**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q/A**


**Amendment
      No. 1**





(Mark
      One)





**ü**  **QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**  **EXCHANGE
      ACT OF 1934**





**For
      the quarterly period ended June 30, 2008**





**OR**





£  **TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE**  **ACT
      OF 1934**





For
      the
      transition period from       to     .





**Commission
      file number 0-50918**


**AIRBEE
      WIRELESS, INC.**


(Exact
      name of registrant as specified in its charter)





**DELAWARE**
            **46-0500345**(State
                or other jurisdiction
            (IRS
                Employerof
                incorporation or organization)
            Identification
                No.)**9400
                Key West Avenue, Suite 100****Rockville,
                MD**
            **20850-3322**(Address
                of principal executive offices)
            (Zip
                Code)





Registrant’s
      telephone number, including area code: **(301)
      517-1860**





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 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 ü No £





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting
      company.




Large
                accelerated filer£
            Accelerated
                filer£
            Non-accelerated
                filer£
            Smaller
                reporting companyü




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





APPLICABLE
      ONLY TO CORPORATE ISSUERS





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 139,356,263Common Stock par value of $0.00004
      as of November 2, 2008.





Transitional
      Small Business Disclosure Form (check one): Yes £ No ü





AIRBEE
      WIRELESS, INC.





FORM
      10-Q/A





INDEX





**PAGE**PART
                I FINANCIAL INFORMATION
            
            3Item
                1. Financial Statements
            
            3Condensed
                Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December
                31, 2007 (Audited)
            
            4Condensed
                Consolidated Statements of Operations for the Six and Three Months
                Ended
                June 30, 2008 and 2007 (Unaudited)
            
            5Condensed
                Consolidated Statements of Cash Flows for the Six Months Ended June
                30,
                2008 and 2007 (Unaudited)
            
            6Notes
                to the Condensed Consolidated Financial Statements
                (Unaudited)
            
            8Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            
            20Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            29Item
                4. Controls and Procedures
            
            30PART
                II OTHER INFORMATION
            
            32Item
                1. Legal Proceedings
            
            32Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            32Item
                3. Defaults Upon Senior Securities
            
            35Item
                4. Submission of Matters to a Vote of Security Holders
            
            35Item
                5. Other Information
            
            35Item
                6. Exhibits
            
            35SIGNATURES
            
            36




2


**PART
      I FINANCIAL INFORMATION**




**Item
      1. Financial Statements**





**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007**


**(UNAUDITED)**




3


**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**





**Restated****(Unaudited)**
            
            **(Audited)****June 30,**
            
            **December 31,****2008**
            
            **2007****ASSETS**Current
                Assets:Cash
                and cash equivalents
            
            $
            87,481
            
            $
            1,925Accounts
                receivable, net
            
            
            40,000
            
            
            89,960Deferred
                financing costs - current
            
            
            28,824
            
            
            -Prepaid
                expenses and other current assets
            
            
            31,525
            
            
            4,589Total
                Current Assets
            
            
            187,830
            
            
            96,474Fixed
                assets, net of depreciation
            
            
            206,060
            
            
            212,793Intangible
                assets
            
            
            10,450
            
            
            268,913Deferred
                financing costs
            
            
            36,029
            
            
            79,265Other
                assets
            
            
            70,397
            
            
            68,656116,876
            
            
            416,834**TOTAL
                ASSETS**
            
            $
            510,766
            
            $
            726,101**LIABILITIES
                AND STOCKHOLDERS' DEFICIT****LIABILITIES**Current
                Liabilities:Notes
                payable - related party
            
            $
            55,389
            
            $
            133,580Notes
                payable - other
            
            
            456,100
            
            
            2,024,952Litigation
                liability
            
            
            -
            
            
            718,411Fair
                value of derivatives
            
            
            392,485
            
            
            458,167Convertible
                debentures, net of discount
            
            
            31,798
            
            
            484,892Warrants
                liability
            
            
            843,485
            
            
            62,229Liability
                for stock to be issued
            
            
            -
            
            
            10,000Accounts
                payable and accrued expenses
            
            
            3,067,848
            
            
            2,903,222Total
                Current Liabilities
            
            
            4,847,105
            
            
            6,795,453Long-term
                Liabilities:Convertible
                debentures, net of discount
            
            
            2,574,171
            
            
            -**Total
                Liabilities**
            
            
            7,421,276
            
            
            6,795,453**COMMITMENTS
                AND CONTINGENCIES**
            
            
            -
            
            
            -**STOCKHOLDERS'
                DEFICIT**Common
                stock, $.00004 Par Value; 200,000,000 shares authorized; 137,975,797
                and
                132,055,795 shares issued; 14,142,511 and 14,142,511 shares held
                in
                escrow; and 123,833,286 and 116,253,248 shares outstanding
            
            
            4,953
            
            
            4,650Additional
                paid-in capital
            
            
            11,756,295
            
            
            15,625,500Unearned
                compensation
            
            
            (5,555
            )
            
            (6,660
            )Prepaid
                consulting
            
            
            -
            
            
            (83,333
            )Other
                accumulated comprehensive income
            
            
            30,202
            
            
            63,938Shares
                issued for deferred financing, net of $3,450,069 discount
            
            
            -
            
            
            (4,216,751
            )Accumulated
                deficit
            
            
            (18,398,866
            )
            
            (17,159,157
            )(6,612,971
            )
            
            (5,771,813
            )Less:
                treasury stock, 1,660,036 and 1,660,036 shares at cost
            
            
            (297,539
            )
            
            (297,539
            )**Total
                Stockholders' Deficit**
            
            
            (6,910,510
            )
            
            (6,069,352
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS' DEFICIT**
            
            $
            510,766
            
            $
            726,101





The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.





4




**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**FOR
      THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007**


**(UNAUDITED)**





**SIX MONTHS ENDED**
            
            **THREE MONTHS ENDED****JUNE 30,**
            
            **JUNE 30,****Restated**
            
            **Restated**
            
            **Restated**
            
            **Restated****2008**
            
            **2007**
            
            **2008**
            
            **2007****OPERATING
                REVENUES**Sales
            
            $
            40,000
            
            $
            23,238
            
            $
            40,000
            
            $
            2,448**COST
                OF SALES**
            
            
            -
            
            
            -
            
            
            -
            
            
            -**GROSS
                PROFIT**
            
            
            40,000
            
            
            23,238
            
            
            40,000
            
            
            2,448**OPERATING
                EXPENSES**Compensation
                and professional fees
            
            
            1,666,246
            
            
            1,786,680
            
            
            851,456
            
            
            1,259,565Stock
                option compensation expense
            
            
            1,521
            
            
            27,965
            
            
            1,521
            
            
            27,496Research
                and development
            
            
            60,000
            
            
            10,432
            
            
            35,000
            
            
            5,590Selling,
                general and administrative expenses
            
            
            444,503
            
            
            684,767
            
            
            285,733
            
            
            482,673Depreciation
                and amortization
            
            
            404,422
            
            
            98,989
            
            
            81,343
            
            
            43,304**Total
                Operating Expenses**
            
            
            2,576,692
            
            
            2,608,833
            
            
            1,255,053
            
            
            1,818,628**LOSS
                BEFORE OTHER INCOME (EXPENSE)**
            
            
            (2,536,692
            )
            
            (2,585,595
            )
            
            (1,215,053
            )
            
            (1,816,180
            )**OTHER
                INCOME (EXPENSE)**Fair
                value adjustments on derivatives and warrants
            
            
            362,063
            
            
            62,008
            
            
            79,254
            
            
            352,826Other
                income
            
            
            1,420,361
            
            
            18,959
            
            
            1,398,425
            
            
            -Interest
                expense
            
            
            (485,441
            )
            
            (466,289
            )
            
            (186,535
            )
            
            (259,911
            )**Total
                Other Income (Expense)**
            
            
            1,296,983
            
            
            (385,322
            )
            
            1,291,144
            
            
            92,915**INCOME
                (LOSS) BEFORE PROVISION FOR INCOME TAXES**
            
            
            (1,239,709
            )
            
            (2,970,917
            )
            
            76,091
            
            
            (1,723,265
            )**Provision
                for Income Taxes**
            
            
            -
            
            
            -
            
            
            -
            
            
            -**NET
                INCOME (LOSS) APPLICABLE TO COMMON SHARES**
            
            $
            (1,239,709
            )
            $
            (2,970,917
            )
            $
            76,091
            
            $
            (1,723,265
            )**NET
                INCOME (LOSS) PER SHARE - BASIC**
            
            $
            (0.01
            )
            $
            (0.03
            )
            $
            0.00
            
            $
            (0.02
            )**NET
                INCOME (LOSS) PER SHARE - DILUTED**
            
            $
            (0.01
            )
            $
            (0.03
            )
            $
            0.00
            
            $
            (0.02
            )**WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES****OUTSTANDING
                - BASIC**
            
            
            108,200,055
            
            
            89,270,904
            
            
            115,147,445
            
            
            97,825,232**WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES****OUTSTANDING
                - DILUTED**
            
            
            108,200,055
            
            
            89,270,904
            
            
            200,000,000
            
            
            97,825,232




The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.




5


**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
      THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007**


**(UNAUDITED)**




**Restated**
            
            **Restated****2008**
            
            **2007****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                loss
            
            $
            (1,239,709
            )
            $
            (2,970,917
            )Adjustments
                to reconcile net loss to net cash (used in) operating
                activitiesDepreciation
                and amortization
            
            
            305,611
            
            
            98,989Common
                stock and warrants issued for services
            
            
            545,604
            
            
            717,229Common
                stock and warrants issued for interest payments
            
            
            84,015
            
            
            -Liability
                for stock to be issued for services
            
            
            -
            
            
            40,000Common
                stock issued for penalty returned
            
            
            (680,000
            )
            
            -Forgiveness
                of debt
            
            
            (740,264
            )
            
            -Gain
                on valuation of derivatives
            
            
            (362,063
            )
            
            (62,008
            )Amortization
                of derivative discounts
            
            
            -
            
            
            87,500Stock
                option compensation expense 123R
            
            
            8,221
            
            
            27,222Amortization
                of financing costs
            
            
            98,811
            
            
            7,728Gain
                (Loss) on foreign currency translations
            
            
            (33,736
            )
            
            9,870Amortization
                of unearned compensation
            
            
            1,105
            
            
            7,984Extension
                and late payment fees on bridge loans
            
            
            248,381
            
            
            213,731Litigation
                settlement
            
            
            (253,411
            )
            
            277,969Amortization
                of prepaid consulting
            
            
            83,333
            
            
            166,667Excess
                tax benefits from share-based payment arrangement
            
            
            (2,877
            )
            
            (9,788
            )**Changes
                in assets and liabilities**Decrease
                (Increase) in accounts receivable
            
            
            49,960
            
            
            (2,448
            )Decrease
                (Increase) in prepaid expenses and other current assets
            
            
            (26,936
            )
            
            18,401(Increase)
                in other assets
            
            
            (1,741
            )
            
            (8,045
            )Increase
                in accounts payable and accrued expenses
            
            
            216,284
            
            
            526,942Total
                adjustments
            
            
            (459,703
            )
            
            2,117,943**Net
                cash (used in) operating activities**
            
            
            (1,699,412
            )
            
            (852,974
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES**Acquisitions
                of fixed assets
            
            
            (30,432
            )
            
            -Acquisitions
                of intangible assets
            
            
            (9,984
            )
            
            (69,183
            )**Net
                cash (used in) investing activities**
            
            
            (40,416
            )
            
            (69,183
            )





The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.


6


**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED**


**FOR
      THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007**


**(UNAUDITED)**





**Restated**
            
            **Restated****2008**
            
            **2007****CASH
                FLOWS FROM FINANCING ACTIVITES**Proceeds
                from common stock issuances
            
            $
            -
            
            $
            70,000Proceeds
                from convertible debentures
            
            
            1,881,168
            
            
            -Proceeds
                from notes payable - other
            
            
            80,100
            
            
            620,064(Payments
                of) notes payable - other
            
            
            (55,000
            )
            
            -Proceeds
                from secured convertible debenture
            
            
            -
            
            
            150,000Proceeds
                from (Payments of) notes payable - related party, net
            
            
            (83,761
            )
            
            27,960Excess
                tax benefits from share-based payment arrangement
            
            
            2,877
            
            
            9,788**Net
                cash provided by financing activities**
            
            
            1,825,384
            
            
            877,812**NET
                  INCREASE (DECREASE) IN CASH AND CASH
                  EQUIVALENTS**
            
            
            85,556
            
            
            (44,345
            )**CASH
                AND CASH EQUIVALENTS - BEGINNING OF PERIOD**
            
            
            1,925
            
            
            59,298**CASH
                AND CASH EQUIVALENTS - END OF PERIOD**
            
            $
            87,481
            
            $
            14,953**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:****CASH
                PAID DURING THE PERIOD FOR:**Interest
                expense
            
            $
            25,055
            
            $
            19,547Income
                taxes
            
            $
            -
            
            $
            -**SUPPLEMENTAL
                DISCLOSURE OF NONCASH ACTIVITIES:**Common
                stock and warrants issued for services
            
            $
            545,604
            
            $
            717,229Common
                stock inssued for deferred financing (Mercatus), net of
                discount
            
            $
            -
            
            $
            4,216,751Stock
                options vested during period
            
            $
            8,221
            
            $
            27,222Reverse
                issuance of common stock; overruled by court order
            
            $
            -
            
            $
            131,268Common
                stock returned upon cancellation of deferred financing,net
                of discount
            
            $
            4,216,751
            
            $
            -Warrants
                converted to liability
            
            $
            997,796
            
            $
            -Warrants
                removed from liability
            
            $
            -
            
            $
            59,621Conversion
                of note payable - other and accrued interest to common
                stock
            
            $
            348,000
            
            $
            60,225Use
                of pledged collateral for settlement of note payable and accrued
                interest
            
            $
            -
            
            $
            72,561Conversion
                of related party notes payable, accrued salaries payableand
                accrued interest to common stock
            
            $
            -
            
            $
            40,266Liability
                for stock to be issued for prepaid consulting fees
            
            $
            -
            
            $
            500,000Liability
                for stock to be issued for services
            
            $
            (10,000
            )
            $
            40,000Conversion
                of accrued interest (included in accounts payable and accruedexpenses)
                to common stock
            
            $
            18,528
            
            $
            -





The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.




7




**AIRBEE
      WIRELESS, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007**


**(UNAUDITED)**





**GENERAL**





**1.**  **Basis
      of Presentation**





The
      condensed unaudited interim consolidated financial statements included herein
      have been prepared, without audit, pursuant to the rules and regulations of
      the
      Securities and Exchange Commission. The condensed consolidated financial
      statements and notes are presented as permitted on Form 10-Q/A and do not
      contain information included in the Company’s annual statements and notes.
      Certain information and footnote disclosures normally included in financial
      statements prepared in accordance with accounting principles generally accepted
      in the United States of America have been condensed or omitted pursuant to
      such
      rules and regulations, although the Company believes that the disclosures are
      adequate to make the information presented not misleading. It is suggested
      that
      these condensed consolidated financial statements be read in conjunction with
      the December 31, 2007 audited consolidated financial statements and the
      accompanying notes thereto. While management believes the procedures followed
      in
      preparing these condensed consolidated financial statements are reasonable,
      the
      accuracy of the amounts are in some respects dependent upon the facts that
      will
      exist, and procedures that will be accomplished by the Company later in the
      year.





These
      condensed unaudited consolidated financial statements reflect all adjustments,
      including normal recurring adjustments, which, in the opinion of management,
      are
      necessary to present fairly the operations and cash flows for the periods
      presented.





**2.**  **Presentation
      of Financial Statements**





The
      condensed consolidated financial statements include the accounts of Airbee
      Wireless, Inc. (the “Company”) and its wholly owned subsidiary Airbee Wireless
      (India) Pvt. Ltd., located in India, for the six and three months ended June
      30,
      2008 and 2007, respectively. All significant inter-company accounts and
      transactions have been eliminated in consolidation. Accounts denominated in
      non-U.S. currencies have been re-measured using the U.S. Dollar as the
      functional currency.





The
      condensed consolidated financial statements have been presented on the basis
      that the Company is a going concern, which contemplates, among other things,
      the
      realization of assets, continued success in accessing supplemental external
      financing, and the satisfaction of liabilities in the normal course of business.
      The Company has incurred losses since its inception, and has an accumulated
      deficit of approximately $18.40 million as of June 30, 2008. The Company's
      operations have been financed primarily through a combination of issued equity
      and debt. For the six months ended June 30, 2008, the Company had a net loss
      of
      approximately $1,240,000 and cash used in operations of approximately
      $1,699,000.





Certain
      amounts for the three and six months ended June 30, 2007 have been reclassified
      to conform to the presentation of the June 30, 2008 amounts. The
      reclassifications have no effect on net income for the three and six months
      ended June 30, 2007. ****





**3.**  **Use
      of 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 disclosures of contingent assets and
      liabilities at the date of the consolidated financial statements and the
      reported amounts of revenues and expenses during the reporting period. Actual
      results could differ from those estimates.





