**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**





(Mark
      One)





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





**For
      the quarterly period ended September 30, 2007**





**OR**





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





**Commission
      file number 0-50918**





**AIRBEE
      WIRELESS, INC.**


(Exact
      name of registrant as specified in its charter)





**DELAWARE**
            **46-0500345**(State
                or other jurisdiction
              of
                incorporation or organization)
            (IRS
                Employer
              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 R No £





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





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: 116,023,381 shares of Common Stock par value
      of $0.00004 as of December 10, 2007.





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















AIRBEE
      WIRELESS, INC.





FORM
      10-QSB





INDEX





**PAGE**PART
                I FINANCIAL INFORMATIONItem
                1. Financial Statements
            3Condensed
                Consolidated Balance Sheet as of September 30, 2007
                (Unaudited)
            4Condensed
                Consolidated Statements of Operations for the Nine Months and Three
                Months
                Ended September 30, 2007 and 2006 (Unaudited)
            5Condensed
                Consolidated Statement of Accumulated Other Comprehensive Income
                for the
                Nine Months Ended September 30, 2007 (Unaudited)
            6Condensed
                Consolidated Statements of Cash Flows for the Nine Months Ended September
                30, 2007 and 2006 (Unaudited)
            7Notes
                to the Condensed Consolidated Financial Statements
                (Unaudited)
            9Item
                2. Management’s Discussion and Analysis or Plan of
                Operations
            32Item
                3. Controls and Procedures
            41PART
                II OTHER INFORMATION
            42Item
                1. Legal Proceedings
            42Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            42Item
                3. Defaults Upon Senior Securities
            43Item
                4. Submission of Matters to a Vote of Security Holders
            43Item
                5. Other Information
            43Item
                6. Exhibits
            43SIGNATURES
            44


2





**PART
      I FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2007 AND 2006**


**(UNAUDITED)**


3





**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEET**


**SEPTEMBER
      30, 2007**


**(UNAUDITED)**





**2007****ASSETS**Current
                Assets:Cash
                and cash equivalents
            
            $
            8,205Accounts
                receivable, net
            
            
            -Prepaid
                expenses and other current assets
            
            
            5,181Total
                Current Assets
            
            
            13,386Fixed
                assets, net of depreciation
            
            
            228,579Intangible
                assets
            
            
            310,157Deferred
                financing costs
            
            
            3,867Other
                assets
            
            
            63,727377,751**TOTAL
                ASSETS**
            
            $
            619,716**LIABILITIES
                AND STOCKHOLDERS' (DEFICIT)****LIABILITIES**Current
                Liabilities:Notes
                payable - related party
            
            $
            137,974Notes
                payable - other
            
            
            1,852,130Montgomery
                settlement liability
            
            
            -Litigation
                settlement liability
            
            
            700,000Liability
                for stock to be issued
            
            
            70,000Fair
                value of derivatives
            
            
            421,415Convertible
                debentures, net of discount of $43,750
            
            
            156,250Warrants
                liability
            
            
            185,540Accounts
                payable and accrued expenses
            
            
            2,586,942Total
                Current Liabilities
            
            
            6,110,251**Total
                Liabilities**
            
            
            6,110,251**COMMITMENTS
                AND CONTINGENCIES**
            
            
            -**STOCKHOLDERS'
                DEFICIT**Common
                stock, $.00004 Par Value; 200,000,000 shares authorized; 121,091,538
                shares issued; 14,142,511 shares held in escrow; and 105,288,991
                shares
                outstanding
            
            
            4,211Additional
                paid-in capital
            
            
            14,920,231Unearned
                compensation
            
            
            (10,578
            )Accumulated
                other comprehensive income
            
            
            56,061Shares
                issued for deferred financing, net of $3,450,069 discount
            
            
            (4,216,751
            )Accumulated
                deficit
            
            
            (15,946,170
            )(5,192,996
            )Less:
                treasury stock, 1,660,036 shares at cost
            
            
            (297,539
            )**Total
                Stockholders' Deficit**
            
            
            (5,490,535
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS' DEFICIT**
            
            $
            619,716





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





4




**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**FOR
      THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2007 AND
      2006**


**(UNAUDITED)**





**NINE
                MONTHS ENDED**
              **SEPTEMBER
                30,**
            
            **THREE
                MONTHS ENDED**
              **SEPTEMBER
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****OPERATING
                REVENUES**Sales
            
            $
            29,163
            
            $
            127,800
            
            $
            5,925
            
            $
            -**COST
                OF SALES**
            
            
            -
            
            
            1,092
            
            
            -
            
            
            361**GROSS
                PROFIT**
            
            
            29,163
            
            
            126,708
            
            
            5,925
            
            
            (361
            )**OPERATING
                EXPENSES**Compensation
                and professional fees
            
            
            2,892,780
            
            
            1,447,550
            
            
            800,068
            
            
            542,809Stock
                option compensation expense
            
            
            27,965
            
            
            1,254,956
            
            
            -
            
            
            27,326Research
                and development
            
            
            10,556
            
            
            -
            
            
            34
            
            
            -Selling,
                general and administrative expenses
            
            
            1,136,809
            
            
            386,407
            
            
            423,728
            
            
            99,850Depreciation
                and amortization
            
            
            146,955
            
            
            40,841
            
            
            75,378
            
            
            16,687**Total
                Operating Expenses**
            
            
            4,215,065
            
            
            3,129,754
            
            
            1,299,208
            
            
            686,672**LOSS
                BEFORE OTHER INCOME (EXPENSE)**
            
            
            (4,185,902
            )
            
            (3,003,046
            )
            
            (1,293,283
            )
            
            (687,033
            )**OTHER
                INCOME (EXPENSE)**Gain
                on derivatives/warrants
            
            
            368,213
            
            
            724,904
            
            
            306,205
            
            
            216,276Other
                income
            
            
            19,682
            
            
            119
            
            
            -
            
            
            -Interest
                expense
            
            
            (755,522
            )
            
            (423,293
            )
            
            (289,047
            )
            
            (258,590
            )**Total
                Other Income (Expense)**
            
            
            (367,627
            )
            
            301,730
            
            
            17,158
            
            
            (42,314
            )**NET
                LOSS BEFORE PROVISION FOR INCOME TAXES**
            
            
            (4,553,529
            )
            
            (2,701,316
            )
            
            (1,276,125
            )
            
            (729,347
            )**Provision
                for Income Taxes**
            
            
            -
            
            
            -
            
            
            -
            
            
            -**NET
                LOSS APPLICABLE TO COMMON SHARES**
            
            $
            (4,553,529
            )
            $
            (2,701,316
            )
            $
            (1,276,125
            )
            $
            (729,347
            )**NET
                LOSS PER BASIC AND DILUTED SHARES**
            
            $
            (0.05
            )
            $
            (0.04
            )
            $
            (0.01
            )
            $
            (0.01
            )**WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING**
            
            
            93,081,086
            
            
            67,728,836
            
            
            101,686,807
            
            
            74,124,876




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


5





**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE
      INCOME**


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2007**


**(UNAUDITED)**





Balance,
                December 31, 2006
            
            $
            933Gain
                on foreign currency translations
            
            
            55,128Balance,
                September 30, 2007
            
            $
            56,061




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


6





**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006**


**(UNAUDITED)**





**2007**
            
            **Restated**
              **2006****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                loss
            
            $
            (4,553,529
            )
            $
            (2,701,316
            )Adjustments
                to reconcile net loss to net cash used
                in operating activitiesDepreciation
                and amortization
            
            
            146,955
            
            
            40,841Common
                stock issued for services
            
            
            1,729,828
            
            
            341,267Common
                stock issued for compensation
            
            
            -
            
            
            55,000Gain
                on valuation of derivatives
            
            
            (368,213
            )
            
            (443,213
            )Amortization
                of derivative discounts
            
            
            131,250
            
            
            131,250Stock
                option compensation expense 123R
            
            
            27,222
            
            
            1,254,956Exercised
                stock options returned by shareholders
            
            
            (723
            )
            
            -Amortization
                of financing fees
            
            
            11,592
            
            
            11,592Gain
                on foreign currency translations
            
            
            55,128
            
            
            (10
            )Amortization
                of unearned compensation
            
            
            11,976
            
            
            11,976Extension
                and late payment fees on bridge loans
            
            
            269,435
            
            
            92,663Use
                of pledgd collateral for settlement of note payable and interest
                expense
            
            
            -
            
            
            (387,236
            )Litigation
                settlement
            
            
            337,839
            
            
            -Excess
                tax benefits from share-based payment arrangement
            
            
            (9,788
            )
            
            (439,235
            )**Changes
                in assets and liabilities**Decrease
                in accounts receivable
            
            
            -
            
            
            10,000Decrease
                in prepaid expenses and other current assets
            
            
            19,312
            
            
            36,041(Increase)
                in other assets
            
            
            (9,492
            )
            
            (31,384
            )Increase
                in accounts payable, accruedexpenses
                and other current liabilities
            
            
            1,092,845
            
            
            490,245Total
                adjustments
            
            
            3,445,166
            
            
            1,174,753**Net
                cash used in operating activities**
            
            
            (1,108,363
            )
            
            (1,526,563
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES**Acquisition
                of intangible assets
            
            
            -
            
            
            (38,256
            )Acquisitions
                of fixed assets
            
            
            (67,926
            )
            
            (97,030
            )**Net
                cash used in investing activities**
            
            
            (67,926
            )
            
            (135,286
            )




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


7




**AIRBEE
      WIRELESS, INC.**


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


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006**


**(UNAUDITED)**





**Restated****2007**
            
            **2006****CASH
                FLOWS FROM FINANCING ACTIVITES**Proceeds
                from common stock issuances
            
            $
            210,000
            
            $
            480,296Proceeds
                from stock subscriptions receivable
            
            
            -
            
            
            127,500Proceeds
                from notes payable - other
            
            
            717,564
            
            
            483,000Proceeds
                from derivative notes payable
            
            
            -
            
            
            115,000Proceeds
                from secured convertible debenture
            
            
            150,000
            
            
            -Proceeds
                from stock option exercise
            
            
            -
            
            
            400Proceeds
                from notes payable - related party, net
            
            
            37,844
            
            
            -Excess
                tax benefits from share-based payment arrangement
            
            
            9,788
            
            
            439,235**Net
                cash provided by financing activities**
            
            
            1,125,196
            
            
            1,645,431**NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**
            
            
            (51,093
            )
            
            (16,418
            )**CASH
                AND CASH EQUIVALENTS - BEGINNING OF PERIOD**
            
            
            59,298
            
            
            27,854**CASH
                AND CASH EQUIVALENTS - END OF PERIOD**
            
            $
            8,205
            
            $
            11,436**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:****CASH
                PAID DURING THE PERIOD FOR:**Interest
                expense
            
            $
            27,570
            
            $
            30,625Income
                taxes
            
            $
            -
            
            $
            -**SUPPLEMENTAL
                  DISCLOSURE OF NONCASH ACTIVITIES:**Common
                stock issued for compensation
            
            $
            -
            
            $
            55,000Common
                stock issued for services
            
            $
            1,729,828
            
            $
            341,267Common
                stock issued for deferred financing, net of discount
            
            $
            4,216,751
            
            $
            -Stock
                options vested during period
            
            $
            27,222
            
            $
            1,254,956Reverse
                issuance of common stock; overruled by court order
            
            $
            131,268
            
            $
            -Warrants
                removed from liability
            
            $
            59,621
            
            $
            -Conversion
                of note payable - other and accrued interest to common
                stock
            
            $
            60,225
            
            $
            113,085Use
                of pledged collateral for settlement of note payable and accrued
                interest
            
            $
            276,298
            
            $
            387,236Conversion
                of related party notes payable, accrued salaries payable and accrued
                interest to common stock
            
            $
            46,968
            
            $
            1,870,972




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


8


**AIRBEE
      WIRELESS, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2007 AND 2006**


**(UNAUDITED)**





**NOTE
              1 -**
            **ORGANIZATION
                AND BASIS OF
                PRESENTATION**




Airbee
      Wireless, Inc. (“ *Airbee* ”
or
      the
“ *Company* ”),
      was
      incorporated in Delaware in 2002 to develop and supply cutting edge intelligent
      software that is generally embedded into microprocessors thereby allowing
      manufacturers (OEMs) of various products to create advanced wireless
      communications systems.




