of accounting based on their relative fair values. In cases where there is objective and reliable evidence of the fair value(s) of the undelivered item(s) in an arrangement but no such evidence for one or more of the delivered item(s), the residual method is used to allocate the arrangement consideration. In cases in which there is not objective and reliable evidence of the fair value(s) of the undelivered item(s), the Company defers all revenue for the arrangement until the period in which the last item is delivered.
 
For revenue arrangements with multiple deliverables, upon shipment, devices, the Company has fair value for all remaining undelivered elements and recognizes the residual amount within the arrangement as revenue for the delivered items as prescribed in EITF 00-21. Revenues for the Company’s arrangements that include multiple elements are allocated to each undelivered element based on the fair value of each element. Fair value is determined based on the price charged when each element is sold separately and/or the price charged by third parties for similar services.
Net revenues from services such as customer support are initially deferred and then recognized on a straight-line basis over the term of the contract. Net revenues from services such as installations, equipment repairs, refurbishment arrangements, training and consulting are recognized as the services are rendered.

Allowance for doubtful accounts

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

Principals of Consolidation

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

Use of Estimates

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

Inventory Valuation

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

Impairment of Long-Lived Assets

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

Cash and Cash Equivalents

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

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is determined using the straight-line method over the estimated useful lives of the respective assets, which are generally three to five years for computers, equipment and furniture. Depreciation on leasehold improvements is provided using the straight-line method over the shorter of the estimated useful lives of the improvements or the lease term. Expenditures for maintenance and repairs are charged to operating expense as incurred. Upon retirement or sale, the original cost and related accumulated depreciation are removed from the respective accounts, and the gains and losses are included in other income or expense. The Company evaluates its long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Goodwill and other intangible assets

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite.
 
Intangible assets other than goodwill are carried at cost less accumulated amortization. Intangible assets are generally amortized on a straight-line basis over the useful lives of the respective assets, generally two to seven years. Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the amount the carrying value exceeds the fair value of the asset.
 
Goodwill is carried at cost. Goodwill is not amortized but is subject to an annual test for impairment at the reporting unit level (operating segment) and between annual tests in certain circumstances. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the Company’s reporting units with the reporting unit’s carrying amount, including goodwill. The Company generally determines the fair value of its reporting units using the expected present value of future cash flows, giving consideration to the market valuation approach. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss, if any.

Business and Credit Risk

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

Research and Development

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

Income Taxes

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

Stock-Based Compensation

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

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

SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense was recorded net of estimated forfeitures for the three months ended September 30, 2007 such that expense was recorded only for those stock-based awards that are expected to vest. Total stock-based compensation for the three months ended September 30, 2007 was $0.

Income (loss) per common share

Income (loss) per common share is calculated based on the consolidated net income (loss) for the period divided by the weighted average number of common shares outstanding as of September 30, 2007 and 2006. Common stock equivalents are not included, as their effect would be antidilutive.

Reclassifications

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

Recent Accounting Pronouncements
 
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to prior periods' unaudited financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The Company does not expect the adoption of this SFAS to have a material impact on its consolidated financial position, results of operations or cash flows.
 
On February 16, 2006 the FASB issued SFAS 155, "Accounting for Certain Hybrid Instruments," which amends SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. The Company does not expect its adoption of this new standard to have a material impact on its financial position, results of operations or cash flows.
 

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

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

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

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

NOTE 2: ACQUISITIONS

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

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

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

Based on the impairment tests performed using present value of future cash flows, the value of intangible asset acquired in April 2005 was considered impaired as of December 31, 2005. Accordingly, the Statement of Operations for the year ended December 31, 2005, included a charge of $3,712 for impairment of intangible asset.
 
Acquisition of Depthcom 7, Inc. (“DC7”)
 
In March 2005, the Company acquired DC7, a privately owned shell company with no assets and liabilities. The merger was part of a fund-raising transaction structured to get private investment in Nayna Delaware. The Company issued 9,250,000 shares of common stock in anticipation of receiving funding promptly after the acquisition.
 
The shares issued have been recorded in accordance with the principles outlined in SFAS 123. The fair value of services received in this share-based transaction is more reliably measurable than the fair value of the shares issued. The management’s estimate of the fair value of services received is $0.93. In the first quarter of 2007, the Company received $100 and considers the matter closed.