**4.**  **Income
      Taxes**





Income
      tax benefit is computed on the pretax loss based on current tax law. Deferred
      income taxes are recognized for the tax consequences in future years of
      differences between the tax basis of assets and liabilities and its financial
      reporting amounts at each year-end based on enacted tax laws and statutory
      tax
      rates. No benefit is reflected for the six months ended June 30, 2008 and 2007,
      respectively.





**5.**  **Fixed
      Assets**





Fixed
      assets are stated at cost. Depreciation is computed using the straight-line
      method over the estimated useful lives of the assets; two to four years for
      machinery and equipment and four to forty years for buildings. Reviews are
      regularly performed to determine whether facts and circumstances exist that
      indicate carrying amount of assets may not be recoverable or the useful life
      is
      shorter than originally estimated. The Company assesses the recoverability
      of
      its fixed assets by comparing the projected undiscounted net cash flows
      associated with the related asset or group of assets over their remaining lives
      against their respective carrying amounts. Impairment, if any, is based on
      the
      excess of the carrying amount over the fair value of those assets. If assets
      are
      determined to be recoverable, but the useful lives are shorter than originally
      estimated, the net book value of the assets is depreciated over the newly
      determined remaining useful lives. When fixed assets are retired or otherwise
      disposed of, the cost and related accumulated depreciation are removed from
      the
      accounts and the resulting gain or loss is included in operations.


8




**6.**  **Earnings
      (Loss) Per Share of Common Stock**





Historical
      net income (loss) per common share is computed using the weighted average number
      of common shares outstanding. Diluted earnings per share (EPS) includes
      additional dilution from common stock equivalents, such as stock issuable
      pursuant to the exercise of stock options and warrants. Common stock equivalents
      were not included in the computation of diluted earnings per share at June
      30,
      2008 and 2007 when the Company reported a loss because to do so would be
      anti-dilutive for periods presented. The Company has incurred losses since
      inception as a result of funding its research and development, including the
      development of its intellectual property portfolio which is key to its core
      products.





The
      following is a reconciliation of the computation for basic and diluted
      EPS:





June 30, 2008
              Restated
            
            June 30, 2007
              RestatedNet
                Loss
            
            $
            (1,239,709
            )
            $
            (2,970,917
            )Weighted-average
                common shares outstanding (Basic)
            
            
            108,200,055
            
            
            89,270,904Weighted-average
                common stock Equivalents:Stock
                options
            
            
            -
            
            
            -Warrants
            
            
            -
            
            
            -Weighted-average
                common shares outstanding (Diluted)
            
            
            108,200,055
            
            
            89,270,904





**7.**  **Stock-Based
      Compensation**





Effective
      December 31, 2005, the Company adopted the provisions of Financial Accountings
      Standards Board Statement of Financial Accounting Standard (“SFAS”) No. 123(R),
“Share-Based Payments,” which establishes the accounting for employee
      stock-based awards. Under the provisions of SFAS No. 123(R), stock-based
      compensation is measured at the grant date, based on the calculated fair value
      of the award, and is recognized as an expense over the requisite employee
      service period (generally the vesting period of the grant). The Company adopted
      SFAS No. 123(R) using the modified prospective method and, as a result, periods
      prior to December 31, 2005 have not been restated. The Company recognized
      stock-based compensation awards issued under the Company’s stock option plans in
      the stock option compensation expense line item of the Condensed Consolidated
      Statement of Operations. Additionally, no modifications were made to outstanding
      stock options prior to the adoption of SFAS No. 123(R), and no cumulative
      adjustments were recorded in the Company’s financial statements.





Employee
      stock awards prior to periods beginning January 1, 2006 under the Company's
      compensation plans are accounted for in accordance with Accounting Principles
      Board Opinion No. 25 (“APB 25”), “ *Accounting
      for Stock Issued to Employees* ”,
      and
      related interpretations. The Company provides the disclosure requirements of
      SFAS No. 123, “ *Accounting
      for Stock-Based Compensation* ”
(“SFAS
      123”), and related interpretations. Stock-based awards to non-employees are
      accounted for under the provisions of SFAS 123 and the Company adopted the
      enhanced disclosure provisions of SFAS No. 148 “ *Accounting
      for Stock-Based Compensation- Transition and Disclosure* ,”
an
      amendment of SFAS No. 123.





The
      Company measures compensation expense for its employee stock-based compensation
      using the intrinsic-value method. Under the intrinsic-value method of accounting
      for stock-based compensation, when the exercise price of options granted to
      employees is less than the estimated fair value of the underlying stock on
      the
      date of grant, deferred compensation is recognized and is amortized to
      compensation expense over the applicable vesting period. Amortization expense
      for the six months ended June 30, 2008 and 2007 was $1,105 and $7,984,
      respectively.




The
      Company measures compensation expense for its non-employee stock-based
      compensation under the Financial Accounting Standards Board (FASB) Emerging
      Issues Task Force (EITF) Issue No. 96-18, “ *Accounting
      for Equity Instruments that are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* ”.
      The
      fair value of the option issued is used to measure the transaction, as this
      is
      more reliable than the fair value of the services received. Fair value is
      measured as the value of the Company’s common stock on the date that the
      commitment for performance by the counterparty has been reached or the
      counterparty’s performance is complete. The fair value of the equity instrument
      is charged directly to compensation expense and additional paid-in
      capital.


9





The
      following table summarizes the stock option activity for the six months ended
      June 30, 2008:





Shares
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Contractual
              Term (Years)Outstanding, December
                31, 2007
            
            
            1,728,000
            
            
            0.2995
            
            
            
            
            
            4.69Options
                granted
            
            
            -
            
            
            -
            
            
            
            
            
            -Options
                reinstated
            
            
            -
            
            
            -
            
            
            
            
            
            -Options
                exercised
            
            
            -
            
            
            -
            
            
            
            
            
            -Options
                cancelled
            
            
            33,000
            
            
            0.2995
            
            
            
            
            
            3.70Options
                forfeited or expired
            
            
            -
            
            
            -
            
            
            
            
            
            -Outstanding,
                June 30, 2008
            
            
            1,695,000
            
            
            0.3037
            
            
            
            
            
            3.54Options
                exercisable, June 30, 2008
            
            
            1,378,125
            
            
            0.2964
            
            
            
            
            
            3.15





**8.**  **Goodwill
      and Other Intangible Assets**





The
      identifiable intangible assets presented on the condensed consolidated balance
      sheet represent the intellectual property that was capitalized
      post-technological feasibility. Beginning with the second quarter of 2005, the
      Company began amortizing its intellectual property costs over a five year
      period. As part of management’s monitoring and assessment of any impairment
      charges against those assets in accordance with the provisions of SFAS No.
      142
      and SFAS No. 144, “ *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,”
it
      was
      determined that the identifiable intangible assets were impaired as of March
      31,
      2008 and were therefore written off. The amount amortized for the six months
      ended June 30, 2008 and 2007 was $32,575 and $15,100, respectively.





The
      capitalized research and development costs pertain to the development of the
      Company’s software stack to meet the ZigBee 1.0 standard, which was superseded
      by ZigBee standard 2006 in September 2006. The ZigBee 2006 standard was not
      100%
      backwards-compatible with the ZigBee 1.0 standard. The Company determined that
      30% of its ZigBee 1.0 compatible stack was not transferable to the newer
      standard and wrote off $173,294 in the fourth quarter of 2007. In addition,
      the
      Company wrote-off $34,071 of other research and development costs capitalized
      in
      the fourth quarter of 2007. The Company began amortizing its capitalized
      research and development costs in the fourth quarter of 2006 over a three-year
      period, or $33,696 per quarter. During the first quarter of 2008, the Company
      determined that the capitalized research and development costs were now impaired
      pursuant to the provisions of SFAS No. 142 and SFAS No. 144, “ *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,”
and
      wrote off the balance.





The
      main
      components of intangible assets are as follows:




Six Months Ended June 30, 2008Gross Amount
            
            Accumulated
              Amortization
            
            Net Carrying
              AmountIntellectual
                Property
            
            $
            116,090
            
            $
            116,090
            
            $
            -Patent
            
            
            10,450
            
            
            -
            
            
            10,450Capitalized
                Research & Development
            
            
            403,887
            
            
            403,887
            
            
            -Total
                Intangible Assets
            
            $
            530,427
            
            $
            519,977
            
            $
            10,450




10





Year Ended December 31, 2007Gross Amount
            
            Accumulated
              Amortization
            
            Net Carrying
              AmountIntellectual
                Property
            
            $
            116,090
            
            $
            83,050
            
            $
            33,040Patent
            
            
            464
            
            
            -
            
            
            464Capitalized
                Research & Development
            
            
            403,888
            
            
            168,479
            
            
            235,409Total
                Intangible Assets
            
            $
            520,442
            
            $
            251,529
            
            $
            268,913





Amortization
      expense for the next five years ending June 30 is expected to be as follows:
      $3,483 in 2009; $3,483 in 2010, $3,483 in 2011and $0 in 2012 and
      2013.





**9.**  **Recent
      Accounting Pronouncements**





In
      September 2006, the Financial Accounting Standards Board ("FASB") issued
      SFAS No. 157, *“Fair
      Value Measurements”* (“SFAS
      No. 157”), which clarifies the definition of fair value whenever another
      standard requires or permits assets or liabilities to be measured at fair value.
      Specifically, the standard clarifies that fair value should be based on the
      assumptions market participants would use when pricing the asset or liability,
      and establishes a fair value hierarchy that prioritizes the information used
      to
      develop those assumptions. SFAS No. 157 does not expand the use of fair value
      to
      any new circumstances, and must be applied on a prospective basis except in
      certain cases. The standard also requires expanded financial statement
      disclosures about fair value measurements, including disclosure of the methods
      used and the effect on earnings.





In
      February 2008, FASB Staff Position (“FSP”) FAS No. 157-2, *“Effective
      Date of FASB Statement No. 157”* (“FSP
      No. 157-2”) was issued. FSP No. 157-2 defers the effective date of SFAS No. 157
      to fiscal years beginning after December 15, 2008, and interim periods within
      those fiscal years, for all nonfinancial assets and liabilities, except those
      that are recognized or disclosed at fair value in the financial statements
      on a
      recurring basis (at least annually). Examples of items within the scope of
      FSP
      No. 157-2 are nonfinancial assets and nonfinancial liabilities initially
      measured at fair value in a business combination (but not measured at fair
      value
      in subsequent periods), and long-lived assets, such as property, plant and
      equipment and intangible assets measured at fair value for an impairment
      assessment under SFAS No. 144.





The
      partial adoption of SFAS No. 157 on January 1, 2008 with respect to financial
      assets and financial liabilities recognized or disclosed at fair value in the
      financial statements on a recurring basis did not have a material impact on
      the
      Company's consolidated financial statements. See Note 13 for the fair value
      measurement disclosures for these assets and liabilities. The Company is in
      the
      process of analyzing the potential impact of SFAS No. 157 relating to its
      planned January 1, 2009 adoption of the remainder of the standard.





On
      January 1, 2008 (the first day of fiscal 2008), the Company adopted SFAS No.
      159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities, Including
      an
      amendment of FASB Statement No. 115”* (“SFAS
      No. 159”). SFAS No. 159 permits entities to choose to measure many financial
      instruments and certain other items at fair value, which are not otherwise
      currently required to be measured at fair value. Under SFAS No. 159, the
      decision to measure items at fair value is made at specified election dates
      on
      an instrument-by-instrument basis and is irrevocable. Entities electing the
      fair
      value option are required to recognize changes in fair value in earnings and
      to
      expense upfront costs and fees associated with the item for which the fair
      value
      option is elected. The new standard did not impact the Company's Condensed
      Consolidated Financial Statements as the Company did not elect the fair value
      option for any instruments existing as of the adoption date. However, the
      Company will evaluate the fair value measurement election with respect to
      financial instruments the Company enters into in the future.




In
      December 2007, the FASB issued SFAS No. 160, *“Noncontrolling
      Interests in Consolidated Financial Statements - An Amendment of ARB No.
      51.”* SFAS No.
      160 establishes new accounting and reporting standards for the noncontrolling
      interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS
      No.
      160 is effective for fiscal years beginning on or after December 15, 2008.
      The
      Company believes that SFAS No. 160 should not have a material impact on the
      condensed consolidated financial position or results of operations.





In
      March
      2008, the FASB issued SFAS No. 161, *“Disclosures
      about Derivative Instruments and Hedging Activities,”* SFAS No.
      161 requires companies with derivative instruments to disclose information
      that
      should enable financial statement users to understand how and why a company
      uses
      derivative instruments, now derivative instruments and related hedged items
      are
      accounted for under SFAS No. 133 *“Accounting
      for Derivative Instruments and Hedging Activities”* and how
      derivative instruments and related hedged items affect a company’s financial
      position, financial performance and cash flows. SFAS No. 161 is effective for
      financial statements issued for fiscal years and interim periods beginning
      after
      November 15, 2008. The adoption of this statement is not expected to have a
      material effect on the Company’s future financial position or results of
      operations.


11





**10.**  **Debt**





***Notes
      Payable - Other***





In
      September 2005, a former director loaned the Company $100,000 in return for
      an
      unsecured demand promissory note. The terms of the note provided for interest
      at
      6.5% per annum. Payment of the note was guaranteed by an affiliate of the
      Company. On September 19, 2006, the Company issued its promissory note for
      $100,000 due December 31, 2006 to replace the prior note. The terms of the
      note
      provided for interest at 10.0% per annum. The note was secured by 555,555
      pledged shares of stock which are held by an escrow agreement pursuant to a
      written escrow agreement. The parties have engaged in discussions extending
      the
      due date but have not reached agreement and the Company has been served with
      a
      summons and complaint. The negotiations between the parties are
      continuing.





On
      May
      18, 2006, Henry and Catherine Zimmer (the “Zimmers”), two accredited investors,
      accepted the Company’s term sheet for senior secured bridge loans by providing
      $385,000 cash to the Company. The terms of this bridge loan were: interest
      at
      12% per annum, compounded monthly; payable in ninety (90) days, the Company
      having the option of extending for another 30 days for a fee of 8% of the amount
      provided the Company. The indebtedness is secured by the Company’s assets. The
      Company exercised its option to extend the term for an additional thirty (30)
      days. If the loan was not repaid by the end of its term plus the optional
      extension, the Company agreed to pay a penalty of 10% of the dollar value of
      the
      amount outstanding; the Company further agreed to pay an additional 10% penalty
      for each quarter thereafter that the loan remained unpaid. These accredited
      investors also received 577,500 warrants to purchase common stock at the ratio
      of 1.5 common shares for each $1.00 loaned. The warrants have a three year
      term
      and an exercise price of $0.50 per share. These accredited investors made
      subsequent loans to the Company totaling $215,000 which were added to this
      bridge loan on the same terms and conditions between December 15, 2006 and
      February 28, 2007. In addition, the Company issued a total of 2,022,500 warrants
      to purchase common stock. These warrants have an exercise price of $0.40 per
      share and expire at various dates through January 29, 2009. As a result of
      its
      failure to make timely payment, the Company issued 3,200,000 shares of its
      restricted common stock pursuant to the terms of the loan documents. As of
      April
      15, 2008 the total amount due the Zimmers for outstanding principal, interest
      and penalties was $1,411,368. On April 15, 2008, the Company entered into a
      Note
      and Settlement Agreement (“Note”) with the Zimmers. The new Note replaces all
      prior Bridge Note documents and has a face value of $700,000 at 8.5% simple
      interest payable monthly in cash or stock at discrete times at the Company’s
      option. The Zimmers have the option of converting up to $200,000 of the Note
      to
      common stock at a conversion rate of $0.044 per share. The term of the Note
      is
      two years. The Zimmers returned to the Company the 3,200,000 shares issued
      pursuant to the Bridge Note and the Company agreed to reprice the outstanding
      warrants strike price to $0.17 per share. The parties also executed a full
      mutual release for any and all actions prior to the date of the
      Note.





On
      April
      3, 2007 the Company executed a promissory note for $100,000 to Memphis Scale
      Works, Inc. The note bears interest at the rate of 12% per annum. As an
      inducement to make the loan the Company issued 200,000 restricted shares of
      its
      common stock to maker. The note was due May 2, 2007 but is still outstanding.
      The parties have engaged in discussions extending the due date but have not
      reached agreement as of August 12, 2008 although no notice of default has been
      issued.





On
      May
      11, 2007 the Company executed a promissory note for $20,000 to Larry Watkins.
      The note bore interest at the rate of 10% per annum for the first fifteen days,
      increasing to 15% per annum thereafter. As an inducement to make the loan the
      Company issued 20,000 warrants to purchase restricted shares of its common
      stock
      to maker exercisable over 18 months at an exercise price of $0.50 per share.
      The
      note was due September 30, 2007 but is still outstanding. The parties have
      engaged in discussions extending the due date but have not reached agreement
      as
      of June 30, 2008. See Note 16 - Subsequent Events for additional
      details.





On
      May
      11, 2007 the Company executed a promissory note for $20,000 to Robert Noone.
      The
      note bore interest at the rate of 12% per annum. As an inducement to make the
      loan the Company issued 100,000 warrants to purchase restricted shares of its
      common stock to maker exercisable over 18 months at an exercise price of $0.50
      per share. The note was due September 30, 2007 but is still outstanding. The
      parties have engaged in discussions extending the due date but have not reached
      agreement as of July 28, 2008 although no notice of default has been
      issued.





