**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**


(Mark
      One)





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





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





**OR**





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





For
      the
      transition period from       to     .





**Commission
      file number 0-50918**




**AIRBEE
      WIRELESS, INC.**


(Exact
      name of registrant as specified in its charter)





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





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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.           Yes þ No
o





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


Large
                accelerated filer o
            
            Accelerated
                filer o
            
            Non-accelerated
                filer o
            
            Smaller
                reporting company þ




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





APPLICABLE
      ONLY TO CORPORATE ISSUERS





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 139,356,263Common Stock par value of $0.00004
      as of November 11, 2008.





Transitional
      Small Business Disclosure Form (check one): Yes o  No
þ










AIRBEE
      WIRELESS, INC.





FORM
      10-Q





INDEX




**PAGE**PART
                I FINANCIAL INFORMATION
            
            3Item
                1. Financial Statements
            
            3Condensed
                Consolidated Balance Sheets as of September 30, 2008 (Unaudited)
                and
                December 31, 2007 (Audited)
            
            4Condensed
                Consolidated Statements of Operations for the Nine and Three Months
                Ended
                September 30, 2008 and 2007 (Unaudited)
            
            5Condensed
                Consolidated Statements of Cash Flows for the Nine Months Ended September
                30, 2008 and 2007 (Unaudited)
            
            6Notes
                to the Condensed Consolidated Financial Statements
                (Unaudited)
            
            8Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            
            19Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            29Item
                4. Controls and Procedures
            
            29PART
                II OTHER INFORMATION
            
            32Item
                1. Legal Proceedings
            
            32Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            32Item
                3. Defaults Upon Senior Securities
            
            33Item
                4. Submission of Matters to a Vote of Security Holders
            
            34Item
                5. Other Information
            
            34Item
                6. Exhibits
            
            34SIGNATURES
            
            35


2




**PART
      I FINANCIAL INFORMATION**




**Item
      1. Financial Statements**





**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008 AND 2007**


**(UNAUDITED)**


3





**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**





**(Unaudited)**
            
            **(Audited)****September 30,**
            
            **December 31,****2008**
            
            **2007****ASSETS**Current
                Assets:Cash
                and cash equivalents
            
            $
            7,805
            
            $
            1,925Accounts
                receivable, net
            
            
            40,000
            
            
            89,960Deferred
                financing costs - current
            
            
            28,824
            
            
            -Prepaid
                expenses and other current assets
            
            
            70,845
            
            
            4,589Total
                Current Assets
            
            
            147,474
            
            
            96,474Fixed
                assets, net of depreciation
            
            
            174,740
            
            
            212,793Intangible
                assets
            
            
            12,598
            
            
            268,913Deferred
                financing costs
            
            
            28,823
            
            
            79,265Other
                assets
            
            
            49,679
            
            
            68,65691,100
            
            
            416,834**TOTAL
                ASSETS**
            
            $
            413,314
            
            $
            726,101**LIABILITIES
                AND STOCKHOLDERS' DEFICIT****LIABILITIES**Current
                Liabilities:Notes
                payable - related party
            
            $
            50,127
            
            $
            133,580Notes
                payable - other
            
            
            506,713
            
            
            2,024,952Litigation
                liability
            
            
            -
            
            
            718,411Fair
                value of derivatives
            
            
            444,942
            
            
            458,167Convertible
                debentures, net of discount
            
            
            13,300
            
            
            484,892Warrants
                liability
            
            
            897,328
            
            
            62,229Liability
                for stock to be issued
            
            
            -
            
            
            10,000Accounts
                payable and accrued expenses
            
            
            3,210,612
            
            
            2,903,222Total
                Current Liabilities
            
            
            5,123,022
            
            
            6,795,453Long-term
                Liabilities:Convertible
                debentures, net of discount
            
            
            2,768,246
            
            
            -**Total
                Liabilities**
            
            
            7,891,268
            
            
            6,795,453**COMMITMENTS
                AND CONTINGENCIES**
            
            
            -
            
            
            -**STOCKHOLDERS'
                DEFICIT**Common
                stock, $.00004 Par Value; 200,000,000 shares authorized; 154,660,701
                and
                121,091,538 shares issued; 14,142,511 and 14,142,511 shares held
                in
                escrow; and 138,858,154 and 105,288,991 shares outstanding
            
            
            5,554
            
            
            4,650Additional
                paid-in capital
            
            
            11,953,659
            
            
            15,625,500Unearned
                compensation
            
            
            (5,000
            )
            
            (6,660
            )Prepaid
                consulting
            
            
            -
            
            
            (83,333
            )Other
                accumulated comprehensive income
            
            
            (48,005
            )
            
            63,938Shares
                issued for deferred financing, net of $3,450,069 discount
            
            
            -
            
            
            (4,216,751
            )Accumulated
                deficit
            
            
            (19,086,623
            )
            
            (17,159,157
            )(7,180,415
            )
            
            (5,771,813
            )Less:
                treasury stock, 1,660,036 and 1,660,036 shares at cost
            
            
            (297,539
            )
            
            (297,539
            )**Total
                Stockholders' Deficit**
            
            
            (7,477,954
            )
            
            (6,069,352
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS' DEFICIT**
            
            $
            413,314
            
            $
            726,101





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


4





**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**FOR
      THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2008 AND
      2007**


**(UNAUDITED)**





**NINE MONTHS ENDED**
            
            **THREE MONTHS ENDED****SEPTEMBER 30,**
            
            **SEPTEMBER 30,****Restated**
            
            
            
            **Restated****2008**
            
            **2007**
            
            **2008**
            
            **2007****OPERATING REVENUES**Sales
            
            $
            80,000
            
            $
            29,163
            
            $
            40,000
            
            $
            5,925**COST
                OF SALES**
            
            
            -
            
            
            -
            
            
            -
            
            
            -**GROSS
                PROFIT**
            
            
            80,000
            
            
            29,163
            
            
            40,000
            
            
            5,925**OPERATING
                EXPENSES**Compensation
                and professional fees
            
            
            2,000,031
            
            
            2,711,749
            
            
            333,786
            
            
            925,068Stock
                option compensation expense
            
            
            16,274
            
            
            27,965
            
            
            14,753
            
            
            -Research
                and development
            
            
            60,000
            
            
            10,556
            
            
            -
            
            
            124Selling,
                general and administrative expenses
            
            
            531,084
            
            
            1,136,354
            
            
            86,581
            
            
            451,587Depreciation
                and amortization
            
            
            500,259
            
            
            146,955
            
            
            95,837
            
            
            47,966**Total
                Operating Expenses**
            
            
            3,107,648
            
            
            4,033,579
            
            
            530,957
            
            
            1,424,745**LOSS
                BEFORE OTHER INCOME (EXPENSE)**
            
            
            (3,027,648
            )
            
            (4,004,416
            )
            
            (490,957
            )
            
            (1,418,820
            )**OTHER
                INCOME (EXPENSE)**Fair
                value adjustments on derivatives and warrants
            
            
            351,303
            
            
            368,213
            
            
            (10,760
            )
            
            306,205Other
                income
            
            
            1,420,361
            
            
            19,682
            
            
            -
            
            
            723Interest
                expense
            
            
            (671,482
            )
            
            (755,522
            )
            
            (186,041
            )
            
            (289,233
            )**Total
                Other Income (Expense)**
            
            
            1,100,182
            
            
            (367,627
            )
            
            (196,801
            )
            
            17,695**LOSS
                BEFORE PROVISION FOR INCOME TAXES**
            
            
            (1,927,466
            )
            
            (4,372,043
            )
            
            (687,758
            )
            
            (1,401,125
            )**Provision
                for Income Taxes**
            
            
            -
            
            
            -
            
            
            -
            
            
            -**NET
                LOSS APPLICABLE TO COMMON SHARES**
            
            $
            (1,927,466
            )
            $
            (4,372,043
            )
            $
            (687,758
            )
            $
            (1,401,125
            )**NET
                LOSS PER BASIC AND DILUTED SHARES**
            