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-QSB 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, 2006 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.





Focusing
      on its core competencies in the design and engineering of advanced, embedded
      short-range wireless data and voice communications software, the Company
      believes that it is positioned to play a pivotal role in the convergence of
      various wireless communications applications through software embedded on
      silicon and in niche service applications for its software.




In
      March
      2004, Airbee became a member of The ZigBee Alliance which has defined a global
      standard for reliable, cost-effective, low-power, low data rate, wireless
      applications. With over 200 international member companies, the ZigBee standard,
      based on IEEE 802.15.4 standard, is emerging as a dominant wireless standard
      for
      a host of industrial controls, telemetry, and in-building and home automation
      networking needs.




Airbee’s
      portfolio of products is generally connected over the rapidly emerging Wireless
      Personal Area Network (WPAN) or the Wireless Local Area Network (WLAN)
      technology space. Critical to the success of new products in these areas is
      the
      ability to interoperate or “talk to each other” based on industry-adopted
      standards. Airbee’s products are designed and engineered to be compliant with
      ZigBee/802.15.4 WPAN standards (approved by IEEE on August 7, 2003). Airbee’s
      patent-pending software technology, in conjunction with an Airbee enabled
      wireless network, allows a computer to work with a printer or PDA, a headset
      accessory to work with a mobile phone, a utility meter to be read remotely,
      or a
      manufacturing line to be wirelessly controlled and monitored as examples. Airbee
      leverages the widespread market awareness created by Bluetooth but offers
      similar products at less than half the cost, three times the operating range
      and
      better reliability per the ZigBee specifications.




As
      stated
      in Note 12, the Company has amended its previously issued condensed consolidated
      financial statements for the three months ended March 31, 2006 for amortization
      of intangible assets of $5,050 and certain balance sheet reclassifications
      to
      conform with the December 31, 2005 restatement. The effect of these changes
      resulted in an increase of the loss for the three month period ended March
      31,
      2006 of $5,050 to a net loss of $1,290,180 and an increase in the accumulated
      deficit to $7,886,805.





The
      Company has also amended its previously issued condensed consolidated financial
      statement for the three months ended March 31, 2007 to recognize additional
      compensation and professional fees of $510,000. The effect of these changes
      resulted in an increase of the loss for the three month period ended March
      31,
      2007 of $510,000 to a net loss of $1,705,985 and an increase in the accumulated
      deficit to $13,098,626.





9




The
      Company has also amended its previously issued condensed consolidated financial
      statement for the three months ended June 30, 2007 to recognize additional
      compensation and professional fees of $2,699, additional research and
      development expense of $90, additional depreciation expense of $902, additional
      interest expense of $186 and other income of $723. The effect of these changes
      resulted in an increase of the loss for the three month period ended June 30,
      2007 of $3,154 to a net loss of $1,571,419 and an increase in the accumulated
      deficit to $14,670,045.




**NOTE
              2 -**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**




**Liquidity**




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 $15.95 million as of September 30, 2007. The Company's
      operations have been financed primarily through a combination of issued equity
      and debt. For the nine months ended September 30, 2007, the Company had a net
      loss of approximately $4,553,500 and cash used in operations of approximately
      $1,108,400.




The
      Company regularly evaluates its working capital needs and existing burn rate
      to
      make appropriate adjustments to operating expenses. On December 29, 2005, the
      Company executed a $500,000 convertible debenture with Montgomery Equity
      Partners, Ltd. (“Montgomery”). Pursuant to its terms, Montgomery disbursed
      $350,000 to the Company upon execution and the remaining $150,000 was disbursed
      on April 9, 2007. The convertible debenture is due December 29, 2007 and accrues
      monthly interest at 15% per year.




As
      discussed below in Note 10, the Company has executed a Restricted Equity
      Purchase Agreement with Mercatus & Partners Limited (“Mercatus”), a United
      Kingdom private limited company by which Mercatus purchased 33,334,000 shares
      of
      Company stock in a delayed funding transaction. The closing had not been
      scheduled as of the balance sheet date but is anticipated to take place in
      the
      next quarter. There are no assurances that the transaction will close in which
      case the Company’s sole remedy is the return of its stock.




**Principles
      of Consolidation**




The
      condensed consolidated financial statements include the accounts of the Company
      and its wholly owned subsidiary Airbee Wireless (India) Pvt. Ltd., located
      in
      India, for the nine months ended September 30, 2007 and 2006, 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.




**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.




**Cash
      and Cash Equivalents**




The
      Company considers all highly liquid debt instruments and other short-term
      investments with an initial maturity of three months or less to be cash
      equivalents.




10




The
      Company maintains cash and cash equivalent balances at financial institutions
      in
      the United States of America and India. The financial institution in the United
      States of America is insured by the Federal Deposit Insurance Corporation up
      to
      $100,000. Of the $8,205 in cash and cash equivalents on September 30, 2007,
      the
      India rupee equivalent of $7,736 is uninsured.




**Accounts
      Receivable**




The
      Company conducts business and extends credit based on an evaluation of the
      customers’ financial condition, generally without requiring collateral. Exposure
      to losses on receivables is expected to vary by customer due to the financial
      condition of each customer. The Company monitors exposure to credit losses
      and
      maintains allowances for anticipated losses considered necessary under the
      circumstances. The Company has an allowance for doubtful accounts of $0 at
      September 30, 2007. Accounts receivable are generally due within thirty (30)
      days and collateral is not required.




**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.




**Intangible
      Assets**




Intellectual
      property assets represent technology and are amortized over the periods of
      benefit, ranging from two to five years, generally on a straight-line
      basis.




Identified
      intangible assets are regularly reviewed to determine whether facts and
      circumstances exist which indicate that the useful life is shorter than
      originally estimated or the carrying amount of assets may not be recoverable.
      The Company assesses the recoverability of its identifiable intangible assets
      by
      comparing the projected discounted 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.




**Intellectual
      Property**




Costs
      incurred in creating products are charged to expense when incurred as research
      and development until technological feasibility is established upon completion
      of a working model. Thereafter, all software production costs are capitalized
      and subsequently reported at the lower of unamortized cost or net realizable
      value. Capitalized costs are amortized based on current and future revenue
      for
      each product with an annual minimum equal to the straight-line amortization
      over
      the remaining estimated economic life of the product.




In
      accordance with SFAS No. 2, “ *Accounting
      for Research and Development Costs* ”,
      SFAS
      No. 68, “ *Research
      and Development Arrangements* ”,
      and
      SFAS No. 86, “ *Accounting
      for the Costs of Computer Software to be Sold, Leased, or Otherwise
      Marketed* ”,
      technological feasibility for the Airbee UltraLite TM was
      established on November 20, 2002 with completion of the detailed program design.
      Several working models were delivered at various points through July of 2003.




Trademarks
      and patents are regularly reviewed to determine whether the facts and
      circumstances exist to indicate that the useful life is shorter than originally
      estimated or the carrying amount of the assets may not be recoverable. The
      Company assesses the recoverability of its trademarks and patents by comparing
      the projected discounted net cash flows associated with the related asset,
      over
      their remaining lives, in comparison to their respective carrying amounts.
      Impairment, if any, is based on the excess of the carrying amount over the
      fair
      value of those assets.




11




Intangible
      assets pertain to the Company’s intellectual property, more specifically
      software code for both IEEE 802.15.4 and the ZigBee standard version 1.0 and
      to
      the 2006 ZigBee standard version 1.1.




The
      software serves as the core code (i.e., one of the key building blocks) for
      current and future products that must comply with these international standards.
      Hence, core software based upon the global standards of IEEE and ZigBee to
      enable the rest of our software to function has an undefined, but not
      necessarily infinite, useful life. Management, with the assistance of its
      technical staff, has determined that this specific intellectual property should
      be amortized beginning in the second quarter of 2005 in accordance with SFAS
      No.
      86. The status of that intellectual property is reviewed for impairment annually
      or more frequently if events and circumstances indicate that the asset may
      be
      impaired. With the release of the ZigBee 2006 standard in September 2006, it
      was
      determined that 30% of the previously capitalized research & development
      costs should be written off. The Company believes that at this point in time,
      any further determination of impairment is impractical because (a) the IEEE
      802.15 global standard was only finalized in October 2003; (b) the ZigBee global
      standard was only finalized on September 23, 2006; and (c) the Company’s
      software written in conformity with both global standards is vital to making
      the
      rest of its software function and therefore be in compliance with these global
      standards.




**Revenue
      and Cost Recognition**




The
      Company currently recognizes revenues from four primary sources: (1) time-based
      product license fees, (2) time-based license royalties, (3) product revenues
      for
      software development tools and kits, and (4) software development
      services.




Licensing
      revenues (e.g., Airbee-ZNS TM ,
      Airbee-ZMAC TM ,
      and
      Airbee-ZNMS TM )
      consist
      of revenues from licensing under the enterprise licensing model, of Airbee
      platforms, which include a combination of products and services, and items
      such
      as development tools, an operating system, various protocols and interfaces
      and
      maintenance and support services, such as installation and training, which
      are
      licensed over a limited period of time, typically 12-36 months. Service revenues
      are derived from fees for professional services, which include design and
      development fees, software maintenance contracts, and customer training and
      consulting.




The
      Company accounts 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* .”
The
      Company recognizes 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.




12




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 time-based number of units shipped
      by customer.




Revenue
      attributed to undelivered elements is based on the sales price rather than
      on
      the renewal rate for the following reasons:




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.




The
      Company expects to enter into software 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. If the Company provides 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.




The
      Company assesses probability of collection based on a number of factors,
      including its past transaction history with the customer and the
      creditworthiness of the customer. New customers are subject to a credit review
      process that evaluates the customers’ financial position and ultimately its
      ability to pay according to the original terms of the arrangement. Based on
      this
      review process, if it is determined from the outset of an arrangement that
      collection of the resulting receivable is not probable, revenue is then
      recognized on a cash-collected basis.




Cost
      of
      revenue includes direct costs to produce and distribute products and direct
      costs to provide product support and training.




**Deferred
      Financing Costs**




Deferred
      financing fees were incurred in connection with the convertible debenture to
      Montgomery Equity Partners, Ltd. (see discussion below in Note 5). These will
      be
      amortized over the life of the convertible debenture (24 months). During the
      nine months ended September 30, 2007 and 2006, the Company recognized $11,592
      in
      deferred financing costs.




**Research
      and Development**




Research
      and development costs are related primarily to the Company developing its
      intellectual property. Research and development costs were expensed as incurred
      prior to the Company’s demonstration of technical feasibility of its media
      access control (“MAC”) layer in November 2004 and of its Network and Security
      layers in April 2005. Research and development costs (which include costs of
      coding and testing) incurred to produce a product master have been capitalized
      in accordance with Statement No. 86, “ *Accounting
      for the Costs of Computer Software to be Sold, Leased, or Otherwise
      Marketed* ”
issued
      by the Financial Accounting Standards Board.