On
      May
      11, 2007 the Company executed a promissory note for $30,000 to Henry Zimmer.
      The
      note was interest-free for the first 30 days of its term and subsequently bore
      interest at the rate of 12% per annum. The note was due with 72 hours of receipt
      of any new significant financing and is still outstanding and is not part of
      the
      Note and Settlement Agreement dated April 15, 2008 between the Company and
      Henry
      and Catherine Zimmer.





On
      June
      1, 2007 the Company executed a promissory note for $10,000 to Shekar
      Viswanathan. The note bore interest at the rate of 10% per annum. The note
      was
      due July 6, 2007 but remained outstanding until April 30, 2008 when the Company
      issued 272,917 shares of common stock in full payment of principal and accrued
      interest.





On
      November 26, 2007 the Company executed a promissory note for $112,000 to Jerry
      Michie. The note bears interest at the rate of 12% per annum. As an inducement
      to make the loan the Company issued 400,000 restricted shares of its common
      stock to Mr. Michie. The note is convertible at holder’s option; the conversion
      price is the five day weighted average closing price of the Company’s stock for
      the five trading days preceding conversion. The note is due 90 days after date.
      If the Company fails to repay the note within the time allotted, the Company
      will issue 1 million shares to the holder and the interest rate will increase
      to
      22% per annum from the due date until the note is repaid. The parties have
      engaged in discussions extending the due date but have not reached agreement
      as
      of August 12, 2008 although no notice of default has been
      issued.


12





On
      December 10, 2007 the Company executed a promissory note for $44,500 to Marcus
      Perez. The note bore no interest, the Company having issued 400,000 restricted
      shares of its common stock and issued 400,000 three-year warrants with an
      exercise price of $0.05 per share and 300,000 three-year warrants with an
      exercise price of $0.12 per share. The note is convertible at holder’s option;
      the conversion price is the five day weighted average closing price of the
      Company’s stock for the five trading days preceding conversion. The note is due
      within five business days after the Company receives any funding from an
      investment group or from generated revenue, whichever first occurs. On January
      4, 2008, the Company executed a promissory note for $60,000 to Marcus Perez.
      The
      promissory note was due within five business days after receipt of any funding
      from an investment group or from generated revenue and bore interest at the
      rate
      of 12% per annum. The note had a conversion feature exercisable at the holder’s
      option. On January 25, 2008 the Company issued 1,000,000 shares of common stock
      in partial payment of $24,151 of principal. On June 23, 2008 the Company issued
      1,442,448 shares of common stock in partial payment of $26,349 of principal
      and
      $5,042 of accrued interest. The remaining principal balance on Mr. Perez’s notes
      is $54,000.





On
      January 10, 2008, the Company executed a promissory note for $10,100 to Rudolph
      Cane, Jr. The note bears interest at the rate of 12% per annum and is due July
      9, 2008. The note has a conversion feature exercisable at the holder’s option.
      In further consideration of the note, the Company issued 50,000 warrants to
      purchase common shares of its restricted common stock exercisable for three
      years at $0.25 per share. The parties have engaged in discussions extending
      the
      due date but have not reached agreement as of July 28, 2008 although no notice
      of default has been issued.





On
      January 15, 2008, the Company executed a promissory note for $10,000 to Dave
      Brubaker. The note bears interest at the rate of 12% per annum and is due July
      16, 2008. The note has a conversion feature exercisable at the holder’s option.
      In further consideration of the note, the Company issued 50,000 warrants to
      purchase common shares of its restricted common stock exercisable for three
      years at $0.25 per share. The parties have engaged in discussions extending
      the
      due date but have not reached agreement as of July 28, 2008 although no notice
      of default has been issued.





***Convertible
      Debentures***





On
      December 29, 2005, the Company executed a convertible debenture for $500,000
      to
      Montgomery Equity Partners Ltd. (“Montgomery”). The convertible debenture is
      secured by substantially all of the assets of the Company, pledged shares of
      stock of three affiliates of the Company, and 13.5 million pledged shares of
      stock (which are not counted as outstanding shares until converted pursuant
      to
      the terms of the Stock Purchase Agreement and Escrow Agreement that were part
      of
      this transaction). The pledged shares are held by an escrow agent, who is
      Montgomery’s general counsel, a partner of Montgomery’s general partner and
      Montgomery’s attorney for this transaction, pursuant to a written escrow
      agreement. Pursuant to the terms of the convertible debenture, Montgomery
      disbursed $350,000 upon the date the debenture was executed and the remaining
      $150,000 was disbursed on April 8, 2007. The debenture is convertible at the
      option of the holder into common shares of the Company at a price per share
      equal to 80% of the lowest closing value 10 days prior to the closing date
      or 10
      days prior to the conversion date. In addition, the Company issued 2,000,000
      freestanding warrants exercisable over three years as follows: 1,000,000
      warrants at a strike price of the lesser of 80% of the average closing bid
      price
      for the 5 trading days preceding exercise or $0.20 per share; 500,000 warrants
      at a strike price of the lesser of 80% of the average closing bid price for
      the
      5 trading days preceding exercise or $0.30 per share; and 500,000 warrants
      at a
      fixed strike price of $0.001. Montgomery has exercised all 2,000,000 warrants
      in
      cashless exercises and received a total of 1,337,009 shares of common stock.
      During 2007, Montgomery converted $380,000 of the debentures and received
      4,134,615 shares, leaving a balance due upon maturity of $120,000. The Company
      was unable to pay the outstanding debentures on December 29, 2007 and was in
      default under the terms of the debentures. After negotiations, Montgomery
      converted an additional $66,700 of the debentures on January 28, 2008, receiving
      5,210,938 shares, sold $13,300 of the debentures to BARTFAM LP on January 30,
      2008, and retained $40,000 for its own account. The purchase price of the
      January 30 th transaction was $98,842, consisting of $13,300 for the debentures, outstanding
      and accrued interest of $35,012, a redemption fee of $1,330 and liquidated
      damages of $49,200. Montgomery also assigned its security interest to BARTFAM
      LP, which also took possession of the 15,318,833 pledge shares held in escrow.
      On April 5, 2008, Montgomery converted the remaining $40,000 of its debentures
      and received 1,666,667 shares of common stock.





On
      October 5, 2007, the Company executed a $350,000 convertible debenture with
      Golden Gate Investors, Inc. (“Golden Gate”). Pursuant to its terms, Golden Gate
      disbursed $350,000 to the Company upon execution. The convertible debenture
      was
      due October 4, 2008 and accrued interest at 8.75% per year. In addition, the
      Company issued 2,000,000 warrants to purchase common stock exercisable at $0.12
      per share. The warrants expire on October 4, 2010. When a condition of default
      occurred Golden Gate accelerated the note in December 2007. When the Company
      was
      unable to repay the note, Golden Gate began selling 10 million pledged shares,
      which it completed in February 2008. On April 24, 2008, Golden Gate converted
      $20,000 of its remaining debentures and received 1,015,486 shares of common
      stock. On June 13, 2008, Golden Gate converted $14,000 of its remaining
      debentures and received 911,874 shares of common stock. As of June 30, 2008,
      the
      remaining balance owed to Golden Gate is approximately $12,800 plus accrued
      interest.


13





On
      February 6, 2008 and effective as of January 30, 2008, the Company entered
      into
      a Debenture and Warrant Purchase Agreement, as amended, with Bartfam LP, et
      al
      (“Bartfam”) by which Bartfam agreed to purchase and the Company agreed to sell
      approximately $1.4 million of secured convertible debentures in three tranches
      convertible at $0.02 per share. In addition, the Company agreed to issue
      37,364,667 warrants to purchase common stock exercisable as follows: 12,454,889
      warrants at $0.10 per share; 12,454,889 warrants at $0.20 per share; and
      12,454,889 warrants at $0.30 per share. The warrants expire on the fifth
      anniversary of the date of issuance. The first tranche of $500,000 was disbursed
      to the Company on February 6, 2008 upon the Company’s execution of a two-year
      12% secured convertible debenture with interest payable quarterly. The second
      tranche of $500,000 was disbursed to the Company on April 15, 2008 upon the
      execution of a two-year 12% secured convertible debenture with interest payable
      quarterly. The third tranche of $401,158 was disbursed to the Company on May
      29,
      2008 upon the execution of a two-year 12% secured convertible debenture with
      interest payable quarterly. With the funding of the first tranche, the Company
      issued 4,444,500 warrants exercisable at $0.10, 4,444,500 warrants exercisable
      at $0.20, and 4,444,500 warrants exercisable to $0.30. With the funding of
      the
      second tranche, the Company issued 4,444,500 warrants exercisable at $0.10,
      4,444,500 warrants exercisable at $0.20, and 4,444,500 warrants exercisable
      to
      $0.30. With the funding of the third tranche, the Company issued 3,565,889
      warrants exercisable at $0.10, 3,565,889 warrants exercisable at $0.20, and
      3,565,889 warrants exercisable to $0.30.





Effective
      as of January 31, 2008, the Company entered into a series of Debenture and
      Warrant Purchase Agreements with six investors (the “Empire Financial
      Investors”) by which the Empire Financial Investors agreed to purchase and the
      Company agreed to sell $280,000 of secured convertible debentures convertible
      at
      $0.05 per share. The debentures have a two-year term with interest payable
      quarterly at 12% per annum. In addition, the Company agreed to issue 2,800,000
      warrants to purchase common stock exercisable at $0.10 per share. The warrants
      expire on January 30, 2013.





Effective
      as of April 17, 2008, the Company entered into a Debenture and Warrant Purchase
      Agreement with Anita Green (“Green”) by which Green agreed to purchase and the
      Company agreed to sell $200,000 of secured convertible debentures convertible
      at
      $0.05 per share. The debentures have a two-year term with interest payable
      quarterly at 10% per annum. In addition, the Company agreed to issue 3,200,000
      warrants to purchase common stock exercisable at $0.10 per share. The warrants
      expire on April 17, 2013.





***Bridge
      Loan Derivatives***





Between
      April 16, 2006 and May 5, 2006, five accredited investors accepted the Company’s
      term sheet for convertible senior secured bridge loans by providing a total
      of
      $115,000 cash to the Company. The terms of these bridge loans are: interest
      at
      12% per annum, compounded monthly; repayable in ninety (90) days but the Company
      has the option of extending for another 30 days for a fee of 8% of the amount
      provided the Company; these five accredited investors have the option to convert
      their bridge loans to restricted shares of common stock at an exercise price
      of
      the lower of the average closing bid price of the Company’s stock for the five
      trading days preceding the date of the conversion or the market price of the
      stock on the trading day preceding the conversion. The Company exercised its
      option to extend the term for an additional thirty (30) days for these five
      loans. If the bridge loans are not repaid or converted by the end of their
      terms
      plus the optional extension, the Company will pay a penalty of 10% of the dollar
      value of the amount outstanding; the Company will pay an additional 10% penalty
      for each quarter thereafter that the bridge loans remain unpaid. These five
      accredited investors also received warrants to purchase common stock at the
      ratio of one common share for each $2.00 loaned. All warrants have a three
      year
      term and an exercise price of $0.50 per share. The warrants and any shares
      converted have piggyback registration rights. The Company has not repaid the
      bridge loans and the outstanding balance including accrued interest and
      penalties is $344,537. As a result of the conversion rights associated with
      these bridge loans, the Company recorded these bridge loans as a derivative
      liability valued at $350,587. The loss on this derivative for the three months
      ended June 30, 2008 was $6,050.





***Notes
      Payable - Related Parties***





The
      Company entered into promissory notes with some of its officers. There are
      amounts outstanding under these notes. These amounts accrue interest at varying
      rates between 6.0% and 12.0% annually. In February 2008, the Company repaid
      $83,761 in full payment of principal and accrued interest on an officer’s notes.
      As of June 30, 2008, the Company has $55,389 outstanding under these notes
      plus
      $2,369 in accrued interest. Because the remaining notes are demand notes, they
      are therefore reflected as current liabilities on the condensed consolidated
      balance sheets. The notes relate to services rendered or funds loaned to the
      Company.





Principal
      payments on all notes payable for the next five years ending June 30 are due
      as
      follows: $887,824 in 2009, $3,046,168 in 2010, and $0 in 2011 through
      2013.





**11.**  **Stockholders’
      Equity**





The
      Company has 200,000,000 shares of common stock, par value $0.00004, authorized
      at June 30, 2008, with 137,975,797 common shares issued, 14,142,511 shares
      held
      in escrow, 1,660,036 shares in treasury, and 123,833,286 shares
      outstanding.





The
      following stock transactions occurred in the three months ended June 30,
      2008:




On
      April
      11, 2008, the Company issued 1,666,667 restricted shares to Montgomery Equity
      Partners, Ltd. for the conversion of $40,000 of the $500,000 secured convertible
      debentures due December 29, 2007. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The organization received information
      concerning the Company and had the ability to ask questions about the
      Company.


14





On
      April
      15, 2008, the Company issued 13,333,500 warrants to purchase our common stock
      to
      Bartfam in connection with their $500,000 convertible debenture of even date.
      The warrants expire April 15, 2013 and were issued as follows: 4,444,500
      warrants are exercisable at $0.10 per share, 4,444,500 warrants are exercisable
      at $0.20 per share, and 4,444,500 warrants are exercisable at $0.30 per share.
      The securities were issued pursuant to the exemption from registration provided
      by Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The accredited investors received information concerning the Company and had
      the
      ability to ask questions about the Company.





On
      April
      15, 2008, the Company cancelled 3,900,000 warrants to purchase common stock
      incorrectly issued to Allen & Associates LLC on February 6, 2008 due to a
      clerical error and issued 2,500,000 warrants to purchase common stock to Allen
      & Associates LLC as part of a success fee pursuant to a management and
      financial consulting agreement. The warrants are exercisable at $0.02 per share
      and expire on April 15, 2013. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The organization received information
      concerning the Company and had the ability to ask questions about the
      Company.





On
      April
      15, 2008, the Company issued 560,000 warrants to purchase common stock to Steve
      Barnes as part of a success fee pursuant to a financial consulting agreement.
      The warrants are exercisable at $0.05 per share and expire on April 15, 2013.
      The securities were issued pursuant to the exemption from registration provided
      by Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The organization received information concerning the Company and had the ability
      to ask questions about the Company.





On
      April
      15, 2008, the Company issued 3,200,000 warrants to purchase common stock to
      Anita Green in connection with her $200,000 convertible debenture of even date.
      The warrants are exercisable at $0.10 per share and expire on April 15, 2013.
      The securities were issued pursuant to the exemption from registration provided
      by Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The organization received information concerning the Company and had the ability
      to ask questions about the Company.





On
      April
      16, 2008, the Company issued 2,500,000 warrants to purchase common stock to
      Allen & Associates LLC as part of a success fee pursuant to a management and
      financial consulting agreement. The warrants are exercisable at $0.02 per share
      and expire on April 15, 2013. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The organization received information
      concerning the Company and had the ability to ask questions about the
      Company.





On
      April
      16, 2008, the Company issued 2,841,667 warrants to purchase our common stock
      to
      Richard Sommerfeld in connection with his $465,000 convertible debenture of
      even
      date. The warrants expire April 16, 2013 and were issued as follows: 1,550,000
      warrants are exercisable at $0.10 per share, 775,000 warrants are exercisable
      at
      $0.20 per share, and 516,667 warrants are exercisable at $0.30 per share. The
      securities were issued pursuant to the exemption from registration provided
      by
      Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The accredited investors received information concerning the Company and had
      the
      ability to ask questions about the Company.





On
      April
      17, 2008, the Company issued 400,000 warrants to purchase common stock to Allen
      & Associates LLC as part of a success fee pursuant to a management and
      financial consulting agreement. The warrants are exercisable at $0.05 per share
      and expire on April 17, 2013. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The organization received information
      concerning the Company and had the ability to ask questions about the
      Company.





On
      April
      25, 2008, the Company issued 1,015,486 restricted shares to Golden Gate
      Investors, Inc. for the conversion of $20,000 of the $350,000 secured
      convertible debentures issued October 5, 2007. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The organization
      received information concerning the Company and had the ability to ask questions
      about the Company.





On
      April
      28, 2008, the Company cancelled 3,200,000 restricted shares previously issued
      as
      a non-payment penalty to Henry and Catherine Zimmer, these shares being returned
      to the Company as part of the Promissory Note and Settlement Agreement dated
      April 15, 2008 more fully described in Note 10, above.





On
      April
      30, 2008, the Company issued 272,917 restricted shares of stock to Shekar
      Viswanathan, an accredited investor, to settle a note payable totaling $10,915
      including accrued interest. The securities were issued pursuant to the exemption
      from registration provided by Section 4(2) of the Securities Act and contain
      the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The accredited investor received information concerning
      the Company and had the ability to ask questions about the
      Company.


15





On
      April
      30, 2008, the Company issued 334,783 restricted shares to Allen & Associates
      LLC for corporate finance and strategic counsel services worth $12,500 when
      incurred. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The organization received information concerning the Company and
      had
      the ability to ask questions about the Company.





On
      May 1,
      2008, the Company issued 5,750,000 restricted shares to Bartfam pursuant to
      the
      anti-dilution provisions of the Debenture and Warrant Purchase Agreement dated
      January 30, 2008. The securities were issued pursuant to the exemption from
      registration provided by Section 4(2) of the Securities Act and contain the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The accredited investors received information concerning
      the Company and had the ability to ask questions about the Company.





