**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


WASHINGTON, D.C 20549




**FORM
      10-QSB**




**x**  **QUARTERLY
      REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITES**


**EXCHANGE
      ACT OF 1934**




**FOR
      THE QUARTERLY PERIOD ENDED September 30, 2007**




*COMMISSION
      FILE NUMBER: 0-21419*




**NETFABRIC
      HOLDINGS, INC.**


(Exact
      Name of Small Business Issuer as Specified in Its Charter)





Delaware
            76-0307819(State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            (I.R.S
                Employer Identification No.)





(Address
      of Principal Executive Offices)


299
      Cherry Hill Road,


Parsippany,
      New Jersey 07054




(973)-537-0077


(Issuer's
      Telephone Number, Including Area Code)





(Former
      address, if changed since last report)







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


Yes x No o




Indicate
      by a check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x




State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date: As of November 9, 2007, 96,0053,044 shares
      of
      common stock, $.001 par value per share, of the issuer were
      outstanding.




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














**NETFABRIC
      HOLDINGS, INC.**




INDEX





PagePART
                I.
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                Statements (Unaudited)Condensed
                Consolidated Balance Sheets
            1Condensed
                Consolidated Statements of Operations
            2Condensed
                Consolidated Statements of Cash Flows
            3Notes
                to Interim Condensed Consolidated Financial Statements
            4Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            12Item
                3.
            Controls
                and Procedures
            19PART
                II.
            OTHER
                INFORMATION
            19Item
                1.
            Legal
                Proceedings
            19Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            19Item
                3.
            Defaults
                Upon Senior Securities
            19Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            20Item
                5.
            Other
                Information
            20Item
                6.
            Exhibits
            20Signatures
            21












**NETFABRIC
                HOLDINGS, INC. AND SUBSIDIARIES****CONDENSED
                CONSOLIDATED BALANCE
                SHEETS**




**SEPTEMBER
                30,**
              **2007**
            
            
            **DECEMBER
                31,**
              **2006****ASSETS**
            
            
            (UNAUDITED)
            
            
            (NOTE
                1)**CURRENT
                ASSETS:**Cash
            
            $
            8,869
            
            $
            13,437Trade
                accounts receivable, net
            
            
            2,163,699
            
            
            2,149,680Prepaid
                expenses and other current assets
            
            
            22,183
            
            
            5,110Total
                current assets
            
            
            2,194,751
            
            
            2,168,227Property
                and equipment, net
            
            
            217,958
            
            
            197,215Goodwill
            
            
            10,585,000
            
            
            13,982,451Other
                intangibles, net
            
            
            714,691
            
            
            879,702Other
                assets
            
            
            22,924
            
            
            55,028**TOTAL
                ASSETS**
            
            $
            13,735,324
            
            $
            17,282,623**LIABILITIES
                AND STOCKHOLDERS' EQUITY****CURRENT
                LIABILITIES:**Convertible
                debentures, net of unamortized discounts
            
            $
            150,000
            
            $
            685,168Notes
                payable to officer, net of unamortized discounts
            
            
            
            
            
            150,000Short
                term borrowings
            
            
            470,000Accounts
                payable and accrued liabilities
            
            
            4,100,338
            
            
            3,747,809Accrued
                compensation
            
            
            382,936
            
            
            338,283Deferred
                revenues and customer advances
            
            
            689,821
            
            
            -Revolving
                note, net of unamortized discount
            
            
            973,556
            
            
            1,014,249Total
                current liabilities
            
            
            6,766,651
            
            
            5,935,509Convertible
                note, net of unamortized discount
            
            
            817,060
            
            
            443,430Total
                liabilities
            
            
            7,583,711
            
            
            6,378,939**COMMITMENTS
                AND CONTINGENCIES****STOCKHOLDERS'
                EQUITY :**Common
                Stock, $.001 par value, authorized shares 200,000,000,
                96,053,044
              and
                75,023,883 shares issued and outstanding, respectively
            
            
            96,053
            
            
            75,024Additional
                paid-in capital
            
            
            37,797,055
            
            
            36,201,479Accumulated
                deficit
            
            
            (31,741,495
            )
            
            (25,372,819
            )Total
                stockholders' equity
            
            
            6,151,613
            
            
            10,903,684**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            13,735,324
            
            $
            17,282,623The
                accompanying notes should be read in conjunction with the condensed
                consolidated financial statements.




1




**NETFABRIC
                  HOLDINGS, INC. AND SUBSIDIARIES****UNAUDITED
                  CONDENSED CONSOLIDATED STATEMENT OF
                  OPERATIONS**
  **THREE
                    MONTHS****ENDED**
              
              
              **THREE
                    MONTHS****ENDED**
              
              
              **NINE
                    MONTHS****ENDED**
              
              
              **NINE
                    MONTHS****ENDED****September
                  30, 2007**
              
              
              **September
                  30, 2006**
              
              
              **September
                  30, 2007**
              
              
              **September
                  30, 2006****Revenues**
              
              $
              3,636,721
              
              $
              4,553,403
              
              $
              12,016,185
              
              $
              12,951,807**OPERATING
                  EXPENSES:**Direct
                  employee compensation andconsultant
                  expenses (includes share based compensationof
                  $11,396, $11,396, $34,188 and $11,396)
              
              
              2,788,865
              
              
              3,500,839
              
              
              9,272,344
              
              
              9,695,997Selling,
                  general and administrative expenses (includesshare
                  based compensation of $83,237 and $190,778, $337,076 and $432,796
                  )
              
              
              1,070,006
              
              
              1,438,123
              
              
              3,978,922
              
              
              4,513,821Non-cash
                  charge for dispute settlements
              
              
              
              
              
              
              
              
              
              
              
              9,492,070Non-cash
                  goodwill impairment
              
              
              -
              
              
              
              
              
              3,397,451In
                  process research and development
              
              
              
              
              
              1,200,000
              
              
              
              
              
              1,200,000Depreciation
                  and amortization
              
              
              153,466
              
              
              81,367
              
              
              351,229
              
              
              223,794Total
                  operating expenses
              
              
              4,012,337
              
              
              6,220,329
              
              
              16,999,946
              
              
              25,125,682Loss
                  from operations
              
              
              (375,616
              )
              
              (1,666,926
              )
              
              (4,983,761
              )
              
              (12,173,875
              )**OTHER
                  INCOME / (EXPENSE):**Amortization
                  of debt discounts and debtissuance
                  costs
              
              
              (182,799
              )
              
              (364,144
              )
              
              (552,272
              )
              
              (2,600,572
              )Interest
                  and bank charges
              
              
              (78,359
              )
              
              (60,901
              )
              
              (240,202
              )
              
              (228,809
              )Gain/(charge)
                  on derivative financial instruments
              
              
              
              
              
              
              
              
              
              
              
              336,352Debt
                  extinguishment costs
              
              
              (539,043
              )
              
              (27,104
              )
              
              (539,043
              )
              
              (1,773,181
              )Total
                  other income / (expense)
              
              
              (800,201
              )
              
              (452,149
              )
              
              (1,331,517
              )
              
              (4,266,210
              )Loss
                  before provision for income taxes
              
              
              (1,175,817
              )
              
              (2,119,075
              )
              
              (6,315,278
              )
              
              (16,440,085
              )Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -**LOSS
                  FROM CONTINUING OPERATIONS**
              
              
              (1,175,817
              )
              
              (2,119,075
              )
              
              (6,315,278
              )
              
              (16,440,085
              )**DISCONTINUED
                  OPERATIONS:**Loss
                  from operations of discontinued operations
              
              
              
              
              
              
              
              
              (53,398
              )
              
              (474,411
              )**NET
                  LOSS**
              
              $
              (1,175,817
              )
              $
              (2,119,075
              )
              $
              (6,368,676
              )
              $
              (16,914,496
              )Net
                  loss from continuing operationsper
                  common share, basic and diluted
              
              $
              (0.01
              )
              $
              (0.03
              )
              
              (0.08
              )
              $
              (0.25
              )Net
                  loss from discontinued operationsper
                  common share, basic and diluted
              
              
              -
              
              
              -
              
              
              -
              
              $
              (0.01
              )Net
                  loss per common share, basic anddiluted
              
              $
              (0.01
              )
              $
              (0.03
              )
              
              (0.08
              )
              $
              (0.26
              )Weighted
                  average number of sharesoutstanding,
                  basic and diluted
              
              
              91,148,533
              
              
              70,601,600
              
              
              80,763,179
              
              
              65,749,547The
                  accompanying notes should be read in conjunction with the condensed
                  consolidated financial
                  statements.