**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 nine months ended September 30, 2007
      and
      2006, respectively.




13




**Start-up
      Costs**




In
      accordance with the American Institute of Certified Public Accountants Statement
      of Position 98-5, “Reporting on the Costs of Start-up Activities,” the Company
      expensed all costs incurred in connection with the start-up and organization
      of
      the Company.




**Advertising**




The
      Company’s policy is to expense the costs of advertising as incurred. The Company
      had no such cost for the nine months ended September 30, 2007 and 2006,
      respectively.




**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 September
      30, 2007 and 2006 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:




September
                30,
              2007
            
            September
                30,
              2006Net
                Loss
            
            $
            (4,553,529
            )
            $
            (2,701,316
            )Weighted-average
                common shares outstanding (Basic)
            
            
            93,081,086
            
            
            67,728,836Weighted-average
                common stockEquivalents:Stock
                options
            
            
            -
            
            
            -Warrants
            
            
            -
            
            
            -Weighted-average
                common shares outstanding (Diluted)
            
            
            93,081,086
            
            
            67,728,836





**Fair
      Value of Financial Instruments**




The
      carrying amount reported in the consolidated balance sheet for cash and cash
      equivalents, accounts payable and accrued expenses approximates fair value
      because of the immediate or short-term maturity of these financial instruments.
      The carrying amount reported for notes payable approximates fair value because,
      in general, the interest on the underlying instruments fluctuates with market
      rates.




**L****imitations**




Fair
      value estimates are made at a specific point in time, based on relevant market
      information and information about the financial statement. These estimates
      are
      subjective in nature and involve uncertainties and matters of significant
      judgment and therefore cannot be determined with precision. Changes in
      assumptions could significantly affect the estimates.




14




**Derivative
      Instruments**




The
      Company has an outstanding convertible debt instrument that contains
      free-standing and embedded derivative features. The Company accounts for these
      derivatives in accordance with SFAS No. 133, *“Accounting
      for Derivative Instruments and Hedging Activities”* ,
      and
      EITF Issue No. 00-19, *“Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock”* .
      In
      accordance with the provisions of SFAS No. 133 and EITF Issue No. 00-19, the
      embedded derivatives are required to be bifurcated from the debt instrument
      and
      recorded as a liability at fair value on the consolidated balance sheet. Changes
      in the fair value of the derivatives are recorded at each reporting period
      and
      recorded in net gain (loss) on derivative, a separate component of the other
      income (expense). As of September 30, 2007, the fair value of the convertible
      debenture derivatives was $178,851, a decrease of $293,710 from December 31,
      2006. The Company also had a net gain of $75,319 for the nine months ended
      September 30, 2007 on an additional derivative with a fair value of $242,564
      at
      September 30, 2007. The total fair value of these derivatives was $421,415
      at
      September 30, 2007; the total decrease in fair value for the nine months then
      ended was $218,391. The Company has included these as a component of net gain
      on
      derivatives in the Other Income (Expense) section of its Consolidated Statements
      of Operations.




**Stock-Based
      Compensation**




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 nine months ended September 30, 2007 and 2006 was $11,976,
      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.




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 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.




SFAS
      No.
      123(R) requires disclosure of pro-forma information for periods prior to the
      adoption. The pro-forma disclosures are based on the fair value of awards at
      the
      grant date, amortized to expense over the service period. The following table
      illustrates the effect on net income and earnings per share as if the Company
      had applied the fair value recognition provisions of SFAS No. 123, “Accounting
      for Stock-Based Compensation” for the period prior to the adoption of SFAS No.
      123(R), and the actual effect on net income and earnings per share for the
      period after the adoption of SFAS No. 123(R).




15




Nine
                  Months Ended09/30/07
              
              09/30/06Net
                  loss, as reported
              
              
              4,553,529
              
              
              2,701,316Add:
                  Stock-based employee compensation expense included in reported
                  net income,
                  net of related tax effects
              
              
              27,222
              
              
              1,254,956Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards, net of related tax
                  effects
              
              
              (27,222
              )
              
              (1,254,956
              )Net
                  loss, pro forma
              
              
              4,553,529
              
              
              2,701,316Earnings
                  per share:Basic,
                  as reported
              
              $
              (0.05
              )
              $
              (0.04
              )Basic,
                  pro forma
              
              $
              (0.05
              )
              $
              (0.04
              )Diluted,
                  as reported
              
              $
              (0.05
              )
              $
              (0.04
              )Diluted,
                  pro forma
              
              $
              (0.05
              )
              $
              (0.04
              )




For
      the
      purpose of the above table, the fair value of each option granted is estimated
      as of the date of grant using the Black-Scholes option-pricing model with the
      following assumptions:




Nine
                Months Ended09/30/07
            
            09/30/06Dividend
                yield
            
            
            0.00
            %
            
            0.00
            %Expected
                volatility
            
            
            73.86
            %
            
            156.59
            %Risk-free
                interest rate
            
            
            4.00
            %
            
            4.00
            %Expected
                life in years
            
            
            3.75
                - 4.67
            
            
            3.25
                - 4.50




The
      following table summarizes the stock option activity for the nine months ended
      September 30, 2007:




Shares
            
            Weighted
              Average
              Exercise
                Price
            
            Weighted
              Average
              Contractual
              Term
                (Years)Outstanding,
                December 31, 2006
            
            
            34,437,010
            
            
            0.27420
            
            
            3.04Options
                granted
            
            
            204,500
            
            
            0.23280
            
            
            4.86Options
                reinstated
            
            
            -
            
            
            -
            
            
            -Options
                exercised
            
            
            -
            
            
            -
            
            
            -Options
                cancelled
            
            
            32,750,010
            
            
            0.27267
            
            
            2.67Options
                forfeited or expired
            
            
            17,000
            
            
            0.32000
            
            
            3.76Outstanding,
                September 30, 2007
            
            
            1,874,500
            
            
            0.29530
            
            
            4.07Options
                exercisable, Sept. 30, 2007
            
            
            559,000
            
            
            0.38830
            
            
            4.10




16


**Product
      Warranty**




The
      Company’s product warranty accrual includes specific accruals for known product
      issues and an accrual for an estimate of incurred but unidentified product
      issues based on historical activity. Due to effective product testing and the
      short time between product shipment and the detection and correction of product
      failures, the warranty accrual based on historical activity and the related
      expense were not significant as of and for the nine months ended September
      30,
      2007 and 2006, respectively.




**Goodwill
      and Other Intangible Assets**




The
      identifiable intangible assets presented on the consolidated balance sheet
      represent the intellectual property that was capitalized post-technological
      feasibility. Management will continue to monitor and assess 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* .”
      Beginning with the second quarter of 2005, the Company began amortizing its
      intellectual property costs over a five year period. The amortization amount
      for
      the current quarter is calculated based upon the ending balance of intellectual
      property from the preceding quarter. The amount amortized for the nine months
      ended September 30, 2007 was $22,650.




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. In addition, the Company
      wrote-off $34,071 of other research and development costs capitalized in the
      fourth quarter. 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.




The
      main
      components of intangible assets are as follows:




Nine
                Months Ended September 30, 2007Gross
              Amount
            
            Accumulated
                Amortization
            
            Net
                Carrying
              AmountIntellectual
                Property
            
            $
            116,090
            
            $
            75,500
            
            $
            40,590Capitalized
                Research & Development
            
            
            404,352
            
            
            134,785
            
            
            269,567Total
                Intangible Assets
            
            $
            520,442
            
            $
            210,285
            
            $
            310,157




**Currency
      Risk and Foreign Currency Translation**




The
      Company transacts business in currencies other than the U.S. Dollar, primarily
      the Indian Rupee. All currency transactions occur in the spot foreign exchange
      market and the Company does not use currency forward contracts, currency
      options, currency borrowings, interest rate swaps or any other derivative
      hedging strategy at this point in time.


17




The
      Company has determined that based on the cash flow, sales price, sales market,
      expense, financing, and inter-company transactions and arrangements indicators
      set forth in SFAS 52, “ *Foreign
      Currency Translation* ,”
that
      the functional currency of the Company is that of the parent company and is
      US
      Dollars. The Company has reported its gain on foreign currency in its
      consolidated statements of accumulated other comprehensive income due to the
      fact that these translation adjustments result from the translation of all
      assets and liabilities at the current rate, while the stockholder equity
      accounts were translated by using historical and weighted-average rates.




**Recent
      Accounting Pronouncements**




In
      February 2006, the FASB issued SFAS No. 155, “ *Accounting
      for Certain Hybrid*  *Financial
      Instruments, an amendment of FASB Statements No. 133 and 140.* ”
SFAS
      No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No.
      D1,
“ *Application
      of Statement 133 to Beneficial Interests in Securitized
      Financial*  *Assets* ,”
and
      permits fair value remeasurement for any hybrid financial instrument that
      contains an embedded derivative that otherwise would require bifurcation,
      clarifies which interest-only strips and principal-only strips are not subject
      to the requirements of SFAS No. 133, establishes a requirement to evaluate
      interests in securitized financial assets to identify interests that are
      freestanding derivatives or that are hybrid financial instruments that contain
      an embedded derivative requiring bifurcation, clarifies that concentrations
      of
      credit risk in the form of subordination are not embedded derivatives and amends
      SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity
      from holding a derivative financial instrument that pertains to a beneficial
      interest other than another derivative financial instrument. SFAS No. 155 is
      effective for all financial instruments acquired or issued after the beginning
      of the first fiscal year that begins after September 15, 2006. The
      implementation of this standard did not have a material impact on its financial
      position, results of operations or cash flows.





In
      March
      2006, the FASB issued SFAS No. 156, “ *Accounting
      for Servicing of Financial Assets, an amendment of FASB Statement No.
      140* .”
FAS
      No. 156 requires an entity to recognize a servicing asset or liability each
      time
      it undertakes an obligation to service a financial asset by entering into a
      servicing contract under a transfer of the servicer’s financial assets that
      meets the requirements for sale accounting, a transfer of the servicer’s
      financial assets to a qualified special-purpose entity in a guaranteed mortgage
      securitization in which the transferor retains all of the resulting securities
      and classifies them as either available-for-sale or trading securities in
      accordance with FAS No. 115, “Accounting for Certain Investments in Debt and
      Equity Securities” and an acquisition or assumption of an obligation to service
      a financial asset that does not relate to financial assets of the servicer
      or
      its consolidated affiliates. Additionally, FAS No. 156 requires all separately
      recognized servicing assets and servicing liabilities to be initially measured
      at fair value, permits an entity to choose either the use of an amortization
      or
      fair value method for subsequent measurements, permits at initial adoption
      a
      one-time reclassification of available-for-sale securities to trading securities
      by entities with recognized servicing rights and requires separate presentation
      of servicing assets and liabilities subsequently measured at fair value and
      additional disclosures for all separately recognized servicing assets and
      liabilities. FAS No. 156 is effective for transactions entered into after the
      beginning of the first fiscal year that begins after September 15, 2006. The
      implementation of this standard did not have a material impact on its financial
      position, results of operations or cash flows.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
      109* ”
(“FIN
      48”). FIN 48 prescribes a comprehensive model for the financial statement
      recognition, measurement, presentation and disclosure of income tax
      uncertainties with respect to position taken or expected to be taken in income
      tax returns. FIN 48 is effective for fiscal years beginning after December
      15,
      2006. The Company is currently evaluating the effect the adoption of FIN 48
      will
      have but believes it will not have a material impact on its financial position
      or results of operations.