On
      May
      15, 2008, the Company issued 176,865 restricted shares to Catherine Zimmer
      in
      payment of $4,958 in interest due pursuant to the Promissory Note and Settlement
      Agreement dated April 15, 2008. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The accredited investors received
      information concerning the Company and had the ability to ask questions about
      the Company.





On
      May
      15, 2008, the Company issued 182,558 restricted shares to the Empire Financial
      Investors in payment of $5,264 in interest due pursuant to the Debenture and
      Warrant Purchase Agreements dated January 30, 2008. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investors received information concerning the Company and had the ability to
      ask
      questions about the Company.





On
      May
      15, 2008, the Company issued 349,508 restricted shares to Bartfam in payment
      of
      $10,028 in interest due pursuant to the Debenture and Warrant Purchase
      Agreements dated January 30, 2008. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The accredited investors received
      information concerning the Company and had the ability to ask questions about
      the Company.




On
      May
      15, 2008, the Company issued 11,621 restricted shares to Bartfam in payment
      of
      interest due pursuant to the convertible debenture acquired from Montgomery
      on
      January 30, 2008. The securities were issued pursuant to the exemption from
      registration provided by Section 4(2) of the Securities Act and contain the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The accredited investors received information concerning
      the Company and had the ability to ask questions about the Company.





On
      May
      29, 2008, the Company issued 10,697,667 warrants to purchase our common stock
      to
      Bartfam in connection with their $500,000 convertible debenture of even date.
      The warrants expire May 29, 2013 and were issued as follows: 3,565,889 warrants
      are exercisable at $0.10 per share, 3,565,889 warrants are exercisable at $0.20
      per share, and 3,565,889 warrants are exercisable at $0.30 per share. The
      securities were issued pursuant to the exemption from registration provided
      by
      Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The accredited investors received information concerning the Company and had
      the
      ability to ask questions about the Company.





On
      May
      29, 2008, the Company issued 2,005,788 warrants to purchase common stock to
      Allen & Associates LLC as part of a success fee pursuant to a management and
      financial consulting agreement. The warrants are exercisable at $0.02 per share
      and expire on May 29, 2013. The securities were issued pursuant to the exemption
      from registration provided by Section 4(2) of the Securities Act and contain
      the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The organization received information concerning the
      Company and had the ability to ask questions about the Company.





On
      May
      31, 2008, the Company issued 300,280 restricted shares to Allen & Associates
      LLC for corporate finance and strategic counsel services worth $12,500 when
      incurred. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The organization received information concerning the Company and
      had
      the ability to ask questions about the Company.





On
      June
      13, 2008, the Company issued 911,874 restricted shares to Golden Gate Investors,
      Inc. for the conversion of $14,000 of the $350,000 secured convertible
      debentures issued October 5, 2007. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The organization received information
      concerning the Company and had the ability to ask questions about the
      Company.


16





On
      June
      23, 2008, the Company issued 1,442,448 restricted shares of stock to an
      accredited investor to partially settle $31,391 of notes payable and accrued
      interest. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The accredited investor received information concerning the Company
      and had the ability to ask questions about the Company.





On
      June
      24, 2008, the Company issued 1,000,000 restricted shares of stock to Memphis
      Scale Works, Inc. pursuant to the default provisions of a promissory note made
      in 2007. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The accredited investor received information concerning the Company
      and had the ability to ask questions about the Company.





On
      June
      30, 2008, the Company issued 458,792 restricted shares to the Empire Financial
      Investors in payment of $8,377 in interest due pursuant to the Debenture and
      Warrant Purchase Agreements dated January 30, 2008. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investors received information concerning the Company and had the ability to
      ask
      questions about the Company.





On
      June
      30, 2008, the Company issued 1,725,652 restricted shares to Bartfam in payment
      of $31,508 in interest due pursuant to the Debenture and Warrant Purchase
      Agreements dated January 30, 2008. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The accredited investors received
      information concerning the Company and had the ability to ask questions about
      the Company.





On
      June
      30, 2008, the Company issued 27,241 restricted shares to Bartfam in payment
      of
      interest due pursuant to the convertible debenture acquired from Montgomery
      on
      January 30, 2008. The securities were issued pursuant to the exemption from
      registration provided by Section 4(2) of the Securities Act and contain the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The accredited investors received information concerning
      the Company and had the ability to ask questions about the Company.





On
      June
      30, 2008, the Company issued 547,681 restricted shares to Allen & Associates
      LLC for corporate finance and strategic counsel services worth $12,500 when
      incurred. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The organization received information concerning the Company and
      had
      the ability to ask questions about the Company.





**12.**  **Commitments
      and Contingencies**





***Repayment
      Agreement***





MindTree
      provided services to the Company under a Time and Materials Contract dated
      March
      30, 2005 (the T&M Contract”). On a monthly basis, MindTree invoiced the
      Company for work it performed. Payment terms were net 30. The Company was unable
      to pay the invoices as they became due and, by informal agreement, extended
      the
      repayment terms monthly. On December 15, 2005, the Company entered into a
      written agreement with MindTree by which it agreed to pay MindTree $200,000
      on
      or before December 23, 2005 and $100,000 per month on the last business day
      of
      each succeeding month until the outstanding indebtedness of approximately
      $580,000 was fully paid. The Company’s performance was secured by the software
      code MindTree developed under the T&M Contract. If the Company defaulted in
      making any payment when due and such default was not cured within five business
      days after receipt of a notice of default, MindTree would be entitled to co-own
      the software code, with any revenue the Company realized from the software
      code
      during the co-ownership period to be split 50-50 with MindTree. If full payment
      is made, full ownership of the software code reverts to the
      Company.





To
      date,
      the Company has paid MindTree $275,000 pursuant to this agreement. MindTree
      has
      not yet issued any notice of default. By a series of additional agreements,
      the
      payment deadline has been extended to September 30, 2008. The Company expects
      to
      complete or substantially complete the repayment by the new deadline. MindTree
      has indicated that if repayment of the indebtedness is substantially complete
      it
      will agree to an additional extension of the agreement.





***Litigation***





On
      October 3, 2005, Richard Sommerfeld, Jr., the Company’s former chief financial
      officer (“Sommerfeld”) filed suit against the Company. Pursuant to the
      settlement agreement, plaintiff entered a consent judgment for $700,000 on
      September 26, 2007 and commenced judgment enforcement proceedings against the
      Company. The amount of the judgment plus statutory interest and costs is carried
      in the current liabilities section of the balance sheet. The parties reached
      a
      settlement on April 16, 2008. The Company agreed to pay Sommerfeld $350,000
      which was allocated between salary, interest and legal fees. The Company also
      issued a Subordinated Secured Convertible Debenture to Sommerfeld in the amount
      of $465,000 at 12% interest and convertible at $0.05 per share. The debenture
      matures two years from the date of the agreement. In addition, the Company
      issued Sommerfeld 2,841,667 warrants to purchase common stock at various rates
      of $0.10, $0.20 and $0.30 per share. Sommerfeld agreed to have the judgment
      marked “Paid and Satisfied” and joined in a consent motion for the return of the
      Company’s property seized under judgment enforcement proceedings. Sommerfeld
      also executed an inter-creditor agreement with the Company and its senior
      creditors.


17





***Accounting
      Treatment of Stock Based Compensation***





A
      special
      committee of the Company’s Board of Directors is conducting an
      investigation, for which it has retained special counsel, into tax and
      accounting issues arising out of the issuance, in 2006, of common stock to
      certain officers of the Company in payment for compensation deferred in prior
      years. The investigation is not complete. As a result, the Company cannot
      determine (a) whether it or any of its directors or officers at the time of
      such
      issuance have any liability in connection with the issuance and/or
      characterization for tax and accounting purposes of such issuance; or, (b)
      in the event that there is such liability, its nature or extent; or (c) whether
      any such liability would be considered material to the Company. Based on
      information currently available to the special committee and the Company,
      however, it is anticipated that any financial impact (i) will not be material
      to
      the Company’s statement of operations for fiscal year 2006; (ii) will not affect
      the net loss per share ($.07) reported for 2006; and (iii) will not
      materially affect the Company’s financial condition as a whole. At the
      conclusion of the investigation, the Company will both report on its results
      and
      determine whether it is necessary or appropriate to restate its financial
      statements for 2006 or any subsequent year.





**13.**  **Fair
      Value Measurements**





On
      January 1, 2008, the Company adopted SFAS No. 157 *“Fair
      Value Measurements”* (“SFAS
      157”). SFAS 157 defines fair value, provides a consistent framework for
      measuring fair value under Generally Accepted Accounting Principles and expands
      fair value financial statement disclosure requirements. SFAS 157’s valuation
      techniques are based on observable and unobservable inputs. Observable inputs
      reflect readily obtainable data from independent sources, while unobservable
      inputs reflect market assumptions. SFAS 157 classifies these inputs into the
      following hierarchy:




·
            Level
                1 Inputs- Quoted prices for identical instruments in active
                markets.





·
            Level
                2 Inputs- Quoted prices for similar instruments in active markets;
                quoted
                prices for identical or similar instruments in markets that are not
                active; and model-derived valuations whose inputs are observable
                or whose
                significant value drivers are
                observable.





·
            Level
                3 Inputs- Instruments with primarily unobservable value
                drivers.





The
      following table represents the fair value hierarchy for those financial assets
      and liabilities measured at fair value on a recurring basis as of June 30,
      2008.




Fair Value Measurements on a Recurring Basis as of June 30, 2008Level I
            
            Level II
            
            Level III
            
            TotalAssets
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Total
                Assets
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Liabilities
            
            $
            -
            
            $
            4,298,039
            
            $
            -
            
            $
            4,298,039Total
                Liabilities
            
            $
            -
            
            $
            4,298,039
            
            $
            -
            
            $
            4,298,039





**14.**  **Going
      Concern**





As
      shown
      in the accompanying condensed consolidated financial statements, as is typical
      of companies going through early-stage development of intellectual property,
      and
      products and services, the Company incurred net losses for the years ended
      December 31, 2007 and 2006 and for the six months ended June 30, 2008. There
      is
      no guarantee whether the Company will be able to generate enough revenue and/or
      raise capital to support current operations and expand sales. This raises
      substantial doubt about the Company’s ability to continue as a going
      concern.





Management
      believes that the Company’s capital requirements will depend on many factors
      including the success of the Company’s sales efforts. The Company has been
      successful in recent months in raising capital to fund its operating
      costs.





The
      Company has also been enhancing its business processes to account for the
      significant development that has occurred in the past year, and believes that
      with the proper bridge financing and potential permanent financing they
      anticipate, the viability of the Company remains very positive in excess of
      one
      year.


18





The
      condensed consolidated financial statements do not include any adjustments
      relating to the recoverability or classification of recorded assets and
      liabilities that might result should the Company be unable to continue as a
      going concern.





**15.**  **Restatement**





The
      Company amended its previously issued condensed consolidated financial
      statements for the three months ended June 30, 2008 to reduce the amortization
      of discount on debt resulting from the recalculation of the discount on debt
      associated with the Bartfam and Empire Financial convertible debentures. The
      effect of these changes resulted in a decrease in the loss for the three month
      period ended June 30, 2008 of $80,789 to a net income of $76,091 and a decrease
      in the accumulated deficit to $18,398,866. The cumulative effect of these
      changes resulted in an increase in loss for the six months ended June 30, 2008
      of $122,249 to a net loss of $1,239,709 and a decrease in the accumulated
      deficit to $18,398,866. There was no change in net loss per share for the six
      or
      three months ended June 30, 2008.





The
      Company amended its previously issued condensed consolidated financial
      statements for the three months ended March 31, 2008 to recognize additional
      amortization expense of $203,038, the net amount of changes occasioned by the
      write-off of intellectual property and capitalized research and development
      and
      the recalculation of the discount on debt associated with the Bartfam and Empire
      Financial convertible debentures. The effect of these changes resulted in an
      increase in the loss for the three month period ended March 31, 2008 of $203,038
      to a net loss of $1,315,799 and an increase in the accumulated deficit to
      $18,474,956. There was no change in net loss per share for the three months
      ended March 31, 2008.





The
      Company amended its previously issued condensed consolidated financial
      statements for the three months ended June 30, 2007 to recognize additional
      compensation and professional fees of $155,000. The effect of these changes
      resulted in an increase of the loss for the three month period ended June 30,
      2007 of $155,000 to a net loss of $1,723,265 and an increase in the accumulated
      deficit to $14,363,558. There was no change in the net loss per share for the
      six or three months ended June 30, 2007.





**16.**  **Subsequent
      Events**





On
      July
      10, 2008, the Company issued 971,131 restricted shares of stock to Larry
      Watkins, an accredited investor, to settle a note payable totaling $23,501
      including accrued interest.





On
      July
      18, 2008, the Company issued 415,921 restricted shares of stock to Rudolph
      Cane,
      Jr., an accredited investor, to settle a note payable totaling $10,731 including
      accrued interest.





On
      July
      24, 2008, Satya Akula commenced an action in the United States District Court
      for the Eastern District of Virginia by serving a summons and complaint on
      the
      Company and Sundaresan Raja (“Raja”). The complaint alleges that the Company and
      Raja are in default pursuant to the terms of September 19, 2006 promissory
      note
      in the principal amount of $100,000. Plaintiff seeks a judgment for the
      outstanding principal, accrued interest, collection costs and expenses and
      reasonable attorneys’ fees. Defendants answer is due August 13,
      2008.





On
      July
      31, 2008, Bartfam and the Company executed Amendment No. 1 to Security Agreement
      and Amendment No. 3 to Debenture and Warrant Purchase Agreement by which Bartman
      Bros., a California General Partnership, was added to the participating
      investors under the January 30, 2008 Debenture and Warrant Purchase Agreement
      and the third tranche of said Debenture and Warrant Purchase Agreement was
      increased by $500,000 to $901,158.





In early
      September, 2008, a special committee of the Company’s Board of Directors began
      an investigation, for which it has retained special counsel, into tax and
      accounting issues arising out of the issuance, in 2006, of common stock to
      certain officers of the Company in payment for compensation deferred in
      prior years. The investigation is not complete. As a result, the Company cannot
      determine (a) whether it or any of its directors or officers at the time of
      such
      issuance have any liability in connection with the issuance and/or
      characterization for tax and accounting purposes of such issuance; or, (b)
      in the event that there is such liability, its nature or extent; or (c) whether
      any such liability would be considered material to the Company. Based on
      information currently available to the special committee and the Company,
      however, it is anticipated that any financial impact (i) will not be
      material to the Company’s statement of operations for fiscal year 2006; (ii)
      will not affect the net loss per share ($.07) reported for 2006; and (iii)
      will
      not materially affect the Company’s financial condition as a whole. At the
      conclusion of the investigation, the Company will both report on its results
      and
      determine whether it is necessary or appropriate to restate its financial
      statements for 2006 or any subsequent year.


19




**Item
      2. Management’s Discussion and Analysis of Financial Condition and
      Results**  **of
      Operations**





**Forward
      Looking Statements**





This
      Form
      10-Q/A, including “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations,” contains forward-looking statements regarding future
      events. These statements are based on current expectations, estimates,
      forecasts, and projections about the industries in which we operate and the
      beliefs and assumptions of our management. Words such as “expects,” “will,”
“anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,”
“seeks,” “estimates,” “continues,” “may,” variations of such words, and similar
      expressions are intended to identify such forward-looking statements. In
      addition, any statements that refer to projections of our future financial
      performance, our anticipated growth and trends in our businesses including
      the
      potential growth of advanced technologies and other characterizations of future
      events or circumstances are forward-looking statements. Readers are cautioned
      that these forward-looking statements are only predictions and are subject
      to
      risks, uncertainties, and assumptions that are difficult to predict. Therefore,
      actual results may differ materially and adversely from those expressed in
      any
      forward-looking statements. Important factors that could cause actual results
      to
      differ materially from our expectations are disclosed in our Annual Report
      on
      Form 10-KSB for the year ended December 31, 2007, including but not limited
      to
      those factors discussed in “Item 1A, Risk Factors.” All subsequent written and
      oral forward-looking statements attributable to us or persons acting on our
      behalf are expressly qualified in their entirety by these cautionary statements.
      We undertake no obligation to revise or update any forward-looking statements
      for any reason.





**Executive
      Summary**





·
            During
                the first half of 2008, our software engineers were engaged in
                demonstrating to our clients that our ZigBee-compliant ZigBee Pro
                software
                works on their hardware platforms in advance of signing licensing
                or
                application development agreements with
                them.





·
            We
                had a $1,239,709 net loss before provision for income taxes in the
                first
                six months of 2008 on revenue of $40,000. We recorded a $362,063
                gain in
                other income (expense) from the re-valuation of derivatives required
                under
                SFAS 133 and had other income of $1,420,361 from compromised debts.
                We
                raised $1,881,168 from the sale of convertible debentures to accredited
                investors and $80,100 in shareholder notes
                payable.





·
            Liquidity
                and capital resources issues continue to constrain growth but given
                signs
                of an emerging marketplace for our software and our track record
                of
                raising capital, we believe we will be able to obtain sufficient
                funds to
                continue operations until we can generate increased revenues from
                our
                license agreements.