2




**NETFABRIC
                  HOLDINGS, INC. AND SUBSIDIARIES****UNAUDITED
                  CONDENSED CONSOLIDATED****STATEMENT
                  OF CASH FLOWS****OPERATING
                ACTIVITIES**
              
              
              NINE
                  MONTHS
                ENDED
                September 30,
                  2007
              
              
              NINE
                  MONTHS
                ENDED
                September
                  30, 2006Net
                  loss
              
              
              (6,368,676
              )
              
              (16,914,496
              )Loss
                  from discontinued operations
              
              
              53,398
              
              
              474,411Adjustments
                  to reconcile net loss to net cash provided by (used in)
                  operatingactivities:Non-cash
                  charge for interest expense
              
              
              
              
              
              22,500Non-cash
                  charge for settlement of disputes
              
              
              
              
              
              9,492,070Non-cash
                  charge for reissuance of warrants in connection withdebt
                  extinguishment
              
              
              
              
              
              372,353Common
                  stock, options and warrants issued for services
              
              
              77,600
              
              
              105,503Non-cash
                  charge for employee share based compensation
              
              
              293,664
              
              
              338,689Non-cash
                  charge on debt extinguishment
              
              
              539,043
              
              
              1,152,104Non-cash
                  gain on derivative financial instrument
              
              
              
              
              
              (336,352
              )Non-cash
                  charge for in process research and development
              
              
              
              
              
              1,200,000Amortization
                  of debt discounts
              
              
              552,272
              
              
              2,600,572Non-cash
                  goodwill impairment
              
              
              3,397,451Depreciation
                  and amortization
              
              
              351,229
              
              
              223,794Changes
                  in operating assets and liabilities:Trade
                  accounts receivable
              
              
              (14,019
              )
              
              (239,518
              )Prepaid
                  expenses and other current assets
              
              
              (17,073
              )
              
              (84,046
              )Other
                  assets
              
              
              31,502Accounts
                  payable and accrued liabilities
              
              
              372,062
              
              
              424,761Accrued
                  compensation
              
              
              44,653
              
              
              (8,353
              )Deferred
                  revenues and advances
              
              
              689,821
              
              
              563,838Net
                  cash provided by continuing operations
              
              
              2,927
              
              
              (612,170
              )Net
                  cash used in discontinued operations
              
              
              (53,398
              )
              
              (454,344
              )Net
                  cash used in operating activities
              
              
              (50,471
              )
              
              (1,066,514
              )**INVESTING
                  ACTIVITIES**Net
                  cash acquired in technology licensing transaction
              
              
              
              
              
              450,000Purchases
                  of property and equipment
              
              
              (95,010
              )
              
              (98,471
              )Net
                  cash (used in) provided by investing activities
              
              
              (95,010
              )
              
              351,529**FINANCING
                  ACTIVITIES**Proceed
                  from a private sale of common stock
              
              
              450,000Proceeds
                  from sale of debentures
              
              
              200,000Repayment
                  of debentures
              
              
              (200,000
              )Short
                  term borrowings
              
              
              570,000Repayment
                  of short term borrowings
              
              
              (100,000
              )Repayment
                  of loans from officer and director
              
              
              
              
              
              (170,000
              )Repayment
                  of note to officer
              
              
              
              
              
              (200,000
              )Proceeds
                  of convertible debentures
              
              
              
              
              
              650,000Repayment
                  of convertible debentures
              
              
              (500,000
              )
              
              (100,000
              )Repayment
                  of bridge loans
              
              
              
              
              
              (500,000
              )Proceeds
                  from issuance (repayment) of revolving note, net
              
              
              (167,087
              )
              
              1,336,407Proceeds
                  from issuance of convertible note, net
              
              
              
              
              
              1,430,500Debt
                  issuance costs
              
              
              (112,000
              )
              
              (20,697
              )Repayment
                  of convertible debenture
              
              
              
              
              
              (1,658,160
              )Net
                  cash (used in ) provided by financing activities
              
              
              140,913
              
              
              768,050**Net
                  increase in cash**
              
              
              (4,568
              )
              
              53,065**Cash
                  at beginning of period**
              
              
              13,437
              
              
              9,540**Cash
                  at end of period**
              
              $
              8,869
              
              $
              62,605**Supplemental
                  cash flow information:**Cash
                  paid for interest expense
              
              $
              252,000
              
              $
              182,000Cash
                  paid for income taxes
              
              $
              -
              
              $
              -The
                  accompanying notes should be read in conjunction with the condensed
                  consolidated financial
                  statements.






3




**NETFABRIC
      HOLDINGS INC. AND SUBSIDIARIES**




**NOTES
      TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      1. NATURE OF BUSINESS AND MANAGEMENT'S PLANS**




NetFabric
      Holdings, Inc. ("Holdings" or the "Company") (formerly known as Houston
      Operating Company) was incorporated under the laws of the State of Delaware
      on
      August 31, 1989. On December 9, 2004, Holdings entered into an exchange
      agreement (the "Acquisition Agreement" or "Share Exchange") with all of the
      stockholders of NetFabric Corporation, a Delaware corporation ("NetFabric")
      whereby Holdings acquired all of the issued and outstanding capital stock of
      NetFabric and NetFabric became a wholly-owned subsidiary of Holdings. Upon
      completion of the merger, the NetFabric stockholders controlled approximately
      95% of the then issued and outstanding stock. NetFabric's business activities
      were the activities of the merged company and Holdings was a shell corporation
      without any operations. As a result of these factors, this transaction was
      treated as a reverse merger for financial reporting purposes.




NetFabric
      was incorporated on December 17, 2002 and began operations in July 2003.
      NetFabric developed and marketed Voice over Internet Protocol ("VoIP")
      appliances that simplified the integration of standard telephone systems with
      an
      IP infrastructure. On May 5, 2006, the Company announced its decision to exit
      from the hardware-based VoIP communications product line (including resale
      of
      transport services) that is targeted at small to mid-sized businesses ("SMBs").
      In accordance with Statement of Financial Accounting Standards No. 144
      "Accounting for the Impairment or Disposal of Long-Lived Assets", ("SFAS No.
      144"), the Company has presented the results of operations from its VoIP
      business segment as “discontinued operations” in the accompanying consolidated
      balance sheets, statements of operations and statements of cash flows (Note
      3).




On
      May
      20, 2005, Holdings entered into and closed on a share exchange agreement
      ("Exchange Agreement"), whereby Holdings acquired all of the issued and
      outstanding shares of UCA Services, Inc., a New Jersey company ("UCA Services")
      , from its shareholders in exchange for the issuance of 24,096,154 shares of
      common stock of Holdings (see Note 8). Holdings emerged from the development
      stage upon the acquisition of UCA Services. In May 2007, UCA Services changed
      its legal name to NetFabric Technologies, Inc.




UCA
      Services is an information technology ("IT") services company that serves the
      information and communications needs of a wide range of Fortune 500 and SMB
      clients in the financial markets industry as well as the pharmaceutical, health
      care and hospitality sectors. UCA Services delivers a broad range of IT services
      in the practice areas of infrastructure builds and maintenance, application
      development and maintenance, managed services and professional
      services.




Management's
      plans




The
      accompanying unaudited condensed consolidated financial statements have been
      prepared on a going concern basis. As shown in the accompanying unaudited
      condensed consolidated financial statements, the Company has incurred
      accumulated losses totaling $31,741,495 and has a working capital deficit of
      $4,571,900 at September 30, 2007. These factors, among others, indicate that
      the
      Company may be unable to continue as a going concern. The unaudited condensed
      consolidated financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.







4




**NETFABRIC
      HOLDINGS INC. AND SUBSIDIARIES**


**NOTES
      TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




Management
      recognizes that the Company's continuation as a going concern is dependent
      upon
      its ability to generate sufficient cash flow to allow the Company to continue
      the development of its business plans and satisfy its current and long-term
      obligations on a timely basis. The Company believes that it will be able to
      complete the necessary steps in order to meet its cash requirements throughout
      fiscal year 2007 and continue its business development efforts.