In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* .”
SFAS
      No. 157 clarifies the principle that fair value should be based on the
      assumption that market participants would use when pricing an asset or
      liability. Additionally, it establishes a fair value hierarchy that prioritizes
      the information used to develop those assumptions. SFAS No. 157 is effective
      for
      financial statements issued for fiscal years beginning after November 15, 2007.
      The Company does not expect the adoption of SFAS No. 157 will have a material
      impact on it financial position or results of operations.


18





In
      September 2006, the FASB issued SFAS No. 158, “ *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans, an
      amendment of FASB Statements No 87, 88, 106 and 132(R)* .”
This
      Statement improves financial reporting by requiring an employer to recognize
      the
      under funded or over funded status of a defined benefit postretirement plan
      as
      an asset or liability in its statement of financial position and to recognize
      changes in that funded status in the year in which the changes occur through
      accumulated other comprehensive income. Additionally, SFAS No. 158 requires
      employers to measure the funded status of a plan as of the date of its year-end
      statement of financial position. The new reporting requirements and related
      new
      footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending
      after December 15, 2006. The new measurement date requirement applies for fiscal
      years ending after December 15, 2008. The Company does not expect the adoption
      of SFAS No. 158 will have a material impact on its financial position or results
      of operations.





In
      February 2007, the FASB issued SFAS No. 159, " *The
      Fair Value Option for Financial Assets and Financial Liabilities—Including
      an
      Amendment of FASB Statement No. 115.* "
      SFAS
      159 permits companies to choose to measure at fair value many financial
      instruments and certain other items that are not currently required to be
      measured at fair value. Entities choosing the fair value option would be
      required to recognize subsequent changes in the fair value of those instruments
      and other items directly in earnings. This standard also establishes
      presentation and disclosure requirements designed to facilitate comparisons
      between companies that choose different measurement attributes for similar
      types
      of assets and liabilities. SFAS 159 is effective beginning the first fiscal
      year
      that begins after November 15, 2007. The Company does not expect the adoption
      of
      SFAS No. 159 will have a material impact on its financial position or results
      of
      operations.




In
      June
      2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-11,
      " *Accounting
      for Income Tax Benefits of Dividends on Share-Based Payment
      Awards.* "
      EITF
      06-11 provides for the recognition and classification of deferred taxes
      associated with dividends or dividend equivalents on nonvested equity shares
      or
      nonvested equity share units (including restricted stock units (RSUs)) that
      are
      paid to employees and charged to retained earnings.  This issue is
      effective for annual periods beginning after September 15, 2007.  Also in
      June 2007, the EITF ratified EITF Issue No. 07-3 *,* " *Accounting
      for Advance Payments for Goods or Services to Be Used in Future Research and
      Development Activities* ."
       EITF 07-3 provides that nonrefundable advance payments made for goods or
      services to be used in future research and development activities should be
      deferred and capitalized until such time as the related goods or services are
      delivered or are performed, at which point the amounts would be recognized
      as an
      expense. This issue is effective for fiscal years beginning after December
      15,
      2007.  We are currently evaluating the potential impact these standards may
      have on our financial position and results of operations, but do not believe
      the
      impact will be material.




Also
      in
      June 2007, the American Institute of Certified Public Accountants (AICPA) issued
      Statement of Position (SOP) No. 07-1, " *Clarification
      of the Scope of the Audit and Accounting Guide "Investment Companies" and
      Accounting by Parent Companies and Equity Method Investors for Investments
      in
      Investment Companies* ."
      This
      SOP provides guidance for determining whether an entity is an investment company
      and also addresses when the specialized industry accounting principles of an
      investment company should be used by a parent company in consolidation or by
      an
      investor that applies the equity method of accounting to its investment in
      the
      entity. This SOP is effective for fiscal years beginning on or after December
      15, 2007. We have evaluated the potential impact of this standard and anticipate
      it will have no material impact on our financial position and results of
      operations.





**NOTE
              3 -**
            **CONCENTRATION
                OF CREDIT RISK**




The
      Company’s trade receivables are derived from sales to original equipment
      manufacturers and manufacturers of microprocessors and transceivers. The Company
      endeavors to keep pace with the evolving computer and communications industries,
      and has adopted credit policies and standards intended to accommodate industry
      growth and inherent risk. Management believes that credit risks are moderated
      by
      the diversity of the Company’s end customers and geographic sales areas. The
      Company performs ongoing credit evaluations of its customers’ financial
      condition and requires collateral as deemed necessary.


19




**NOTE
              4 -**
            **FIXED
                ASSETS**




Fixed
      assets consist of the following at September 30, 2007:




2007Computer
                and office equipment
            
            $
            267,739Leasehold
                improvements, net
            
            
            44,601Less:
                accumulated depreciation
            
            
            (83,761
            )Net
                book value
            
            $
            228,579





Depreciation
      expense for the nine months ended September 30, 2007 and 2006 was $23,217 and
      $18,191, respectively.




**NOTE
              5 -**
            **DEBT**




**Notes
      Payable –
      Other**




On
      April
      20, 2005, the Company executed a promissory note for $750,000 to Montgomery
      Equity Partners, Ltd. (“Montgomery”). Pursuant to the terms of the promissory
      note, Montgomery disbursed the entire $750,000 to the Company upon the date
      the
      note was executed and an additional $250,000 was to be disbursed to the Company
      after the Company’s common stock commences trading on the Over-the-Counter
      Bulletin Board. The promissory note was secured by substantially all of the
      assets of the Company and shares of stock of an affiliate of the Company. The
      promissory note had a one-year term and accrued interest monthly at 24% per
      year. The Company had difficulty meeting the payment schedule called for by
      the
      promissory note and by virtue of a settlement with Montgomery, the obligation,
      which together with interest and liquidated damages totaled $937,500, is being
      repaid by a Company affiliate’s collateral. Because the settlement with
      Montgomery permits it to take any action necessary to recover any deficiency
      should liquidation of the pledged shares fail to recoup the entire agreed payoff
      amount, the Company continued to recognize this liability on its balance sheet.
      In September 2007, Montgomery completed the settlement. Over the nearly two
      year
      period, it sold a total of 4,019,221 of the 9.4 million pledged shares and
      realized net proceeds of $937,500.




In
      September 2005, a former director loaned the Company $100,000 in return for
      an
      unsecured demand promissory note. The terms of the note provide for interest
      at
      6.5% per annum. Payment of the note is 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
      provide for interest at 10.0% per annum. The note is secured by 555,555 shares
      of stock which are held in escrow pursuant to a written escrow agreement.
      Payment of the promissory note has been extended to December 31, 2007 with
      the
      consent of the holder.




On
      July
      28, 2006, the Company executed a promissory note for $58,000 to Sharanpreet
      Singh. The promissory note was due on or before March 31, 2007 and bore interest
      at the rate of 8% per annum. The note had a conversion feature exercisable
      at
      the holder’s option. On January 17, 2007, the note had accrued interest totaling
      $2,225. The holder exercised his option to convert the note and on January
      17,
      2007 the Company issued 446,109 shares of common stock in full payment of
      principal and accrued interest.




On
      January 12, 2007 and March 5, 2007, the Company executed promissory notes for
      $3,491 and $56,573, respectively, to Marcus Perez. The notes were due May 31,
      2007 and June 30, 2007, respectively, but have been extended with the consent
      of
      the holder to December 31, 2007. Each note bears interest at the rate of 12%
      per
      annum. On May 11, 2007 the Company executed a promissory note for $15,000 to
      Mr.
      Perez. This note is due within 72 hours of any new significant funding. It
      is
      interest-free for 30 days. If not paid within that time, the note bears interest
      at 12% per annum compounded monthly. On June 6, 2007 the Company executed a
      promissory note for $25,000 to Mr. Perez. The note bears interest at the rate
      of
      10% per annum and was due July 6, 2007. The note was paid on June 11, 2007.
      On
      August 23, 2007 the Company executed a promissory note for $30,000 to Mr. Perez.
      The note bears no interest; the Company issued 800,000 warrants exercisable
      through August 29, 2010 at an exercise price of $0.13 in lieu of interest.
      The
      note is due within five days after the Company receives a minimum of $1 million
      funding. On September 14, 2007 the Company executed a promissory note for
      $30,000 to Mr. Perez. The note bears no interest; the Company having issued
      the
      aforementioned 800,000 warrants exercisable through August 29, 2010 at an
      exercise price of $0.13 in lieu of interest. The note is due within five days
      after the Company receives a minimum of $1 million funding. As of September
      30,
      2007, the notes had accrued interest of $4,788.


20




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 and was due
      May
      2, 2007. In further consideration of the note, the Company issued 200,000 shares
      of its restricted common stock. The note has been extended with the consent
      of
      the holder to December 31, 2007. As of September 30, 2007, the note had accrued
      interest of $5,918.




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 15 days of
      the
      term and thereafter at the rate of 15% per annum. The note was due September
      30,
      2007 but has been extended to December 31, 2007 with the consent of the parties.
      In further consideration, the Company issued 20,000 warrants to purchase common
      stock exercisable through November 10, 2008 at an exercise price of $0.50 per
      share. As of September 30, 2007, the note had accrued interest of $1,167.




On
      May
      11, 2007 the Company executed a promissory note for $20,000 to Robert V. Noone.
      The note bore interest at the rate of 12% per annum and was due September 30,
      2007 but has been extended to December 31, 2007 with the consent of the parties.
      In further consideration, the Company issued 100,000 warrants to purchase common
      stock exercisable through November 10, 2008 at an exercise price of $0.50 per
      share. As of September 30, 2007, the note had accrued interest of $934.




On
      May
      11, 2007 the Company executed a promissory note for $30,000 to Henry Zimmer.
      This note is due within 72 hours of any new significant funding. The note is
      interest-free for the first 30 days of its term and thereafter at the rate
      of
      12% per annum compounded monthly. As of September 30, 2007, the note had accrued
      interest of $1,111.




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 and was due
      July 6, 1007 but has been extended to November 30, 2007 with the consent of
      the
      parties. The note has a conversion feature exercisable at the holder’s option.
      As of September 30, 2007, the note had accrued interest of $332.




On
      June
      1, 2007 the Company executed a promissory note for $25,000 to Lakshminarayana
      Peesapati and Anasuya Peesapati. The note bore interest at the rate of 10%
      per
      annum and was due July 6, 1007. The note has been extended with the consent
      of
      the holder to November 30, 2007. The note has a conversion feature exercisable
      at the holder’s option. As of September 30, 2007, the note had accrued interest
      of $829.




On
      June
      1, 2007 the Company executed a promissory note for $25,000 to Ramamohan Lal
      Tummala. The note bore interest at the rate of 10% per annum and was due July
      1,
      1007. The note has been extended with the consent of the holder to November
      30,
      2007. The note has a conversion feature exercisable at the holder’s option. As
      of September 30, 2007, the note had accrued interest of $795.




On
      June
      8, 2007 the Company executed a promissory note for $250,000 to Eric Roderick
      and
      Steve Barnes. The note bore interest at the rate of $25,000 for the lending
      period and is due 60 days from date. The note was extended with the consent
      of
      the holder to September 8, 2007 for an additional $12,500 in interest. It was
      replaced by a new promissory note dated September 6, 2007 in the amount of
      $287,500 bearing interest at 12% per annum due November 5, 2007, which has
      been
      further extended to February 15, 2008. The note has a conversion feature
      exercisable at the holder’s option. As of September 30, 2007, the note had
      accrued interest of $2,268.