·
            Risk
                factors include -





o
            Royalties
                from the license agreements are dependent on our customers’ ability to
                create demand and market acceptance for their
                product.


o
            Our
                international operations involve inherent risks that include currency
                controls and fluctuations, tariff and import regulations, and regulatory
                requirements that may limit our or our customers’ ability to manufacture,
                assemble and test, design, develop or sell products in particular
                countries.


o
            Our
                ability to continue as a going concern is dependent upon our obtaining
                adequate capital to fund losses until we become
                profitable.


o
            The
                developmental stage of the industry in general may create delays
                as chip
                and radio manufacturers re-engineer their products to accommodate
                ZigBee-compliant software.





**Overview**





*Organizational
      History*




Airbee
      Wireless, Inc. (hereinafter called “Airbee” or “Company”) was organized under
      the laws of the state of Delaware in August 2002 to develop a portfolio of
      embedded wireless connectivity software. In October 2002, we acquired
      Connexus Technologies (Pte.) Ltd. and its wholly-owned subsidiary,
      Connexus Technologies (India) Pvt. Ltd., with the intention of
      securing complementary wireless technology to enhance our operating scheme.
      We
      acquired Connexus because it was developing wireless technologies that were
      complementary to the software technologies that we were developing. We believed
      that our embedded software could be developed at a faster rate via this
      acquisition because of its compatible technologies with the additional benefits
      of lower product cost and shorter time to market. Connexus Technologies (Pte.)
      Ltd. was incorporated in Singapore under The Companies Act on July 8, 2000
      as a
      limited liability company. Connexus Technologies (India) Pvt. Ltd. was
      incorporated in India as a wholly-owned subsidiary of Connexus Technologies
      (Pte.) Ltd. on June 14, 2001. Subsequent to this acquisition, Connexus
      Technologies (Pte.) Ltd. changed its name to Airbee Wireless Pte. Ltd. and
      Connexus Technologies (India) Pte. Ltd. changed its name to Airbee Wireless
      (India) Pvt. Ltd. In March 2004, we became a member of the ZigBee Alliance,
      an international industry group formed to facilitate the development of a global
      standard for the wireless data and voice communications industry. As indicated
      on the ZigBee Alliance website ( www.ZigBee.com ) , the
      ZigBee Alliance has defined a standard for reliable, short-range,
      cost-effective, low-power wireless applications. The ZigBee standard first
      release of version 1.0 was formally released to the wireless industry on
      December 14, 2004. A second release has updated the standard known as
      version 1.1 or ZigBee 2006. It specifies a short-range, low-power, secure
      wireless data and voice transmission baseline. The version 1.1 required further
      development of our products to respond to changes in the standard. We have
      developed our products to meet the ZigBee PRO standard released in September
      2007. We completed the ZigBee product certification testing by an independent
      testing facility authorized by the ZigBee Alliance for the ZNS Software Stack
      in
      November 2006 and the current PRO version was certified in January 2008. With
      over 250 member companies, the ZigBee standard based on the IEEE 802.15.4
      standard for remote monitoring and control applications released by the
      Institute of Electrical and Electronic Engineers in May 2003 is emerging as
      a wireless standard for a host of industrial controls, telemetry, and
      in-building and home automation networking needs.




20




*Our
      Business*




We
      are a
      developer of intelligent connectivity software for wireless voice and data
      communications designed to comply with the ZigBee global standard as well as
      non-ZigBee wireless mesh networks. Our software, when embedded on microchips
      or
      in various devices containing such microchips, will enable consumer and business
      devices to wirelessly connect to each other over distances of less than 100
      meters. We license our software, which has been designed and engineered to
      comply with the recently released ZigBee standard for short-range, low-energy
      consumption, voice and data wireless communications to manufacturers of
      microprocessors and OEM manufacturers, thereby enabling them to develop an
      increasing number of wireless communications applications using Airbee’s
      software, including consumer electronics, medical equipment, sensor and metering
      equipment, and industrial automation equipment. To date, we have negotiated
      software licenses with seven licensees with revenues to be determined by the
      licensees’ product commercialization. We are dependent on our customers’
commercialization of their product development which will generate revenues
      from
      licensing and/or royalty payments to us, typically on a quarterly measurement
      basis.




Our
      corporate offices are located in Rockville, Maryland. We have also established
      an office in San Diego, California for our marketing and sales operations.
      The
      west coast is where the bulk of the wireless technology companies are located
      and where the ZigBee Alliance is headquartered. The engineering and development
      activities are conducted in our Chennai, India center. Training and problem
      resolution is handled via the Internet through a delivery and support system
      which has been tailored for our use and supported by the development center
      in
      India.




The
      Company reported $40,000 of revenue from planned operations in the first six
      months of 2008. We have continued our go-to-market strategy of licensing the
      major microcontroller and IEEE 802.15.4 radio companies, having previously
      announced agreements with several microchip manufacturers. We believe this
      will
      lead to two types of revenues - service revenue from customized stack work,
      integration support and application development and royalty revenue from the
      licensing of our stack. We previously announced a new product that facilitates
      low-power radio frequency (“RF”) application development for mesh networks
      including ZigBee.





We
      have
      also embarked on the design and development of a reference design board for
      use
      by developers for applications development and evaluation. The initial bill
      of
      material and board layout is complete and fabrication is expected to be finished
      in September. Upon completion, the unit will simulate any microprocessor and
      IEEE 802.15.4 radio combination on which the Airbee ZigBee stack will be
      loaded.




Our
      goal
      remains being a preeminent provider of intelligent software for short range
      wireless communications embedded into silicon chips and platform solutions.
      We
      focus our core competencies in the design and engineering of intelligent
      wireless communications software that is platform agnostic, ultra-low in energy
      consumption with complete portability across all controllers, radios, and
      operating system platforms. Our software is licensed to various global
      manufacturers of radio chips, radio frequency modules, and microprocessors
      used
      in an increasing number of wireless communications applications and
      devices.





We
      operate in highly innovative environments characterized by a continuing and
      rapid introduction of new products that offer improved performance at lower
      prices. With the trend toward convergence in wireless communications products,
      our software will likely cross over multiple categories, offering us new
      opportunities, but may also result in more businesses that compete with us.
      Competition tends to increase pricing pressure on our products, which may mean
      that we must offer our products at lower prices than we had anticipated,
      resulting in lower profits This is a two-step approach: (a) become an approved
      third-party vendor and achieve recognition in the manufacturer’s documentation,
      website and sales force (i.e. distributors for Texas Instruments and Radiocrafts
      as examples); and (b) the overriding objective is to be embedded directly into
      the controller by the manufacturer and shipped directly with each
      controller.





We
      operate an online help desk to support our prospective customers as they
      evaluate our products for their application and use, and worked extensively
      with
      the ATMEL corporation to attain certification of our software to both the 2006
      ZigBee standard and the new PRO version. We are one of three companies whose
      ZigBee Pro software has been named a “Golden Unit” for subsequent compliance
      testing by independent testing laboratories. We note similar progress with
      our
      ZigBee module partner Radiocrafts, which now has more than 50 OEMs using our
      ZNS
      stack and ZAPP (SPPIO) application. We anticipate several of these will go
      into
      production later this year.




21




We
      will
      begin training programs for our customers to train their field application
      engineers after successful demonstration and evaluation by the OEMs. We expect
      this will result in increased opportunities with our partner’s customers. In
      addition, we participated in the ZigBee Developers program last year where
      we
      taught new developers how to use our stack to develop applications. We did
      so
      again at the European developers’ conference which was held in June 2008. We
      have also established a world class RF laboratory at our development center
      in
      Chennai, India, which has already produced real world knowledge about RF
      interference issues in the ZigBee environment.





The
      Company has implemented a service relationship for customers and potential
      customers which we have named “ZSupport”. This is an online system which is
      hosted by a Parature product. It provides the “Knowledge Base of Airbee
      Products” and is the medium to upload (and download) deliverables, product
      documentations and product documentation. It is also a medium of contact between
      our Customers and Airbee, the medium to promote the Company, its products and
      events. We have seen a further increased interest in our products from OEMs
      and
      system integrators in the quarter. We experienced a significant increase in
      the
      customer registrations in the first quarter which increased steadily after
      the
      ZigBee-PRO certification was announced, have continued to increase during the
      second quarter of 2008 and are expected to go up in subsequent quarters. These
      registrations give us valuable insight as to customer preferences as far as
      favored transceiver and microcontroller, give us the customer profile, download
      history and metrics and input for questions.





The
      interest in ZigBee was also demonstrated by the case studies and increased
      downloads from our website this quarter. The “Triple R” and the “Remote
      Monitoring of Wireless Sensor Networks” were the most frequently viewed Case
      Studies. The Airbee/TI **-** 4 Node
      Demo Application was downloaded more times than we have ever recorded during
      the
      quarter. Finally, “ZigBee - Calling all software” was the most read article and
“Airbee Wireless Mesh Network” specification sheet was downloaded more often
      than in any previous recorded period.





Since
      late January 2008 when our status as a ZigBee Pro “Golden Unit” was confirmed
      and our software certified ZigBee compliant, we have been developing a solution
      for a significant client which has been delivered for evaluation. Barring
      unforeseen issues and the client’s satisfaction, we expect to solidify the
      arrangement in the third or fourth quarter. We expect to address other OEMs
      following the evaluation period. We also previously disclosed that we had an
      initial development contract with NXP which has gone very well and NXP has
      indicated that they are ready to proceed to the next phase with expanded scope
      and access to their client set. That effort should also begin in the third
      quarter. The principal terms of such agreement have been negotiated but not
      yet
      completed pending final review of the initial effort. We have also engaged
      two
      new chip manufacturers in discussions and have negotiated the principle terms
      of
      an agreement with one of them which is now ready for go-ahead in early October.
      We anticipate an agreement with the other chip manufacturer will be signed
      before the end of the year.




Our
      engineering team has been engaged to build a solution for a major international
      medical application. The application may go into production late this year,
      pending testing and the client’s satisfaction. If successful, it would be the
      largest revenue producer for us thus far. Pricing and projected cost discussions
      have been held between the parties.





The
      Mercatus financing did not close in the third quarter of 2007 as anticipated.
      Airbee terminated the transaction due to the delay in funding at the beginning
      of this year. In late January, we concluded an agreement with Bartfam, a
      California Limited Partnership, which funded its first tranche of $500,000
      on
      February 6, 2008. The second and third tranches totaling $901,158 were funded
      in
      the second quarter. We also received partial funding from Empire Financial
      investors totaling $280,000 which has not yet completely closed. Airbee expects
      to receive a total of $500,000 from the Empire Financial investors transactions
      once they are completely closed. We have concluded an agreement with a new
      investor on April 17, 2008 worth $200,000. We are seeking further investment
      from institutional entities in the next few months.





**Results
      of Operations**





***Six
      Months Ended June 30, 2008 Compared to the Six Months Ended June 30,
      2007***





During
      the first six months of 2008 we had $40,000 in operating revenues, resulting
      in
      a net loss applicable to common shares of $1,239,709, or $0.01 net loss per
      share, compared to a net loss of $2,970,917 or $0.03 net loss per share for
      the
      same period in 2007. Cumulative net loss since inception totals
      $18,398,866.





Our
      net
      revenue for the six months ended June 30, 2008 increased to $40,000 as compared
      to $23,238 for the six months ended June 30, 2007. Our software was certified
      ZigBee compliant to the ZigBee Pro standard in January 2008 and we are one
      of
      the companies designated as a “golden unit” to be used in the certification
      process.





Operating
      expenses for the six months ended June 30, 2008 were $2,576,692 as compared
      to
      $2,608,833 for the six months ended June 30, 2007, a decrease of 1% or $32,141.
      This decrease, as further explained below, is principally due to decreases
      in
      compensation and professional fees, selling general and administrative expense
      and stock option compensation expense, which offset increases in research and
      development expense and depreciation and amortization.




22




Our
      overall decrease in compensation and professional fees for the six months ended
      June 30, 2008 compared to the six months ended June 30, 2007 was $120,434,
      to
      $1,666,246 from $1,786,680. This decrease consists of a decrease of $46,226
      in
      compensation costs, a decrease of $93,016 in financing professional fees and
      an
      $18,808 increase in legal and accounting professional fees. Part of the decrease
      in compensation is attributable to vacancies in management positions in the
      US
      offset by increased staff in India but also the result of an unfavorable change
      in the exchange rate resulting from the weaker dollar. Financing professional
      fees decreased due to completion in February of the amortization of financing
      fees begun in 2007 despite cash payments for a 10% success fee totaling $198,000
      as well as non-cash payments to our corporate finance and strategic counsel
      of
      restricted shares valued at $12,500 per month and the fair value of warrants
      to
      purchase common stock issued as part of a success fee plus financing
      arrangements with other short-term lenders.





Stock
      option compensation expense required by SFAS 123R was $1,521 for the six months
      ended June 30, 2008 as compared to $27,965 for the six months ended June 30,
      2007. A total of 437,500 options issued prior to December 31, 2005 vested during
      the six months. The Company is now required to expense stock options granted
      in
      the period. This is a non-cash expense.





Selling,
      general and administrative expenses decreased to $444,503 in the first six
      months of 2008, down $240,264 or 35% from $684,767 in the first six months
      of
      2007. This decrease was due primarily to decreases in marketing, consulting,
      travel, printing, dues and subscriptions, utilities and other costs which offset
      increases insurance, rent and other expenses. Our overall selling and marketing
      expenses consist primarily of marketing related expenses, compensation related
      expenses, sales commissions, facility costs and travel costs. Expenses,
      particularly certain marketing and compensation-related expenses, may vary
      going
      forward, depending in part on the level of revenue and profits. We believe
      that
      general and administrative expenses will not increase significantly in the
      short-term. However, we do expect an increase in absolute dollars in the
      long-term, as we continue to invest in staff and infrastructure in the areas
      of
      information systems and sales and marketing.





Research
      and development expense for the six months ended June 30, 2008 was $60,000
      compared to $10,432 for the six months ended June 30, 2007. The R&D expense
      for 2008 represents the cost of certification testing by the independent testing
      facility and development costs associated with the FPGA boards.




Depreciation
      and amortization expense for the six months ended June 30, 2008 increased
      $305,433 or 309% to $404,422 from $98,989 for the six months ended June 30,
      2007. Depreciation expense for the six months was $25,815. Amortization of
      deferred financing costs accounted for $98,810 of the total expense for the
      six
      months. Amortization of capitalized research and development costs and
      intellectual property was $268,447 during the period. Amortization of leasehold
      improvements at our India office was $11,350 for the six months ended June
      30,
      2008. Interest expense for the six months ended June 30, 2008 increased $19,152
      to $485,441 from $466,289 for the six months ended June 30, 2007. Interest
      costs
      associated with notes payable - related parties, notes payable - others and
      the
      bridge loans accounted for this increase.





***Three
      Months Ended June 30, 2008 Compared to the Three Months Ended June 30,
      2007***





During
      the second quarter of 2008 we had $40,000 in operating revenues, resulting
      in a
      net income applicable to common shares of $76,091, or $0.00 net gain per share,
      compared to a net loss of $1,723,265 or $0.02 net loss per share for the same
      period in 2007. Cumulative net loss since inception totals
      $18,398,866.





Our
      net
      revenue for the three months ended June 30, 2008 increased to $40,000 as
      compared to $2,448 for the three months ended June 30, 2007. Our software was
      certified ZigBee compliant to the ZigBee Pro standard in January 2008 and we
      are
      one of the companies designated as a “golden unit” to be used in the
      certification process.





Operating
      expenses for the three months ended June 30, 2008 were $1,255,053 as compared
      to
      $1,818,628 for the three months ended June 30, 2007, a decrease of 31% or
      $563,575. This decrease, as further explained below, is principally due to
      decreases in compensation and professional fees, selling, general and
      administrative expense and stock option compensation expense which offset
      increases in research and development expenses and depreciation and
      amortization.





Our
      overall decrease in compensation and professional fees for the quarter ended
      June 30, 2008 compared to the quarter ended June 30, 2007 was $408,109, to
      $851,456 from $1,259,565. This decrease consists of a decrease of $73,006 in
      compensation costs, a decrease of $372,342 in financing professional fees and
      a
      $37,239 increase in legal and accounting professional fees. Part of the decrease
      in compensation is due to unfilled management positions in the US partially
      offset by increased staff in India and an unfavorable change in the exchange
      rate resulting from the weaker dollar. Financing professional fees decreased
      due
      to completion in February of the amortization of financing fees begun in 2007
      despite cash payments for success fees as well as non-cash payments to our
      corporate finance and strategic counsel of restricted shares valued at $12,500
      per month and the fair value of warrants to purchase common stock issued as
      part
      of a success fee plus financing arrangements with other short-term
      lenders.




23




Stock
      option compensation expense required by SFAS 123R was $1,521 for the quarter
      ended June 30, 2008 as compared to $27,496 for the quarter ended June 30, 2007.
      A total of 437,500 options issued prior to December 31, 2005 vested during
      the
      quarter. The Company is now required to expense stock options granted in the
      period. This is a non-cash expense.