Acquisition of Abundance Networks, LLC

On January 20, 2006, the Company completed the acquisition of substantially all of the assets, including all of its intellectual property and all outstanding capital stock of Abundance Networks, LLC (“AN”) and its wholly-owned subsidiary, Abundance Networks (India) Pvt. Ltd. (“ANI India”), and certain of the liabilities, including approximately $600 of bank debt of ANI India, pursuant to the terms of an Asset Purchase Agreement. AN is now a wholly-owned subsidiary of the Company known as Nayna Networks Broadband, Inc. AN 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 AN'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 AN. 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 AN, based on achievement of certain revenue and earnings milestones. If (a) on the one-year anniversary of the closing, the Original Issue shares do not have an average closing price of at least $2.00 per share, or (b) on the conclusion of the Indemnification Period, the Indemnification Shares do not have an average closing price of at least $2.00 per share, or (c) on the date that any of the Earnout Shares become due and issuable, any such Earnout Shares do not have an average closing price of at least $2.00 per share, such issuances are subject to a true-up calculation, whereby, the total number of shares issued may be adjusted by multiplying the original number of shares issued by $2.00 and dividing by the average of the closing prices of Nayna's common stock during the twenty consecutive trading days ending one day prior to the date of the adjustment , as traded on the OTCBB (or other national exchange) (each such adjustment, a "True-up").
 

On April 17, 2007, the Company and Abundance entered into Amendment No. 2 to the Asset Purchase Agreement by and among us, Abundance Networks, Inc., a Delaware corporation and wholly-owned subsidiary, Abundance Networks, LLC, a Delaware limited liability company and Abundance Networks (India) Pvt Ltd, an India private limited company which provides that we will issue 4,500,000 shares to Abundance in full satisfaction of all remaining obligations to issues stock under the original Asset Purchase Agreement. In that second amendment, the Parties agreed to delete the section in the Agreement that called for Nayna to issue more shares to AN in order to true up the Initial shares if the Average Closing Price of Nayna Common Stock for the twenty-day period prior to January 20, 2007 was not $2.00. The Parties also agreed to delete the section in the Agreement that called for Nayna to issue more shares to AN in order to true up the Indemnification shares if the Average Closing Price of Nayna Common Stock for the twenty-day period prior to April 20, 2007 was not $2.00. The Parties also agreed to delete the section in the Agreement that called for Nayna to issue more shares to AN if certain revenue and margin targets were met for the period January 20, 2006 through March 31, 2007. The Parties agreed that, in return, Nayna would issue AN 4,500,000 shares of Nayna Common Stock on or before April 30, 2007. These shares were issued on April 27, 2007.

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


On March 23, 2007, pursuant to the terms of a Membership Purchase Agreement, Nayna acquired all of the outstanding membership interests of Professional Satellite & Communications, LLC, (“ProSAT”), a privately held California limited liability company. Under the terms of the Membership Purchase Agreement, the Company agreed to issue 16 million restricted shares of common stock to the members of ProSAT. 2 million of which are being held in escrow for fifteen months to satisfy any indemnification claims by the Company during such period. The Company also agreed to issue 2 million shares in the form of stock options to current ProSAT employees.

As a result of the acquisition the Company has booked $17.4 million of goodwill and has issued the 18 million shares of common stock.

Acquisition of Alarmco, LLC

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

Property and equipment consisted of the following at September 30, 2007 and September 30, 2006:

 
  
Sept. 30,
2007
  
Sept. 30,
2006
  
 
  
 
  
 
  
Computer equipment
    
1,557
    
692
  
Computer software
    
1,359
    
1,360
  
Furniture and fixtures
    
2
    
2
  
 
    
2,820
    
2,054
  
Accumulated depreciation and amortization
    
(2,029
)
  
(1,991
)
 
  
$
791
  
$
95
  

 
 
NOTE 4: NOTES PAYABLE
 
Notes Payable
 
Notes payable at September 30, 2007 and 2006 consist of the following:
 
 
  
Sept. 30, 2007
  
Sept. 30, 2006
  
Short term bridge loan from accredited investors, 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, 2007.
  