            $
            (0.02
            )
            $
            (0.05
            )
            $
            (0.01
            )
            $
            (0.01
            )**WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING**
            
            
            115,070,420
            
            
            93,081,086
            
            
            128,661,796
            
            
            101,686,807





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





5




**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**


**(UNAUDITED)**





**Restated****2008**
            
            **2007****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                loss
            
            $
            (1,927,466
            )
            $
            (4,372,043
            )Adjustments
                to reconcile net loss to net cash (used in) operating
                activitiesDepreciation
                and amortization
            
            
            320,557
            
            
            146,955Common
                stock and warrants issued for services
            
            
            571,473
            
            
            1,229,828Common
                stock and warrants issued for interest payments
            
            
            172,174
            
            
            -Liability
                for stock to be issued for services
            
            
            (10,000
            )
            
            -Common
                stock issued for penalty returned
            
            
            (680,000
            )
            
            -Forgiveness
                of debt
            
            
            (740,264
            )
            
            -Gain
                on valuation of derivatives
            
            
            (351,303
            )
            
            (368,213
            )Amortization
                of derivative discounts
            
            
            -
            
            
            131,250Stock
                & stock option compensation expense 123R
            
            
            16,274
            
            
            27,222Exercised
                stock options returned by shareholders
            
            
            -
            
            
            (723
            )Amortization
                of financing costs
            
            
            179,702
            
            
            11,592Gain
                (Loss) on foreign currency translations
            
            
            (111,943
            )
            
            55,128Amortization
                of unearned compensation
            
            
            1,660
            
            
            11,976Extension
                and late payment fees on bridge loans
            
            
            294,312
            
            
            269,435Litigation
                settlement
            
            
            (253,411
            )
            
            337,839Amortization
                of prepaid consulting
            
            
            83,333
            
            
            291,667Excess
                tax benefits from share-based payment arrangement
            
            
            (5,694
            )
            
            (9,788
            )**Changes
                in assets and liabilities**Decrease
                in accounts receivable
            
            
            49,960
            
            
            -Decrease
                (Increase) in prepaid expenses and other current assets
            
            
            (66,256
            )
            
            19,312(Increase) Decrease in
                other assets
            
            
            18,977
            
            
            (9,492
            )Increase
                in accounts payable and accrued expenses
            
            
            421,474
            
            
            1,119,692Total
                adjustments
            
            
            (88,975
            )
            
            3,263,680**Net
                cash (used in) operating activities**
            
            
            (2,016,441
            )
            
            (1,108,363
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES**Acquisitions
                of fixed assets
            
            
            (14,057
            )
            
            -Acquisitions
                of intangible assets
            
            
            (12,132
            )
            
            (67,926
            )**Net
                cash (used in) investing activities**
            
            
            (26,189
            )
            
            (67,926
            )





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


6





**AIRBEE
      WIRELESS, INC.**


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


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**


**(UNAUDITED)**




**Restated****2008**
              
              **2007****CASH
                  FLOWS FROM FINANCING ACTIVITES**Proceeds
                  from common stock issuances
              
              $
              -
              
              $
              210,000Proceeds
                  from convertible debentures
              
              
              2,051,169
              
              
              -Proceeds
                  from notes payable - other
              
              
              130,100
              
              
              717,564(Payments
                  of) notes payable - other
              
              
              (55,000
              )
              
              -Proceeds
                  from secured convertible debenture
              
              
              -
              
              
              150,000Proceeds
                  from (Payments of) notes payable - related party, net
              
              
              (83,453
              )
              
              37,844Excess
                  tax benefits from share-based payment arrangement
              
              
              5,694
              
              
              9,788**Net
                  cash provided by financing activities**
              
              
              2,048,510
              
              
              1,125,196**NET
                  INCREASE (DECREASE) IN CASH AND CASH
                  EQUIVALENTS**
              
              
              5,880
              
              
              (51,093
              )**CASH
                  AND CASH EQUIVALENTS - BEGINNING OF PERIOD**
              
              
              1,925
              
              
              59,298**CASH
                  AND CASH EQUIVALENTS - END OF PERIOD**
              
              $
              7,805
              
              $
              8,205**SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:****CASH
                  PAID DURING THE PERIOD FOR:**Interest
                  expense
              
              $
              25,055
              
              $
              27,570Income
                  taxes
              
              $
              -
              
              $
              -**SUPPLEMENTAL
                  DISCLOSURE OF NONCASH ACTIVITIES:**Common
                  stock and warrants issued for services
              
              $
              571,473
              
              $
              1,229,828Common
                  stock inssued for deferred financing (Mercatus), net of
                  discount
              
              $
              -
              
              $
              4,216,751Stock
                  grants and stock options vested during period
              
              $
              16,274
              
              $
              27,222Reverse
                  issuance of common stock; overruled by court order
              
              $
              -
              
              $
              131,268Common
                  stock returned upon cancellation of deferred financing, net of
                  discount
              
              $
              4,216,751
              
              $
              -Warrants
                  converted to liability
              
              $
              1,047,405
              
              $
              -Warrants
                  removed from liability
              
              $
              -
              
              $
              59,621Conversion
                  of note payable - other and accrued interest to common
                  stock
              
              $
              378,100
              
              $
              60,225Use
                  of pledged collateral for settlement of note payable and accrued
                  interest
              
              $
              -
              
              $
              276,298Conversion
                  of related party notes payable, accrued salaries payable and accrued
                  interest to common stock
              
              $
              -
              
              $
              46,968Liability
                  for stock to be issued for prepaid consulting fees
              
              $
              -
              
              $
              500,000Liability
                  for stock to be issued for services
              
              $
              (10,000
              )
              $
              70,000Conversion
                  of accrued interest (included in accounts payable and accrued expenses)
                  to
                  common stock
              
              $
              38,284
              
              $
              -





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


7





**AIRBEE
      WIRELESS, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008 AND 2007**


**(UNAUDITED)**





**GENERAL**





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





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





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





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





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





The
      condensed consolidated financial statements have been presented on the basis
      that the Company is a going concern, which contemplates, among other things,
      the
      realization of assets, continued success in accessing supplemental external
      financing, and the satisfaction of liabilities in the normal course of business.
      The Company has incurred losses since its inception, and has an accumulated
      deficit of approximately $19.1 million as of September 30, 2008. The Company's
      operations have been financed primarily through a combination of issued equity
      and debt. For the nine months ended September 30, 2008, the Company had a net
      loss of approximately $1,930,000 and cash used in operations of approximately
      $2,020,000.





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





**3.**  **Use
      of Estimates**





The
      preparation of the condensed consolidated financial statements in conformity
      with accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosures of contingent assets and
      liabilities at the date of the consolidated financial statements and the
      reported amounts of revenues and expenses during the reporting period. Actual
      results could differ from those estimates.





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





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





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





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


8





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





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





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


September 30,
                2008
              
              September 30,
                2007
                RestatedNet Loss
              
              $
              (1,927,466
              )
              $
              (4,372,043
              )Weighted-average common shares outstanding (Basic)
              
              
              115,070,420
              
              
              93,081,086Weighted-average
                  common stock Equivalents:Stock
                  options
              
              
              -
              
              
              -Warrants
              
              
              -
              
              
              -Weighted-average
                  common shares outstanding (Diluted)
              
              
              115,070,420
              
              
              93,081,086





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





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





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





The
      Company measures compensation expense for its employee stock-based compensation
      using the intrinsic-value method. Under the intrinsic-value method of accounting
      for stock-based compensation, when the exercise price of options granted to
      employees is less than the estimated fair value of the underlying stock on
      the
      date of grant, deferred compensation is recognized and is amortized to
      compensation expense over the applicable vesting period. Amortization expense
      for the nine months ended September 30, 2008 and 2007 was $1,660 and $11,976,
      respectively.