Management's
      plans in this regard include, but are not limited to current discussions and
      negotiations with a number of additional financing alternatives, one or more
      of
      which it believes will be able to successfully close to provide the necessary
      working capital. There is no assurance that the Company will be successful
      in
      completing the financing. To fund the Company's operations for fiscal year
      2007,
      the Company needs to raise additional financing and generate cash flows from
      its
      operations. Should additional cash flows not be available, the Company believes
      that it will have the ability to restructure its operations, and if necessary,
      initiate significant expense reductions. In addition, the Company will have
      to
      negotiate with its lenders to extend the repayment dates of its indebtedness.
      There can be no assurance, however, that the Company will be able to
      successfully restructure its operations or debt obligations in the event that
      it
      fails to obtain additional financing.




**BASIS
      OF PRESENTATION / INTERIM FINANCIAL STATEMENTS**




The
      accompanying unaudited condensed consolidated financial statements have been
      prepared pursuant to the rules and regulations of the Securities and Exchange
      Commission ("SEC"), except for the condensed consolidated balance sheet as
      of
      December 31, 2006, which was derived from audited financial statements. Certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with generally accepted accounting principles in the
      United States of America have been omitted pursuant to such rules and
      regulations. However the Company believes that the disclosures are adequate
      to
      make the information presented not misleading. The financial statements reflect
      all adjustments (consisting only of normal recurring adjustments) that are,
      in
      the opinion of management, necessary for a fair presentation of the Company's
      financial position and results of operations. The operating results for the
      three months ended September 30, 2007 and September 30, 2006 are not necessarily
      indicative of the results to be expected for any other interim period or any
      future year. The accompanying unaudited condensed consolidated financial
      statements should be read in conjunction with the Company's December 31, 2006
      consolidated financial statements, including the notes thereto, which are
      included in the Company's Annual Report on Form 10-KSB for the fiscal year
      ended
      December 31, 2006 filed on April 16, 2007.




**RECLASSIFICATIONS**




Certain
      reclassifications have been made in the prior periods consolidated financial
      statements to conform to the current period’s presentation.




As
      a
      result of the Company's decision to exit the VoIP hardware business, previously
      reported financial statements have been reclassified as discontinued operations
      to conform to the current period presentation.




5




**NETFABRIC
      HOLDINGS INC. AND SUBSIDIARIES**


**NOTES
      TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**ESTIMATES**




The
      preparation of the condensed consolidated financial statements in conformity
      with accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities as of the date of the condensed consolidated financial statements
      and the reported amounts of revenues and expenses during the reporting period.
      The accounting estimates that require management's most difficult and subjective
      judgments include provisions for bad debts, depreciable/amortizable lives,
      impairment of long-lived assets, accounting for goodwill and other intangible
      assets, the fair value of the Company's common stock, the fair value of options
      and warrants issued for services, the allocation of proceeds from certain
      financings to equity instruments and the computation of other reserves. Because
      of the uncertainty inherent in such estimates, actual results may differ from
      these estimates.




**Concentrations
      of Credit Risk**




Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist primarily of cash and cash equivalents and accounts receivable.
      The
      Company reduces its credit risk by placing its cash and cash equivalents with
      major financial institutions with high credit ratings. At times, such amounts
      may exceed Federally insured limits. The Company reduces its credit risk related
      to accounts receivable by routinely assessing the financial strength of its
      customers and maintaining an appropriate allowance for doubtful
      accounts.




The
      Company's services have been provided primarily to a limited number of clients
      located in a variety of industries. The Company had revenues from four clients
      representing a total of 66% (40%, 9% , 9% and 8%, respectively) of revenues
      during the three months ended September 2007. The Company had revenues from
      four
      clients representing a total of 63% (37%, 9%, 9% and 8%, respectively) of
      revenues during the nine months ended September 30, 2007.




The
      Company generally does not require its clients to provide collateral.
      Additionally, the Company is subject to a concentration of credit risk with
      respect to its accounts receivable. The Company had one client that accounted
      for 38% of total gross accounts receivable as of September 30,
      2007.




**Income
      Taxes**





Effective
      January 1, 2007, the Company adopted FIN No. 48 (“FIN 48”), Accounting for
      Uncertainty in Income Taxes. FIN48 prescribes a more-likely-than-not threshold
      for financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. This interpretation also provides guidance
      on derecognition of income tax assets and liabilities, classification of current
      and deferred income tax assets and liabilities, accounting for interest and
      penalties associated with tax positions, accounting for income taxes in interim
      periods and income tax disclosures.




As
      a
      result of the implementation of FIN 48, the Company performed a review of its
      portfolio of uncertain tax positions in accordance with recognition standards
      established by FIN 48. In this regard, an uncertain tax position represents
      the Company’s expected treatment of a tax position taken in a filed tax return,
      or planned to be taken in a future tax return, that has not been reflected
      in
      measuring income tax expense for financial reporting purposes. Based on its
      review, the Company concluded that there are no significant unrecognized tax
      positions requiring recognition in the Company’s financial statements. The
      Company does not believe there will be any material changes in our unrecognized
      tax positions over the next 12 months.




6




**NETFABRIC
      HOLDINGS INC. AND SUBSIDIARIES**


**NOTES
      TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




The
      Company files federal income tax returns, as well as multiple state, local
      and
      foreign jurisdiction tax returns. The income tax returns are subject to
      examinations by tax authorities. A number of years may elapse before our tax
      positions are audited and finally resolved. While it is often difficult to
      predict the final outcome or the timing of resolution of any particular
      uncertain tax position, the Company believes its reserves for income taxes
      reflect the most probable outcome. The Company adjusts these reserves, as well
      as the related interest, in light of changing facts and circumstances. The
      resolution of a matter would be recognized as an adjustment to its provision
      for
      income taxes in the period of resolution.




The
      Company’s policy is to recognize interest and penalties accrued as a component
      of income tax expense. As of the date of adoption of FIN 48, the Company did
      not
      have any penalties or tax-related interest, and there was no tax- related
      interest or penalties recognized during the three month and nine months ended
      September 30, 2007.





**Earnings
      (Loss) Per Share**




The
      Company calculates earnings (loss) per share in accordance with SFAS No. 128,
      "Earnings per Share" (“SFAS No. 128”). SFAS No. 128 computes basic earnings
      (loss) per share by dividing the net income (loss) by the weighted average
      number of shares of common stock outstanding during the period. Diluted earnings
      (loss) per share is computed by dividing the net income (loss) by the weighted
      average number of shares of common stock outstanding during the period plus
      the
      effects of any dilutive securities.




Diluted
      earnings (loss) per share considers the impact of potentially dilutive
      securities except in periods in which there is a loss because the inclusion
      of
      the potential common shares would have an anti-dilutive effect. The Company's
      potentially dilutive securities include common shares which may be issued upon
      exercise of its stock options, exercise of warrants or conversion of convertible
      debt.




Diluted
      loss per share for the three and nine months ended September 30, 2007 and 2006
      exclude potentially issuable common shares of approximately 14,353,856 and
      20,431,124, respectively, primarily related to the Company's outstanding stock
      options, warrants and convertible debt, because the assumed issuance of such
      potential common shares is antidilutive.




**Recent
      Accounting Pronouncements**




In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," (“SFAS
      No. 157”), which defines fair value, establishes a framework for using fair
      value to measure assets and liabilities, and expands disclosures about fair
      value measurements. SFAS No. 157 applies whenever other statements require
      or
      permit assets or liabilities to be measured at fair value. SFAS No. 157 is
      effective for fiscal years beginning after November 15, 2007. We are currently
      evaluating the impact SFAS No. 157 will have on our consolidated financial
      statements.




7




**NETFABRIC
      HOLDINGS INC. AND SUBSIDIARIES**




**NOTES
      TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





In
      February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
      Financial Assets and Financial Liabilities. (“FAS 159”) is effective for fiscal
      years beginning after November 15, 2007. Early adoption is permitted subject
      to
      specific requirements outlined in FAS 159. Therefore, calendar-year companies
      may be able to adopt FAS 159 for their first quarter 2007 financial
      statements.




FAS
      159
      allows entities to choose, at specified election dates, to measure eligible
      financial assets and liabilities at fair value that are not otherwise required
      to be measured at fair value. If a company elects the fair value option for
      an
      eligible item, changes in that item's fair value in subsequent reporting periods
      must be recognized in current earnings. FAS 159 also establishes presentation
      and disclosure requirements designed to draw comparisons between entities that
      elect different measurement attributes for similar assets and liabilities.
      Management is currently evaluating the effect of this pronouncement on financial
      statements.