Selling,
      general and administrative expenses decreased to $285,733 in the second quarter
      of 2008, down $196,940 or 41% from $482,673 in the second quarter of 2007.
      This
      increase was due primarily to increases in loan transaction costs and other
      costs which offset decreases in travel, insurance, marketing and other expenses.
      Our overall selling and marketing expenses consist primarily of marketing
      related expenses, compensation related expenses, sales commissions, facility
      costs and travel costs. Expenses, particularly certain marketing and
      compensation-related expenses, may vary going forward, depending in part on
      the
      level of revenue and profits. We believe that general and administrative
      expenses will not increase significantly in the short-term. However, we do
      expect an increase in absolute dollars in the long-term, as we continue to
      invest in staff and infrastructure in the areas of information systems and
      sales
      and marketing.





Research
      and development expense for the three months ended June 30, 2008 was $35,000
      compared to $5,590 for the three months ended June 30, 2007. The R&D expense
      for the second quarter of 2008 represents development costs related to the
      FPGA
      board.





Depreciation
      and amortization expense for the quarter ended June 30, 2008 increased $38,039
      or 88% to $81,343 from $43,304 for the quarter ended June 30, 2007. Depreciation
      expense for the quarter was $13,608. Amortization of deferred financing costs
      accounted for $61,973 of the total expense for the quarter. Amortization of
      capitalized research and development costs and intellectual property was $0
      during the period as the balances were written off in the first quarter.
      Amortization of leasehold improvements at our India office was $5,762 for the
      three months ended June 30, 2008. Interest expense for the three months ended
      June 30, 2008 decreased $73,376 to $186,535 from $259,911 for the three months
      ended June 30, 2007. Interest costs associated notes payable - others were
      offset by lower balances of notes payable - related parties. The elimination
      of
      interest costs associated with the Zimmer bridge loan resulting from the
      Company’s settlement with the Zimmers accounted for most of this
      decrease.




**Liquidity
      and Capital Resources**





Since
      inception, we have funded our operations principally from private placements
      of
      securities and management and shareholder loans and contributions of $7,573,706.
      As of June 30, 2008, we have $1,542,868 outstanding under related party notes
      and accrued payroll, and $358,511 in accrued interest. During the first six
      months of 2008, we received $80,100 in loans from shareholders and $1,881,168
      from convertible debentures. Proceeds were used to pay down current payables
      and
      salaries of our development staff in India and to start settling our outstanding
      liabilities in the U.S. We estimate we require approximately $5 million to
      continue operations for the next 12 months. Most of the funding will be
      allocated principally for sales, marketing and working capital. It is not
      anticipated that any lack of funding will impact upon the existing license
      and
      development agreements with our customers since our software development has
      been completed for four of our eight products that are under such license and
      development agreements.




We
      have
      incurred an accumulated deficit at June 30, 2008 of $18,398,866 compared to
      $17,159,157 at December 31, 2007. We had negative working capital at June 30,
      2008 of $4,659,275 compared to negative working capital of $6,698,979 at
      December 31, 2007. Our ability to continue as a going concern is dependent
      upon
      our obtaining adequate capital to fund losses until we become
      profitable.





On
      December 29, 2005, we entered into a Securities Purchase Agreement with
      Montgomery pursuant to which we agreed to issue Montgomery secured convertible
      debentures in the principle amount of $500,000. Of these secured convertible
      debentures, $350,000 was funded on December 29, 2005. The remaining $150,000
      was
      funded on April 9, 2007. The secured convertible debentures were convertible,
      in
      whole or in part, at any time and from time to time before maturity (December
      29, 2007) at the option of the holder at the lesser of (a) eighty percent (80%)
      of the lowest closing bid price of the common stock for the ten (10) trading
      days immediately preceding the closing date or (b) eighty percent (80%) of
      the
      lowest closing bid price of common stock for ten (10) trading days immediately
      preceding the conversion date. The secured convertible debentures, which after
      several conversions totaled $120,000, were due December 29, 2007, had piggy-back
      registration rights and accrued interest monthly at the rate of fifteen percent
      (15%) per year. We were $83,479, behind with our interest payments, which
      included $49,200 in liquidated damages..





Montgomery
      converted $66,700 of the debentures in January 2008 and received 5,210,938
      shares. On January 30, 2008, Montgomery sold $13,300 of the debentures to
      Bartfam as further described below and on April 5, 2008 converted the remaining
      $40,000 of the debentures and received 1,666,667 shares.





On
      May
      14, 2007, the Company executed a Restricted Equity Purchase Agreement (“REPA”)
      with Mercatus & Partners Limited (“Mercatus”), a United Kingdom private
      limited company, by which Mercatus agreed to purchase 33,334,000 shares of
      the
      Company’s restricted common stock in a delayed purchase transaction. The REPA
      was a Regulation S transaction. The amount the Company received was to be
      determined at closing in accordance with the provisions of the REPA less a
      45%
      discount to market price and less a total of $60,000 in structuring, due
      diligence and administrative fees. The restricted shares issued by the Company
      were not subject to registration unless Mercatus was deemed to be an affiliate
      of the Company pursuant to the Securities Act of 1933, as amended, as of or
      at
      any time subsequent to the second anniversary of the closing, at which time
      the
      Company would have 120 days after Mercatus’ request to file a registration
      statement for all shares then held by Mercatus. The Company issued 33,334,000
      shares of its common stock and deposited it with the custodian on May 15, 2007.
      On January 2, 2008 when the closing had still not been scheduled, the Company
      cancelled the REPA and demanded the return of its shares, which were received
      and cancelled in February 2008.




24




On
      October 5, 2007, the Company executed a $350,000 convertible debenture with
      Golden Gate Investors, Inc. (“Golden Gate”). Pursuant to its terms, Golden Gate
      disbursed $350,000 to the Company upon execution. The convertible debenture
      was
      due October 4, 2008 and accrued interest at 8.75% per year. In addition, the
      Company issued 2,000,000 warrants to purchase common stock exercisable at $0.12
      per share. The warrants expire on October 4, 2010. When a condition of default
      occurred Golden Gate accelerated the note in December 2007. When the Company
      was
      unable to repay the note, Golden Gate began selling 10 million pledged shares,
      which it completed in February 2008. On April 24, 2008, Golden Gate converted
      $20,000 of the outstanding debenture and received 1,015,486 shares of our common
      stock. On June 13, 2008, Golden Gate converted $14,000 of the outstanding
      debenture and received 911,874 shares of our common stock. As of June 30, 2008,
      the remaining balance is approximately $18,500 plus accrued
      interest.




On
      February 6, 2008 and effective as of January 30, 2008, the Company entered
      into
      a Debenture and Warrant Purchase Agreement, as amended, with Bartfam LP, et
      al
      (“Bartfam”) by which Bartfam agreed to purchase and the Company agreed to sell
      approximately $1.4 million of secured convertible debentures in three tranches
      convertible at $0.02 per share. In addition, the Company agreed to issue
      37,364,667 warrants to purchase common stock exercisable as follows: 12,454,889
      warrants at $0.10 per share with the first tranche; 12,454,889 warrants at
      $0.20
      per share with the second tranche; and 12,454,889 warrants at $0.30 per share
      with the third tranche. The warrants expire on the fifth anniversary of the
      date
      of issuance. The first tranche of $500,000 was disbursed to the Company on
      February 6, 2008 upon the Company’s execution of a two-year 12% secured
      convertible debenture with interest payable quarterly. With the funding of
      the
      first tranche, the Company issued 4,444,500 warrants exercisable at $0.10,
      4,444,500 warrants exercisable at $0.20, and 4,444,500 warrants exercisable
      to
      $0.30. The second tranche of $500,000 was disbursed on April 15, 2008 when
      the
      Company met the required benchmarks. With the funding of the second tranche,
      the
      Company issued 4,444,500 warrants exercisable at $0.10, 4,444,500 warrants
      exercisable at $0.20, and 4,444,500 warrants exercisable to $0.30. The third
      tranche of $401,157 was disbursed on May 29, 2008 and the Company issued
      3,565,889 warrants exercisable at $0.10, 3,565,889 warrants exercisable at
      $0.20, and 3,565,889 warrants exercisable to $0.30.




Effective
      as of January 31, 2008, the Company entered into a series of Debenture and
      Warrant Purchase Agreements with six investors (the “Empire Financial
      Investors”) by which the Empire Financial Investors agreed to purchase and the
      Company agreed to sell $280,000 of secured convertible debentures convertible
      at
      $0.05 per share. The debentures have a two-year term with interest payable
      quarterly at 12% per annum. In addition, the Company agreed to issue 2,800,000
      warrants to purchase common stock exercisable at $0.10 per share. The warrants
      expire on January 30, 2013. A total of $280,000 was disbursed to the Company
      in
      February 2008.




Effective
      as of April 17, 2008, the Company entered into a Debenture and Warrant Purchase
      Agreement with Anita Green (“Green”) by which Green agreed to purchase and the
      Company agreed to sell $200,000 of secured convertible debentures convertible
      at
      $0.05 per share. The debentures have a two-year term with interest payable
      quarterly at 10% per annum. In addition, the Company agreed to issue 3,200,000
      warrants to purchase common stock exercisable at $0.10 per share. The warrants
      expire on April 17, 2013. A total of $200,000 was disbursed to the Company
      in
      April 2008.




Our
      principal sources of liquidity have been private placements of our securities
      and loans from management and shareholders. There will continue to be an
      operating cash flow deficit from the licensing of embedded software in the
      near
      term.





Cash
      at
      June 30, 2008 and December 31, 2007, respectively, was $87,481 and $1,925.
      At
      June 30, 2008 and December 31, 2007, respectively, we had total stockholders’
deficit of $6,910,510 and $6,069,352.





Our
      capital requirements depend on numerous factors including our research and
      development expenditures, expenses related to selling, general and
      administrative operations and working capital to support business growth. We
      anticipate that our operating and capital expenditures will constitute a
      material use of our cash resources. As a result, our net cash flows will depend
      heavily on (a) the level of our future sales (which depend, to a large extent,
      on general economic conditions affecting us and our customers, as well as the
      timing of our products’ sales cycles and other competitive factors) and (b) our
      ability to control expenses.




25




With
      regard to our current liabilities at June 30, 2008, $55,389 is payable to a
      related note holder who has deferred repayment. However, as he left the Company
      during the second quarter of 2008, this related party note payable will have
      to
      be repaid soon. Trade payables at June 30, 2008 of $1,179,595 are outstanding
      and will be paid as they come due or as payment may be extended by agreement
      of
      the parties. Given the age of some of these payables, the Company will attempt
      to settle some of these outstanding payables at less than their full amount.
      One
      vendor, MindTree Consulting Pvt. Ltd. (“MindTree”), accounted for 28% of the
      Company’s accounts payable. MindTree provided services to the Company under a
      Time and Materials Contract dated March 30, 2005 (the T&M Contract”). On a
      monthly basis, MindTree invoiced the Company for work it performed. Payment
      terms were net 30 days. The Company was unable to pay the invoices as they
      became due and, by informal agreement, extended the repayment terms monthly.
      On
      December 15, 2005, the Company entered into a written agreement with MindTree
      by
      which it agreed to pay MindTree $200,000 on or before December 23, 2005 and
      $100,000 per month on the last business day of each succeeding month until
      the
      outstanding indebtedness of approximately $580,000 was fully paid. The Company’s
      performance was secured by the software code then in existence (the
“Intellectual Property”) MindTree developed under the T&M Contract; the
      ZigBee version 1.0 software. If the Company defaulted in making any payment
      when
      due and such default was not cured within five business days after receipt
      of a
      notice of default, MindTree would be entitled to co-own the Intellectual
      Property, with any revenue the Company realized from the Intellectual Property
      during the co-ownership period to be split 50-50 with MindTree. To date, the
      Company has paid MindTree $275,000 pursuant to this agreement. As of June 30,
      2008, the Company is behind in making the scheduled payments. MindTree has
      not
      yet issued any notice of default and has extended the deadline to substantially
      complete the repayment until September 30, 2008.




We
      believe that revenues will slowly increase during 2008 from our licensing and
      other agreements with the increasing marketplace acceptance of the ZigBee Pro
      software. We are one of a few members of the Alliance selected to develop the
      so-called “Golden Unit” to be used in the certification testing for this new
      standard. We shall continue to be dependent upon financing to accelerate our
      marketing activities and continue product enhancement. We anticipate monthly
      expenses of approximately $200,000 over the next several months. This amount
      includes costs of our SEC reporting obligations, which were approximately
      $160,000 for the year ending December 31, 2007. Cost of SEC reporting
      obligations includes all filing costs and professional fees.





As
      shown
      in the accompanying condensed consolidated financial statements, as is typical
      of companies going through early-stage development of intellectual property,
      and
      products and services, the Company incurred net losses for the years ended
      December 31, 2007 and 2006 and for the six month period ended June 30, 2008.
      There is no guarantee whether the Company will be able to generate enough
      revenue and/or raise capital to satisfy past due obligations, support current
      operations and expand sales. This raises substantial doubt about the Company’s
      ability to continue as a going concern.





The
      Company’s current financing and related security agreements contain numerous
      covenants that restrict our ability to raise needed funds. It is possible that
      needed funds may not be available, in which case the Company may be forced
      to
      temporarily suspend operations. Our existing financing contains a right of
      first
      refusal for our lender. Numerous discussions with investment bankers throughout
      the country lead us to conclude that additional financing will be
      available.





The
      Company expects to be able to satisfy its past-due accounts payable as
      additional financing is obtained and intends to negotiate lump-sum payment
      reductions with the larger vendors (MindTree excepted). The bulk of our
      contractual obligations are employment contracts with current management. Given
      management’s commitment to the success of the Company, it is not anticipated
      these contracts will be an impediment. Our long-term debt consists of secured
      convertible debentures, which the Company expects will be paid off or converted
      when substitute financing is arranged.





If
      circumstances require, the Company will renegotiate employment contracts with
      management to defer or convert (but not eliminate) its obligations under these
      contracts. It will also consider overhead reductions at its headquarters and
      at
      its India subsidiary. However, (a) the Company is leanly staffed at the
      administrative level and (b) staff cuts in India would adversely impact our
      ability to complete product development, deliver product and provide
      support.





**Critical
      Accounting Estimates**





***General***




Management’s
      discussion and analysis of our financial condition and results of operations
      is
      based upon our Consolidated Financial Statements, which were prepared in
      accordance with accounting principles generally accepted in the United States,
      or GAAP. GAAP requires us to make estimates and assumptions that affect the
      reported amounts of assets, liabilities, revenues and expenses, as well as
      the
      disclosure of contingent assets and liabilities. Note 2, *“Summary
      of Significant Accounting Policies”* of Notes
      to the Consolidated Financial Statements for the year ended December 31, 2007
      describes our significant accounting policies which are reviewed by us on a
      regular basis and which are also reviewed by senior management with our Board
      of
      Directors.





An
      accounting policy is deemed by us to be critical if it requires an accounting
      estimate to be made based on assumptions about matters that are highly uncertain
      at the time the estimate is made, and if different estimates that reasonably
      could have been used, or changes in the accounting estimates that are reasonably
      likely to occur periodically, could materially impact the financial statements.
      The policy and estimate that we believe is most critical to an understanding
      of
      our financial results and condition and that requires a higher degree of
      judgment and complexity is revenue recognition.




26




***Revenue
      Recognition***





We
      account for the time-based licensing of software in accordance with the American
      Institute of Certified Public Accountants Statement of Position (SOP) 97-2,
      “Software Revenue Recognition.” We recognize revenue when (i) persuasive
      evidence of an arrangement exists; (ii) delivery has occurred or services have
      been rendered; (iii) the sales price is fixed or determinable; and (iv) the
      ability to collect is reasonably assured. For software arrangements with
      multiple elements, revenue is recognized dependent upon whether vendor-specific
      objective evidence (VSOE) of fair value exists for each of the elements. When
      VSOE does not exist for all the elements of a software arrangement and the
      only
      undelivered element is post-contract customer support (PCS), the entire
      licensing fee is recognized ratably over the contract period.




Revenue
      attributable to undelivered elements, including technical support, is based
      on
      the sales price of those elements, and is recognized ratably on a straight-line
      basis over the term of the time-based license. Post-contract customer support
      revenue is recognized ratably over the contract period. Shipping charges billed
      to customers are included in revenue and the related shipping costs are included
      in cost of sales.





Time-based
      product licensing fees are collected in advance. Revenues from licenses are
      recognized on a prorated-basis over the life of the license. Airbee’s customary
      practice is to have non-cancelable time-based licenses and a customer purchase
      order prior to recognizing revenue.





Enterprise
      license model arrangements require the delivery of unspecified future updates
      and upgrades within the same product family during the time-based license.
      Accordingly, Airbee will recognize fees from its enterprise license model
      agreements ratably over the term of the license agreement.





Time-based
      royalties are charged on a unit basis. Royalties are not fixed dollar amounts,
      but are instead a percentage of the customer’s finished product and the
      percentage varies on a tiered basis with the number of units shipped by
      customer.





Revenue
      attributed to undelivered elements is based on the sales price rather than
      on
      the renewal rate because of (i) the newness of the ZigBee standard for this
      short-range wireless technology, (ii) the newness of the Company’s product
      introductions into the marketplace for a range of applications being developed
      by its customers, and (iii) the lack of historical data for potentially
      defective software, which may be a function of the application into which it
      is
      installed, a reasonable reserve for returns cannot yet be established. In
      accordance with SFAS No. 48 “Revenue Recognition When Right of Return Exists,”
in the absence of historical data, the Company is unable to make a reasonable
      and reliable estimate of product returns at this time.