$
680
  
$
580
  
Short term bridge loan from related parties due September 30, 2007, interest payable at 8% per annum. In addition, the Company issued to the investors warrants to purchase 467,665 shares of common stock, none of which were exercised up to September 30, 2007. On June 26, 2007, the related parties agreed to convert this loan and the warrants into 3,997,354 shares of the Company’s common stock.
    
0
    
580
  
Accrued interest on bridge loan
   
144
    
93
  
Notes payable in connection with unsettled claims from acquisition of Xpeed in April 2003, unsecured ($85 due to related parties).
    
310
    
310
  
Notes payable in connection with assumption of liability upon acquisition of Abundance Networks, Inc., unsecured
    
179
    
179
  
Note payable to a foreign bank in connection with assumption of liability upon acquisition of Abundance Networks, Inc. and its foreign subsidiary. The note accrued interest at the rate of 15% and was secured by all the assets of the foreign subsidiary and the personal guarantees of several related parties. The bank foreclosed on the loan, and the Company now owes the balance to the related parties since the bank exercised its guarantees.
    
691
    
580
  
Notes payable to six of nine convertible bond holders as a result of settlement agreements. These notes are secured by the Company’s intellectual property.
    
2,536
        
Total notes payable
    
4,540
    
2,322
  
Less: current maturity
    
(4,540
)
  
(2,322
)
   
$
 -  
$
    
 
In connection with above notes issued in 2005, the Company issued 750,990 warrants to purchase shares of common stock to the bridge loan investors. The warrant prices are fixed and were determined by using the average volume weighted share price for the ten (10) trading days prior to the receipt of the funding and range from $0.71 per share to $2.08 per share and expire three years from the date of the note. The fair value of the warrants was estimated using the Black-Scholes option pricing model and was recorded as warrant liability in accordance with the guidance under EITF 00-19. Assumptions used to value these warrants included that all warrants would be exercised on their respective expiration dates, using annualized volatility rate of 100%, and using risk free interest rate of 4.71%. As of September 30, 2007, warrant liability included the estimated fair value of these warrants of $9.

Convertible Debentures
 
On March 27, 2006, the Company converted its convertible debt of $2,339 into 2,338,786 shares of common stock at the conversion price of $1.00 per share. The conversion price exceeded the fair market value of the shares; therefore, the excess of $1,731 was recorded as a gain on conversion of debt in additional paid-in capital. Of the total shares issued 888,786 shares of common stock were issued to a related party.
 
Callable Secured Convertible Notes
 
In November 2005, the company entered into a securities purchase agreement which provides for the purchase and sale of callable secured convertible notes and warrants. Under the securities purchase agreement, the company will receive up to $4,800 upon issuance of a corresponding amount of the company’s 8% callable secured convertible notes and warrants to purchase up to an aggregate of 2,400,000 shares of common stock. The conversion of the debt to common stock of the Company is at the option of the holder and may be exercised at any time. The notes were accompanied by a Registration Rights Agreement.
 
During 2005, the Company received $2,974 ($3,200 net of financing costs) and issued 1,600,000 five year $1.00 warrants, none of which have been exercised. The terms of the notes provide for full payment on or before the third anniversary date of issuance, with interest at the rate of 8% per annum. The company has the option to prepay (i) all of the outstanding principal and unpaid interest at any time if the common stock is trading at or below $0.75 per share and (ii) portion of the outstanding principal and unpaid interest at any time if the common stock is trading at or below $1.12 per share. The notes are convertible into common shares at the lesser of $0.68 or 55% of the market price of the Company’s common stock, as defined. Additionally, the notes are secured by intellectual properties owned by the company.

On May 14, 2007, the Company entered into Satisfaction and Release Agreements (“Agreements”) with the six of the nine holders of the callable secured convertible notes and warrants (the “Lenders”). Under these Agreements, the Lenders and the Company have agreed that the Lenders shall accept an aggregate amount of $2,536 as settlement in satisfaction of the amounts owed to the Lenders. $380 (15%) of the aggregate amount is payable within 30 days of the date of the Agreements, and the remaining $2,156 is payable within 180 days of the date of the Agreements. As of June 30, 2007, the Company has not made its required payment of $380. In addition, the Company agrees to honor and the Lenders agrees to limit the exercise of their right of conversion to a number of shares which when combined with all shares obtained upon conversion of the Loan Documents by all of its affiliates (including any past conversions by each Lender or its affiliates) will not exceed, for each of the six Lenders, 4.99% of the total issued and outstanding shares of the Company as of December 31, 2006. The total amount of shares issued to the six Lenders was 7,630,091. The Lenders also agreed to waive any past, existing and future defaults under the original loan documents for a period of 180 days from the date of the Agreements.