**NOTE
      2. DISCONTINUED OPERATIONS**




On
      May 5,
      2006, the Company announced its decision to exit from the hardware-based VoIP
      communications product line (including resale of transport services) that is
      targeted at SMBs. In accordance with SFAS No. 144 "Accounting for the Impairment
      or Disposal of Long-Lived Assets", ("SFAS No. 144"), the Company recorded loss
      from discontinued operations of $0 and $53,398, respectively, for the three
      and
      nine months ended September 30, 2007. The Company has reclassified prior period
      results to conform with the current period presentation. Accordingly, $ 0 and
      $474,411 for the three and nine months ended September 30, 2006, have been
      classified as loss from discontinued operations. Revenues from VoIP operations
      have been nominal in all periods presented and operating expenses are the losses
      reported.





**NOTE
      3. IMPAIRMENT OF GOODWILL**





Goodwill
      represents the Company’s allocation of the cost to acquire UCA Services in
      excess of the fair value of net assets acquired. The purchase price and its
      allocation, to reflect the fair values of identifiable assets acquired and
      liabilities assumed, have been based on management’s evaluation and an
      independent valuation.





Pursuant
      to SFAS No. 142 “Goodwill and Other Intangibles Assets,” (“SFAS No. 142”), the
      Company performed its annual testing of goodwill impairment in the second
      quarter of 2007. As a part of goodwill impairment testing, management reviewed
      various factors, such as the market price of the Company’s common stock,
      discounted cash flows from projected earnings and values of comparable companies
      to determine whether impairment exists. Based on this evaluation it was
      determined that the goodwill was impaired.   The impairment was due to a
      continued decline in the Company’s market capitalization during
      the past year, and due to lower future cash flows expected to be generated
      by the business due to working capital constraints. The implied value of the
      goodwill was $10,585,000 compared to a carrying value of $13,982,451, indicating
      an impairment of $3,397,451. The impairment loss was charged to operations
      during the nine months ended September 30, 2007.




8





**NETFABRIC
      HOLDINGS INC. AND SUBSIDIARIES**




**NOTES
      TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      4. DEBT FINANCINGS**


Debt Financings consist of the following as of September 30, 2007 and December
      31, 2006:


2007UnamortizeddebtPrincipal
              
              
              Discount
              
              
              Net2006
                  Convertible Debenture, due in December 2007
              
              $
              150,000
              
              
              
              
              $
              150,000Short
                  term borrowing, due at various dates between October 2007 and December
                  2007
              
              
              470,000
              
              
              
              
              
              470,000Laurus
                  Revolving Note Due in February 2009
              
              
              1,320,265
              
              
              (346,709
              )
              
              973,556Laurus
                  Convertible Note Due in February 2009
              
              
              1,500,000
              
              
              (682,940
              )
              
              817,060$
              3,440,265
              
              
              ($1,029,649
              )
              $
              2,410,616




2006UnamortizeddebtPrincipal
              
              
              Discount
              
              
              Net2006
                  Convertible Debentures, due at various datesbetween
                  December 2006 and April 2007
              
              $
              700,000
              
              $
              (14,832
              )
              $
              685,168Convertible
                  Debenture payable to stockholder due in April 2007
              
              
              150,000
              
              
              
              
              
              150,000Laurus
                  Revolving Note Due in February 2009
              
              
              1,487,353
              
              
              (473,104
              )
              
              1,014,249Laurus
                  Convertible Note Due in February 2009
              
              
              1,500,000
              
              
              (1,056,570
              )
              
              443,430$
              3,837,353
              
              $
              (1,544,506
              )
              $
              2,292,847
  In
        January and February of 2007, the Company repaid five of the seven 2006
        Convertible Debentures in the aggregate face amount of $500,000. In December
        2006, the Company and the holders of the Convertible Debentures agreed to
        extend
        the term of two of 2006 Convertible Debentures in the face amount of $200,000
        to
        April 30, 2007. In April 2007, the Company and the holders of the Convertible
        Debentures agreed to extend the term of two of 2006 Convertible Debentures
        in
        the face amount of $200,000 to August 31, 2007. In August 2007, the Company
        and
        the officer who is the holder of the 2006 Convertible Debentures in the amount
        of $150,000 agreed to extend the term to December 2007 and $50,000 of the
        2006
        Convertible Debentures was converted as fully explained later in this note
        .





In
      April
      2007, the Company sold Debentures (the "Debentures") in the face amount of
      $200,000 to an individual. The Debentures bear interest at 8% and is due on
      July
      12, 2007. In connection with the sale, the Company issued warrants to acquire
      an
      aggregate of 500,000 shares of its common stock with a nominal exercise price.
      The warrants expire in three years from the date of issuance. The Company
      allocated the $200,000 of proceeds received based on the computed relative
      fair
      value of debt and warrants. The warrants were valued using a Black-Scholes
      option-pricing model, which resulted in a fair value of $46,026 and a relative
      fair value of $37,415. The relative fair value of the warrants of $37,415 was
      recorded to additional paid in capital and the resulting debt discount was
      amortized over the term of the Debentures. The Company paid financing costs
      of
      $20,000 to third parties and this amount was included as debt issuance costs
      in
      other assets and amortized over the term of the Debentures. In July 2007, the
      Company repaid the Debentures.





In
      August
      2007, the Company entered into an Agreement to Convert (the “Agreement”) with
      Fred Nazem, a stockholder. Pursuant to this Agreement, the stockholder agreed
      to
      convert $218,882 due to him in outstanding convertible debentures and accrued
      interest of $18,882 into 5,472,050 shares of common stock, which includes
      4,900,394 shares as an inducement for conversion. The fair value of the
      inducement to convert approximated $539,000 and was charged to operations in
      the
      three months ended September 30, 2007 as debt extinguishment costs.




During
      the nine months ended September 30, 2007, the Company borrowed an aggregate
      o f
      $570,000 from three individuals and repaid $100,000 of that prior to September
      30, 2007. The amount outstanding as of September 30, 2007 is $470,000 and is
      due
      at various dates between October 2007 and December 2007. In October 2007, the
      Company repaid $200,000. The borrowings are unsecured and bear nominal interest.
      The Company paid financing costs of $92,000 to third parties and this amount
      is
      being amortized over the term of the borrowings.





**NOTE
      5. STOCKHOLDERS' EQUITY**


**COMMON
      STOCK**




During
      the nine months ended September 30, 2007, the Company entered into a placement
      agency agreement with an unaffiliated entity and a consulting agreement with
      an
      unaffiliated individual. Pursuant to the agreements, the Company issued an
      aggregate of 640,000 shares of its common stock. The fair value of the shares
      was $77,600 and was charged to operations as a consulting expense during the
      nine months ended September 30, 2007.




In
      July
      2007, the Company sold an aggregate of 11,250,000 shares of the Company’s common
      stock, par value $0.01 (the “Common Stock”) to four investors, for an aggregate
      purchase price of $450,000, including $100,000 from Fred Nazem, a stockholder
      of
      the Company.





In
      July
      and August 2007, Laurus Master Fund, Ltd. (“Laurus”) exercised 3,702,268 of its
      warrants on a cashless basis, and Laurus was issued 3,667,111 shares of the
      Company’s common stock.




9





**NETFABRIC
      HOLDINGS INC. AND SUBSIDIARIES**




**NOTES
      TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**Warrants**




Outstanding
      warrant securities consist of the following at September 30,
      2007:


Warrants
                
                Exercise
                  Price
                
                ExpirationLaurus
                
                
                554,282
                
                $
                0.001
                
                
                See
                    note (1
                )Macrocom
                
                
                1,000,000
                
                $
                1.50
                
                
                July
                    2008Cornell
                    Warrants
                
                
                560,000
                
                $
                0.40
                
                
                October
                    20082006
                    Convertible Debenture and 2007 Debenture Financing
                
                
                1,850,000
                
                $
                0.01
                
                
                April
                    2009 to April 2010Others
                    including officer,director
                    and stockholder
                
                
                1,966,137
                
                $
                0.15
                    to $0.82
                
                
                December
                    2008 to June 20115,930,419




(1)
      No
      expiration.




**NOTE
      6. STOCK-BASED COMPENSATION**




Share-based
      compensation expense recognized under SFAS 123(R) for the three months and
      nine
      months ended September 30, 2007 was $94,633 and $293,664, respectively.
      Share-based compensation expense recognized under SFAS 123(R) for the three
      months and nine months ended September 30, 2006 was $157,008 and $338,689,
      respectively. Share-based compensation expense recognized in the Company's
      condensed consolidated statements of operations includes compensation expense
      for share-based payment awards granted prior to, but not yet vested as of
      December 31, 2005, based on the grant-date fair value estimated in accordance
      with the provisions of SFAS 123.