We
      expect
      to enter into maintenance contracts with its customers. Maintenance fees are
      not
      a fixed dollar amount, but rather a percentage fee based upon the value of
      the
      license and/or royalties billed/received. Maintenance contracts are paid for
      and
      collected at the beginning of the contract period. We provide bug fixes (under
      warranty obligations) free-of-charge that are necessary to maintain compliance
      with published specifications, it accounts for the estimated costs to provide
      bug fixes in accordance with SFAS No. 5 “ *Accounting
      for Contingencies* .”





Revenue
      from products licensed to original equipment manufacturers (OEMs) is based
      on
      the time-based licensing agreement with an OEM and recognized when the OEM
      ships
      licensed products to its customers.





**Factors
      That May Affect Future Results**




*Our
      business faces significant risks. The risks described below may not be the
      only
      risks we face. Additional risks that we do not yet know of or that we currently
      think are immaterial may also impair our business operations. If any of the
      events or circumstances described in the following risks actually occurs, our
      business, financial condition or results of operations could suffer, and the
      trading price of our common stock could decline.*




Our
      future results of operations and the other forward-looking statements contained
      in this filing, including this MD&A, involve a number of risks and
      uncertainties—in particular, the statements regarding our goals and strategies,
      new product introductions, plans to cultivate new businesses, future economic
      conditions, revenue, pricing, gross margin and costs, capital spending,
      depreciation and amortization, research and development expenses and the tax
      rate. In addition to the various important factors discussed above, a number
      of
      other factors could cause actual results to differ materially from our
      expectations.




**Because
      a significant portion of our revenue will be derived from software licenses,
      we
      are dependent upon the ability of our customers to develop and penetrate new
      markets successfully.**




Our
      software license revenues depend not only upon our ability to successfully
      negotiate license agreements with our customers but also upon our customers’
ability to commercialize their products using our embedded software. We cannot
      control our customers’ product development or commercialization or predict their
      success. Demand for our products, which impacts our revenue and gross margin
      percentage, is affected by business and economic conditions, as well as
      communications industry trends, and the development and timing of introduction
      of compelling software applications and operating systems that take advantage
      of
      the features of our products. Demand for our products is also affected by
      changes in customer order patterns, such as changes in the levels of inventory
      maintained by our customers and the timing of customer purchases. Airbee
      operates in a highly competitive industry (i.e., embedded communications
      software), and our revenue and gross profits could be affected by factors such
      as competing software technologies and standards, pricing pressures, actions
      taken by our competitors and other competitive factors, as well as market
      acceptance of our new ZigBee-compliant products in specific market segments.
      Future revenue is also dependent on continuing technological advancement,
      including the timing of new product introductions, sustaining and growing new
      businesses, and integrating and operating any acquired businesses. Results
      could
      also be affected by adverse effects associated with product defects and
      deviations from published specifications, and by litigation or regulatory
      matters involving intellectual property or other issues.




27




**Numerous
      factors may cause our total revenues and operating results to fluctuate
      significantly from period to period. These fluctuations increase the difficulty
      of financial planning and forecasting and may result in decreases in our
      available cash and declines in the market price of our
      stock.**




A
      number
      of factors, many of which are outside our control, may cause or contribute
      to
      significant fluctuations in our total revenues and operating results. These
      fluctuations make financial planning and forecasting more difficult and may
      result in unanticipated decreases in our available cash, which could negatively
      impact our operations and increase the volatility of our stock price. Factors
      that may cause or contribute to fluctuations in our operating results and
      revenues include:




·
            Acceptance
                by our customers of our Airbee embedded software platforms and/or
                the slow
                acceptance by the market of the ZigBee global standard for short-range
                wireless voice and data
                communications;




·
            The
                number and timing of orders we receive, including disproportionately
                higher receipt and shipment of orders in the last month of a
                quarter;





·
            Changes
                in the length of our products sales cycles, which increases as our
                customers’ purchase decisions become more strategic and are made at higher
                management levels;





·
            The
                success of our customers’ products from which we derive our production
                license revenue;





·
            The
                mix of our revenues between sales of products and lower-margin sales
                of
                services;





·
            Our
                ability to control our operating expenses and fully realize the impact
                of
                the restructuring plans we have
                implemented;





·
            Our
                ability to continue to develop, introduce and ship competitive new
                products and product enhancements
                quickly;





·
            Possible
                deferrals of orders by customers in anticipation of new product
                introductions;





·
            Announcements,
                product introductions and price reductions by
                competitors;





·
            The
                impact of, and our ability to react to, natural disasters and/or
                terrorist
                actions;





·
            Changes
                in business cycles that affect the markets in which we sell our products
                and services;





·
            Economic,
                political and other conditions in the United States and
                internationally;





·
            Foreign
                currency exchange rates; and


·
            The
                impact of any stock-based compensation charges arising from the issuance
                of stock options, stock appreciation rights or any other stock-based
                awards.




**The
      Company’s excessive liabilities may make it difficult to continue operations if
      it is unable to pay its debts as they become due. It may also have a negative
      impact on our ability to raise needed capital since potential investors will
      want new investment reserved for working capital and not applied to pre-existing
      liabilities.**




Of
      primary concern is the impact judgment creditors may have on our operations.
      While all or substantially all of the Company’s assets are pledged as security
      for debts which pre-date any judgment entered against the Company to date,
      the
      ability of any judgment creditor to hinder our operations must be acknowledged.
      Management’s time devoted to vendor lawsuits and judgment enforcement
      proceedings is time not spent growing the Company. These distractions also
      impede our ability to raise additional capital. Investors are not looking for
      their investments to be utilized by paying past liabilities.




28




One
      or
      more of the foregoing factors may cause our operating expenses to be
      disproportionately high or may cause our net revenue and operating results
      to
      fluctuate significantly. Results from prior periods are thus not necessarily
      indicative of the results of future periods.




We
      operate internationally, with sales, marketing and research and development
      activities. We are, therefore, subject to risks and factors associated with
      doing business outside the U.S. International operations involve inherent risks
      that include currency controls and fluctuations, tariff and import regulations,
      and regulatory requirements that may limit our or our customers’ ability to
      manufacture, assemble and test, design, develop or sell products in particular
      countries. If terrorist activity, armed conflict, civil or military unrest,
      or
      political instability occurs in the U.S., or other locations, such events may
      disrupt our customers’ manufacturing, assembly and test, logistics, security and
      communications, and could also result in reduced demand for our products.
      Business continuity could also be affected if labor issues disrupt our
      transportation arrangements or those of our customers or suppliers. In addition,
      we may rely on a single or limited number of suppliers, or upon suppliers in
      a
      single country. On an international basis, we regularly review our key
      infrastructure, systems, services and suppliers, both internally and externally,
      to seek to identify potentially significant vulnerabilities as well as areas
      of
      potential business impact if a disruptive event were to occur. Once identified,
      we assess the risks, and as we consider it to be appropriate, we initiate
      actions intended to mitigate the risks and their potential impact. There can,
      however, be no assurance that we have identified all significant risks or that
      we can mitigate all identified risks with reasonable effort.




We
      are
      continuing to assemble the personnel and financial resources required to achieve
      the objectives of our business plan. Future revenue, costs and profits are
      all
      influenced by a number of factors, including those discussed above, all of
      which
      are inherently difficult to forecast.




**Off-Balance
      Sheet Arrangements**





As
      of
      June 30, 2008, we did not have any off-balance sheet arrangements, as defined
      in
      Item 303(a)(4)(ii) of SEC Regulation S-K.




**Tax
      and Accounting Treatment of Stock Based Compensation**




A
      special
      committee of the Company’s Board of Directors is conducting an
      investigation, for which it has retained special counsel, into tax and
      accounting issues arising out of the issuance, in 2006, of common stock to
      certain officers of the Company in payment for compensation deferred in prior
      years. The investigation is not complete. As a result, the Company cannot
      determine (a) whether it or any of its directors or officers at the time of
      such
      issuance have any liability in connection with the issuance and/or
      characterization for tax and accounting purposes of such issuance; or, (b)
      in the event that there is such liability, its nature or extent; or (c) whether
      any such liability would be considered material to the Company. Based on
      information currently available to the special committee and the Company,
      however, it is anticipated that any financial impact (i) will not be
      material to the Company’s statement of operations for fiscal year 2006; (ii)
      will not affect the net loss per share ($.07) reported for 2006; and (iii)
      will not materially affect the Company’s financial condition as a whole. At the
      conclusion of the investigation, the Company will both report on its results
      and
      determine whether it is necessary or appropriate to restate its financial
      statements for 2006 or any subsequent year.





**Contractual
      Obligations**





Our
      long-term debt obligation increased during the interim period with the closing
      of convertible debentures totaling $1,101,158 with interest payable quarterly
      at
      10% to 12% per annum. We are current with our interest payments through June
      30,
      2008 for these debentures.





Our
      purchase obligations are limited to employment contracts with company executives
      and senior staff. We have four written contracts for one to three years in
      duration, two of which expire on December 31, 2008 and the other two expired
      on
      or before May 15, 2008. The contracts contain automatic one-year extension
      provisions. New employment contracts are currently being
      negotiated.





Our
      operating leases are limited to the lease for office space in Chennai, India
      for
      our India subsidiary. We have signed a three-year lease for 6,000 sq. ft. of
      office space expiring on June 30, 2009. We just completed the second year of
      a
      three year lease. The current rent is approximately $5,471 per month with a
      10%
      increase in the third year of the lease.





We
      have
      no capital lease obligations as defined in FASB Statement of Accounting
      Standards No. 13, “Accounting for Leases” nor do we have any other long-term
      liabilities reflected on the balance sheet under generally accepted accounting
      principles in the United States.




**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**





Not
      required pursuant to Regulation S-K, Rule 305(3).




29




**Item
      4. Controls and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**




It
      is
      management’s responsibility to establish and maintain adequate internal control
      over all financial reporting pursuant to Rule 13a-15 under the Securities
      Exchange Act of 1934 (the “Exchange Act”). The Company’s management, with the
      participation of the Company’s chief executive officer and interim chief
      financial officer, evaluated the effectiveness of the Company’s disclosure
      controls and procedures within ninety (90) days of the filing date of this
      report. The term “disclosure controls and procedures,” as defined in Rules
      13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other
      procedures of a company that are designed to ensure that information required
      to
      be disclosed by a company in the reports that it files or submits under the
      Exchange Act is recorded, processed, summarized and reported, within the time
      periods specified in the Securities and Exchange Commission’s rules and forms.
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure that information required to be disclosed by
      a
      company in the reports that it files or submits under the Exchange Act is
      accumulated and communicated to the company’s management, including its
      principal executive and principal financial officers, as appropriate to allow
      timely decisions regarding required disclosures. Management recognizes that
      any
      controls and procedures, no matter how well designed and operated, can provide
      only reasonable assurance of achieving their objectives and management
      necessarily applies its judgment in evaluating the cost-benefit relationship
      of
      possible controls and procedures. Based on the evaluation of the Company’s
      disclosure controls and procedures as of the end of the period covered by this
      report, the Company’s chief executive officer and interim chief financial
      officer concluded that, as of such date, the Company’s disclosure controls and
      procedures were not effective for the reasons disclosed below.




The
      Company has previously identified certain internal control deficiencies that
      we
      consider to be material weaknesses. These consist of (1) inadequate
      communication leading to the untimely filing of a current report with the
      Securities and Exchange Commission in January 2005 and (2) certain accounting
      and disclosure matters. The accounting and disclosure deficiencies were: (1)
      a
      failure to amortize capitalized intellectual property costs and (2) improper
      accounting of unearned compensation arising from the issuance of stock options
      below market value. The accounting deficiencies are principally due to the
      Company’s transition from a private company to a public reporting company. Prior
      to going public the Company amortized capitalized intellectual property costs
      and accounted for unearned compensation arising from the issuance of stock
      options below market value contrary to the requirements of SFAS 86 and SFAS
      123,
      respectively, as such accounting methods were not required by a private entity.
      Subsequent to going public, the Company’s controller recognized the necessity to
      account for these items in accordance with SFAS 86 and SFAS 123. A further
      disclosure deficiency was presented when a material services agreement with
      the
      Company’s investment and strategic advisor with an effective date of March 5,
      2007 was not provided to the corporate secretary and the controller until the
      start of the third calendar quarter and after the Company’s Form 10-QSB for the
      quarter ended March 31, 2007 had been filed. This agreement required the Company
      to issue 2 million shares of its common stock as compensation upon the signing
      of the agreement. It also provided for monthly charges of $7,500 paid in cash
      or
      $10,000 paid in restricted stock. The Company issued the two million shares
      of
      common stock on July 10, 2007. However, because the signature date of the
      agreement was deemed to be March 5, 2007 pursuant to its terms, the Company
      has
      restated its Form 10-QSB for the quarter ended March 31, 2007, recognizing
      a
      liability for stock to be issued in the amount of $510,000 on its balance sheet
      offset by a prepaid consulting account in the equity section of its balance
      sheet in the amount of $458,333 and a professional fees - financing expense
      of
      $51,667. The Company has also restated its Form 10-QSB for the quarter ended
      June 30, 2007 to amortize prepaid consulting fees of $125,000 to professional
      fees in the quarter reducing the balance in the prepaid consulting account
      to
      $333,333 and increase the liability for stock to be issued by $30,000 to record
      the professional fees - financing expense for the quarter arising from this
      service agreement. The Company has also restated its Form 10-QSB for the quarter
      ended September 30, 2007 to amortize prepaid consulting fees of $125,000 to
      professional fees in the quarter reducing the balance in the prepaid consulting
      account to $208,333.




The
      Company attempted to remediate and eliminate previous internal control and
      disclosure deficiencies by hiring a controller in May 2005. The Company’s
      controller identified the internal control and disclosure control deficiencies
      disclosed above during the latter part of the third quarter of 2005. The
      controller is a CPA and has experience in accounting and disclosure procedures
      for public companies. The Company’s India subsidiary also hired a chartered
      accountant (equivalent to US CPA) who was also a certified corporate secretary
      as its finance manager in August 2005. The controller and the subsidiary’s
      finance manager were tasked with centralizing and formalizing the purchasing
      decisions, establishing and maintaining proper procedures for payment of
      accounts payable and other liabilities, setting credit and collection policies,
      and tracking the fixed assets of the Company, among other duties. The Company
      has implemented an accounting analysis procedure that requires all transactions,
      including but not limited to transactions similar to the deficiencies above,
      be
      analyzed by an employee of the Company in accordance with SEC public reporting
      standards. Separation of duties was instituted so that the person authorizing
      the purchase of goods or services was not the person preparing or signing the
      check in payment for such goods or services.




The
      controller and the interim chief financial officer are working together to
      keep
      each other appraised of items which may require disclosure and to see that
      proper level of disclosure is made. The controller and interim chief financial
      officer have also reminded all executives with authority to bind the Company
      to
      agreements made in the ordinary course of business of the necessity to share
      such agreements as early as practicable so that an appropriate judgment can
      be
      made regarding a given agreement’s impact on the Company’s financial reporting
      requirements.




While
      the
      Company has implemented an accounts analysis procedure and hired additional
      personnel, the abovementioned material weaknesses will not be considered
      remediated until the new internal controls operate for a sufficient period
      of
      time, are tested, and management concludes that these controls are operating
      effectively. The Company expects to complete its analysis by the end of this
      fiscal year ending December 31, 2008. Costs of the controller and finance
      manager and the practices implemented thus far are approximately $170,000 per
      year, consisting mainly of the controller’s and finance manager’s salaries and
      the public reporting costs of additional disclosure.




30




**Changes
      in Internal Controls**




The
      addition of a controller, the chartered accountant and the new policies and
      practices discussed above constitute changes in the Company’s internal control
      over financial reporting. The new policies and practices were implemented during
      the fourth quarter of 2006 and have materially affected, or are reasonably
      likely to materially affect, the Company’s internal controls over financial
      reporting. The new policies and practices arising from the material weakness
      giving rise to the restatements of the Company’s quarterly reports during 2007
      were implemented during the third quarter of 2007 and have materially affected,
      or are reasonably likely to materially affect, the Company’s internal controls
      over financial reporting. The controller, who was promoted to chief accounting
      officer in July 2007, resigned in August 2008 and a successor has not yet been
      named.





**Management’s
      Report on Internal Control over Financial Reporting**





Management
      of the Company is responsible for establishing and maintaining adequate internal
      control of over financial reporting as defined in Rule 13a-15(f) under the
      Securities Exchange Act of 1934. We have assessed the effectiveness of those
      internal controls as of December 31, 2007, using the Committee of Sponsoring
      Organizations of the Treadway Commission (“COSO”) *Internal
      Control - Integrated Framework* as a
      basis for our assessment.




Because
      of inherent limitations, internal control over financial reporting may not
      prevent or detect misstatements. Projections of any evaluation of effectiveness
      to future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies and procedures may deteriorate. All internal control systems, no matter
      how well designed, have inherent limitations Therefore, even those systems
      determined to be effective can provide only reasonable assurance with respect
      to
      financial statement preparation and presentation. Further, the design of a
      control system must reflect the fact that there are resource constraints, and
      the benefits of controls must be considered relative to their
      costs.