Losses
      on
      the derivative feature of the Warrants totaled $91,264.




**Convertible
      Debentures**




On
      December 29, 2005, the Company executed a convertible debenture for $500,000
      to
      Montgomery. 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.
      On
      August 10, 2007, Montgomery converted $300,000 of the debentures and received
      2,884,615 shares of common stock.




21




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 of this transaction, pursuant to a
      written escrow agreement. The convertible debenture is due December 29, 2007
      and
      accrues interest monthly at 15% per year. In connection with this transaction,
      the Company executed an Investor Registration Rights Agreement by which it
      agreed to file a registration statement with the SEC for at least the pledged
      shares held by the escrow agent and the 2 million warrants. The registration
      statement was to be filed within 30 days of the execution of the convertible
      debenture and declared effective within 90 days of filing. Failure to file
      or be
      declared effective within the agreed timeframe subjected the Company to
      liquidated damages equal to two percent (2%) of the liquidated value of the
      convertible debenture (initially $10,000, now $4,000 since August 10, 2007)
      for
      each thirty (30) day period after the scheduled filing or effective date
      deadline. By agreement, the filing and effective date deadlines were extended
      to
      April 30, 2007 and July 30, 2007, respectively. The registration statement
      has
      yet to be declared effective and the Company is working with Montgomery and
      the
      SEC to resolve all outstanding issues. Montgomery has not given notice imposing
      liquidated damages





In
      accordance with SFAS 133,  *“Accounting
      for Derivative Instruments and Hedging Activities”* and EITF
      00-19, *“Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock”* ,
      the
      conversion feature associated with the $500,000 convertible debenture represents
      an embedded derivative. The Company recognized the embedded derivative in the
      amount of $659,966 as a liability in its December 31, 2005 consolidated balance
      sheet and measured it at its estimated fair value. The estimated fair value
      of
      the embedded derivative was calculated based on a Black-Scholes pricing model
      using the following assumptions:





Fair
                market value of stock
            
            $
            0.32Exercise
                price
            
            $
            0.13Dividend
                yield
            
            
            0.00
            %Risk
                free interest rate
            
            
            4.00
            %Expected
                volatility
            
            
            115
            %Expected
                life
            
            
            2
                Years








Changes
      in the fair value of the embedded and freestanding warrants with a variable
      price (derivatives) are calculated at each reporting period and recorded in
      net
      gain (loss) on derivative, a separate component of other income (expense).
      As of September
      30, 2007, the fair value of the embedded derivative was $178,851 and the Company
      recognized a net gain on derivative of $293,710 for the nine months then ending.





The
      allocation of the proceeds of the convertible debenture to the warrants with
      a
      fixed exercise price and the recognition of the embedded derivative resulted
      in
      discounts to the convertible debenture of $109,597 and $240,403, respectively.
      The discount on debt of $350,000 is being amortized to interest through December
      31, 2007 using the effective interest method. The unamortized discount on debt
      at September 30, 2007 is $43,750.





The
      freestanding warrants with a variable exercise price (derivatives) and fixed
      warrants issued in connection with the $500,000 convertible debenture were
      initially valued at $379,080 and $109,597, respectively based on a Black-Scholes
      pricing model using the following assumptions:





Fair
                market value of stock
            
            $
            0.32Exercise
                price
            
            $
            0.13Dividend
                yield
            
            
            0.00
            %Risk
                free interest rate
            
            
            4.00
            %Expected
                volatility
            
            
            115
            %Expected
                life
            
            
            3
                Years


22




Changes
      in the fair value of the embedded and freestanding warrants with a variable
      price (derivatives) are calculated at each reporting period and recorded in
      net
      gain (loss) on derivative, a separate component of other income (expense).
      Montgomery exercised the 1,500,000 variable price warrants in a cashless
      exercise on February 1, 2007 and received 841,176 shares of Company stock in
      the
      exchange. As of February 1, 2007, the fair value of the freestanding warrants
      derivative had decreased to $0 and the Company recognized a net gain on
      derivative of $171,821 for the nine months ended September 30, 2007.




**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 1 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 $236,976. As a result of the conversion rights associated with
      these bridge loans, the Company recorded these bridge loans as a derivative
      liability valued at $242,564. The loss on this derivative for the nine months
      was $6,054.




**NOTE
              6 -**
            **PROMISSORY
                NOTES –
                RELATED PARTY**




The
      Company entered into promissory notes with some of its officers who have amounts
      outstanding with the Company. These amounts accrue interest at varying rates
      between 6.0% and 12.0% annually. As of September 30, 2007, the Company has
      $137,974 outstanding under these notes, plus $27,475 in accrued interest. With
      the exception of a promissory note due to an officer in the amount of $39,798
      due March 31, 2008, the remaining notes are demand notes. All such notes are
      therefore reflected as current liabilities on the consolidated balance sheets.
      The notes relate to services rendered or funds loaned to the Company.




**NOTE
              7-**
            **PROVISION
                FOR INCOME TAXES**





Deferred
      income taxes will be determined using the liability method for the temporary
      differences between the financial reporting basis and income tax basis of the
      Company’s assets and liabilities. Deferred income taxes will be measured based
      on the tax rates expected to be in effect when the temporary differences are
      included in the Company’s consolidated tax return. Deferred tax assets and
      liabilities are recognized based on anticipated future tax consequences
      attributable to differences between financial statement carrying amounts of
      assets and liabilities and their respective tax bases.





At
      September 30, 2007 and 2006, deferred tax assets consist of the
      following:





September
                30,2007
            
            2006Deferred
                tax asset
            
            $
            5,581,160
            
            $
            3,254,279Less:
                valuation allowance
            
            
            (5,581,160
            )
            
            (3,254,279
            )Total
            
            $
            -
            
            $
            -




23




At
      September 30, 2007 and 2006, the Company had accumulated deficits in the amount
      of $15,946,170 and $9,297,941, respectively, available to offset future taxable
      income through 2027. The Company established valuation allowances equal to
      the
      full amount of the deferred tax assets due to the uncertainty of the utilization
      of the operating losses in future periods.







**NOTE
              8 -**
            **ACCOUNTS
                PAYABLE AND ACCRUED
                EXPENSES**




Accounts
      payable and accrued expenses at June 30, 2007 consist of the
      following:




September 30, 2007Accounts
                payable
            
            $
            1,027,036Accrued
                salaries payable
            
            
            1,266,342Accrued
                interest payable
            
            
            175,535Accrued
                payroll liabilities
            
            
            84,945Reimbursements
                owed
            
            
            23,156Deferred
                tax liability (India)
            
            
            402Other
                current liabilities
            
            
            9,526Total
            
            $
            2,586,942




Trade
      accounts payable are paid as they become due or as payment terms are extended
      with the consent of the vendor. At September 30, 2007, one vendor, MindTree
      Consulting Pvt. Ltd., an India corporation (“MindTree”), accounted for 32% of
      the Company’s accounts payable. The Company and MindTree entered into a
      repayment agreement more fully described in Note 10.




**NOTE
              9 -**
            **STOCKHOLDERS’EQUITY**




The
      Company has 200,000,000 shares of common stock, par value $0.00004, authorized
      at September 30, 2007.




At
      September 30, 2007, the Company has 121,091,538 common shares issued, 14,142,511
      shares held in escrow, 1,660,036 shares in treasury, and 105,288,991 shares
      outstanding.




The
      following stock transactions occurred in the nine months ended September 30,
      2007:




On
      January 1, 2007, the Company issued 100,000 warrants to each of two accredited
      investors in connection with monies loaned to the Company (see Note 10). The
      warrants have a strike price of $0.40 and expire on January 1, 2009. 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
      January 11, 2007, the Company issued 236,859 restricted shares to an executive
      officer in partial payment of accrued salary valued at $40,266 at the time
      of
      issuance. 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 executive officer received information concerning the Company
      and
      had the ability to ask questions about the Company.





On
      January 11, 2007, the Company issued 73,529 restricted shares and 9,310 warrants
      with a strike price of $0.40 to an accredited investor in return for his
      assistance in raising capital and providing short-term loans to the Company.
      The
      warrants expire on January 12, 2009. The
      investor provided the Company with comments regarding the financial structure
      of
      the Company as such issues related to the Company’s equity securities and made
      limited introductions of the Company to potential accredited
      investors. His
      services were isolated services which were not solicited by the Company. The
      investor did not negotiate for the sale of any the Company's securities; discuss
      details of the nature of the securities sold or whether recommendations were
      made concerning the sale of the securities; engage in due diligence activities;
      provide advice relating to the valuation of or the financial advisability of
      any
      investments in the Company; or handle any funds or securities on behalf of
      the
      Company. The value of these services and consideration for providing the short
      term loans was an aggregate of **** $12,500
      at the time of issuance. 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.


24





On
      January 19, 2007, the Company issued 446,109 restricted shares of stock to
      an
      accredited investor to settle a note payable totaling $60,225. 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
      January 29, 2007, the Company issued 30,000 warrants to each of two accredited
      investors in connection with monies loaned to the Company (see Note 10). The
      warrants have a strike price of $0.40 and expire on January 29, 2009. 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
      January 31, 2007, the Company issued 200,000 restricted shares of stock to
      Newbridge Securities, Inc. for services worth $60,000 at the time of issuance.
      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
      February 1, 2007, the Company issued 841,176 restricted shares to Montgomery
      Equity Partners, Ltd for the cashless exercise of 1,500,000 warrants. This
      transaction created 658,824 shares of treasury stock. 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
      February 5, 2007, the Company issued 36,697 restricted shares to an accredited
      investor in return for his assistance in raising capital and providing
      short-term loans to the Company. The
      investor provided the Company with comments regarding the financial structure
      of
      the Company as such issues related to the Company’s equity securities and made
      limited introductions of the Company to potential accredited
      investors. His
      services were isolated services which were not solicited by the Company. The
      investor did not negotiate for the sale of any the Company's securities; discuss
      details of the nature of the securities sold or whether recommendations were
      made concerning the sale of the securities; engage in due diligence activities;
      provide advice relating to the valuation of or the financial advisability of
      any
      investments in the Company; or handle any funds or securities on behalf of
      the
      Company. The value of these services and consideration for providing the short
      term loans was an aggregate of **** $7,000
      at
      the time of issuance. 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
      February 28, 2007 the Company issued 9,808 restricted shares to The Ardell
      Group
      for public relations services worth $2,550 at the time of issuance. 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
      March
      4, 2007, the Company issued 200,000 warrants to an accredited investor in
      connection with his loan to the Company of $56,573. The warrants had a strike
      price of $0.4753 and expire on March 4, 2009. 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.


25





On
      March
      22, 2007, the Company issued 199,368 restricted shares to an accredited investor
      in return for his assistance in raising capital and providing short-term loans
      to the Company. The
      investor provided the Company with comments regarding the financial structure
      of
      the Company as such issues related to the Company’s equity securities and made
      limited introductions of the Company to potential accredited
      investors. His
      services were isolated services which were not solicited by the Company. The
      investor did not negotiate for the sale of any the Company's securities; discuss
      details of the nature of the securities sold or whether recommendations were
      made concerning the sale of the securities; engage in due diligence activities;
      provide advice relating to the valuation of or the financial advisability of
      any
      investments in the Company; or handle any funds or securities on behalf of
      the
      Company. The value of these services and consideration for providing the short
      term loans was an aggregate of **** $58,230
      at the time of issuance. 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.