**NOTE
      7. RELATED PARTY TRANSACTIONS**




As
      of
      September 30, 2007, the Company had Convertible Debentures payable to an officer
      and director in the aggregate face amount of $150,000.




The
      Company subleased certain office space and incurred occupancy related costs
      under an agreement with UCA Global, Inc. ("Global"), an entity affiliated with
      a
      shareholder of the Company, whereby the Company paid rent and other occupancy
      costs based on the proportion of square footage occupied by the Company in
      Global's office facility. Rent and occupancy expenses incurred by the Company
      under this agreement, which commenced on May 20, 2005, during the nine months
      ended September 30, 2007 was $63,750, ($95,625 for the nine months ended
      September 30, 2006) and is included in selling, general and administrative
      expense on the accompanying statements of operations. The Company terminated
      the
      sublease arrangement effective June 2007 and has moved into a new office
      location.




10




**NETFABRIC
      HOLDINGS INC. AND SUBSIDIARIES**




**NOTES
      TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




In
      the
      normal course of business, the Company performed services for an entity
      affiliated with the Company' stockholders, in the amount of $ 0 and $71,000
      ,
      respectively during the nine months ended September 30, 2007 and 2006. As of
      September 30, 2007 approximately $235,000 was owed to the Company, including
      amounts owed to UCA Services prior to the acquisition and a full allowance
      is
      provided due to uncertainty of the recovery of the amount.





**NOTE
      8. TECHNOLOGY LICENSE ACQUISITION**




On
      August
      11, 2006, the Company entered into an agreement with Utek Corporation ("Utek"),
      an unaffiliated specialty finance company focused on technology transfers,
      to
      acquire a technology license for intrusion detection software developed by
      a
      university. To facilitate the transfer of technology; Utek formed a subsidiary,
      Intrusion Detection Technologies, Inc. ("IDTI"). IDTI did not have any business
      operations and its assets consisted of cash and a license agreement with a
      university for intrusion detection software by the university. The Company
      acquired all of the outstanding shares of IDTI from Utek for consideration
      of
      7,500,000 shares of the Company's common stock, including 375,000 shares
      assigned by Utek to its consultant. In addition, the Company had a consultant
      for the transaction to whom it paid $50,000 in cash and issued 750,000 shares
      of
      its common stock. The term of the license agreement is until the later of 15
      years from the date of filing of the licensed patents or the expiration of
      the
      last patent.




The
      university requires a royalty in the amount of five percent of net sales of
      the
      licensed products. In the university requires certain minimum royalty payments
      from 2009 onwards.




On
      September 30, 2006, the Company determined the purchase price at $1,200,000
      based on the estimated fair value of common stock issued of $1,650,00, net
      of
      cash acquired was allocated to the license agreement . Subsequently at December
      31, 2006, the Company revised the purchase price. Pursuant to accepted valuation
      methodologies, the Company valued the transaction at $660,000, including related
      expense. Net of cash acquired ($500,000 prior to related expense); $160,000
      was
      allocated to the licensing agreement. The cash paid to the consultant and the
      fair value of the shares issued to the consultant approximated $200,000, and
      was
      charged to selling general and administrative expenses during the year ended
      December 31, 2006. The Company anticipates further development and testing
      of
      the technology. Because of the uncertainties surrounding the ultimate commercial
      deployment of the technology and due to the technology not having alternative
      use, the Company charged the cost of the license agreement as in process
      research and development costs during the year ended December 31,
      2006.







**NOTE
      9. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
      ACTIVITIES**




For
                the Nine Monthsended
                September 30,2007
            
            
            2006Discount
                on revolving note relating to warrants
            
            
            
            
            $
            513,820Discount
                on convertible note relating to warrants
            
            
            
            
            $
            918,923Discount
                on convertible debt relating to beneficial conversion
                feature
            
            
            
            
            $
            511,577Issuance
                of common shares in connection with settlement of
                payables
            
            
            
            
            
            35,000Discount
                on April 2006 Convertible debentures related to common
                stock
            
            
            
            
            $
            251,379Discount
                on April 2006 Convertible Debentures related to beneficial conversion
                feature
            
            
            
            
            $
            322,755Discount
                on April 2006 Convertible Debentures related to warrants
            
            
            
            
            $
            206,647Discount
                on April 2007 Debenture related to warrants
            
            $
            37,519Amortization
                of debt discounts
            
            $
            552,272
            
            $
            2,600,572Settlement
                on bridge loan with common stock
            
            
            
            
            $
            500,000Common
                stock issued for technology licensing acquisition
            
            
            
            
            $
            1,650,000Conversion
                on Convertible debenture issued to stockholder with common
                stock
            
            $
            200,000
            
            $
            130,000





**NOTE
      10. SUBSEQUENT EVENTS**




In
      October 2007, the Company sold Debentures (the "Debentures") in the face amount
      of $200,000 to an individual. The Debentures bear interest at 8% and is due
      on
      January 18, 2008. In connection with the sale, the Company issued warrants
      to
      acquire an aggregate of 300,000 shares of its common stock with a nominal
      exercise price. The warrants expire in three years from the date of
      issuance.




The
      Company’s agreement with Laurus Master Fund, Ltd. (“Laurus”) had an over advance
      feature for $1,000,000 that expired on July 31, 2007. On October the Company
      and
      Laurus entered into an extensions agreement (the “Extension Agreement’). The
      Extension Agreement provides for the extension of the over advance feature
      until
      February 2009 .However, the over advance amount will reduce by $5,000 each
      month
      from November 2007 to February 2008 and by $50,000 each month from March of
      2008.




11




**ITEM
      2.**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**




The
      following discussion and analysis and results of operations should be read
      in
      conjunction with the unaudited condensed consolidated financial statements
      and
      accompanying notes and the other financial information appearing elsewhere
      in
      this report and reports included herein by reference. The following discussion
      contains forward-looking statements that reflect our plans, estimates and
      beliefs. Our actual results could differ materially from those discussed in
      the
      forward-looking statements.




Our
      independent registered public accounting firm has indicated in their report,
      dated April 13, 2007, on our December 31, 2006 financial statements since we
      have experienced net losses since inception and have a working capital
      deficiency their report indicates that these matters raise substantial doubt
      about our ability to continue as a going concern. Our plan with regard to this
      matter is discussed elsewhere in this document. The consolidated financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.




**CORPORATE
      HISTORY**




We
      were
      formerly known as Houston Operating Company and were incorporated in Delaware
      on
      August 31, 1989. On December 9, 2004, we entered into an Acquisition Agreement
      with all of the stockholders of NetFabric Corp., a Delaware corporation.
      NetFabric Corp. was incorporated in Delaware on December 17, 2002 and began
      operations in July 2003. At the closing, which occurred simultaneously with
      the
      execution of the Acquisition Agreement, we acquired all of the issued and
      outstanding capital stock of NetFabric Corp. from the stockholders in exchange
      for an aggregate of 32,137,032 newly-issued shares of our common stock. The
      acquisition was accounted for as a reverse merger whereby NetFabric Corp. was
      treated as the acquirer. On April 19, 2005, our name was changed from Houston
      Operating Company to NetFabric Holdings, Inc. and our stock symbol was changed
      from "HOOC" to "NFBH."




**UCA
      SERVICES, INC. ACQUISITION**




On
      May
      20, 2005, we entered into and closed on a share exchange agreement, whereby
      we
      purchased all of the issued and outstanding shares of UCA Services, Inc., a
      New
      Jersey company (“UCA Services”) from its shareholders in exchange for the
      issuance of 24,096,154 shares of our common stock. UCA Services is an IT
      services and solutions company that serves the information needs of a wide
      range
      of Fortune 500 clients in the financial markets industry and the pharmaceutical,
      health care and hospitality sectors. UCA Services delivers a broad range of
      IT
      services in managed services, professional services, infrastructure building
      and
      maintenance, application development and maintenance areas. The acquisition
      was
      accounted for using the purchase method of accounting with UCA Service’s results
      of operations included in our consolidated financial statements from the date
      of
      acquisition.




**DISCONTINUED
      OPERATIONS**




Prior
      to
      acquiring NetFabric Corp., Houston Operating Company did not have any
      operations, and we were a shell company whose primary business objective was
      to
      merge and become public.





