**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 June 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)





Three
      Stewart Court


Denville,
      New Jersey, 07834


(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 August 8, 2007, 96,079,950 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**
  **JUNE
                  30, 2007**
              
              **DECEMBER
                  31, 2006**(UNAUDITED)
              
              (NOTE
                  2)**ASSETS****CURRENT
                  ASSETS:**Cash
              
              $
              14,166
              
              $
              13,437Trade
                  accounts receivable, net
              
              
              2,159,010
              
              
              2,149,680Prepaid
                  expenses and other current assets
              
              
              19,145
              
              
              5,110Total
                  current assets
              
              
              2,192,321
              
              
              2,168,227Property
                  and equipment, net
              
              
              229,579
              
              
              197,215Goodwill
              
              
              10,585,000
              
              
              13,982,451Other
                  intangibles, net
              
              
              769,695
              
              
              879,702Other
                  assets
              
              
              50,421
              
              
              55,028**TOTAL
                  ASSETS**
              
              $
              13,827,016
              
              $
              17,282,623**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****CURRENT
                  LIABILITIES:**Convertible
                  debentures, net of unamortized discounts
              
              $
              200,000
              
              $
              685,168Notes
                  payable to officer, net of unamortized discounts
              
              
              150,000
              
              
              150,000Debentures,
                  net of amortized discounts
              
              
              195,653Accounts
                  payable and accrued liabilities
              
              
              3,972,165
              
              
              3,747,809Accrued
                  compensation
              
              
              320,050
              
              
              338,283Deferred
                  revenues and customer advances
              
              
              785,223
              
              
              -Revolving
                  note, net of unamortized discount
              
              
              1,093,802
              
              
              1,014,249Total
                  current liabilities
              
              
              6,716,893
              
              
              5,935,509Convertible
                  note, net of unamortized discount
              
              
              691,148
              
              
              443,430Total
                  liabilities
              
              
              7,408,041
              
              
              6,378,939**COMMITMENTS
                  AND CONTINGENCIES****STOCKHOLDERS'
                  EQUITY :**Common
                  Stock, $.001 par value, authorized shares 200,000,000, 75,663,883
                  and
                  75,023,883 shares issued and outstanding, respectively
              
              
              75,664
              
              
              75,024Additional
                  paid-in capital
              
              
              36,508,989
              
              
              36,201,479Subscription
                  received
              
              
              400,000Accumulated
                  deficit
              
              
              (30,565,678
              )
              
              (25,372,819
              )Total
                  stockholders' equity
              
              
              6,418,975
              
              
              10,903,684**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              13,827,016
              
              $
              17,282,623
  The
        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**
              
              **THREE
                  MONTHS**
              
              **SIX
                  MONTHS**
              
              **SIX
                  MONTHS****ENDED**
              
              **ENDED**
              
              **ENDED**
              
              **ENDED****June
                  30, 2007**
              
              **June
                  30, 2006**
              
              **June
                  30, 2007**
              
              **June
                    30, 2006****Revenues**
              
              $
              4,109,276
              
              $
              4,299,958
              
              $
              8,379,464
              
              $
              8,398,404**OPERATING
                  EXPENSES:**Direct
                  employee compensation andconsultant
                  expenses (includes share based compensationof
                  $11,396, $0, $22,792 and $0)
              
              
              3,123,798
              
              
              3,198,055
              
              
              6,483,479
              
              
              6,195,158Selling,
                  general and administrative expenses (includesshare
                  based compensation of $83,236 and $147,242, $253,839 and $242,018
                  )
              
              
              1,348,686
              
              
              1,565,021
              
              
              2,908,916
              
              
              3,075,698Non-cash
                  charge for dispute settlements
              
              
              
              
              
              
              
              
              
              
              
              9,492,070Non-cash
                  goodwill impairment
              
              
              3,397,451
              
              
              
              
              
              3,397,451Depreciation
                  and amortization
              
              
              108,529
              
              
              72,259
              
              
              197,763
              
              
              142,427Total
                  operating expenses
              
              
              7,978,464
              
              
              4,835,335
              
              
              12,987,609
              
              
              18,905,353Loss
                  from operations
              
              
              (3,869,188
              )
              
              (535,377
              )
              
              (4,608,145
              )
              