9





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.





The
      following table summarizes the stock option activity for the nine months ended
      September 30, 2008:


Shares
              
              Weighted
                Average
                Exercise
                Price
              
              Weighted
                Average
                Contractual
                Term (Years)Outstanding, December 31, 2007
              
              
              1,728,000
              
              
              0.2995
              
              
              4.69Options
                  granted
              
              
              -
              
              
              -
              
              
              -Options
                  reinstated
              
              
              -
              
              
              -
              
              
              -Options
                  exercised
              
              
              -
              
              
              -
              
              
              -Options
                  cancelled
              
              
              33,000
              
              
              0.2995
              
              
              3.70Options
                  forfeited or expired
              
              
              -
              
              
              -
              
              
              -Outstanding,
                  September 30, 2008
              
              
              1,695,000
              
              
              0.3037
              
              
              3.27Options
                  exercisable, September 30, 2008
              
              
              1,465,125
              
              
              0.3132
              
              
              2.91




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





The
      identifiable intangible assets presented on the condensed consolidated balance
      sheet represent the intellectual property that was capitalized
      post-technological feasibility. Beginning with the second quarter of 2005,
      the
      Company began amortizing its intellectual property costs over a five year
      period. As part of management’s monitoring and assessment of any impairment
      charges against those assets in accordance with the provisions of SFAS No.
      142
      and SFAS No. 144, “ *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,”
it
      was
      determined that the identifiable intangible assets were impaired as of March
      31,
      2008 and were therefore written off. The amount amortized for the nine months
      ended September 30, 2008 and 2007 was $32,575 and $22,650,
      respectively.





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





The
      main
      components of intangible assets are as follows:




Nine Months Ended September 30, 2008 (Unaudited)Gross Amount
            
            Accumulated
              Amortization
            
            Net Carrying
              AmountIntellectual Property
            
            $
            116,090
            
            $
            116,090
            
            $
            -Patent
            
            
            12,598
            
            
            -
            
            
            12,598Capitalized
                Research & Development
            
            
            403,888
            
            
            403,888
            
            
            -Total
                Intangible Assets
            
            $
            532,576
            
            $
            519,978
            
            $
            12,598


10





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





Amortization
      expense for the next five years ending September 30 is expected to be as
      follows: $4,199 in 2009; $4,199 in 2010, $4,200 in 2011and $0 in 2012 and
      2013.





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





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





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





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





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





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





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


11





**10.**  **Debt**





***Notes
      Payable - Other***





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





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





On
      April
      3, 2007 the Company executed a promissory note for $100,000 to Memphis Scale
      Works, Inc. The note bears interest at the rate of 12% per annum. As an
      inducement to make the loan the Company issued 200,000 restricted shares of
      its
      common stock to maker. The note was due May 2, 2007 but is still outstanding.
      On
      July 31, 2008, this note was rolled into a new note; see details
      below.





On
      May
      11, 2007 the Company executed a promissory note for $20,000 to Larry Watkins.
      The note bore interest at the rate of 10% per annum for the first fifteen days,
      increasing to 15% per annum thereafter. As an inducement to make the loan the
      Company issued 20,000 warrants to purchase restricted shares of its common
      stock
      to maker exercisable over 18 months at an exercise price of $0.50 per share.
      The
      note was due September 30, 2007 but remained unpaid until July 10, 2008 when
      the
      Company issued 971,131 shares of common stock in full payment of principal
      and
      accrued interest.





On
      May
      11, 2007 the Company executed a promissory note for $20,000 to Robert Noone.
      The
      note bore interest at the rate of 12% per annum. As an inducement to make the
      loan the Company issued 100,000 warrants to purchase restricted shares of its
      common stock to maker exercisable over 18 months at an exercise price of $0.50
      per share. The note was due September 30, 2007 but is still outstanding. The
      parties have engaged in discussions extending the due date but have not reached
      agreement as of November 10, 2008 although no notice of default has been
      issued.





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


12





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





On
      November 26, 2007 the Company executed a promissory note for $112,000 to Jerry
      Michie. The note bears interest at the rate of 12% per annum. As an inducement
      to make the loan the Company issued 400,000 restricted shares of its common
      stock to Mr. Michie. The note is convertible at holder’s option; the conversion
      price is the five day weighted average closing price of the Company’s stock for
      the five trading days preceding conversion. The note is due 90 days after date.
      If the Company fails to repay the note within the time allotted, the Company
      will issue 1 million shares to the holder and the interest rate will increase
      to
      22% per annum from the due date until the note is repaid. On July 31, 2008,
      the
      outstanding principal and accrued interest were rolled into a new note; see
      details below.





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





On
      January 10, 2008, the Company executed a promissory note for $10,100 to Rudolph
      Cane, Jr. The note bears interest at the rate of 12% per annum and is due July
      9, 2008. The note has a conversion feature exercisable at the holder’s option.
      In further consideration of the note, the Company issued 50,000 warrants to
      purchase common shares of its restricted common stock exercisable for three
      years at $0.25 per share. On July 18, 2008 the Company issued 415,921 shares
      of
      common stock in full payment of principal and accrued interest





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





On
      July
      31, 2008, the Company executed a promissory note for $242,713.43 to Memphis
      Scale Works, Inc. This note replaces the $100,000 note dated April 3, 2007
      to
      Memphis Scale Works, Inc. and the $112,000 note dated November 26, 2007 to
      Jerry
      Michie, the president of Memphis Scale Works, Inc. The new note bears simple
      interest at the rate of 10% per annum and is due July 30, 2009 or sooner upon
      closing of the earlier of a funding event that is greater than $2 million net
      to
      the Company or an institutional funding event.





On
      September 16, 2008, the Company and its India subsidiary jointly and severally
      executed an amended and restated promissory note for $50,000 to Bartman
      Brothers, a California general partnership. The note bore interest at the rate
      of 12% per annum and was initially due October 31, 2008; if principal and
      accrued interest were unpaid by that date the note became a demand
      note.





***Convertible
      Debentures***





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


13





On
      October 5, 2007, the Company executed a $350,000 convertible debenture with
      Golden Gate Investors, Inc. (“Golden Gate”). Pursuant to its terms, Golden Gate
      disbursed $350,000 to the Company upon execution. The convertible debenture
      was
      due October 4, 2008 and accrued interest at 8.75% per year. In addition, the
      Company issued 2,000,000 warrants to purchase common stock exercisable at $0.12
      per share. The warrants expire on October 4, 2010. When a condition of default
      occurred Golden Gate accelerated the note in December 2007. When the Company
      was
      unable to repay the note, Golden Gate began selling 10 million pledged shares,
      which it completed in February 2008. On April 24, 2008, Golden Gate converted
      $20,000 of its remaining debentures and received 1,015,486 shares of common
      stock. On June 13, 2008, Golden Gate converted $14,000 of its remaining
      debentures and received 911,874 shares of common stock. On August 5, 2008,
      Golden Gate converted the remaining debentures and accrued interest totaling
      $23,324 and received 1,708,186 shares of common stock.