The value of the notes held by the remaining three note holders is $600. The Company is working on Satisfaction and Release Agreements with these note holders.
 
 
NOTE 4: RELATED PARTY TRANSACTIONS
 
Prior to the reverse merger in April 2005, Nayna Delaware settled liabilities of $906 assumed in connection with an acquisition in 2003 to a member of the Board of Directors of Nayna Delaware and his affiliates, by paying $334 in cash in 2004 and issuing convertible notes of $589 in 2005. Nayna Delaware also borrowed $300 in 2004 from the same related party upon issuance of convertible debt and $580 in 2005 as a part of bridge loan. The related party converted all of the bridge loan into common stock on June 26, 2007. 
 
As of September 30, 2007 and 2006, the following debts were owed to the related party:

 
  
Sept. 30, 2007
  
Sept. 30, 2006
  
Notes payable
  
$
136
  
$
675
  
Convertible debentures
    
-
    
889
  
 
NOTE 5: LEASES
 
On July 31, 2005, the Company's lease on 180 Rose Orchard Way, San Jose, CA expired. The Company signed a six month lease for the premises located at 4699 Old Ironsides Drive, Santa Clara, California, which the Company now occupies as its primary headquarters. In February 2006 the Company extended that lease through April 2007.
 
In June 2005, the Company sold some equipment to a leasing company and immediately executed a 24 month operational lease. The sale and leaseback resulted in net sale proceeds of $631 and a gain of $422. Under the terms of the lease the Company has agreed to pay, on a quarterly basis, $179 over the term of the lease. At the end of the lease the Company has the right to return the equipment, negotiate a re-lease, or purchase the equipment at fair market value.

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

The company has defaulted in making the quarterly lease payments since April 1, 2006 and the matter is now in litigation. As of March 31, 2007, lease payments outstanding under this operating lease are $79, net of sale proceeds to be released at the end of lease term $771 and prepaid rent of $179.

On April 12, 2007, the Company entered into a Settlement Agreement and Release (the Agreement’) with the leasing company. Under the terms of the Agreement, the Company agreed to pay the sum of $30 to satisfy all outstanding amounts due under the term of the lease. As of September 30, 2007, $10 of the agreed upon settlement amount is past due.
 

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

NOTE 7: COMMON STOCK (in actual amounts)

As of September 30, 2007, there were 91,662,663 shares of Common Stock issued and outstanding.

NOTE 8: SUBSEQUENT EVENTS

There have been no subsequent events after the close of the third quarter.

NOTE 9: GOING CONCERN
 
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has incurred losses since its inception and has current liabilities in excess of current assets. The Company does not have sufficient cash on hand to continue its operations in the manner they have historically been conducted. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise any necessary additional funds not provided by operations through loans or through additional sales of its common stock. There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
 

Item 2. Management's Discussion and Analysis or Plan of Operations
 
This Quarterly Report on Form 10-QSB, including the following sections, contains forward-looking statements. Any statements contained in this Form 10-QSB that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "estimate" or "continue" or comparable terminology are intended to identify forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, and the cautionary statements set forth below and those set forth herein under the caption entitled "Risk Factors" identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. Investors should not place any undue reliance on any such forward looking statements and are cautioned that actual results may differ materially from those projected in the forward-looking statements as a result of certain risk factors identified in this Quarterly Report on Form 10-QSB and other filings we have made, and may make, with the Securities and Exchange Commission.
 
Any forward-looking statements made by us do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments the Company may make. The Company does not assume, and specifically disclaims, any obligation to update any forward-looking statements, and these statements represent the Company's current outlook only as of the date given.
 
The following discussion should be read in conjunction with the condensed financial statements and notes thereto included elsewhere in this report, as well as, the financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2006 filed with the Commission on April 27, 2007, and amended on April 30, 2007, and other filings that the Company may make, from time to time, with the Commission.