Throughout
      the quarter ended March 31, 2007, the Company issued 357,951 restricted shares
      of common stock to 5 accredited investors for cash totaling $70,000. In
      addition, the Company issued 143,180 warrants to these investors at strike
      prices ranging between $0.42 and $0.65 per share. The warrants will expire
      at
      varying dates from July 2, 2008 through August 18, 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
      April
      30, 2007 the Company issued 17,885 restricted shares to The Ardell Group for
      public relations services worth $4,650 at the time of issuance. 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
      11, 2007 the Company issued 50,000 restricted shares to Marcus Perez, an
      accredited investor, in return for his assistance in raising capital and
      obtaining short-term loans to the Company. The investor provided the Company
      with comments regarding the financial structure of the Company as such issues
      related to the Company’s equity securities and made limited introductions of the
      Company to potential accredited investors. His services were isolated services
      which were not solicited by the Company. The investor did not negotiate for
      the
      sale of any the Company's securities; discuss details of the nature of the
      securities sold or whether recommendations were made concerning the sale of
      the
      securities; engage in due diligence activities; provide advice relating to
      the
      valuation of or the financial advisability of any investments in the Company;
      or
      handle any funds or securities on behalf of the Company. The value of these
      services was $11,500 at the time of issuance.





On
      May
      11, 2007 the Company issued 100,000 restricted shares to Henry Zimmer, an
      accredited investor, in return for his assistance in raising capital and
      obtaining short-term loans to the Company. The investor provided the Company
      with comments regarding the financial structure of the Company as such issues
      related to the Company’s equity securities and made limited introductions of the
      Company to potential accredited investors. His services were isolated services
      which were not solicited by the Company. The investor did not negotiate for
      the
      sale of any the Company's securities; discuss details of the nature of the
      securities sold or whether recommendations were made concerning the sale of
      the
      securities; engage in due diligence activities; provide advice relating to
      the
      valuation of or the financial advisability of any investments in the Company;
      or
      handle any funds or securities on behalf of the Company. The value of these
      services was $23,000 at the time of issuance.





On
      May
      11, 2007 the Company issued 20,000 warrants to purchase our common stock
      exercisable at $0.50 to Larry Watkins, an accredited investor, in connection
      with his $20,000 loan. The warrants expire November 10, 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
      investor received information concerning the Company and had the ability to
      ask
      questions about the Company.


26





On
      May
      11, 2007 the Company issued 100,000 warrants to purchase our common stock
      exercisable at $0.50 to Robert V. and Kendra Noone, accredited investors, in
      connection with their $20,000 loan. The warrants expire November 10, 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 investor received information concerning the Company and had
      the
      ability to ask questions about the Company.





On
      May
      14, 2007, the Company issued 33,334,000 restricted shares to Mercatus &
Partners Limited (“Mercatus”), a United Kingdom private limited company,
      pursuant to a Restricted Equity Purchase Agreement (“REPA”) providing for a
      delayed purchase transaction. The REPA is a Regulation S transaction. The amount
      the Company receives will be determined at closing in accordance with the
      formula established in the REPA, less a 45% discount to market price and less
      a
      total of $60,000 in structuring, due diligence and administrative fees. The
      securities were issued pursuant to the exemption from registration provided
      by
      Regulation S 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, 2007 the Company issued 2,087 restricted shares to The Ardell Group for
      public relations services worth $480 at the time of issuance. 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
      1, 2007 the Company issued 25,000 warrants to purchase our common stock
      exercisable at $0.50 to Lakshmil Narayana Peesapati and Anasuya Peesapati,
      accredited investors, in connection with their $25,000 loan. The warrants expire
      May 31, 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
      1, 2007 the Company issued 10,000 warrants to purchase our common stock
      exercisable at $0.50 to Shekar Viswanathan, an accredited investor, in
      connection with his $10,000 loan. The warrants expire May 31, 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 investor received information concerning the Company and had
      the
      ability to ask questions about the Company.





On
      June
      1, 2007 the Company issued 25,000 warrants to purchase our common stock
      exercisable at $0.50 to Ramamohan Lal Tummala, an accredited investor, in
      connection with his $25,000 loan. The warrants expire May 31, 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 investor received information concerning the Company and had
      the
      ability to ask questions about the Company.





On
      June
      25, 2007 the Company issued 38,462 restricted shares to Marcus Perez, an
      accredited investor, in return for his assistance in raising capital and
      obtaining short-term loans to the Company. The investor provided the Company
      with comments regarding the financial structure of the Company as such issues
      related to the Company’s equity securities and made limited introductions of the
      Company to potential accredited investors. His services were isolated services
      which were not solicited by the Company. The investor did not negotiate for
      the
      sale of any the Company's securities; discuss details of the nature of the
      securities sold or whether recommendations were made concerning the sale of
      the
      securities; engage in due diligence activities; provide advice relating to
      the
      valuation of or the financial advisability of any investments in the Company;
      or
      handle any funds or securities on behalf of the Company. The value of these
      services was $7,692 at the time of issuance.


27





On
      June
      25, 2007 the Company issued 20,000 restricted shares to Dwight James, an
      accredited investor, in return for his assistance in raising capital and
      obtaining short-term loans to the Company. The investor provided the Company
      with comments regarding the financial structure of the Company as such issues
      related to the Company’s equity securities and made limited introductions of the
      Company to potential accredited investors. His services were isolated services
      which were not solicited by the Company. The investor did not negotiate for
      the
      sale of any the Company's securities; discuss details of the nature of the
      securities sold or whether recommendations were made concerning the sale of
      the
      securities; engage in due diligence activities; provide advice relating to
      the
      valuation of or the financial advisability of any investments in the Company;
      or
      handle any funds or securities on behalf of the Company. The value of these
      services was $4,000 at the time of issuance.





On
      July
      10, 2007 the Company issued 2,000,000 restricted shares to Allen &
Associates LLC for corporate finance and strategic counsel services worth
      $500,000 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
      July
      17, 2007, the Company issued 495,833 restricted shares to Montgomery Equity
      Partners, Ltd. for the cashless exercise of 500,000 warrants. This transaction
      created 4,167 shares of treasury stock. 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
      July
      30, 2007 the Company issued 450,000 restricted shares to City VAC for public
      relations services worth $65,250 at the time of issuance. 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
      August
      10, 2007, the Company issued 2,884,615 restricted shares to Montgomery Equity
      Partners, Ltd. for the conversion of $300,000 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
      August
      29, 2007 the Company issued 800,000 warrants to purchase our common stock
      exercisable at $0.13 to Marcus Perez, an accredited investor, in lieu of
      interest for his $60,000 loan. The warrants expire August 29, 2010. 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
      September 5, 2007 the Company issued 100,000 warrants to purchase our common
      stock exercisable at $0.12 to Erik Roderick and Steve Barnes, accredited
      investors, in connection with their $250,000 loan. The warrants expire September
      5, 2009. 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
      September 19, 2007 the Company issued 1,000,000 warrants to purchase our common
      stock exercisable at $0.20 to Pan American Relations in connection with
      shareholder and public relations services. The warrants expire June 19, 2009.
      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.


28





On
      September 20, 2007 the Company issued 111,703 restricted shares to David
      McCartney, a former officer, in reimbursement for expenses worth $6,702; this
      included a 50% premium for the restricted shares. 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 individual
      received information concerning the Company and had the ability to ask questions
      about the Company.





Throughout
      the quarter ended September 30, 2007, the Company issued 1,068,627 restricted
      shares of common stock to 2 accredited investors (one of which is an affiliate
      of the Company) for cash totaling $140,000. In addition, the Company issued
      568,627 warrants to these investors at strike prices ranging between $0.37
      and
      $0.42 per share. The warrants will expire at varying dates from January 8,
      2009
      through March 9, 2009. 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.





**NOTE
              10 -**
            **COMMITMENTS
                AND CONTINGENCIES**




**Employment
      Agreements**




The
      Company has entered into employment agreements with key members of management
      and some officers. Most of these employment agreements are for a period of
      three
      to five years; renewals of the employment agreements for the CEO and President
      have been for one year terms. As part of the employment agreements, the Company
      has granted stock options to these individuals that vest over a three to
      five-year period of time.




**Lease
      Agreements**




A
      subsidiary, Airbee Wireless (India) Pvt. Ltd., has entered into a three-year
      lease agreement for office space in Chennai, India. Monthly rent in the US
      Dollar equivalent is $5,471. The lease runs from July 2006 through June
      2009.




**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 March 31, 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




**Guarantees**




As
      mentioned in Note 6, above, on March 12, 2003 and April 30, 2003, Sundaresan
      Raja advanced a total of approximately $39,798 to Airbee Wireless (India) Pvt.
      Ltd. (“Airbee India”), the Company’s wholly-owned subsidiary in India. Airbee
      India has issued Mr. Raja a promissory note due on demand. The note accrues
      interest at 11.25% per year, which is below the local Indian market rates of
      14%
      to 16%. On June 20, 2005, Mr. Raja advanced approximately $12,560 to Airbee
      India (of which approximately $6,280 remains outstanding) which issued Mr.
      Raja
      another demand promissory note. This note accrues interest at 12.0% per year,
      which is below the local Indian market rates of 14% to 16%. During 2007, Mr.
      Raja has advanced a total of approximately $31,902 to Airbee India on the same
      terms as the June 2005 note. At September 30, 2007, $77,979 was due under the
      notes, plus accrued interest of $23,489. The Company has guaranteed repayment
      of
      the advances.




29




**Deferred
      Financing**




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 common stock in a delayed purchase transaction. The REPA is a
      Regulation S transaction. The amount the Company receives will be determined
      at
      closing in accordance with the formula set forth in 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
      are not subject to registration unless Mercatus is 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 will 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. The Company recorded the issuance of the stock based
      on the closing stock price of $0.23 per share on May 14, 2007 and shows the
      anticipated amount of the deferred financing net of the 45% discount to market
      price in the Equity section of its September 30, 2007 balance sheet. As of
      the
      balance sheet date, the closing has not been scheduled but is expected to close
      in November 2007. There are no assurances that this transaction will close in
      which case the Company’s sole remedy is the return of its stock.




**Litigation**





On
      October 3, 2005, Richard Sommerfeld, Jr., the Company’s former chief financial
      officer (“Sommerfeld”) filed suit against the Company. For a complete discussion
      of the claims and counterclaims in this action, please see the Litigation
      section of Note 9 to the Financial Statements in our Form 10-KSB/A for the
      year
      ended December 31, 2005.





On
      June
      8, 2007, an order was entered in favor of Sommerfeld for partial summary
      judgment in the matter of payment of salary. The order stipulated that
      Sommerfeld be awarded $183,316.64 in accrued salary through his last day of
      work
      (August 29, 2005) plus interest, which is approximately $30,000. It was also
      ordered that payment be made in cash or cash equivalent and that promissory
      notes previously issued by the Company to Sommerfeld for wages are unenforceable
      and that counts one through six of Airbee's counterclaim alleging breach of
      employment agreement, breach of fiduciary duties, fraudulent inducement,
      tortious interference and taking of company property are dismissed. The
      remaining issues in the case were Sommerfeld's enhancement claim, stock option
      dispute and attorney's fees. The court ordered the parties to proceed to
      mediation, which took place on July 1, 2007 at which time the parties agreed
      to
      settle their disputes. The
      Company agreed to pay Sommerfeld’s back salary $183,316.64 along with an
      additional $316,683.36 in full payment of interest, reimbursements owed, and
      attorney’s fees as provided by statute. The Company had until August 14, 2007
      (later extended to September 10, 2007) to pay the total settlement amount of
      $500,000 but was unable to do so. Pursuant to the settlement agreement,
      plaintiff was then entitled to enter a consent judgment for $700,000, which
      was
      entered on September 26, 2007, and is
      shown
      in the Current Liabilities section of the September 30, 2007 balance
      sheet.