On
      February 6, 2008 and effective as of January 30, 2008, the Company entered
      into
      a Debenture and Warrant Purchase Agreement, as amended, with Bartfam LP, et
      al
      (“Bartfam”) by which Bartfam agreed to purchase and the Company agreed to sell
      approximately $1.4 million of secured convertible debentures in three tranches
      convertible at $0.02 per share. In addition, the Company agreed to issue
      37,364,667 warrants to purchase common stock exercisable as follows: 12,454,889
      warrants at $0.10 per share; 12,454,889 warrants at $0.20 per share; and
      12,454,889 warrants at $0.30 per share. The warrants expire on the fifth
      anniversary of the date of issuance. The first tranche of $500,000 was disbursed
      to the Company on February 6, 2008 upon the Company’s execution of a two-year
      12% secured convertible debenture with interest payable quarterly. The second
      tranche of $500,000 was disbursed to the Company on April 15, 2008 upon the
      execution of a two-year 12% secured convertible debenture with interest payable
      quarterly. The third tranche of $401,158 was disbursed to the Company on May
      29,
      2008 upon the execution of a two-year 12% secured convertible debenture with
      interest payable quarterly. With the funding of the first tranche, the Company
      issued 4,444,500 warrants exercisable at $0.10, 4,444,500 warrants exercisable
      at $0.20, and 4,444,500 warrants exercisable to $0.30. With the funding of the
      second tranche, the Company issued 4,444,500 warrants exercisable at $0.10,
      4,444,500 warrants exercisable at $0.20, and 4,444,500 warrants exercisable
      to
      $0.30. With the funding of the third tranche, the Company issued 3,565,889
      warrants exercisable at $0.10, 3,565,889 warrants exercisable at $0.20, and
      3,565,889 warrants exercisable to $0.30. On July 31, 2008, Bartfam and the
      Company executed Amendment No. 1 to Security Agreement and Amendment No. 3
      to
      Debenture and Warrant Purchase Agreement by which Bartman Bros., a California
      General Partnership, was added to the participating investors under the January
      30, 2008 Debenture and Warrant Purchase Agreement and the third tranche of
      said
      Debenture and Warrant Purchase Agreement was increased by $500,000 to $901,158.
      With the funding of $170,000 on July 31, 2008, the Company issued 1,511,136
      warrants exercisable at $0.10, 1,511,136 warrants exercisable at $0.20, and
      1,511,136 warrants exercisable to $0.30.





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





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





***Bridge
      Loan Derivatives***





Between
      April 16, 2006 and May 5, 2006, five accredited investors accepted the Company’s
      term sheet for convertible senior secured bridge loans by providing a total
      of
      $115,000 cash to the Company. The terms of these bridge loans are: interest
      at
      12% per annum, compounded monthly; repayable in ninety (90) days but the Company
      has the option of extending for another 30 days for a fee of 8% of the amount
      provided the Company; these five accredited investors have the option to convert
      their bridge loans to restricted shares of common stock at an exercise price
      of
      the lower of the average closing bid price of the Company’s stock for the five
      trading days preceding the date of the conversion or the market price of the
      stock on the trading day preceding the conversion. The Company exercised its
      option to extend the term for an additional thirty (30) days for these five
      loans. If the bridge loans are not repaid or converted by the end of their
      terms
      plus the optional extension, the Company will pay a penalty of 10% of the dollar
      value of the amount outstanding; the Company will pay an additional 10% penalty
      for each quarter thereafter that the bridge loans remain unpaid. These five
      accredited investors also received warrants to purchase common stock at the
      ratio of one common share for each $2.00 loaned. All warrants have a three
      year
      term and an exercise price of $0.50 per share. The warrants and any shares
      converted have piggyback registration rights. The Company has not repaid the
      bridge loans and the outstanding balance including accrued interest and
      penalties is $390,468. As a result of the conversion rights associated with
      these bridge loans, the Company recorded these bridge loans as a derivative
      liability valued at $398,953. The loss on this derivative for the three months
      ended September 30, 2008 was $8,485.


14





***Notes
      Payable - Related Parties***





The
      Company entered into promissory notes with some of its officers. There are
      amounts outstanding under these notes. These amounts accrue interest at varying
      rates between 6.0% and 12.0% annually. In February 2008, the Company repaid
      $83,761 in full payment of principal and accrued interest on an officer’s notes.
      As of September 30, 2008, the Company has $50,127 outstanding under these notes
      plus $2,144 in accrued interest. Because the remaining notes are demand notes,
      they are therefore reflected as current liabilities on the condensed
      consolidated balance sheets. The notes relate to services rendered or funds
      loaned to the Company.





Principal
      payments on all notes payable, bridge loans and convertible debentures for
      the
      next five years ending September 30 are due as follows: $671,840 in 2009,
      $3,229,469 in 2010, and $0 in 2011 through 2013.





**11.****Stockholders’
      Equity**





The
      Company has 200,000,000 shares of common stock, par value $0.00004, authorized
      at September 30, 2008, with 154,660,701 common shares issued, 14,142,511 shares
      held in escrow, 1,660,036 shares in treasury, and 138,858,154 shares
      outstanding.





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





On
      July
      10, 2008, the Company issued 971,131 restricted shares of stock to Larry
      Watkins, an accredited investor, to settle a note payable totaling $23,501
      including accrued interest. 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
      15, 2008, the Company issued 236,854 restricted shares to the Catherine Zimmer
      in payment of $4,953 in interest due pursuant to the Debenture and Warrant
      Purchase Agreements dated April 15, 2008. The securities were issued pursuant
      to
      the exemption from registration provided by Section 4(2) of the Securities
      Act
      and contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The accredited investor received
      information concerning the Company and had the ability to ask questions about
      the Company.





On
      July
      18, 2008, the Company issued 415,921 restricted shares of stock to Rudolph
      Cane,
      Jr., an accredited investor, to settle a note payable totaling $10,731 including
      accrued interest. 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
      31, 2008, the Company issued 481,781 restricted shares to Allen & Associates
      LLC for corporate finance and strategic counsel services worth $12,500 when
      incurred. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The organization received information concerning the Company and
      had
      the ability to ask questions about the Company.





On
      July
      31, 2008, the Company issued 4,533,408 warrants to purchase our common stock
      to
      Bartfam in connection with their $170,000 convertible debenture of even date.
      The warrants expire July 31, 2013 and were issued as follows: 1,511,136 warrants
      are exercisable at $0.10 per share, 1,511,136 warrants are exercisable at $0.20
      per share, and 1,511,136 warrants are exercisable at $0.30 per share. The
      securities were issued pursuant to the exemption from registration provided
      by
      Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The accredited investors received information concerning the Company and had
      the
      ability to ask questions about the Company.





On
      August
      5, 2008, the Company issued 1,735,186 restricted shares to Golden Gate
      Investors, Inc. for the conversion of the balance of the $350,000 secured
      convertible debentures issued October 5, 2007 plus accrued interest. The total
      amount converted was $23,324. 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.


15





On
      August
      14, 2008, the Company issued 2,791,000 restricted shares to 44 employees of
      the
      Company’s India subsidiary as a stock bonus fair valued as $14,748 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 recipients received information concerning the Company and had
      the ability to ask questions about the Company.





On
      August
      15, 2008, the Company issued 297,197 restricted shares to the Catherine Zimmer
      in payment of $4,953 in interest due pursuant to the Debenture and Warrant
      Purchase Agreements dated April 15, 2008, which included an adjustment of 33,730
      restricted shares to correct the shares under-issued in May 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
      August
      31, 2008, the Company issued 781,250 restricted shares to Allen & Associates
      LLC for corporate finance and strategic counsel services worth $12,500 when
      incurred. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The organization received information concerning the Company and
      had
      the ability to ask questions about the Company.





On
      September 15, 2008, the Company issued 380,321 restricted shares to the
      Catherine Zimmer in payment of $4,953 in interest due pursuant to the Debenture
      and Warrant Purchase Agreements dated April 15, 2008. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investor received information concerning the Company and had the ability to
      ask
      questions about the Company.





On
      September 30, 2008, the Company issued 1,010,426 restricted shares to Allen
      & Associates LLC for corporate finance and strategic counsel services worth
      $12,500 when incurred. The securities were issued pursuant to the exemption
      from
      registration provided by Section 4(2) of the Securities Act and contain the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The organization received information concerning the
      Company and had the ability to ask questions about the Company .