OVERVIEW
 
Headquartered in Santa Clara, CA, Nayna Networks, Inc., ("Nayna" or the "Company") is a hardware and software development company that designs, develops and markets next generation broadband access solutions, also known as Ethernet in the First Mile ("EFM") for the secure communications market. The Company acquired Professional Satellite & Communications, LLC, (“ProSAT”) to provide a new line of products and services that Nayna expects will complement its existing terrestrial based offerings. ProSAT was a leading third party marketing and customer acquisition vehicle for DirecTV™ throughout the United States. ProSAT offered standard and high definition television equipment installation. It was an authorized reselling partner of DirecTV’s satellite TV services including premium channel offerings. DirecTV is one of the top two leading satellite services providers in the United States.
 
Nayna was formed as a result of a merger and plan of reorganization (the "Merger") between ResCon Technology Corporation ("Rescon") and Nayna Networks, Inc. ("NNI"). On April 1, 2005, NNI merged into Rescon in a stock-for-stock transaction. As a result of the Merger, Rescon continued as the surviving corporation, assumed the operations and business plan of NNI, the stockholders of NNI became stockholders of Rescon, and Rescon changed its name to Nayna Networks, Inc. (trading symbol NAYN.OB).

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

On March 23, 2007, pursuant to the terms of a Membership Purchase Agreement, Nayna acquired all of the outstanding membership interests of Professional Satellite & Communications, LLC, (“ProSAT”), a privately held California limited liability company and Alarmco, LLC, a privately held California limited liability closely associated with ProSAT. The businesses formally operated by ProSAT and Alarmco are now operated as subsidiaries of Nayna. These financial statements for the period ended September 30, 2007 include financials for ProSAT.

On July 2, 2007, ProSAT received a notice of termination from DIRECTV, for whom ProSAT acts as an authorized commissioned retailer and authorized commissioned customer referral contractor. This business association represented over 95% of the revenue to ProSAT for the period ended June 30, 2007. The Company is currently formulating its plans relative to the ProSAT subsidiary.
 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2006

Revenues, Cost of Sales and Gross Profit
 
The Company recognized revenue of $956 in the three months ended September 30, 2007 and $0 in the three months ended September 30, 2006. Cost of Goods for the three months ended September 30, 2007 was $357 versus $0 for the same period in 2006. Gross profit for the three months ended September 30, 2007 and September 30, 2006 was $599 and $0, respectively. The revenue, cost of goods and net profit was entirely from Nayna’s newly acquired subsidiary, ProSAT.

Operating Expenses
 
Operating expenses include research and development, business development, general and administrative, and goodwill impairment expenses. Total operating expenses for three months ended September 30, 2007 and September 30, 2006 were $1,398 and $1,410, respectively. This decrease of $12 resulted primarily from the following: 
 
Research and development expenditures decreased $108 from $268 in the third quarter of 2006 to $154 in the third quarter of 2007 as a result of a decrease in salaries and wages and other associated expenses.
 
Business development expenditures increased $780 from $89 in the third quarter of 2006 to $829 in the third quarter of 2007 as a result of the sales and marketing efforts of the ProSAT subsidiary.

General and administration expenditures decreased $644 from $1,059 in the third quarter of 2006 to $415 in the third quarter of 2007 as a result of reduction in G&A expenses in both the Nayna and ProSAT operations.
 

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, 2007 and September 30, 2006, were $19 and ($1,341) respectively.

Unrealized Gain or Loss Related to the Adjustment of Derivative and Warrant Liability
 
For the three months ended September 30, 2007, we had no unrealized gains related to derivative and warrant liabilities as compared to ($1,339) for the same period in 2006. These gains resulted from the November 2005 securities purchase agreement which provides for the purchase and sale of convertible notes and warrants, and is the result of a rise in the average price of the Company’s stock over the period.

Net Interest Expense
 
Net interest expense for the three months ended September 30, 2007 and September 30, 2006, was $19 and $(55), respectively. This increase of $74 was primarily due to interest earned on deposits by the ProSAT subsidiary.

Gain (loss) on sale of assets
 
There was no gain or loss on the sale of assets during three months ended September 30, 2007. There was a gain of $53 in the three months ended September 30, 2006. This gain was from the sale and lease back of certain equipment in 2005.

Net Income (Loss)
 
As a result of the foregoing factors, for the three months ended September 30, 2007, the Company incurred a net loss of ($818) versus a net loss of ($2.751) for the three months ended September 30, 2006.