              (10,506,949
              )**OTHER
                  INCOME / (EXPENSE):**Amortization
                  of debt discounts and debtissuance
                  costs
              
              
              (193,678
              )
              
              (783,781
              )
              
              (369,473
              )
              
              (2,236,428
              )Interest
                  and bank charges
              
              
              (82,961
              )
              
              (90,676
              )
              
              (161,843
              )
              
              (167,908
              )Gain/(charge)
                  on derivative financial instruments
              
              
              
              
              
              
              
              
              
              
              
              336,352Debt
                  extinguishment costs
              
              
              
              
              
              (1,125,000
              )
              
              
              
              
              (1,746,077
              )Total
                  other income / (expense)
              
              
              (276,639
              )
              
              (1,999,457
              )
              
              (531,316
              )
              
              (3,814,061
              )Loss
                  before provision for income taxes
              
              
              (4,145,827
              )
              
              (2,534,834
              )
              
              (5,139,461
              )
              
              (14,321,010
              )Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -**LOSS
                  FROM CONTINUING OPERATIONS**
              
              
              (4,145,827
              )
              
              (2,534,834
              )
              
              (5,139,461
              )
              
              (14,321,010
              )**DISCONTINUED
                  OPERATIONS:**Loss
                  from operations of discontinued operations
              
              
              (53,398
              )
              
              (234,269
              )
              
              (53,398
              )
              
              (474,411
              )**NET
                  LOSS**
              
              $
              (4,199,225
              )
              $
              (2,769,103
              )
              $
              (5,192,859
              )
              $
              (14,795,421
              )Net
                  loss from continuing operationsper
                  common share, basic and diluted
              
              $
              (0.06
              )
              $
              (0.04
              )
              
              (0.07
              )
              $
              (0.23
              )Net
                  loss from discontinued operationsper
                  common share, basic and diluted
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss per common share, basic anddiluted
              
              $
              (0.06
              )
              $
              (0.04
              )
              
              (0.07
              )
              $
              (0.23
              )Weighted
                  average number of sharesoutstanding,
                  basic and diluted
              
              
              75,663,883
              
              
              64,066,520
              
              
              75,484,435
              
              
              63,283,310
  The
          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**
  **SIX
                      MONTHS**
                  
                  **SIX
                      MONTHS****ENDED**
                  
                  **ENDED****June
                      30, 2007**
                  
                  **June
                      30, 2006****OPERATING
                      ACTIVITIES**Net
                      loss
                  
                  
                  (5,192,859
                  )
                  
                  (14,795,421
                  )Loss
                      from discontinued operations
                  
                  
                  53,398
                  
                  
                  474,411Adjustments
                      to reconcile net loss to net cash provided by (used in) operating
                      activities: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
                  
                  
                  60,337Non-cash
                      charge for employee share based compensation
                  
                  
                  199,031
                  
                  
                  181,681Non-cash
                      charge on debt extinguishment
                  
                  
                  
                  
                  
                  1,125,000Non-cash
                      gain on derivative financial instrument
                  
                  
                  
                  
                  
                  (336,352
                  )Amortization
                      of debt discounts
                  
                  
                  369,473
                  
                  
                  2,236,428Non-cash
                      goodwill impairment
                  
                  
                  3,397,451Depreciation
                      and amortization
                  
                  
                  197,763
                  
                  
                  142,427Changes
                      in operating assets and liabilities:Trade
                      accounts receivable
                  
                  
                  (9,330
                  )
                  
                  114,155Prepaid
                      expenses and other current assets
                  
                  
                  (14,035
                  )
                  
                  (102,224
                  )Other
                      assets
                  
                  
                  4,593Accounts
                      payable and accrued liabilities
                  
                  
                  224,358
                  
                  
                  1,265Accrued
                      compensation
                  
                  
                  (18,233
                  )
                  
                  18,328Deferred
                      revenues and advances
                  
                  
                  785,223
                  
                  
                  1,206,081Net
                      cash provided by continuing operations
                  
                  
                  74,433
                  
                  
                  213,039Net
                      cash used in discontinued operations
                  
                  
                  (53,398
                  )
                  
                  (454,344
                  )Net
                      cash provided by (used in) operating activities
                  