On
      September 30, 2008, the Company issued 679,006 restricted shares to the Empire
      Financial Investors in payment of $8,400 in interest due pursuant to the
      Debenture and Warrant Purchase Agreements dated January 30, 2008. The securities
      were issued pursuant to the exemption from registration provided by Section
      4(2)
      of the Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investors received information concerning the Company and had the ability to
      ask
      questions about the Company.





On
      September 30, 2008, the Company issued 1,127,635 restricted shares to Richard
      P.
      Sommerfeld, Jr. in payment of $13,950 in interest due pursuant to the Promissory
      Note and Settlement Agreement dated April 15, 2008. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investor received information concerning the Company and had the ability to
      ask
      questions about the Company.





On
      September 30, 2008, the Company issued 404,170 restricted shares to Anita Green
      in payment of $5,000 in interest due pursuant to the Debenture and Warrant
      Purchase Agreements dated April 17, 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
      September 30, 2008, the Company issued 40,316 restricted shares to Bartfam
      in
      payment of interest due pursuant to the convertible debenture acquired from
      Montgomery on January 30, 2008. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The accredited investors received
      information concerning the Company and had the ability to ask questions about
      the Company.





On
      September 30, 2008, the Company issued 3,672,672 restricted shares to Bartfam
      in
      payment of $45,435 in interest due pursuant to the Debenture and Warrant
      Purchase Agreements dated January 30, 2008. The securities were issued pursuant
      to the exemption from registration provided by Section 4(2) of the Securities
      Act and contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The accredited investors received
      information concerning the Company and had the ability to ask questions about
      the Company.


16





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





***Repayment
      Agreement***





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





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





***Litigation***





On
      July
      24, 2008, Satya Akula commenced an action in the United States District Court
      for the Eastern District of Virginia by serving a summons and complaint on
      the
      Company and Sundaresan Raja (“Raja”). The complaint alleges that the Company and
      Raja are in default pursuant to the terms of September 19, 2006 promissory
      note
      in the principal amount of $100,000. Plaintiff seeks a judgment for the
      outstanding principal, accrued interest, collection costs and expenses and
      reasonable attorney’s fees. Defendants answer was due August 13, 2008. The
      Company did not appear in the action nor did it file an answer. As of November
      19, 2008, the Company has not been notified that plaintiff has entered
      judgment.





In
      an
      action commenced in the Superior Court of the State of California in the County
      of San Diego on July 29, 2008, David L. McCartney, a former vice president
      of
      sales and marketing, sued the Company for non-payment of wages and other
      unspecified actual and punitive damages. The Company did not defend this action
      and the time for filing an answer or making an appearance has
      passed.





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





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




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





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





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





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




Fair Value Measurements on a Recurring Basis as of September 30, 2008Level I
            
            Level II
            
            Level III
            
            TotalAssets
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Total
                Assets
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Liabilities
            
            $
            -
            
            $
            4,630,529
            
            $
            -
            
            $
            4,630,529Total
                Liabilities
            
            $
            -
            
            $
            4,630,529
            
            $
            -
            
            $
            4,630,529


17





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





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





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





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





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





**15.**  **Restatement**





The
      Company amended its previously issued condensed consolidated financial statement
      for the three months ended June 30, 2008 to reduce the amortization of discount
      on debt resulting from the recalculation of the discount on debt associated
      with
      the Bartfam and Empire Financial convertible debentures. The effect of these
      changes resulted in a decrease in the loss for the three month period ended
      June
      30, 2008 of $80,789 to a net income of $76,092 and a decrease in the accumulated
      deficit to $18,398,866. The cumulative effect of these changes resulted in
      an
      increase in loss for the six months ended June 30, 2008 of $122,249 to a net
      loss of $1,239,709 and a decrease in the accumulated deficit to $18,398,866.
      There was no change in net loss per share for the six and three months ended
      June 30, 2008.





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





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





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





In early
      September, 2008, a special committee of the Company’s Board of Directors began
      an investigation, for which it retained special counsel, into tax and accounting
      issues arising out of the issuance of common stock to certain officers of the
      Company in 2006 in payment for compensation deferred in prior years. The
      investigation was completed in October, 2008 and was reported to the Board
      of
      Directors on November 3, 2008. The special counsel, the board member who
      commissioned the review and the Company’s auditors concluded that the issue is
      not material even though several procedural errors (classified as significant
      deficiencies) were identified. As a result, the Company has determined that
      no
      restatement of operations for fiscal year 2006 is necessary, that the net loss
      per share for the period is not affected, and that it does not affect the
      Company’s financial condition as a whole.





On
      October 8, 2008, the Company and its India subsidiary jointly and severally
      executed an amended and restated promissory note for $80,000 to Bartman
      Brothers, a California general partnership. The note bore interest at the rate
      of 12% per annum and was initially due November 6, 2008; if principal and
      accrued interest were unpaid by that date the note became a demand note.


18




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





**Forward
      Looking Statements**





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





**Executive
      Summary**





·
            During
                the first nine months of 2008, our software engineers were engaged
                in
                demonstrating to prospective clients that our ZigBee-compliant ZigBee
                Pro
                software works on their hardware platforms in advance of signing
                licensing
                or application development agreements with them. We attended several
                working sessions and demonstrations in the third quarter, mostly
                in Asia,
                to both semiconductor manufacturers and OEMs. Some of the silicon
                manufacturers have had problems with their new chip designs which
                have
                delayed significantly their decisions on engaging Airbee for our
                ZigBee
                products. We believe however that the prospective agreements remain
                viable
                and that as soon as these engineering problems get sorted out, we
                will be
                able to close deals with them.





·
            We
                had a $1,927,466 net loss before provision for income taxes in the
                first
                nine months of 2008 on revenue of $80,000. We recorded a $351,303
                gain in
                other income (expense) from the re-valuation of derivatives required
                under
                SFAS 133 and had other income of $1,420,361 from compromised debts.
                We
                raised $2,051,168 from the sale of convertible debentures to accredited
                investors and $130,100 in shareholder notes
                payable.





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




Risk
      factors include -





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





·
            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.





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


19





**Overview**





*Organizational
      History*





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





*Our
      Business*





We
      are a
      developer of intelligent connectivity software for wireless voice and data
      communications designed to comply with the ZigBee global standard as well as
      non-ZigBee wireless mesh networks. Our software, when embedded on microchips
      or
      in various devices containing such microchips, will enable consumer and business
      devices to wirelessly connect to each other over distances of less than 100
      meters. We license our software, which has been designed and engineered to
      comply with the recently released ZigBee standard for short-range, low-energy
      consumption, voice and data wireless communications to manufacturers of
      microprocessors and OEM manufacturers, thereby enabling them to develop an
      increasing number of wireless communications applications using Airbee’s
      software, including consumer electronics, medical equipment, sensor and metering
      equipment, and industrial automation equipment. To date, we have negotiated
      several software licenses with licensees that have not yet yielded any
      significant revenue, principally because our licensees have not yet committed
      to
      a commercialization of their respective products. We are dependent on our
      customers’ commercialization of their product development which will generate
      revenues from licensing and/or royalty payments to us, typically on a quarterly
      measurement basis.





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





The
      Company reported $80,000 of revenue from planned operations in the first nine
      months of 2008. We have continued our go-to-market strategy of licensing the
      major microcontroller and IEEE 802.15.4 radio companies, having previously
      announced agreements with several microchip manufacturers. We believe this
      will
      lead to two types of revenues - service revenue from customized stack work,
      integration support and application development and royalty revenue from the
      licensing of our stack. We previously announced a new product that facilitates
      low-power radio frequency (“RF”) application development for mesh networks
      including ZigBee and we anticipate announcing our Airbee Development Kit in
      the
      near future. Any application developer can use our Development Kit to test
      the
      suitability of almost any microprocessor for the application being developed.
      We
      expect our Development Kit will significantly reduce a developer’s research and
      development time enabling our customers’ ZigBee products to reach the
      marketplace faster.