A
      material weakness in internal controls is a deficiency in internal control,
      or
      combination of control deficiencies, that adversely affects the Company’s
      ability to initiate, authorize, record, process or report external financial
      data reliably in accordance with accounting principles generally accepted in
      the
      United States of America such that there is more than a remote likelihood that
      a
      material misstatement of the Company’s annual or interim financial statements
      that is more than inconsequential will not be prevented or detected. In the
      course of making our assessment of the effectiveness of internal controls over
      financial reporting, we identified a material weakness in our internal control
      over financial reporting. This material weakness consisted of inadequate
      staffing and supervision within the accounting operations of our company. The
      relatively small number of employees who have bookkeeping and accounting
      functions prevents us from segregating duties within our internal control
      system. The inadequate separation of duties is a weakness because it could
      lead
      to the untimely identification and resolution of accounting and disclosure
      matters or could lead to a failure to perform timely and effective reviews.
      Inadequate staffing did not play a role causing the restatements of the
      Company’s interim reports during 2007. The root cause of the restatements was an
      officer’s failure to turn over an executed contract in a timely manner which
      prevented the Company from recognizing and recording the transaction in the
      proper period and delayed its discovery until after the close of the second
      calendar quarter. These
      financial statements are being restated to correct an accounting error relating
      to the improper bifurcation of several convertible debenture and warrant
      purchase agreements concluded in the first quarter of 2008. As
      we are
      not aware of any other instance in which the Company failed to identify or
      resolve a disclosure matter or failed to perform a timely and effective review,
      we determined that the addition of personnel to our bookkeeping and accounting
      operations is not an efficient use of our resources at this time.




Because
      of the above condition, the Company’s internal controls over financial reporting
      were not effective as of June 30, 2008.




This
      quarterly report does not include an attestation report of the Company’s
      registered public accounting firm regarding internal control over financial
      reporting. Management’s report was not subject to attestation by the Company’s
      registered public accounting firm pursuant to temporary rules of the Securities
      and Exchange Commission that permit the Company to provide only management’s
      report in this quarterly report.





31




**PART
      II OTHER INFORMATION**




**Item
      1. Legal Proceedings.**





In
      an
      action commenced in the District Court of Maryland for Montgomery County in
      October 2005, our former chief financial officer sued us for non-payment of
      wages, interest, statutory damages and attorney’s fees. We filed an answer to
      the complaint generally denying liability and asserting seven counterclaims
      against plaintiff including breach of fiduciary duty and duty of loyalty. On
      July 1, 2007 the parties reached a mediated settlement by which we agreed to
      pay
      plaintiff $500,000 by August 14, 2007 or consent to entry of judgment against
      us
      of $700,000 if we failed to make payment on time. After several extensions
      of
      time to pay, plaintiff entered the consent judgment for $700,000 on September
      26, 2007 and commenced post-judgment enforcement activities. The parties settled
      and the judgment was deemed “Paid and Satisfied” in April 2008. See the
      Litigation section of Note 12 - Commitments and Contingencies for additional
      information on this settlement.





In
      an
      action commenced in the United States District Court for the Eastern District
      of
      Virginia located in Alexandria, Virginia, Satya Akula, a former director and
      current note holder, sued the Company and Sundaresan Raja for non-payment of
      the
      promissory note. Defendants were served with the summons and complaint on July
      24, 2008 and are required to file an answer on or before August 13, 2008. The
      Company and Raja are studying their options and intend to response appropriately
      before their time to answer expires.





From
      time
      to time, the Company is party to business disputes arising in the normal course
      of its business operations. The Company does not believe that any other action,
      standing alone, or in the aggregate, is currently material to the Company’s
      operations or financial condition.




**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.**





The
      following stock transactions occurred in the second quarter of
      2008:





On
      April
      11, 2008, the Company issued 1,666,667 restricted shares to Montgomery Equity
      Partners, Ltd. for the conversion of $40,000 of the $500,000 secured convertible
      debentures due December 29, 2007. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The organization received information
      concerning the Company and had the ability to ask questions about the
      Company.





On
      April
      15, 2008, the Company issued 13,333,500 warrants to purchase our common stock
      to
      Bartfam in connection with their $500,000 convertible debenture of even date.
      The warrants expire April 15, 2013 and were issued as follows: 4,444,500
      warrants are exercisable at $0.10 per share, 4,444,500 warrants are exercisable
      at $0.20 per share, and 4,444,500 warrants are exercisable at $0.30 per share.
      The securities were issued pursuant to the exemption from registration provided
      by Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The accredited investors received information concerning the Company and had
      the
      ability to ask questions about the Company.





On
      April
      15, 2008, the Company cancelled 3,900,000 warrants to purchase common stock
      incorrectly issued to Allen & Associates LLC on February 6, 2008 due to a
      clerical error and issued 2,500,000 warrants to purchase common stock to Allen
      & Associates LLC as part of a success fee pursuant to a management and
      financial consulting agreement. The warrants are exercisable at $0.02 per share
      and expire on April 15, 2013. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The organization received information
      concerning the Company and had the ability to ask questions about the
      Company.





On
      April
      15, 2008, the Company issued 560,000 warrants to purchase common stock to Steve
      Barnes as part of a success fee pursuant to a financial consulting agreement.
      The warrants are exercisable at $0.05 per share and expire on April 15, 2013.
      The securities were issued pursuant to the exemption from registration provided
      by Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The organization received information concerning the Company and had the ability
      to ask questions about the Company.





On
      April
      15, 2008, the Company issued 3,200,000 warrants to purchase common stock to
      Anita Green in connection with her $200,000 convertible debenture of even date.
      The warrants are exercisable at $0.10 per share and expire on April 15, 2013.
      The securities were issued pursuant to the exemption from registration provided
      by Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The organization received information concerning the Company and had the ability
      to ask questions about the Company.




On
      April
      16, 2008, the Company issued 2,500,000 warrants to purchase common stock to
      Allen & Associates LLC as part of a success fee pursuant to a management and
      financial consulting agreement. The warrants are exercisable at $0.02 per share
      and expire on April 15, 2013. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The organization received information
      concerning the Company and had the ability to ask questions about the
      Company.




32




On
      April
      16, 2008, the Company issued 2,841,667 warrants to purchase our common stock
      to
      Richard Sommerfeld in connection with his $465,000 convertible debenture of
      even
      date. The warrants expire April 16, 2013 and were issued as follows: 1,550,000
      warrants are exercisable at $0.10 per share, 775,000 warrants are exercisable
      at
      $0.20 per share, and 516,667 warrants are exercisable at $0.30 per share. The
      securities were issued pursuant to the exemption from registration provided
      by
      Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The accredited investors received information concerning the Company and had
      the
      ability to ask questions about the Company.





On
      April
      17, 2008, the Company issued 400,000 warrants to purchase common stock to Allen
      & Associates LLC as part of a success fee pursuant to a management and
      financial consulting agreement. The warrants are exercisable at $0.05 per share
      and expire on April 17, 2013. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The organization received information
      concerning the Company and had the ability to ask questions about the
      Company.





On
      April
      25, 2008, the Company issued 1,015,486 restricted shares to Golden Gate
      Investors, Inc. for the conversion of $20,000 of the $350,000 secured
      convertible debentures issued October 5, 2007. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The organization
      received information concerning the Company and had the ability to ask questions
      about the Company.





On
      April
      28, 2008, the Company cancelled 3,200,000 restricted shares previously issued
      as
      a non-payment penalty to Henry and Catherine Zimmer, these shares being returned
      to the Company as part of the Promissory Note and Settlement Agreement dated
      April 15, 2008 more fully described in Note 10, above.





On
      April
      30, 2008, the Company issued 272,917 restricted shares of stock to Shekar
      Viswanathan, an accredited investor, to settle a note payable totaling $10,915
      including accrued interest. The securities were issued pursuant to the exemption
      from registration provided by Section 4(2) of the Securities Act and contain
      the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The accredited investor received information concerning
      the Company and had the ability to ask questions about the Company.





On
      April
      30, 2008, the Company issued 334,783 restricted shares to Allen & Associates
      LLC for corporate finance and strategic counsel services worth $12,500 when
      incurred. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The organization received information concerning the Company and
      had
      the ability to ask questions about the Company.





On
      May 1,
      2008, the Company issued 5,750,000 restricted shares to Bartfam pursuant to
      the
      anti-dilution provisions of the Debenture and Warrant Purchase Agreement dated
      January 30, 2008. The securities were issued pursuant to the exemption from
      registration provided by Section 4(2) of the Securities Act and contain the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The accredited investors received information concerning
      the Company and had the ability to ask questions about the Company.





On
      May
      15, 2008, the Company issued 176,865 restricted shares to Catherine Zimmer
      in
      payment of $4,958 in interest due pursuant to the Promissory Note and Settlement
      Agreement dated April 15, 2008. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The accredited investors received
      information concerning the Company and had the ability to ask questions about
      the Company.





On
      May
      15, 2008, the Company issued 182,558 restricted shares to the Empire Financial
      Investors in payment of $5,264 in interest due pursuant to the Debenture and
      Warrant Purchase Agreements dated January 30, 2008. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investors received information concerning the Company and had the ability to
      ask
      questions about the Company.




On
      May
      15, 2008, the Company issued 349,508 restricted shares to Bartfam in payment
      of
      $10,028 in interest due pursuant to the Debenture and Warrant Purchase
      Agreements dated January 30, 2008. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The accredited investors received
      information concerning the Company and had the ability to ask questions about
      the Company.




33




On
      May
      15, 2008, the Company issued 11,621 restricted shares to Bartfam in payment
      of
      interest due pursuant to the convertible debenture acquired from Montgomery
      on
      January 30, 2008. The securities were issued pursuant to the exemption from
      registration provided by Section 4(2) of the Securities Act and contain the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The accredited investors received information concerning
      the Company and had the ability to ask questions about the Company.





On
      May
      29, 2008, the Company issued 10,697,667 warrants to purchase our common stock
      to
      Bartfam in connection with their $500,000 convertible debenture of even date.
      The warrants expire May 29, 2013 and were issued as follows: 3,565,889 warrants
      are exercisable at $0.10 per share, 3,565,889 warrants are exercisable at $0.20
      per share, and 3,565,889 warrants are exercisable at $0.30 per share. The
      securities were issued pursuant to the exemption from registration provided
      by
      Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The accredited investors received information concerning the Company and had
      the
      ability to ask questions about the Company.





On
      May
      29, 2008, the Company issued 2,005,788 warrants to purchase common stock to
      Allen & Associates LLC as part of a success fee pursuant to a management and
      financial consulting agreement. The warrants are exercisable at $0.02 per share
      and expire on May 29, 2013. The securities were issued pursuant to the exemption
      from registration provided by Section 4(2) of the Securities Act and contain
      the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The organization received information concerning the
      Company and had the ability to ask questions about the Company.





On
      May
      31, 2008, the Company issued 300,280 restricted shares to Allen & Associates
      LLC for corporate finance and strategic counsel services worth $12,500 when
      incurred. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The organization received information concerning the Company and
      had
      the ability to ask questions about the Company.





On
      June
      13, 2008, the Company issued 911,874 restricted shares to Golden Gate Investors,
      Inc. for the conversion of $14,000 of the $350,000 secured convertible
      debentures issued October 5, 2007. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The organization received information
      concerning the Company and had the ability to ask questions about the
      Company.





On
      June
      23, 2008, the Company issued 1,442,448 restricted shares of stock to an
      accredited investor to partially settle $31,391 of notes payable and accrued
      interest. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The accredited investor received information concerning the Company
      and had the ability to ask questions about the Company.





On
      June
      24, 2008, the Company issued 1,000,000 restricted shares of stock to Memphis
      Scale Works, Inc. pursuant to the default provisions of a promissory note made
      in 2007. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The accredited investor received information concerning the Company
      and had the ability to ask questions about the Company.





On
      June
      30, 2008, the Company issued 458,792 restricted shares to the Empire Financial
      Investors in payment of $8,377 in interest due pursuant to the Debenture and
      Warrant Purchase Agreements dated January 30, 2008. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investors received information concerning the Company and had the ability to
      ask
      questions about the Company.




On
      June
      30, 2008, the Company issued 1,725,652 restricted shares to Bartfam in payment
      of $31,508 in interest due pursuant to the Debenture and Warrant Purchase
      Agreements dated January 30, 2008. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The accredited investors received
      information concerning the Company and had the ability to ask questions about
      the Company.





On
      June
      30, 2008, the Company issued 27,241 restricted shares to Bartfam in payment
      of
      interest due pursuant to the convertible debenture acquired from Montgomery
      on
      January 30, 2008. The securities were issued pursuant to the exemption from
      registration provided by Section 4(2) of the Securities Act and contain the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The accredited investors received information concerning
      the Company and had the ability to ask questions about the Company.





On
      June
      30, 2008, the Company issued 547,681 restricted shares to Allen & Associates
      LLC for corporate finance and strategic counsel services worth $12,500 when
      incurred. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The organization received information concerning the Company and
      had
      the ability to ask questions about the Company.




34





**Item
      3. Defaults upon Senior Securities.**





None




**Item
      4. Submission of Matters to a Vote of Security Holders.**





On
      April
      10, 2008, the Company filed a definitive proxy statement in connection with
      its
      Annual Meeting which was held on May 13, 2008. Sundaresan Raja, E. Eugene Sharer
      and Mal Gurian, all members of the previous Board of Directors, were nominated
      and re-elected. No other directors were nominated or elected at the meeting.
      Proposals to ratify the accounting firm of Bagell, Josephs, Levine & Co.,
      LLC to continue as independent auditors and to approve the amended and restated
      certificate of incorporation to (a) give the Board of Directors the discretion
      to effect a reverse split of our issued and outstanding shares of common stock
      by any whole number ratio up to 1-for-10, (b) increase the authorized capital
      stock of the Company from 200,000,000 to 250,000,000 shares, (c) to create
      and
      designate 50,000,000 shares of the Company’s capital stock as “blank check”
preferred stock, without par value, and (d) to make other *de
      minimus* administrative corrections and clarification were each approved by the
      shareholders. There were no other proposals voted at the Annual
      Meeting.





The
      table
      below shows the results of the voting at the Annual Meeting on May 13,
      2008.




PROPOSAL
                1 - ELECTION OF BOARD OF DIRECTORS




Nominee
            
            For
            
            WithheldSundaresan
                Raja
            
            
            
            
            
            90,694,480
            
            
            5,845,784E.
                Eugene Sharer
            
            
            
            
            
            90,704,105
            
            
            5,836,159Mal
                Gurian
            
            
            
            
            
            90,966,246
            
            
            5,574,018




PROPOSAL
                2 - RATIFY BAGELL, JOSEPHS, LEVINE & CO. LLC AS INDEPENDENT
                AUDITORS




For
            
            Against
            
            Abstain90,979,427
            
            
            393,749
            
            
            5,167,087




PROPOSAL
                3 - APPROVE SECOND AMENDED & RESTATED CERTIFICATE OF
                INCORPORATION




For
            
            Against
            
            Abstain91,968,013
            
            
            4,568,351
            
            
            3,900




**Item
      5. Other Information.**





A
      special
      committee of the Company’s Board of Directors is conducting an
      investigation, for which it has retained special counsel, into tax and
      accounting issues arising out of the issuance, in 2006, of common stock to
      certain officers of the Company in payment for compensation deferred in prior
      years. The investigation is not complete. As a result, the Company cannot
      determine (a) whether it or any of its directors or officers at the time of
      such
      issuance have any liability in connection with the issuance and/or
      characterization for tax and accounting purposes of such issuance; or, (b)
      in the event that there is such liability, its nature or extent; or (c) whether
      any such liability would be considered material to the Company. Based on
      information currently available to the special committee and the Company,
      however, it is anticipated that any financial impact (i) will not be material
      to
      the Company’s statement of operations for fiscal year 2006; (ii) will not affect
      the net loss per share ($.07) reported for 2006; and (iii) will not
      materially affect the Company’s financial condition as a whole. At the
      conclusion of the investigation, the Company will both report on its results
      and
      determine whether it is necessary or appropriate to restate its financial
      statements for 2006 or any subsequent year.




**Item
      6. Exhibits.**





31.1
        Certification of Principal Executive Officer pursuant to Rule
      13a-14(a)/15d-4(a) of the Securities Exchange Act of 1934.





31.2
        Certification of Principal Financial Officer pursuant to Rule
      13a-14(a)/15d-4(a) of the Securities Exchange Act of 1934.





32.1
        Certification of Principal Executive Officer pursuant to Rule
      13a-14(a)/15d-4(a) of the Securities Exchange Act of 1934 and 18 U.S.C. Section
      1350.





32.2
        Certification of Principal Financial Officer pursuant to Rule
      13a-14(a)/15d-4(a) of the Securities Exchange Act of 1934 and 18 U.S.C. Section
      1350.




35




**SIGNATURES**





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





Dated:
      November 19, 2008





AIRBEE
      WIRELESS, INC.





By:
            /s/
                Sundaresan RajaSundaresan
                RajaChief
                Executive Officer(Principal
                Executive Officer)By:
            /s/
                E. Eugene SharerE.
                Eugene SharerInterim
                Principal Financial Officer




36