**NOTE
              11 -**
            **GOING
                CONCERN**




As
      shown
      in the accompanying 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, 2006 and 2005 and for the nine months ended September 30, 2007.
      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.


30




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.




The
      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.




**NOTE
              12 -**
            **RESTATEMENT**




The
      Company has amended its previously issued condensed consolidated financial
      statement for the three months ended March 31, 2006 for amortization of
      intangible assets of $5,050 and certain balance sheet reclassifications to
      conform with the December 31, 2005 restatement. The effect of these changes
      resulted in an increase of the loss for the three month period ended March
      31,
      2006 of $5,050 to a net loss of $1,290,180 and an increase in the accumulated
      deficit to $7,886,805.





The
      Company has amended its previously issued condensed consolidated financial
      statement for the three months ended March 31, 2007 to recognize additional
      compensation and professional fees of $510,000. The effect of these changes
      resulted in an increase of the loss for the three month period ended March
      31,
      2007 of $510,000 to a net loss of $1,705,985 and an increase in the accumulated
      deficit to $13,098,626.





The
      Company has amended its previously issued condensed consolidated financial
      statement for the three months ended June 30, 2007 to recognize additional
      compensation and professional fees of $2,699, additional research and
      development expense of $90, additional depreciation expense of $902, additional
      interest expense of $186 and other income of $723. The effect of these changes
      resulted in an increase of the loss for the three month period ended June 30,
      2007 of $3,154 to a net loss of $1,571,419 and an increase in the accumulated
      deficit to $14,670,045.




**NOTE
              13 -**
            **SUBSEQUENT
                EVENTS**




On
      October 5, 2007 the Company closed on a $500,000 convertible debenture with
      Golden Gate Investors, Inc. which contains two funding increments. The first
      tranche is for $350,000 which was funded on October 9, 2007. The second tranche
      is for $150,000 and is to be funded when the stock closing bid price reaches
      a
      stable or increasing per share price for five successive trading days. An
      affiliate of the company pledged ten million (10,000,000) shares to guarantee
      performance on the agreement in the event of default. The debenture bears
      interest at the rate of 8.75% per annum and matures in twelve months with an
      extension of up to six months at the option of the holder. The Company issued
      a
      three-year two million (2,000,000) share purchase warrant at a strike price
      of
      $0.12 per share which contains a cashless exercise provision. Subject to
      adjustment, the debenture is convertible at the lesser of (a) $0.25, or (b)
      sixty five percent (65%)of the average of the five (5) lowest daily volume
      weighted average price for the twenty (20) trading days prior to the conversion
      date.


31


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





**Forward
      Looking Statements**





This
      Form
      10-QSB, 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,”
“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. We undertake no obligation to revise or update
      any
      forward-looking statements for any reason.





**Executive
      Summary**





**•**
            During
                2007, we signed application development agreements with Medtronic
                Minimed
                and Fuel Automation India Pvt Ltd.. Our license agreements with foreign
                and domestic customers such as Radiocrafts (Norway), Texas Instruments
                (USA) and Infineon (Germany) remain in effect. Our ZNS Software stack
                version 1.0 was certified ZigBee-compliant through an independent
                testing
                laboratory during the fourth quarter of 2005 and version 1.1 was
                certified
                in January 2007. In addition, our upcoming version called ZigBee
                Pro will
                be undergoing certification soon and has been designated as one of
                the
                “golden units”. This means that the product will be used to set the
                standard by which other vendor’s products will be
                measured.





**•**
            We
                had a $4,553,529 net loss before provision for income taxes in the
                first
                nine months of 2007 on revenue of $29,163. We recorded a $368,213
                gain in
                other income (expense) from the re-valuation of derivatives required
                under
                SFAS 133. We raised $210,000 from the sale of stock to accredited
                investors.





**•**
            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.





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


32




**Overview**





Airbee
      Wireless, Inc. (hereinafter called “Airbee” or “Company”) reported $29,163 of
      revenue from planned operations in the first nine months of 2007. 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 also
      announced a new product that facilitates low-power radio frequency (“RF”)
      application development for mesh networks including ZigBee.





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 the product for their application and use, and we are working with
      ATMEL now in the certification process for both the 2006 ZigBee standard and
      the
      new PRO version. 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
      in
      2008.





We
      will
      begin training programs for ATMEL to train their field application engineers
      upon completion of the certification testing. We expect this will result in
      increased opportunities with our partner’s customers. In addition, we
      participated in the ZigBee Developers program this April where we taught new
      developers how to use our stack to develop applications. We expect to do so
      again in the upcoming developers conference.. 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 is a medium to access deliverables,
      demonstrations and product documentation. During the third quarter of 2007,
      we
      had fewer first-time visitors to our website and received fewer registered
      customers which is a small decrease from the comparable quarter in 2006.
      Statistics gathered from such registrations include transceiver and
      microcontroller preferences, customer profile and case studies. We have seen
      a
      further increased interest in our products from OEMs and system integrators
      in
      the quarter. We also expect to complete the ZigBee PRO certification and
      establish ourselves as a “golden unit” company with the ZigBee Alliance. on the
      new Atmel hardware platform and establish additional partnerships in the fourth
      quarter.





In
      January 2007 the Company’s common stock began trading on the over the counter
      bulletin board (OTCBB) which we believe will facilitate credibility in the
      money
      markets. The Mercatus financing which was anticipated to close in the third
      quarter has not closed at the time of this filing. The delays have been
      attributed to the devaluation of the NAV score which is driven by the stock
      price of the target companies in the investment portfolio. The Mercatus people
      continue to state that they look forward to completing the transaction. We
      continue to actively pursue other funding opportunities.





**Results
      of Operations**





***Nine
      Months Ended September 30, 2007 Compared to the Nine Months Ended September
      30,
      2006***





33




During
      the first nine months of 2007 we had $29,163 in operating revenues, resulting
      in
      a net loss applicable to common shares of $4,553,529, or $0.05 net loss per
      share, compared to a net loss of $2,701,316 or $0.04 net loss per share for
      the
      same period in 2006. Cumulative net loss since inception totals
      $15,946,170.





Our
      net
      revenue for the nine months ended September 30, 2007 decreased to $29,163 as
      compared to $127,800 for the nine months ended September 30, 2006. The ZigBee
      Alliance released its enhanced standard to its members on September 27, 2006,
      which was not backwards compatible with the previous standard. Our software
      was
      certified ZigBee compliant to the new standard in January 2007. Another ZigBee
      enhanced standard (ZigBee Pro) will be released later in 2007. We are one of
      the
      companies selected to develop the “golden unit” to be used in the certification
      process. The succession of new standard releases has inhibited the OEMs and
      integrators from making the financial and technology commitments necessary
      to
      integrate our software into their products.





Operating
      expenses for the nine months ended September 30, 2007 were $4,215,065 as
      compared to $3,129,754 for the nine months ended September 30, 2006, an increase
      of 35% or $1,085,311. This increase, as further explained below, is principally
      due to increases in compensation and financing fees, selling, general and
      administrative expenses, interest costs and depreciation and
      amortization.





Our
      overall increase in compensation and professional fees for the nine months
      ended
      September 30, 2007 compared to the nine months ended September 30, 2006 was
      $1,445,230, to $2,892,780 from $1,447,550. This increase consists of an increase
      of $318,844 in compensation, an increase of $1,078,615 in financing professional
      fees, and a $39,072 increase in legal and accounting professional fees. Part
      of
      the increase in compensation is attributable in part to increased staff in
      India
      and retention bonuses paid to retain existing talent but also to an unfavorable
      change in the exchange rate resulting from the weaker dollar. Financing
      professional fees increased due to a non-cash payment to our corporate finance
      and strategic counsel of 2 million common shares of our stock valued at $500,000
      when issued plus their monthly fee of $10,000 which we have also paid in
      restricted stock. We have also incurred financing costs associated with various
      new notes payable and extensions of existing notes. 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.





Stock
      option compensation expense required by SFAS 123R was $27,222 for the nine
      months ended September 30, 2007 and $1,254,956 for the nine months ended
      September 30, 2006, a decrease of $1,227,734. Starting in January 2006, the
      Company is required to expense stock options granted and vesting in the period.
      This is a non-cash expense caused by the options granted to new India employees
      in the first half of the year. No options issued prior to December 31, 2005
      vested during the first nine months of 2007.





Selling,
      general and administrative expenses increased to $1,136,809 in the first nine
      months of 2007, up $750,402 or 194% from $386,407 in the same period in 2006.
      This increase was due primarily to recognition of $477,969 in costs associated
      with our settlement of the litigation brought by our former CFO and from
      increases in sales and marketing and consulting expenses. Our overall selling
      and marketing expenses consist primarily of marketing 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.





Research
      and development expense for the nine months ended September 30, 2007 was $10,556
      compared to $0 for the nine months ended September 30, 2006. Although our
      software was certified ZigBee compliant in January 2007, the ZigBee Alliance
      has
      announced plans to release a new standard (ZigBee Pro) later in 2007. As a
      result, we have elected not to capitalize any research and development costs
      associated with the ZigBee 2006 standard.





Depreciation
      and amortization expense for the nine months ended September 30, 2007 increased
      $106,114 as the Company began amortizing its capitalized research and
      development costs in the fourth quarter of 2006. Interest expense for the nine
      months ended September 30, 2007 increased $332,229 to $755,522 from $423,293
      for
      the nine months ended September 30, 2006. Interest costs associated with the
      bridge loans accounted for $207,682 of this increase with increased interest
      costs for notes payable – related parties and notes payable – others accounting
      for the rest of the increase.





***Three
      Months Ended September 30, 2007 Compared to the Three Months Ended September
      30,
      2006***





During
      the third quarter of 2007 we had $5,925 in operating revenues, resulting in
      a
      net loss applicable to common shares of $1,276,125, or $0.01 net loss per share,
      compared to a net loss of $729,347 or $0.01 net loss per share for the same
      period in 2006. Cumulative net loss since inception totals
      $15,946,170.





34




Our
      net
      revenue for the three months ended September 30, 2007 increased to $5,925 as
      compared to $0 for the three months ended September 30, 2006. The ZigBee
      Alliance released its enhanced standard to its members on September 27, 2006,
      which was not backwards compatible with the previous standard. Our software
      was
      certified ZigBee compliant to the new standard in January 2007. Another ZigBee
      enhanced standard (ZigBee Pro) will be released later in 2007. We are one of
      the
      companies selected to develop the “golden unit” to be used in the certification
      process. The succession of new standards releases has inhibited the OEMs and
      integrators from making the financial and technology commitments necessary
      to
      integrate our software into their products.





Operating
      expenses for the three months ended September 30, 2007 were $1,299,208 as
      compared to $686,672 for the three months ended September 30, 2006, an increase
      of 89% or $612,536. This increase, as further explained below, is principally
      due to increases in compensation and professional fees, selling, general and
      administrative expenses, and depreciation and amortization, which offset a
      decreases in stock option compensation expense.