As
      reported earlier, we have also embarked on the design and development of a
      reference design board for use by developers for applications development and
      evaluation. The initial bill of material and board layout was completed and
      fabrication finished in September. Upon its completion, the unit can simulate
      any microprocessor and IEEE 802.15.4 radio combination on which the Airbee
      ZigBee stack will be loaded.





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


20





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 chip manufacturers as an
      example); and (b) the overriding objective is to be embedded directly into
      the
      controller by the manufacturer and shipped directly with each
      controller.





We
      operate an online help desk to support our prospective customers as they
      evaluate our products for their application and use, and worked extensively
      with
      the ATMEL corporation to attain certification of our software to both the 2006
      ZigBee standard and the new PRO version. We are one of three companies whose
      ZigBee Pro software has been named a “Golden Unit” for subsequent compliance
      testing by independent testing laboratories. We note similar progress with
      our
      ZigBee module partner Radiocrafts, which now has more than 50 OEMs using our
      ZNS
      stack and ZAPP (SPPIO) application. We had anticipated that several
      manufacturers would go into production later this year but it appears that
      is
      will move into 2009 before the technology gains traction.





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





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





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




In
      late
      January, we concluded an agreement with Bartfam, a California Limited
      Partnership, which funded its first tranche of $500,000 on February 6, 2008.
      The
      second and third tranches totaling $901,158 were funded in the second quarter.
      The third tranche was expanded by an additional $500,000 in July, of which
      $170,000 has been funded to date. We also received partial funding from Empire
      Financial investors totaling $280,000 which has not yet completely closed.
      Airbee expects to receive up to $500,000 from the Empire Financial investors
      once all transactions are completely closed. We also concluded an agreement
      with
      a new investor on April 17, 2008 worth $200,000. We continue to seek further
      investment from institutional entities.





**Results
      of Operations**





***Nine
      Months Ended September 30, 2008 Compared to the Nine Months Ended September
      30,
      2007***





During
      the first nine months of 2008 we had $80,000 in operating revenues, resulting
      in
      a net loss applicable to common shares of $1,927,466, or $0.02 net loss per
      share, compared to a net loss of $4,372,043 or $0.05 net loss per share for
      the
      same period in 2007. Cumulative net loss since inception totals
      $19,086,623.





Our
      net
      revenue for the nine months ended September 30, 2008 increased to $80,000 as
      compared to $29,163 for the nine months ended September 30, 2007. Our software
      was certified ZigBee compliant to the ZigBee Pro standard in January 2008 and
      we
      are one of the companies designated as a “golden unit” to be used in the
      certification process.


21





Operating
      expenses for the nine months ended September 30, 2008 were $3,107,665 as
      compared to $4,033,579 for the nine months ended September 30, 2007, a decrease
      of 23% or $925,914. This decrease, as further explained below, is principally
      due to decreases in compensation and professional fees, selling general and
      administrative expense and stock option compensation expense, which offset
      increases in research and development expense and depreciation and
      amortization.





Our
      overall decrease in compensation and professional fees for the nine months
      ended
      September 30, 2008 compared to the nine months ended September 30, 2007 was
      $711,718, to $2,000,031 from $2,711,749. This decrease consists of a decrease
      of
      $316,820 in compensation costs, a decrease of $20,496 in legal and accounting
      professional fees, and a decrease of $374,402 in financing professional fees.
      Part of the decrease in compensation is attributable to vacancies in management
      positions in the US offset by increased staff in India but also the result
      of an
      unfavorable change in the exchange rate resulting from the weaker dollar.
      Financing professional fees decreased due to completion in February of the
      amortization of financing fees begun in 2007 despite cash payments for a 10%
      success fee totaling $198,000 as well as non-cash payments to our corporate
      finance and strategic counsel of restricted shares valued at $12,500 per month
      and the fair value of warrants to purchase common stock issued as part of a
      success fee plus financing arrangements with other short-term lenders. Legal
      professional fees decreased because our attorneys suspended work as we have
      been
      unable to make payments on our outstanding balance.





Stock
      option compensation expense required by SFAS 123R was $16,274 for the nine
      months ended September 30, 2008 as compared to $27,965 for the nine months
      ended
      September 30, 2007. A total of 462,500 options issued prior to December 31,
      2005
      vested during the nine months ended September 30, 2008. The Company is now
      required to expense the fair value of stock and stock options granted in the
      period. This is a non-cash expense.





Selling,
      general and administrative expenses decreased to $531,084 in the first nine
      months of 2008, down $605,270 or 53% from $1,136,354 in the first nine months
      of
      2007. This decrease was due primarily to decreases in marketing, consulting,
      travel, printing, dues and subscriptions, utilities and other costs which offset
      increases insurance, rent and other expenses. Our overall selling and marketing
      expenses consist primarily of marketing related expenses, compensation related
      expenses, sales commissions, facility costs and travel costs. Expenses,
      particularly certain marketing and compensation-related expenses, may vary
      going
      forward, depending in part on the level of revenue and profits. We believe
      that
      general and administrative expenses will not increase significantly in the
      short-term. However, we do expect an increase in absolute dollars in the
      long-term, as we continue to invest in staff and infrastructure in the areas
      of
      information systems and sales and marketing.





Research
      and development expense for the nine months ended September 30, 2008 was $60,000
      compared to $10,556 for the nine months ended September 30, 2007. The R&D
      expense for 2008 represents the cost of certification testing by the independent
      testing facility and development costs associated with the FPGA
      boards.




Depreciation
      and amortization expense for the nine months ended September 30, 2008 increased
      $353,304 or 240% to $500,259 from $146,955 for the nine months ended September
      30, 2007. Depreciation expense for the nine months was $36,307. Amortization
      of
      deferred financing costs accounted for $179,702 of the total expense for the
      nine months. Amortization of capitalized research and development costs and
      intellectual property was $268,447 during the period. Amortization of leasehold
      improvements at our India office was $15,803 for the nine months ended September
      30, 2008. Interest expense for the nine months ended September 30, 2008
      decreased $84,040 to $671,482 from $755,522 for the nine months ended September
      30, 2007. Interest costs associated notes payable - others were offset by lower
      balances of notes payable - related parties. The elimination of interest costs
      associated with the Zimmer bridge loan resulting from the Company’s settlement
      with the Zimmers accounted for most of this decrease.





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





During
      the third quarter of 2008 we had $40,000 in operating revenues, resulting in
      a
      net loss applicable to common shares of $687,758, or $0.01 net loss per share,
      compared to a net loss of $1,401,125 or $0.01 net loss per share for the same
      period in 2007. Cumulative net loss since inception totals
      $19,086,623.





Our
      net
      revenue for the three months ended September 30, 2008 increased to $40,000
      as
      compared to $5,925 for the three months ended September 30, 2007. Our software
      was certified ZigBee compliant to the ZigBee Pro standard in January 2008 and
      we
      are one of the companies designated as a “golden unit” to be used in the
      certification process.





Operating
      expenses for the three months ended September 30, 2008 were $530,974 as compared
      to $1,424,745 for the three months ended September 30, 2007, a decrease of
      63%
      or $893,771. This decrease, as further explained below, is principally due
      to
      decreases in compensation and professional fees, selling, general and
      administrative expense and research and development expenses which offset
      increases in stock option compensation expense and depreciation and
      amortization.