                  
                  21,035
                  
                  
                  (241,305
                  )**INVESTING
                      ACTIVITIES**Purchases
                      of property and equipment
                  
                  
                  (85,108
                  )
                  
                  (67,015
                  )Net
                      cash used in investing activities
                  
                  
                  (85,108
                  )
                  
                  (67,015
                  )**FINANCING
                      ACTIVITIES**Subscription
                      received
                  
                  
                  400,000Proceeds
                      from sale of debentures
                  
                  
                  200,000Short
                      term borrowings
                  
                  
                  100,000Repayment
                      of short term borrowings
                  
                  
                  (100,000
                  )Repayment
                      of loans from officer and director
                  
                  
                  0
                  
                  
                  (170,000
                  )Repayment
                      of note to officer
                  
                  
                  
                  
                  
                  (200,000
                  )Proceeds
                      (repayment) of convertible debentures
                  
                  
                  (500,000
                  )
                  
                  650,000Repayment
                      of bridge loans
                  
                  
                  
                  
                  
                  (500,000
                  )Proceeds
                      from issuance (repayment) of revolving note, net
                  
                  
                  (198
                  )
                  
                  958,500Proceeds
                      from issuance of convertible note, net
                  
                  
                  
                  
                  
                  1,430,500Debt
                      issuance costs
                  
                  
                  (35,000
                  )
                  
                  (20,697
                  )Repayment
                      of convertible debenture
                  
                  
                  
                  
                  
                  (1,658,160
                  )Net
                      cash (used in ) provided by financing activities
                  
                  
                  64,802
                  
                  
                  490,143**Net
                      increase in cash**
                  
                  
                  729
                  
                  
                  181,823**Cash
                      at beginning of period**
                  
                  
                  13,437
                  
                  
                  9,540**Cash
                      at end of period**
                  
                  $
                  14,166
                  
                  $
                  191,363**Supplemental
                      cash flow information:**Cash
                      paid for interest expense
                  
                  $
                  175,000
                  
                  $
                  70,727Cash
                      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 ("SMB's").
      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 $30,565,678 and has a working capital deficit of
      $4,524,572 at June 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 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 June 30, 2007 and 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 period consolidated financial
      statements to conform to the current period 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 at 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 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 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 3 clients
      representing 56% (36 %, 11% and 9%, respectively) of revenues during the three
      months ended June 30, 2007. The Company had revenues from 3 clients representing
      53% (36%, 9% and 8%, respectively) of revenues during the six months ended
      June
      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 two clients accounting
      for
      47% (33% and 14%, respectively) of total gross accounts receivable as of June
      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 six months ended
      June 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 six months ended June 30, 2007 and 2006 exclude
      potentially issuable common shares of approximately 18,856,124 and 17,118,624,
      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
      September 2006, the SEC issued SAB No. 108, "Considering the Effects of Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements," (“SAB No. 108”), which provides interpretive guidance regarding the
      consideration given to prior year misstatements when determining materiality
      in
      current year financial statements. SAB No. 108 is effective for fiscal years
      ending after November 15, 2006 and had no impact on our 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 comparison 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
      3. 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 SMB's. 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 $53,398 for the three and six
      months ended June 30, 2007. The Company has reclassified prior period results
      to
      conform with the current period presentation. Accordingly, $ 234,269 and
      $474,411 for the three and six months ended June 30, 2006, has 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
      4. 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 three months ended June 30, 2007.




8




**NETFABRIC
      HOLDINGS INC. AND SUBSIDIARIES**




**NOTES
      TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      5. DEBT FINANCINGS**


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




2007UnamortizeddebtPrincipal
            
            Discount
            
            Net2006
                Convertible Debentures, due in July 2007
            
            $
            200,000
            
            
            
            
            $
            200,000Convertible
                Debenture payable to stockholder due in August 2007
            
            
            150,000
            
            
            
            
            
            150,000Debenture,
                due in August 2007
            
            
            200,000
            
            
            (4,347
            )
            
            195,653Laurus
                Revolving Note Due in February 2009
            
            
            1,487,153
            
            
            (393,351
            )
            
            1,093,802Laurus
                Convertible Note Due in February 2009
            
            
            1,500,000
            
            
            (808,852
            )
            
            691,148$
            3,537,153
            
            
            ($1,206,550
            )
            $
            2,330,603




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, the Company and
      the
      stockholder agreed to convert two notes with an aggregate face amount of
      $200,000 into shares of the Company’s common stock. See Note 10.