Liquidity and Capital Resources
 
As of September 30, 2007, the Company has cash and cash equivalents on hand of ($40). The loss of the DIRECTV contract will impact the Company’s cash flow going forward. The Company expects to raise additional capital in 2007 to fund its operations.

 
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.

LOSS OF OUR DIRECTV CONTRACT WILL SIGNIFICANTLY IMPACT OUR BUSINESS.
 
The loss of our contract with DIRECTV will have a significant impact on our business. We will have to reorient the ProSAT operation to other sales opportunities and manage our cash flow so that we can support the entire business until these opportunities, and opportunities on the telecom side of the business, are realized.

FAILURE TO RAISE ADDITIONAL CAPITAL WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY TO FUND OUR GROWTH OPPORTUNITIES.
 
We anticipate that our currently available funds are sufficient to meet our needs for working capital, capital expenditures and business expansion until the end of November 2007. Thereafter, we will need to raise additional funds. We have also been in discussions with investment advisors in an effort to raise additional funds. We cannot assure you that that additional capital will be available on terms acceptable to us, or at all. If we are unable to raise sufficient capital we will not be able to continue operations or to achieve our business objectives.
 

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

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

OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND THE CURRENT MARKET FOR OUR COMMON STOCK IS LIMITED.
 
The market price of our common stock will likely be highly volatile as the stock market in general, and the market for small cap and micro cap technology companies in particular, has been highly volatile. You may not be able to resell your shares of our common stock following periods of volatility because of the market's adverse reaction to volatility. We cannot assure you that our stock will trade at the same levels of other stocks in our industry or that our industry stocks in general will sustain their current market prices.

Factors that could cause such volatility may include, among other things:
 
·  actual or anticipated fluctuations in our quarterly operating results;
·  announcements of technological innovations;
·  changes in financial estimates by securities analysts;
·  conditions or trends in the network control and management industry;
·  changes in the market valuations of other such industry related companies; and
·  the acceptance of market makers and institutional investors of the Company and our stock.

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

THE APPLICATION OF THE "PENNY STOCK REGULATION" COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
 
Our securities may be deemed a penny stock. Penny stocks generally are equity securities with a price of less than $5.00 per share other than securities registered on certain national securities exchanges or quoted on the NASDAQ Stock Market, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. Our securities may be subject to "penny stock rules" that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the "penny stock rules" require the delivery, prior to the transaction, of a disclosure schedule prescribed by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks.
 
Consequently, the "penny stock rules" may restrict the ability of broker-dealers to sell our securities and may have the effect of reducing the level of trading activity of our common stock in the secondary market. The foregoing required penny stock restrictions will not apply to our securities if such securities maintain a market price of $5.00 or greater. We can give no assurance that the price of our securities will reach or maintain such a level.

SALES OF OUR COMMON STOCK BY THE HOLDERS OF THE CONVERTIBLE NOTES AND WARRANTS MAY LOWER THE MARKET PRICE OF OUR COMMON STOCK AND PURCHASERS OF COMMON STOCK MAY EXPERIENCE SUBSTANTIAL DILUTION.
 
We are authorized to issue up to 1,000,000,000 shares of common stock. As of September 30, 2007, 5,967,480 shares of common stock were reserved under the 2000 Stock Option Plan, 5,000,000 shares of common stock were reserved under the 2006 Executive Stock Option Plan, 755,565 shares of common stock were reserved for issuance upon exercise of our outstanding warrants and options other than those issued in connection with the notes and debentures, and an additional 70,892,808 shares of common stock were reserved for issuance upon conversion of the notes and debentures and exercise of the warrants issued in connection with the notes and bridge loans. As of September 30, 2007, there were 91,662,663 shares of common stock outstanding. Of these outstanding shares, 19,025,273 shares were freely tradable without restriction under the Securities Act of 1933, as amended, unless held by affiliates.
 
As of September 30, 2007, $600,000 of the principal amount of callable secured convertible notes were issued and outstanding. 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 September 30, 2007, the $600,000 principal amount of notes would have been convertible into 24,512,019 shares of our common stock, 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.
 