22





Our
      overall decrease in compensation and professional fees for the quarter ended
      September 30, 2008 compared to the quarter ended September 30, 2007 was
      $591,282, to $333,786 from $925,068. This decrease consists of a decrease of
      $236,083 in compensation costs, a decrease of $317,387 in financing professional
      fees and a $37,812 decrease in legal and accounting professional fees. Part
      of
      the decrease in compensation is due to unfilled management positions in the
      US
      partially offset by increased staff in India and an unfavorable change in the
      exchange rate resulting from the weaker dollar. Financing professional fees
      decreased due to completion in February of the amortization of financing fees
      begun in 2007 despite cash payments for success fees as well as non-cash
      payments to our corporate finance and strategic counsel of restricted shares
      valued at $12,500 per month and the fair value of warrants to purchase common
      stock issued as part of a success fee plus financing arrangements with other
      short-term lenders. Legal professional fees decreased because our attorneys
      suspended work as we have been unable to make payments on our outstanding
      balance.





Stock
      option compensation expense required by SFAS 123R was $14,753 for the quarter
      ended September 30, 2008 as compared to $0 for the quarter ended September
      30,
      2007. A total of 25,000 options issued prior to December 31, 2005 vested during
      the quarter. The Company is now required to expense the fair value of stock
      and
      stock options granted in the period. This is a non-cash expense.





Selling,
      general and administrative expenses decreased to $86,581 in the third quarter
      of
      2008, down $365,006 or 81% from $451,587 in the third quarter of 2007. This
      decrease was due primarily to decreases in settlement costs, travel, shareholder
      relations and sales and marketing expenses and other costs which offset
      increases in insurance and other expenses. Our overall selling and marketing
      expenses consist primarily of marketing related expenses, compensation related
      expenses, sales commissions, facility costs and travel costs. Expenses,
      particularly certain marketing and compensation-related expenses, may vary
      going
      forward, depending in part on the level of revenue and profits. We believe
      that
      general and administrative expenses will not increase significantly in the
      short-term. However, we do expect an increase in absolute dollars in the
      long-term, as we continue to invest in staff and infrastructure in the areas
      of
      information systems and sales and marketing.





Research
      and development expense for the three months ended September 30, 2008 was $0
      compared to $124 for the three months ended September 30, 2007.





Depreciation
      and amortization expense for the quarter ended September 30, 2008 increased
      $47,871 or 100% to $95,837 from $47,966 for the quarter ended September 30,
      2007. Depreciation expense for the quarter was $10,483. Amortization of deferred
      financing costs accounted for $80,891 of the total expense for the quarter.
      Amortization of capitalized research and development costs and intellectual
      property was $0 during the period as the balances were written off in the first
      quarter. Amortization of leasehold improvements at our India office was $4,463
      for the three months ended September 30, 2008. Interest expense for the three
      months ended September 30, 2008 decreased $103,192 to $186,041 from $289,233
      for
      the three months ended September 30, 2007. Interest costs associated notes
      payable - others were offset by lower balances of notes payable - related
      parties. The elimination of interest costs associated with the Zimmer bridge
      loan resulting from the Company’s settlement with the Zimmers accounted for most
      of this decrease.




**Liquidity
      and Capital Resources**





Since
      inception, we have funded our operations principally from private placements
      of
      securities and management and shareholder loans and contributions of $7,793,706.
      As of September 30, 2008, we have $1,692,370 outstanding under related party
      notes and accrued payroll, and $363,749 in accrued interest. During the first
      nine months of 2008, we received $130,100 in loans from shareholders and
      $2,051,168 from convertible debentures. Proceeds were used to pay down current
      payables and salaries of our development staff in India and to start settling
      our outstanding liabilities in the U.S. We estimate we require approximately
      $5
      million to continue operations for the next 12 months. Most of the funding
      will
      be allocated principally for sales, marketing and working capital. It is not
      anticipated that any lack of funding will impact upon the existing license
      and
      development agreements with our customers since our software development has
      been completed for four of our eight products that are under such license and
      development agreements.




We
      have
      incurred an accumulated deficit at September 30, 2008 of $19,086,623 compared
      to
      $17,159,157 at December 31, 2007. We had negative working capital at September
      30, 2008 of $4,975,548 compared to negative working capital of $6,698,979 at
      December 31, 2007. Our ability to continue as a going concern is dependent
      upon
      our obtaining adequate capital to fund losses until we become
      profitable.





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


23





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





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





On
      October 5, 2007, the Company executed a $350,000 convertible debenture with
      Golden Gate Investors, Inc. (“Golden Gate”). Pursuant to its terms, Golden Gate
      disbursed $350,000 to the Company upon execution. The convertible debenture
      was
      due October 4, 2008 and accrued interest at 8.75% per year. In addition, the
      Company issued 2,000,000 warrants to purchase common stock exercisable at $0.12
      per share. The warrants expire on October 4, 2010. When a condition of default
      occurred Golden Gate accelerated the note in December 2007. When the Company
      was
      unable to repay the note, Golden Gate began selling 10 million pledged shares,
      which it completed in February 2008. On April 24, 2008, Golden Gate converted
      $20,000 of the outstanding debenture and received 1,015,486 shares of our common
      stock. On June 13, 2008, Golden Gate converted $14,000 of the outstanding
      debenture and received 911,874 shares of our common stock. On August 5, 2008, On
      August
      5, 2008, Golden Gate converted the remaining debentures and accrued interest
      totaling $23,324.38 and received 1,708,186 shares of common
      stock.





On
      February 6, 2008 and effective as of January 30, 2008, the Company entered
      into
      a Debenture and Warrant Purchase Agreement, as amended, with Bartfam LP, et
      al
      (“Bartfam”) by which Bartfam agreed to purchase and the Company agreed to sell
      approximately $1.4 million of secured convertible debentures in three tranches
      convertible at $0.02 per share. In addition, the Company agreed to issue
      37,364,667 warrants to purchase common stock exercisable as follows: 12,454,889
      warrants at $0.10 per share with the first tranche; 12,454,889 warrants at
      $0.20
      per share with the second tranche; and 12,454,889 warrants at $0.30 per share
      with the third tranche. The warrants expire on the fifth anniversary of the
      date
      of issuance. The first tranche of $500,000 was disbursed to the Company on
      February 6, 2008 upon the Company’s execution of a two-year 12% secured
      convertible debenture with interest payable quarterly. With the funding of
      the
      first tranche, the Company issued 4,444,500 warrants exercisable at $0.10,
      4,444,500 warrants exercisable at $0.20, and 4,444,500 warrants exercisable
      to
      $0.30. The second tranche of $500,000 was disbursed on April 15, 2008 when
      the
      Company met the required benchmarks. With the funding of the second tranche,
      the
      Company issued 4,444,500 warrants exercisable at $0.10, 4,444,500 warrants
      exercisable at $0.20, and 4,444,500 warrants exercisable to $0.30. The third
      tranche of $401,157 was disbursed on May 29, 2008 and the Company issued
      3,565,889 warrants exercisable at $0.10, 3,565,889 warrants exercisable at
      $0.20, and 3,565,889 warrants exercisable to $0.30. On July 31, 2008, Bartfam
      and the Company executed Amendment No. 1 to Security Agreement and Amendment
      No.
      3 to Debenture and Warrant Purchase Agreement by which Bartman Bros., a
      California General Partnership, was added to the participating investors under
      the January 30, 2008 Debenture and Warrant Purchase Agreement and the third
      tranche of said Debenture and Warrant Purchase Agreement was increased by
      $500,000 to $901,158. With the funding of $170,000 on July 31, 2008, the Company
      issued 1,511,136 warrants exercisable at $0.10, 1,511,136 warrants exercisable
      at $0.20, and 1,511,136 warrants exercisable to $0.30.





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




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




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


24





Cash
      at
      September 30, 2008 and December 31, 2007, respectively, was $7,805 and $1,925.
      At September 30, 2008 and December 31, 2007, respectively, we had total
      stockholders’ deficit of $7,477,954 and $6,069,352.