12




NetFabric
      Corp. was a provider of hardware and services to small to mid-sized businesses
      ("SMBs") that utilized the Internet for telephone communications or Voice over
      Internet Protocol ("VoIP"). It developed and marketed appliances or Customer
      Premises Equipment ("CPE") that simplified the integration of standard telephone
      systems with an IP infrastructure. In addition, NetFabric Corp resold transport
      services of a third party VoIP transport provider.




Our
      operations, prior to the UCA Services acquisition, consisted of developing
      VoIP
      appliances, including research and product development activities. We also
      hired
      additional personnel for sales and marketing and developed our sales and
      marketing programs.




With
      minimal revenues from VoIP operations, we concluded that we could not implement
      our original business plan for VoIP operations within our resources or with
      the
      additional capital we could raise in the near term. On May 5, 2006, our Board
      of
      Directors decided that the Company should exit the hardware-based VoIP
      communications product line (including resale of transport services) that is
      targeted to SMBs. In accordance with Statement of Financial Accounting Standards
      (‘SFAS’) No. 144 "Accounting for the Impairment or Disposal of Long-Lived
      Assets", ("SFAS No. 144"), the results of operations from the VoIP business
      segment has been reclassified as discontinued operations for all periods
      presented. After the discontinuation of VoIP operations, our only operations
      are
      that of UCA Services.




**OVERVIEW
      OF UCA SERVICES BUSINESS**




UCA
      Services derives revenues primarily from managed IT services, professional
      services, application development services and business process management
      services. Service arrangements with customers are generally on a time and
      material basis or fixed-price, fixed-timeframe revenue basis. UCA Services
      principal operating expenses are direct employee costs, consultant expenses
      and
      selling, general and administrative expenses. The principal components of
      selling, general and administrative expenses are salaries of sales and support
      personnel, and office rent. Direct employee costs and consultant expenses are
      comprised primarily of the costs of consultant labor, including employees,
      subcontractors and independent contractors, and related employee benefits.
      Approximately 50% of our consultants are employees and the remainder are
      subcontractors and independent contractors.




We
      compensate most of our consultants only for the hours that we bill to our
      clients for projects undertaken, which allows us to better match our labor
      costs
      with our revenue generation. With respect to our consultant employees, we are
      responsible for employment-related taxes, medical and health care costs and
      workers' compensation. Labor costs are sensitive to shifts in the supply and
      demand of IT professionals, as well as increases in the costs of benefits and
      taxes.




13




As
      previously noted, the December 9, 2004 acquisition of NetFabric Corp. was
      accounted for as a reverse merger whereby NetFabric Corp. was treated as the
      acquirer. Accordingly, the historical financial statements of NetFabric Corp.
      have been presented for all periods required. NetFabric Corp. began operations
      in January 2003 and was a development stage company until the UCA Services
      acquisition. The UCA Services acquisition was accounted for using the purchase
      method of accounting with the results of the operations included in the
      Company's consolidated financial statements from the date of
      acquisition.





**COMPARISON
      OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND
      2006:**





Revenues.
      Revenues of the three months ended September 30, 2007, decreased by $916,682
      or
      20.1% compared to the same period of the prior year. For the nine months ended
      September 30, 2007, our revenues decreased by $935,622 or 7.2% compared to
      the
      same period of the prior year. The decreases in revenues were due to non
      replacement or non renewal of certain projects undertaken in 2006.




Direct
      employee compensation and consultant expenses. Excluding non-cash share based
      compensation, for the three months ended September 30, 2007, our direct employee
      compensation and consultant expenses decreased by $711,974 or 20.4% to
      $2,777,469. Excluding non-cash share based compensation, for the nine months
      ended September 30, 2007, our direct employee compensation and consultant
      expenses decreased by $446,445 or 4.6% to $9,238,156. Excluding non-cash share
      based compensation as a percentage of revenues our direct employee compensation
      and consultant expenses for the three and nine months ended September 30, 2007
      were 76.4%, and 76.9%, respectively, compared to 76.6% and 74.8%, respectively,
      for the three and nine months ended September 30, 2006. The increase in employee
      compensation and consultant expenses as a percentage of revenues was due to
      the
      nature of projects performed in 2007.




Selling,
      general and administrative expenses.


Excluding
      non-cash share based compensation, our selling, general and administrative
      expenses decreased for the three months ended September 30, 2007 by $260,576,
      or
      20.9%, to $986,769 compared to 2006. For the nine months ended June 30, 2007,
      our selling and administrative expenses decreased by $439,179 or 10.8% compared
      to the same period of the prior year. During the nine months ended September
      30,
      2007, we incurred approximately $162,000 in expenses ($240,000 including the
      fair value of shares of common stock issued) for an acquisition of an entity
      and
      the related financing. We terminated the acquisition related negotiation in
      April and the entire amount incurred was charged to operations during the three
      months ended March 31, 2007. The decreases in our selling, general and
      administrative expenses for the three months and nine months ended September
      30,
      2007 compared to the same period of prior year were due expense reductions
      implemented in the latter half of 2006 and the third quarter of
      2007.




Depreciation
      and amortization.


For
      three
      months ended September 30, 2007, depreciation and amortization increased by
      $72,099 or 88.6%, to $153,466. For the nine months ended September 30, 2007,
      depreciation and amortization increased by $127,435 or 56.9% to $351,229. The
      increases were due to additional amortization of financing costs incurred for
      short term borrowings in 2007.




Amortization
      of debt discount.


Amortization
      of debt discount for the three months ended September 30, 2007 decreased by
      $181,345, or 49.8%, to $182,799. Amortization of debt discount for the nine
      months ended September 30, 2007 decreased by $2,048,300 or 78.8%. A significant
      amount of amortization of debt discount resulting from the allocation of value
      to certain equity instruments issued in connection with debt were amortized
      in
      2006 and due to repayment of certain underlying debt, amortization of debt
      discount decreased in 2007. As of September 30, 2007, the aggregate unamortized
      debt discount was $1,029,649, which will be amortized and charged to operations
      over the term of the respective debt.




Interest
      expense.


For
      the
      three and nine months ended September 30, 2007, interest expense increased
      by
      $17,458 and $11, 393, respectively. Since borrowing levels and interest rates
      did not change materially there were no material variations in our interest
      expense.




14




Non-cash
      charge for dispute settlement. In January 2006, we entered into a termination
      agreement with a consultant. In connection with the termination, an officer,
      director and stockholder of the Company transferred 1,000,000 shares of our
      common stock owned by him to the consultant. We accounted for the settlement
      as
      an expense in our consolidated financial statements, as a non-cash charge for
      dispute settlements, based on the value of the option of $0.94 per share on
      the
      date of settlement, with a corresponding credit to contributed (paid-in) capital
      from the officer, director and stockholder during the year ended December 31,
      2006. In February 2006, we entered into an amendment agreement with the former
      UCA Services shareholders. Pursuant to the amendment agreement, an officer,
      director and stockholder of the Company transferred 9,000,000 shares of our
      common stock owned by him to the former UCA Services shareholders. Since the
      settlement was not a contingency associated with the acquisition of UCA
      Services, we accounted for the shares transferred by the individual as an
      expense, based on the value of the shares on the settlement date, February
      13,
      2006.