Purchasers of common stock will experience substantial dilution of their investment upon conversion by the investors of a material portion of the notes. The notes are not registered and may be sold only if registered under the Securities Act of 1933, as amended, or sold in accordance with an applicable exemption from registration, such as Rule 144. The shares of common stock into which the notes may be converted are being registered pursuant to the currently filed registration statement.

THE RATE AT WHICH THE NOTES MAY BE CONVERTED MAY RESULT IN THE NOTE HOLDERS ACQUIRING A SUBSTANTIALLY GREATER NUMBER OF SHARES THAN CURRENTLY ANTICIPATED, RESULTING IN FURTHER DILUTION TO PURCHASERS OF COMMON STOCK.
 
Because the notes are convertible at a floating rate based on a substantial discount, equal to the average of the lowest three inter-day trading prices during the twenty trading days immediately prior to the date the conversion notice is sent, discounted by forty-five percent, the lower the stock price at the time the holder converts, the more common shares the holder will receive. Furthermore, there is no limit on how low the conversion price can be, which means that there is no limit on the number of shares that we may be obligated to issue. This will result in further dilution to the purchasers of our common stock. To the extent the convertible note holders convert and then sell their common stock upon conversion of the notes, the common stock price may decrease due to the additional shares in the market, allowing the convertible note holders to convert their convertible notes into even greater amounts of common stock, the sales of which would further depress the stock price.
 

IF THE PRICE OF OUR COMMON STOCK DECLINES AS THE CONVERTIBLE NOTE HOLDERS CONVERT AND SELL THEIR SHARES INTO THE MARKET, THE CONVERTIBLE NOTE HOLDERS OR OTHERS MAY BE ENCOURAGED TO ENGAGE IN SHORT SELLING OUR STOCK, FURTHER DEPRESSING THE PRICE OF OUR COMMON STOCK.
 
The significant downward pressure on the price of the common stock as the convertible note holders convert and sell material amounts of common stock could encourage short sales by the convertible note holders or others. Short selling is t he selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold it short. Significant short selling of a company’s stock creates an incentive for market participants to reduce the vale of that company’s common stock. If a significant market for short selling our common stock develops, the market price of our common stock could be further and significantly depressed.

A DEFAULT BY US UNDER OUR 8% NOTES WOULD ENABLE THE HOLDERS OF OUR 8% NOTES TO TAKE CONTROL OF SUBSTANTIALLY ALL OF OUR ASSETS.
 
Our 8% notes are secured by a security agreement under which we pledged substantially all of our assets, including our goods, fixtures, equipment, inventory, contract rights and receivables. A default by us under the 8% notes would enable the holders to take control of substantially all of our assets. The holders of our 8% notes have no operating experience in the industry that could force us to substantially curtail or cease our operations.
 
OUR FAILURE TO COMPLY WITH THE TERMS OF THE CONVERTIBLE NOTES COULD LEAD TO AN ASSESSMENT OF LIQUIDATED DAMAGES BY THE HOLDERS OF THE CONVERTIBLE NOTES AND WARRANTS.
 
Under the registration rights agreement, since the registration statement relating to the convertible notes and warrants was not declared effective by the Securities and Exchange Commission on or before March 17, 2006 or the investors cannot make sales under the registration statement for any period of time after the registration statement is declared effective, we are obligated to pay a registration default fee to the 8% note holders equal to the principal of the note outstanding multiplied by .02 multiplied by the sum of the number of additional months required for the registration statement to become effective (or on a pro rata basis). For example, if the registration statement became effective one (1) month after March 17, 2006, we would pay $5,000 for each $250,000 of outstanding note principal amount. If thereafter, sales could not be made pursuant to the registration statement for an additional period of one (1) month, we would pay an additional $5,000 for each $250,000 of outstanding note principal amount. Accordingly, failure to have the registration statement declared effective by June 17, 2006 has resulted in the assessment of liquidated damages in the amount of $768,000 and will continue to result in the assessment of $64,000 per month for each additional month until the registration statement is declared effective.
 
In addition, we have agreed to have authorized a sufficient number of shares of our common stock to provide for the full conversion of the notes and exercise of the warrants then outstanding and to register and have reserved at all times for issuance at least two times the number of shares that is the actually issuable upon full conversion of the notes and full exercise of the warrants. Accordingly, our failure to comply with this covenant could result in the assessment of additional liquidated damages against us.
 