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 $31,519. The relative fair value of the warrants of $31,519 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.




During
      the three months ended June 30, 2007, the Company borrowed $100,000 from an
      individual and repaid the amount. The Company paid financing costs of $15,000
      to
      third parties and this amount was amortized during the term of the
      borrowing.





**NOTE
      6. STOCKHOLDERS' EQUITY**


**COMMON
      STOCK**


During
      the six months ended June 30, 2007, the Company entered into a placement agency
      agreement with an unaffiliated entity and 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
      $77,600 was charged to operations as consulting expense during the six months
      ended June 30, 2007.


9




**NETFABRIC
      HOLDINGS INC. AND SUBSIDIARIES**




**NOTES
      TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**Warrants**




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





Warrants
            
            ExercisePrice
            
            ExpirationLaurus
            
            
            4,256,550
            
            $
            0.001
            
            
            See
                note (1
            )Macrocom
            
            
            1,000,000
            
            $
            1.50
            
            
            July
                2008Cornell
                Warrants
            
            
            560,000
            
            $
            0.40
            
            
            October
                20082006Convertible
                Debenture Financing
            
            
            1,850,000
            
            $
            0.01
            
            
            April
                to November 2009Others
                including officer,director
                and stockholder
            
            
            1,966,137
            
            $
            0.15
                to $0.82
            
            
            December
                2008 to June 20119,632,687




(1)
      No
      expiration. See Note 10.




**NOTE
      7 STOCK-BASED COMPENSATION**




Share-based
      compensation expense recognized under SFAS 123(R) for the three months and
      six
      months ended June 30, 2007 was $94,632 and $199,031, respectively. Share-based
      compensation expense recognized under SFAS 123(R) for the three months and
      six
      months ended June 30, 2006 was $92,062 and $181,681, 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
      8 RELATED PARTY TRANSACTIONS**




As
      of
      June 30, 2007, the Company had Convertible Debentures payable to a stockholder
      and an officer and director in the aggregate face amount of
      $350,000.




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 six months
      ended June 30, 2007 and 2006 was, $63,750, 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 $63,000
      ,
      respectively during the six months ended June 30, 2007 and 2006. As of June
      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
      9. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
      ACTIVITIES**




For
                the Six Monthsended
                June 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
            
            
            
            
            $
            233,131Discount
                on April 2006 Convertible Debentures related to beneficial conversion
                feature
            
            
            
            
            $
            322,755Discount
                on April 2006 Convertible Debentures related to warrants
            
            
            
            
            $
            189,846Discount
                on April 2007 Debenture related to warrants
            
            $
            31,519Amortization
                of debt discounts
            
            $
            369,473
            
            $
            2,236,428Settlement
              on bridge loan with common stock
            
            
            
            
            $
            500,000Conversion
              on Convertible debenture issued to stockholder with common stock
            
            
            
            
            $
            50,000





**NOTE
      10. SUBSEQUENT EVENTS**




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.





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. The Company and Laurus
      are
      in negotiations to extend the term of the feature and no definitive agreement
      has been concluded.





In
      July
      and August 2007, Laurus exercised of 3,675,362 of their warrants on a cashless
      basis and were issued 3,694,017 shares of the Company’s common
      stock.




In
      August
      2007, the Company 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 4,883,230
      shares as inducement for conversion. The fair value of inducement to convert
      approximates $537,000 and will be charged to operations in the three months
      ended September 30, 2007.


11





**ITEM
      2.**





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




The
      following discussion and analysis and results of operation 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 the 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.




**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 SIX MONTHS ENDED JUNE 30, 2007 AND 2006:**





Revenues.
      Revenues of the three months ended June 30, 2007, decreased by $190,682 or
      4.42%
      compared to the same period of the prior year. For the six months ended June
      30,
      2007, our revenues decreased by $18,940 or 0.2% compared to the same period
      of
      the prior year. In the six months ended June 30, 2007, we either continued
      with
      the projects undertaken during the six months ended June 30, 2006 or
      successfully replaced discontinued projects with new projects thereby
      substantially maintaining the revenue increase in the six months ended June
      30,
      2007. We anticipate our revenues to stay flat in 2007.