Our
      overall increase in compensation and professional fees for the quarter ended
      September 30, 2007 compared to the quarter ended September 30, 2006 was
      $257,259, to $800,068 from $542,809. This increase consists of an increase
      of
      $191,129 in compensation costs, an increase of $48,220 in financing professional
      fees and a $9,965 increase in legal and accounting professional fees. Part
      of
      the increase in compensation is attributable in part to increased staff in
      India
      but also to an unfavorable change in the exchange rate resulting from the weaker
      dollar. Financing professional fees increased due to a non-cash payment to
      our
      corporate finance and strategic counsel of restricted shares valued at $10,000
      per month plus financing arrangements with other short-term lenders. 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.





Stock
      option compensation expense required by SFAS 123R was $0 for the quarter ended
      September 30, 2007 as the Company is now required to expense stock options
      granted and vesting in the period. This is a non-cash expense caused by the
      options granted to new India employees in the quarter. No options issued prior
      to December 31, 2005 vested during the quarter. The comparable expense in the
      third quarter of 2006 was $27,326.





Selling,
      general and administrative expenses increased to $423,728 in the third quarter
      of 2007, up $323,878 or 324% from $99,850 in the third quarter of 2006. This
      increase was due primarily to recognition of $200,000 in costs associated with
      our settlement of the litigation brought by our former CFO and from increases
      in
      marketing, travel and other costs which offset decreases 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.





Research
      and development expense for the three months ended September 30, 2007 was $34
      compared to $0 for the three months ended September 30, 2006. Although our
      software was certified ZigBee compliant in January 2007, the ZigBee Alliance
      has
      announced plans to release a new standard (ZigBee Pro) later in 2007. As a
      result, we have elected not to capitalize any research and development costs
      associated with the ZigBee 2006 standard.





Depreciation
      and amortization expense for the quarter ended September 30, 2007 increased
      $58,691 as the Company began amortizing its capitalized research and development
      costs in the fourth quarter of 2006. Interest expense for the three months
      ended
      September 30, 2007 increased $30,457 to $289,047 from $258,590 for the three
      months ended September 30, 2006. Interest costs associated with notes payable
–
related parties, notes payable – others and the bridge loans accounted for this
      increase.





**Liquidity
      and Capital Resources**





Since
      inception, we have principally funded our operations from private placements
      of
      securities and management and shareholder loans and contributions of $4,911,883.
      This amount includes $97,500 in loans from accredited investors made during
      the
      third quarter of 2007. As of September 30, 2007, we have $137,974 outstanding
      under notes payable – related parties, $1,266,342 outstanding under accrued
      salaries payable and $1,852,130 outstanding in notes payable – other. Proceeds
      from notes payable were used to pay down current payables. We will require
      approximately $5 million to continue operations for the next 12 months. To
      the
      extent permitted by the lender(s), the funding will be allocated principally
      for
      payment of outstanding obligations, 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 three of our products.





35




We
      have
      incurred an accumulated deficit at September 30, 2007 of $15,946,170 compared
      to
      $9,297,941 at September 30, 2006. We had negative working capital at September
      30, 2007 of $6,096,865 compared to negative working capital of $3,696,638 at
      September 30, 2006. 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 are 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 are due
      December 29, 2007, have piggy-back registration rights and accrue interest
      monthly at the rate of fifteen percent (15%) per year. We are $28,646, behind
      with our interest payments.





In
      connection with the Securities Purchase Agreement we issued Montgomery three
      warrants to purchase a total of 2,000,000 shares of our common stock. The
      warrants are exercisable for a period of three years. The exercise price for
      the
      first warrant for 1,000,000 shares is the lesser of 80% of the lowest closing
      bid price for the five trading days immediately preceding the exercise date
      or
      $0.20 per share. The exercise price for the second warrant for 500,000 shares
      is
      the lesser of 80% of the lowest closing bid price for the five trading days
      immediately preceding the exercise date or $0.30 per share. The exercise price
      for the third warrant for 500,000 shares is $0.001 per share. The first two
      such
      warrants for 1.5 million shares were exercised in February 2007 which yielded
      841,176 shares under a cashless exercise provision; the third warrant for
      500,000 shares was exercised in July 2007 which yielded 495,833 shares under
      a
      cashless exercise provision.





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 is
      a Regulation S transaction. The amount the Company receives will 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 are not subject
      to registration unless Mercatus is 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
      will 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. As of the
      balance sheet date, the closing has not been scheduled but is expected to occur
      in November 2007.There are no assurances that this transaction will close in
      which case the Company’s sole remedy is the return of its stock.




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
      September 30, 2007 and 2006, respectively, was $8,205 and $11,436. At September
      30, 2007 and 2006, respectively, we had total stockholders’ deficit of
      $5,490,535 and $2,899,243.





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 (for both the ZigBee 2006 global standard
      and the upcoming release of the ZigBee Pro global standard) and other
      competitive factors) and (b) our ability to control expenses.





With
      regard to our current liabilities at September 30, 2007, $137,974 is payable
      to
      related note holders who have deferred repayment (one has deferred interest
      as
      well). Trade payables at September 30, 2007 of $1,027,036 are outstanding and
      will be paid as they come due or as payment may be extended by agreement of
      the
      parties. One vendor, MindTree Consulting Pvt. Ltd. (“MindTree”), accounted for
      32% 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 October 31, 2007, 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 March 31, 2008.





36




We
      believe that revenues will lag during 2007 from our licensing and other
      agreements until that the enhanced ZigBee standard (ZigBee Pro) is released
      to
      members of the Alliance. 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 $165,000 to $185,000 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, 2006. 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, 2006 and 2005 and for the nine month period ended September 30,
      2007. 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 when
      additional financing is obtained and intends to negotiate lump-sum payment
      reductions with the larger vendors (MindTree excepted). The bulk of the
      Contractual Obligations in the table below 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. The long-term debt listed
      in the table is the secured convertible debenture, 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 (but not eliminate) its obligations under these contracts.
      It will also consider overhead reductions at its headquarters and at its India
      subsidiary. This would be as a last resort as (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 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.





37




***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.**





38




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.





**Numerous
      factors may cause out 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.





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.





39




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.





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, 2006 and 2005 and for the six month period ended June 30, 2007.
      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.





**Off-Balance
      Sheet Arrangements**





As
      of
      September 30, 2007, we did not have any off-balance sheet arrangements, as
      defined in Item 303(a)(4)(ii) of SEC Regulation S-K.





**Contractual
      Obligations**





The
      table
      below lists our known contractual obligations at September 30, 2007.





Our
      long-term debt obligation consists of a $500,000 convertible debenture, plus
      interest payable monthly at 15% per annum. We are six months behind in our
      interest payments through September 2007.





Our
      purchase obligations are limited to employment contracts with company executives
      and senior staff. These seven written contracts are for one to three years
      in
      duration and expire at various dates through May 15, 2008.





The
      operating leases reported here 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 are in 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.




Payments
                  due by periodContractual
                  Obligations
              
              Total
              
              Less
                  than 1year
              
              1
                  -
                  3 years
              
              3
                  -
                  5 years
              
              More
                  than 5yearsPurchase
                  Obligations (employment contracts) *
              
              $
              712,917
              
              
              500,417
              
              
              212,500
              
              
              -
              
              
              -Current
                  Debt Obligations
              
              $
              1,027,036
              
              
              1,027,036
              
              
              -
              
              
              -
              
              
              -Operating
                  Lease Obligations **
              
              $
              139,510
              
              
              67,293
              
              
              72,217
              
              
              -
              
              
              -Capital
                  Lease Obligations
              
              $
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Other
                  Long-Term Liabilities Reflected on Balance Sheet under GAAP
              
              $
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -




40


____________


*
            Employment
                contracts with senior executives ranging in length from 1 year to
                3 years,
                expiring on various dates through May 15,
                2008. **
            Lease
                of 6,000 sq. ft. of office space in Chennai, India expiring June
                30, 2009.
                The lease at our Rockville, MD office is month-to-month and therefore
                not
                included. Our Rockville rent is $1,687 per
                month.





**Item
      3. Controls and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**





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 as of the end of the period covered
      by 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 disclosure. 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.





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.





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 the
      fiscal year ending December 31, 2007. Costs of the controller and finance
      manager and the practices implemented thus far are approximately $120,000 per
      year, consisting mainly of the controller’s and finance manager’s salaries and
      the public reporting costs of additional disclosure.





41




**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.





**PART
      II OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





See
      the
      Litigation subsection of Note 10 - Commitments and Contingencies to the
      Condensed Consolidated Financial Statements in Part 1 of this Form
      10-QSB.





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





The
      following stock transactions occurred in the third quarter of 2007:





On
      July
      9, 2007, the Company issued 235,294 restricted shares of common stock to Robert
      V. Noone, an accredited investor, for cash totaling $40,000. In addition, the
      Company issued 235,294 warrants to Mr. Noone at strike prices of $0.42 per
      share. The warrants will expire on January 8, 2009. 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
      July
      10, 2007 the Company issued 2,000,000 restricted shares to Allen &
Associates LLC for corporate finance and strategic counsel services worth
      $500,000 at the time the obligation was 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
      July
      17, 2007, the Company issued 495,833 restricted shares to Montgomery Equity
      Partners, Ltd. for the cashless exercise of 500,000 warrants. This transaction
      created 4,167 shares of treasury stock. 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
      July
      30, 2007 the Company issued 450,000 restricted shares to City VAC for public
      relations services worth $65,250 at the time of issuance. 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
      August
      10, 2007, the Company issued 2,884,615 restricted shares to Montgomery Equity
      Partners, Ltd. for the conversion of $300,000 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
      August
      29, 2007 the Company issued 800,000 warrants to purchase our common stock
      exercisable at $0.13 to Marcus Perez, an accredited investor, in lieu of
      interest for his $60,000 loan. The warrants expire August 29, 2010. 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.





42




On
      September 5, 2007 the Company issued 100,000 warrants to purchase our common
      stock exercisable at $0.12 to Erik Roderick and Steve Barnes, accredited
      investors, in connection with their $250,000 loan. The warrants expire September
      5, 2009. 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
      September 10, 2007, the Company issued 833,333 restricted shares of common
      stock
      to V.V. Sundaram, an accredited investor and an affiliate of the Company for
      cash totaling $100,000. In addition, the Company issued 333,333 warrants to
      Mr.
      Sundaram at strike prices of $0.37 per share. The warrants will expire on March
      9, 2009. 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
      September 19, 2007 the Company issued 1,000,000 warrants to purchase our common
      stock exercisable at $0.20 to Pan American Relations in connection with
      shareholder and public relations services. The warrants expire June 19, 2009.
      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
      September 20, 2007 the Company issued 111,703 restricted shares to David
      McCartney, a former officer, in reimbursement for expenses worth $6,702; plus
      a
      50% premium for the restricted shares. 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 individual received information
      concerning the Company and had the ability to ask questions about the
      Company.





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





None





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





None





**Item
      5. Other Information.**





None.





**Item
      6. Exhibits.**





31.1  Rule
      13a-14(a)/15d-4(a) Certification of Principal Executive Officer





31.2  Rule
      13a-14(a)/15d-4(a) Certification of Principal Financial Officer





32.1  Section
      1350 Certification of Principal Executive Officer





32.2  Section
      1350 Certification of Principal Financial Officer




43


**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:
      December 19, 2007





AIRBEE
      WIRELESS, INC.




By:
            /s/
              Sundaresan RajaSundaresan
                Raja
              Chief
                Executive Officer
              (Principal
                Executive Officer)By:
            /s/
              E. Eugene SharerE.
                Eugene Sharer
              Interim
                Principal Financial Officer




44