Non-cash
      goodwill impairment. Pursuant to SFAS No. 142 “Goodwill and Other Intangibles
      Assets” (“SFAS No. 142”), we performed our annual testing of goodwill impairment
      in the second quarter of 2007. As a part of goodwill impairment testing,
      management reviewed various factors, such as the market price of our common
      stock, discounted cash flows from projected earnings and values of comparable
      companies to determine whether impairment exists. Based on this evaluation
      it
      was determined that the goodwill was impaired. The impairment was due to a
      continued decline our market capitalization during the past year
      and due to lower future cash flows expected to be generated by us due
      to working capital constraints. The implied value of the goodwill was
      $10,585,000 compared to a carrying value of $13,982,451, indicating an
      impairment of $3,397,451. The impairment loss was charged to operations during
      the three months ended June 30, 2007




Derivative
      Financial Instruments. In July 2005, we entered into an agreement pursuant
      to
      which we sold Cornell Capital Partners ("Cornell") secured convertible
      debentures (the "Cornell Debentures") in the aggregate principal amount of
      $1,000,000. In October 2005, we entered into a securities purchase agreement
      with Cornell whereby both parties agreed to amend and consolidate all of the
      convertible debentures issued to Cornell into one new secured convertible
      debenture in the principal amount of $1,658,160 ("October Convertible
      Debenture"). As a result of the change in the conversion terms of the October
      Convertible Debentures, on October 27, 2005, we determined that the embedded
      conversion feature of the October Cornell Debentures became subject to the
      provisions of SFAS No. 133. Therefore, we accounted for the embedded conversion
      feature as a liability in accordance with the guidance of EITF 00-19,
      "Accounting for Derivative Financial Instruments Indexed to, and Potentially
      Settled in, a Company's Own Stock" ("EITF 00-19"). Accordingly, we recorded
      the
      fair value of the embedded conversion feature of $784,784 as a non-current
      liability on the balance sheet as of October 27, 2005 and a portion of the
      amounts previously recorded to additional paid-in capital as part of the
      Original Cornell Debentures were reclassified from equity to liabilities. For
      the nine months ended September 30, 2006, we recorded a gain in value for
      derivative financial instruments of $336,352 related to the change in fair
      value
      of the embedded conversion feature, which is recorded in the accompanying
      unaudited condensed consolidated statement of operations. For the year ended
      December 31, 2005, we recorded a charge in value for derivative financial
      instruments of $2,131,109 related to the change in fair value of the embedded
      conversion feature. In February 2006, we paid the October Convertible Debenture
      (the "Cornell Repayment") and accordingly, the value of the embedded conversion
      future was reclassified to additional paid-in capital.




Debt
      extinguishment costs.


As
      part
      of the Cornell Repayment, we paid an early redemption charge of 15% of the
      principal amount redeemed or $248,724, which charge is included on the
      accompanying condensed consolidated statement for operations for the six months
      ended June 30, 2006. In connection with the Cornell Repayment, we also agreed
      to
      reduce the exercise price of the 560,000 warrants from $0.50 to $0.40. The
      change in exercise price of the warrants was treated as a new issuance of
      warrants and was valued using the Black Scholes option-pricing model. The
      reduction in exercise price resulted in a fair value of $372,353 for the
      warrants, which was charged to operations for the six months ended June 30,
      2006.





In
      May
      2006, we entered into an agreement with Macrocom Investors LLC (“Macrocom”),
      whereby Macrocom converted a note issued by us in the principal amount of
      $500,000 into one million shares of our common stock. We issued Macrocom one
      million and five hundred thousand shares as additional consideration and the
      fair of value of the additional consideration of $1,1250,000 was charged to
      operations during the three months ended June 30, 2006.





In
      August
      2007, we entered into an Agreement to Convert (“ Agreement”) with Fred Nazem, a
      stockholder. Pursuant to this Agreement, the stockholder agreed to convert
      $218,882 due to him in outstanding convertible debentures and accrued interest
      ($18,882) into 5,472,050 shares of common stock, including 4,900,394 shares
      as
      an inducement for conversion. The fair value of the inducement to convert
      approximated $539,000 and was charged to operations in the three months ended
      September 30, 2007 as debt extinguishment costs.




15




In
      process research and development. On August 11, 2006 we entered into an
      agreement with Utek Corporation ("Utek"), an unaffiliated specialty finance
      company focused on technology transfers, to acquire a technology license for
      intrusion detection software developed by a university. We anticipate further
      development and testing of the technology. Because of the uncertainties
      surrounding the ultimate commercial deployment of the technology and due to
      the
      technology not having an alternative use, we charged the cost of the license
      agreement of $1,200,000 as in process research and development costs during
      the
      three months ended September 30, 2006. Subsequently at December 31, 2006, the
      Company revised the purchase price. Pursuant to accepted valuation
      methodologies, the Company valued the transaction at $660,000, including related
      expense. Net of cash acquired ($500,000 prior to related expense); $160,000
      was
      allocated to the licensing agreement. The cash paid to the consultant and the
      fair value of the shares issued to the consultant approximated $200,000, and
      was
      charged to selling general and administrative expenses during the year ended
      December 31, 2006.





Discontinued
      Operations.


On
      May 5,
      2006, our Board of Directors decided to exit from the hardware-based VoIP
      communications product line (including resale of transport services) that is
      targeted to SMBs. In accordance with SFAS No. 144 "Accounting for the Impairment
      or Disposal of Long-Lived Assets", ("SFAS No. 144"), the results of operations
      from the VoIP business segment has been reclassified as discontinued operations
      for all periods presented. For the three months and nine months ended September
      30, 2007, losses from discontinued operations were $0 and $53,398, respectively.
      For the three and nine months ended September 30, 2006, losses from discontinued
      operations were $0 and $474,411, respectively. Revenues from VoIP operations
      have been nominal in all periods presented and operating expenses are the losses
      reported.




Net
      loss.


As
      a
      result of the foregoing, for the three months ended September 30, 2007, net
      loss
      decreased by $943,258, or 44.5%, to a loss of $1,175,817, compared to a net
      loss
      of $2,119,075 in the three months ended September 30, 2006. For the nine months
      ended September 30, 2007, net loss decreased by $10,545,820 or 62.3% to a loss
      of $6,368,676 compared to a net loss of $16,914,496 in the nine months ended
      September 30, 2006.




**LIQUIDITY
      AND CAPITAL RESOURCES**




As
      of
      September 30, 2007, our working capital deficiency was $4,571,900, compared
      to a
      working capital deficiency of $3,767,282 on December 31, 2006. The increase
      in
      the working capital deficiency was principally due to operating losses. During
      the nine months ended September 30, 2007, our operating activities from
      continuing operations provided approximately $3,000 of cash, compared to
      approximately $612,000 used during the nine months ended September 30,
      2006.




During
      the nine months ended September 30, 2007, our operating losses, after adjusting
      for non-cash items, utilized approximately $1,104,000 of cash, and working
      capital items provided approximately $1,107,000 of cash. The principal component
      of these working capital changes was an increase in our deferred revenues and
      accounts payable. During the nine months ended September 30, 2006, our operating
      losses, after adjusting for non-cash items, utilized approximately $1,269,000
      of
      cash, and working capital items provided approximately $657,000 of
      cash.




In
      February 2006, we repaid $70,000 owed to Fred Nazem, a stockholder of the
      Company, and $200,000 owed to Fahad Syed, an officer and director of the
      Company. Additionally, we repaid $100,000 plus accrued interest to Faisal Syed,
      a stockholder of the Company, in full satisfaction of a promissory note issued
      to him by UCA Services, prior to our acquisition of UCA Services. The promissory
      note bore interest at the rate of 6% and was due, together with accrued but
      unpaid interest in June 2005.




16




In
      February 2006, we along with our subsidiaries, entered into a Security
      Agreement, dated February 10, 2006 ( the "Security Agreement") with Laurus
      Master Fund, Ltd., a Cayman Islands company ("Laurus"). Under the Security
      Agreement, Laurus purchased a Secured Convertible Note (the "Laurus Convertible
      Note"), from the Company with a maturity date of February 10, 2009, in the
      aggregate principal amount of $1,500,000, and a Secured Non-Convertible
      Revolving Note (the "Laurus Revolving Note") in the aggregate principal amount
      of $1,500,000. The Laurus Convertible Note and Laurus Revolving Note are
      collectively referred to as the "Laurus Notes". Availability under the Laurus
      Notes is based on an advance rate equal to 90% of eligible accounts receivable,
      and Laurus has agreed to provide us an over advance for a specified period.
      The
      Laurus Convertible Note has a three-year term, and bears interest at 1% above
      the prime rate, with a minimum interest rate of 8%. Laurus has the option,
      but
      not the obligation, at any time until the maturity date, to convert all or
      any
      portion of the Laurus Convertible Note and accrued interest thereon into shares
      of our common stock at an exercise price of $0.91 per share. If converted in
      full, we would be obligated to issue an aggregate of 1,648,352 shares of our
      common stock to Laurus. We have the option to prepay the Laurus Convertible
      Note
      by paying Laurus the applicable redemption premium. The Laurus Revolving Note
      has a three-year term, and bears interest at 1% above the prime rate, with
      a
      minimum interest rate of 8%.




In
      connection with the borrowing, we issued a common stock purchase option (the
      "Option") to Laurus to purchase up to 4,256,550 shares of our common stock
      for
      nominal consideration. Additionally, we entered into a registration rights
      agreement with Laurus (the "Registration Rights Agreement"), covering the
      registration of common stock underlying the Laurus Convertible Note and the
      Option. Our obligations under the Laurus Notes are secured by first liens on
      all
      of our assets, and Laurus may accelerate all obligations under the Laurus Notes
      upon an event of default.