Direct
      employee compensation and consultant expenses. Excluding non-cash share based
      compensation, for the three months ended June 30, 2007, our direct employee
      compensation and consultant expenses decreased by $85,653 or 2.7% to $3,112,402.
      Excluding non-cash share based compensation, for the six months ended June
      30,
      2007, our direct employee compensation and consultant expenses increased by
      $265,529 or 4.3% to $6,460,687. Excluding non-cash share based compensation
      as a
      percentage of revenues our direct employee compensation and consultant expenses
      for the three and six months ended June 30, 2007 were 75.7%, and 77.1%,
      respectively, compared to 74.4% and 73.8%, respectively, in 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 June 30, 2007 by $152,329, or
      10.7%, to $1,265,450 compared to 2006. For the six months ended June 30, 2007,
      our selling and administrative expenses decreased by $178,603 or 6.3% compared
      to the same period of the prior year. During the six months ended June 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 six months ended June 30, 2007 compared to
      the
      same period of prior year were due expense reductions implemented in the latter
      half of 2006.




Depreciation
      and amortization.


For
      three
      months ended June 30, 2007, depreciation and amortization increased by $36,270
      or 50.2%, to $108,529. For the six months ended June 30, 2007, depreciation
      and
      amortization increased by $55,336 or 38.9% to $197,763. The increases were
      due
      to additional assets added during the later half of 2006 and in
      2007.




Amortization
      of debt discount.


Amortization
      of debt discount for the three months ended June 30, 2007 decreased by $590,103,
      or 75.3%, to $193,678. Amortization of debt discount for the six months ended
      June 30, 2007 decreased by $1,866,955 or 83.5%. Since significant amount
      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. At June 30, 2007, the aggregate unamortized debt discount was
      $1,206,550, which will be amortized and charged to operations over the term
      of
      the respective debt.




Interest
      expense.


For
      the
      three and six months ended June 30, 2007, interest expense decreased by $7,715
      and $6, 065, 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 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 six months ended June 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 of
      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.




15




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 six months ended June 30,
      2007, losses from discontinued operations were $53,398 and $53,398,
      respectively. For the three and six months ended June 30, 2006, losses from
      discontinued operations were $234,269 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 June 30, 2007, net loss
      increased by $1,430,122, or 51.6%, to a loss of $4,199,225, compared to a net
      loss of $2,769,103 in the three months ended June 30, 2006. For the six months
      ended June 30, 2007, net loss decreased by $9,602,562 or 64.9% to a loss of
      $5,192,859 compared to a net loss of $14,795,421 in the six months ended June
      30, 2006.




**LIQUIDITY
      AND CAPITAL RESOURCES**




On
      June
      30, 2007, our working capital deficiency was $4,524,572, 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
      six months ended June 30, 2007, our operating activities from continuing
      operations provided approximately $74,000 of cash, compared to approximately
      $213,000 provided during the six months ended June 30, 2006.




During
      the six months ended June 30, 2007, our operating losses, after adjusting for
      non-cash items, utilized approximately $898,000 of cash, and working capital
      items provided approximately $972,000 of cash. The principal component of these
      working capital changes was an increase in our deferred revenues and accounts
      payable. During the six months ended June 30, 2006, our operating losses, after
      adjusting for non-cash items, utilized approximately $1,025,000 of cash, and
      working capital items provided approximately $1,238,000 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
      over advance feature expired on July 30, 2007 and we are in discussions with
      Laurus for the extension of the over advance feature. 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.




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 June 30, 2007, our availability and borrowing with Laurus was approximately
      $2,987,153 (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 of the seven 2006 Convertible Debentures in the aggregate
      face amount of $500,000. In December 2006, the Company and the officer and
      director and the stockholder agreed to extend the term of two of 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 10 to unadudited condensed consolidated financials statements.





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 with 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 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.**




None





**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:
              August 17, 2007
            
            By:
            /s/ Fahad SyedName:
Fahad
              SyedTitle: Chairman
              and Chief Executive OfficerBy:
            /s/ Vasan
              ThathamName:
Vasan
              ThathamTitle:
Principal
              Financial Officer and Vice
              President




21