Moreover, we are required to pay a penalty of $1,000 per day to the investors if we fail to deliver shares of our common stock upon conversion of the notes within five business days upon receipt of the conversion notice. In the event we default under the 8% notes, we have the ability to pay the resulting liquidated damages detailed above in shares of stock based on the conversion price of the notes. If we pay such liquidated damages in shares of stock, this may result in further dilution to our current investors.
 

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, with offices in Mumbai India, directly addresses the globalization trend, provides us with direct access to lower cost engineering talent and a lower cost sales channel to greater India. Furthermore, we use contract manufacturers for the production of our products and thus we are well positioned to meet customer demand at market prices by building in low cost off shore locations.

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

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

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

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

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

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

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

As of September 30, 2007, we had 91,662,663 shares of our common stock issued and outstanding of which 19,025,273 shares are freely tradable shares. Rule 144 provides, in essence, that a person holding "restricted securities" for a period of one year may sell only an amount every three months equal to the greater of (a) one percent of a company's issued and outstanding shares, or (b) the average weekly volume of sales during the four calendar weeks preceding the sale.

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


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

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

 
PART II - OTHER INFORMATION


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

On November 17, 2005, Siemens Shared Services, LLC filed a law suit with the Superior Court of New Jersey in Middlesex County against us claiming damages of $216,000 plus interest and legal fees in connection with the non-payment of a portion of the debt we assumed in connection with our acquisition of Xpeed Communications, Inc. In the second quarter of 2007, the court ruled in favor of Siemens. The Company has accrued a liability of $225,000 for this matter.

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.

The Company’s ProSAT subsidiary has several lawsuits pending from vendors from whom it contracted advertising. ProSAT is currently negotiating with these vendors.

ProSAT also had a class action lawsuit filed against it relative to claims by employees that ProSAT improperly deducted certain expenses from their wages prior to the merger with Nayna. ProSAT as entered into a settlement agreement and, as of August 2007, has satisfied all terms of the settlement agreement thus settling this matter.

ProSAT has entered into another settlement agreement with an investor who claimed ProSAT management did not follow through on an agreement relative to his investment. The settlement agreement involves a series of payments to this individual. ProSAT has not made payments on this agreement since July 2007.

 

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: November 14, 2007
By:
/s/ Suresh R. Pillai                                       
 
Suresh R. Pillai, President
 
 
 
 
 
 
Dated: November 14, 2007
By:
 /s/ Thomas Richtarich                                     
 
Thomas Richtarich, CFO
 
 
 
 EX-31.1 2 v094138_ex31-1.htm
EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Suresh R. Pillai, certify that:

(1) I have reviewed this quarterly report on Form 10-QSB of Nayna Networks, Inc. (formerly ResCon Technology Corp.), (the "Company");

(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

(3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

(4) The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:

(a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and

(c) Disclosed in this quarterly report any change in the Company's internal controls over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting; and

(5) The Company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons fulfilling the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls over financial reporting.
 
 
 
 
Date: November 14, 2007
By:  
/S/ Suresh R. Pillai
 
Suresh R. Pillai,
Principal Executive Officer
 
 
 
 
 
 
 
EX-31.2 3 v094138_ex31-2.htm

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Thomas Richtarich, certify that:

(1) I have reviewed this quarterly report on Form 10-QSB of Nayna Networks, Inc. (formerly ResCon Technology Corp.), (the "Company");

(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

(3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

(4) The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:

(a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and

(c) Disclosed in this quarterly report any change in the Company's internal controls over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting; and

(5) The Company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons fulfilling the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls over financial reporting.
 
 
 
 
Date: November 14, 2007
By:
/S/ Thomas Richtarich
 
Thomas Richtarich,
Principal Financial Officer
 
 
 
 
 
 EX-32.1 4 v094138_ex32-1.htm Unassociated Document

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 for the period ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Suresh R. Pillai, 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: November 14, 2007
By:
/S/ Suresh R. Pillai
 
Suresh R. Pillai,
Principal Executive Officer
 
 
 
 EX-32.2 5 v094138_ex32-2.htm
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 for the period ended September 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Thomas Richtarich, 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: November 14, 2007
By:
/S/ Thomas Richtarich
 
Thomas Richtarich,
Principal Financial Officer
 
 
 
 
 
 
 

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