The
      Company’s agreement with Laurus had an over advance feature for $1,000,000 that
      expired on July 31, 2007. On October the Company and Laurus entered into an
      extensions agreement (the “Extension Agreement’). The Extension Agreement
      provides for the extension of the over advance feature until February 2009
      .However, the over advance amount will reduce by $5,000 each month from November
      2007 to February 2008 and by $50,000 each month from March of 2008.




Our
      initial borrowing was approximately $2,300,000 and we utilized approximately
      $1,900,000 of the initial borrowing to repay all amounts owed to Cornell
      pursuant to the October Convertible Debenture, including a redemption premium.
      At September 30, 2007, our availability and borrowing with Laurus was
      approximately $2,821,000 (face amount).




At
      various dates between April and December of 2006, we sold seven Convertible
      Debentures in the aggregate face amount of $700,000. In January and February
      of
      2007, we repaid five out of the seven 2006 Convertible Debentures in the
      aggregate face amount of $500,000. In December 2006, the Company, and the
      officer director and the stockholder agreed to extend the term of two of the
      2006 Convertible Debentures in the face amount of $200,000 to April 30, 2007.
      In
      April the term was extended to August 31, 2007. In August 2007, we entered
      into
      an agreement with the stockholder to convert an aggregate amount of $200,000
      in
      Convertible Debentures and accrued interest into shares of our common stock.
      See
      Note 4 to the unadudited condensed consolidated financials statements. In August
      the officer and director with $150,000 face amount of Convertible Debentures
      entered into an agreement with us to extend the maturity to December
      2007.





In
      April
      2007, we sold Debentures (the "Debentures") in the face amount of $200,000
      to an
      individual. The Debentures bear interest at 8% and is due on July 12, 2007.
      In
      connection with the sale, the Company issued warrants to acquire an aggregate
      of
      500,000 shares of its common stock at a nominal exercise price. The warrants
      expire in three years from the date of issuance. We repaid the Debenture in
      July
      2007.





In
      order
      to meet our working capital requirements, we borrowed an aggregate of $570,000
      from three individuals during the nine months ended September 30, 2007. We
      repaid $100,000 of the borrowing prior to September 30, 2007. The balance
      amounts are due at various dates between October and December 2007. In October
      2007, we repaid $200,000 of the borrowings.




In
      order
      to execute our business plan and achieve our objectives for the near future,
      management believes it will require approximately $2,000,000 over the next
      12
      months for working capital. A significant amount of this will be used to satisfy
      our obligations, both from borrowing and vendor accounts payable, as they become
      due. Our ability to continue as a going concern and our future success are
      dependent upon our ability to raise capital in the near term to satisfy our
      current obligations. Management's plans in this regard include, but are not
      limited to, current discussions and negotiations with a number of additional
      financing alternatives, one or more of which management believes will be able
      to
      successfully close to provide the necessary working capital. There is no
      assurance that we will be successful in completing the financing. The
      accompanying condensed consolidated financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.




17




To
      fund
      our operations for fiscal year 2007, we need to raise additional financing
      and
      generate cash flows from our operations. Should additional cash flows not be
      available, we believe that we will have the ability to restructure our
      operations, and if necessary, initiate significant expense reductions. In
      addition, we will have to negotiate with our lenders to extend the repayment
      dates of our indebtedness. There can be no assurance, however, that we will
      be
      able to successfully restructure our operations or debt obligations in the
      event
      we fail to obtain additional financing.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




The
      discussion and analysis and plan of operation is based upon our financial
      statements, which have been prepared in accordance with accounting principles
      generally accepted in the United States of America ("GAAP"). The preparation
      of
      these financial statements requires us to make estimates and judgments that
      affect the reported amounts of assets, liabilities, revenues and expenses,
      related disclosure of contingent assets and liabilities. On an ongoing basis,
      we
      evaluate our estimates, including those related to revenue recognition, accounts
      receivable and long-lived assets. We base our estimates on historical experience
      and on various other assumptions that we believe to be reasonable under the
      current circumstances, the results of which form the basis for making judgments
      about the carrying values of assets and liabilities that are not readily
      apparent from other sources. Actual results may differ from these estimates
      under different assumptions or conditions.


We
      believe the following critical accounting policies affect the judgment and
      estimates used in preparation of our condensed consolidated financial
      statements:




**Income
      Taxes and Uncertain Income Tax Positions**




We
      account for income taxes using the asset and liability method. Under this
      method, deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases, and operating loss and tax credit carryforwards. Deferred tax assets
      and
      liabilities are measured using enacted tax rates expected to apply to taxable
      income in the years in which those temporary differences are expected to be
      recovered or settled. The effect on deferred tax assets and liabilities of
      a
      change in tax rates is recognized in results of operations in the period that
      the tax change occurs.




Effective
      January 1, 2007, we adopted FIN No. 48 (“FIN 48”), A *ccounting
      for Uncertainty in Income Taxes.* FIN
      No. 48 prescribes a more-likely-than-not threshold for financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. This interpretation also provides guidance on derecognition of
      income tax assets and liabilities, classification of current and deferred income
      tax assets and liabilities, accounting for interest and penalties associated
      with tax positions, accounting for income taxes in interim periods and income
      tax disclosures.




18





**ITEM
      3. CONTROLS AND PROCEDURES**




**A.
      EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:**




Our
      disclosure controls and procedures are designed to ensure that information
      required to be disclosed in the reports filed or submitted under the Securities
      Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized
      and
      reported, within the time period specified in the SEC's rules and forms.
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure that information required to be disclosed in
      the
      reports filed under the Exchange Act are accumulated and communicated to
      management, including the Chief Executive Officer ("CEO"") and Chief Financial
      Officer ("CFO") , as appropriate, to allow timely decisions regarding required
      disclosure. As of the end of the period covered by this report, we carried
      out
      an evaluation, under the supervision and with participation of our management,
      including our CEO and CFO, of the effectiveness of the design and operation
      of
      our disclosure controls and procedures. Based upon and as of the date of that
      evaluation, the CEO and CFO concluded that our disclosure controls and
      procedures are effective to ensure that information required to be disclosed
      in
      the reports we file and submit under the Exchange Act are recorded, processed,
      summarized and reported as and when required.




**B.
      CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:**




There
      were no changes in our internal controls over financial reporting during the
      most recent fiscal quarter that have materially affected or are reasonably
      likely to materially affect our internal control over financial
      reporting.





**PART
      II. OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**




The
      Company from time to time is involved in routine legal matters incidental to
      business. In the opinion of management, the ultimate resolution of such matters
      will not have a material adverse effect on the Company's financial position,
      results of operations or liquidity.





**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS.**




During
      the three months ended September 30, 2007:





The
      Company issued 11,250,000 shares of common stock to three individuals and a
      company in private sale of common stock, including 2,500,000 shares to Fred
      Nazem, a stockholder.





The
      Company issued 5,472,050 shares of common stock to Fred Nazem, a stockholder,
      upon conversion of convertible debentures and accrued interest.





The
      Company issued 3,667,111 shares of the Company’s common stock upon exercise of
      warrants to Laurus.





The
      foregoing shares were issued pursuant to exemptions from registration under
      Sections 3(a)(9) and 4(2) of the Securities Act of 1933.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**




None




19





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




None





**ITEM
      5. OTHER INFORMATION**




None





**ITEM
      6. EXHIBITS**




(a)
      Exhibits:




31.1
                Rule 13a-14(a)/15d-14(a) Certification (CEO)
              
              31.2
                Rule 13a-14(a)/15d-14(a) Certification (CFO)
              
              32.1
                Section 1350 Certification (CEO)
              
              32.2
                Section 1350 Certification (CFO)




20





**SIGNATURES**




In
      accordance with the requirements of Section 13 or 15(d) of the Securities
      Exchange Act , the registrant has caused this report to be signed on its behalf
      by the undersigned, thereunto duly authorized.


Date: November
              19, 2007
            By:
            /s/ Fahad
              SyedName:
                Fahad Syed
              Title:
                  Chairman and Chief Executive
                  Officer


By:
            /s/ Vasan
              ThathamName:
                Vasan Thatham
              Title:
                  Principal Financial Officer and Vice
                  President







21