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





With
      regard to our current liabilities at September 30, 2008, $50,127 is payable
      to a
      related note holder who has deferred repayment. However, as he left the Company
      during the second quarter of 2008, this related party note payable will have
      to
      be repaid soon. Trade payables at September 30, 2008 of $1,183,470 are
      outstanding and will be paid as they come due or as payment may be extended
      by
      agreement of the parties. Given the age of some of these payables, the Company
      will attempt to settle some of these outstanding payables at less than their
      full amount. One vendor, MindTree Consulting Pvt. Ltd. (“MindTree”), accounted
      for 27% 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 September 30, 2008, the Company is behind in making the
      scheduled payments. MindTree has not yet issued any notice of default and has
      extended the deadline to substantially complete the repayment until November
      30,
      2008. The parties are attempting to restructure this arrangement and expect
      to
      conclude it in the fourth quarter of 2008.




Revenues
      have not materialized during 2008 from our licensing and other agreements as
      expected but we believe that with the increasing marketplace acceptance of
      the
      ZigBee technology, our ZigBee Pro software will gain traction in 2009. We are
      one of a few members of the Alliance selected to develop the so-called “Golden
      Unit” to be used in the certification testing for this new standard. We shall
      continue to be dependent upon financing to accelerate our marketing activities
      and continue product enhancement. We anticipate monthly expenses of
      approximately $200,000 over the next several months. This amount includes costs
      of our SEC reporting obligations, which were approximately $160,000 for the
      year
      ending December 31, 2007. Cost of SEC reporting obligations includes all filing
      costs and professional fees.





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





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





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





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


25





**Critical
      Accounting Estimates**





***General***




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





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





***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.*


26





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




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




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




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




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





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





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





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





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





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





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





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





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





·
            Announcements,
                product introductions and price reductions by
                competitors;





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


27





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





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





·
            Foreign
                currency exchange rates; and


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





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





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




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




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




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




**Off-Balance
      Sheet Arrangements**





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





**Contractual
      Obligations**





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





Our
      purchase obligations are limited to employment contracts with company executives
      and senior staff. At the beginning of 2008 we had four written contracts for
      one
      to three years in duration, two of which expire on December 31, 2008 and the
      other two expired on or before May 15, 2008. The contracts contain automatic
      one-year extension provisions. One such contract was finalized in August and
      made effective as of May 2008; renegotiation of the other contract became moot
      when the executive resigned in August.


28





Our
      operating leases are limited to the lease for office space in Chennai, India
      for
      our India subsidiary. We have signed a three-year lease for 6,000 sq. ft. of
      office space expiring on June 30, 2009. We just completed the second year of
      a
      three year lease. The current rent is approximately $5,685 per month in the
      third year of the lease.





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




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





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




**Item
      4. Controls and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**




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




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




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


29





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




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




**Changes
      in Internal Controls**




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





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





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




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




A
      material weakness in internal controls is a deficiency in internal control,
      or
      combination of control deficiencies, that adversely affects the Company’s
      ability to initiate, authorize, record, process or report external financial
      data reliably in accordance with accounting principles generally accepted in
      the
      United States of America such that there is more than a remote likelihood that
      a
      material misstatement of the Company’s annual or interim financial statements
      that is more than inconsequential will not be prevented or detected. In the
      course of making our assessment of the effectiveness of internal controls over
      financial reporting, we identified a material weakness in our internal control
      over financial reporting. This material weakness consisted of inadequate
      staffing and supervision within the accounting operations of our company. The
      relatively small number of employees who have bookkeeping and accounting
      functions prevents us from segregating duties within our internal control
      system. The inadequate separation of duties is a weakness because it could
      lead
      to the untimely identification and resolution of accounting and disclosure
      matters or could lead to a failure to perform timely and effective reviews.
      Inadequate staffing did not play a role causing the restatements of the
      Company’s interim reports during 2007. The root cause of the restatements was an
      officer’s failure to turn over an executed contract in a timely manner which
      prevented the Company from recognizing and recording the transaction in the
      proper period and delayed its discovery until after the close of the second
      calendar quarter. The financial statements for the quarters ended March 31,
      2008
      and June 30, 2008 have been restated to correct an accounting error relating
      to
      the improper bifurcation of several convertible debenture and warrant purchase
      agreements concluded in the first quarter of 2008. As we are not aware of any
      other instance in which the Company failed to identify or resolve a disclosure
      matter or failed to perform a timely and effective review, we determined that
      the addition of personnel to our bookkeeping and accounting operations is not
      an
      efficient use of our resources at this time.


30





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




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


31




**PART
      II OTHER INFORMATION**




**Item
      1. Legal Proceedings.**





In
      an
      action commenced in the United States District Court for the Eastern District
      of
      Virginia located in Alexandria, Virginia, Satya Akula, a former director and
      current note holder, sued the Company and Sundaresan Raja for non-payment of
      the
      promissory note. Defendants were served with the summons and complaint on July
      24, 2008 and are required to file an answer on or before August 13, 2008. The
      Company and Raja chose not to respond to the complaint whereupon Akula filed
      for
      summary judgment on September 12, 2008. The Company has not received notice
      of
      entry of judgment as of November 12, 2008.





In
      an
      action commenced in the Superior Court of the State of California in the County
      of San Diego on July 29, 2008, David L. McCartney, a former vice president
      of
      sales and marketing, sued the Company for non-payment of wages and other
      unspecified actual and punitive damages. The Company did not defend this action
      and the time for filing an answer or making an appearance has
      passed.





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




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





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





On
      July
      10, 2008, the Company issued 971,131 restricted shares of stock to Larry
      Watkins, an accredited investor, to settle a note payable totaling $23,501
      including accrued interest. 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
      15, 2008, the Company issued 236,854 restricted shares to the Catherine Zimmer
      in payment of $4,953 in interest due pursuant to the Debenture and Warrant
      Purchase Agreements dated April 15, 2008. The securities were issued pursuant
      to
      the exemption from registration provided by Section 4(2) of the Securities
      Act
      and contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The accredited investor received
      information concerning the Company and had the ability to ask questions about
      the Company.





On
      July
      18, 2008, the Company issued 415,921 restricted shares of stock to Rudolph
      Cane,
      Jr., an accredited investor, to settle a note payable totaling $10,731 including
      accrued interest. 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
      31, 2008, the Company issued 481,781 restricted shares to Allen & Associates
      LLC for corporate finance and strategic counsel services worth $12,500 when
      incurred. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The organization received information concerning the Company and
      had
      the ability to ask questions about the Company.





On
      July
      31, 2008, the Company issued 4,533,408 warrants to purchase our common stock
      to
      Bartfam in connection with their $170,000 convertible debenture of even date.
      The warrants expire July 31, 2013 and were issued as follows: 1,511,136 warrants
      are exercisable at $0.10 per share, 1,511,136 warrants are exercisable at $0.20
      per share, and 1,511,136 warrants are exercisable at $0.30 per share. The
      securities were issued pursuant to the exemption from registration provided
      by
      Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The accredited investors received information concerning the Company and had
      the
      ability to ask questions about the Company.





On
      August
      5, 2008, the Company issued 1,735,186 restricted shares to Golden Gate
      Investors, Inc. for the conversion of the balance of the $350,000 secured
      convertible debentures issued October 5, 2007 plus accrued interest. The total
      amount converted was $23,324. 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
      14, 2008, the Company issued 2,791,000 restricted shares to 44 employees of
      the
      Company’s India subsidiary as a stock bonus fair valued as $14,748 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 recipients received information concerning the Company and had
      the ability to ask questions about the Company.


32





On
      August
      15, 2008, the Company issued 297,197 restricted shares to the Catherine Zimmer
      in payment of $4,953 in interest due pursuant to the Debenture and Warrant
      Purchase Agreements dated April 15, 2008, which included an adjustment of 33,730
      restricted shares to correct the shares under-issued in May 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
      August
      31, 2008, the Company issued 781,250 restricted shares to Allen & Associates
      LLC for corporate finance and strategic counsel services worth $12,500 when
      incurred. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The organization received information concerning the Company and
      had
      the ability to ask questions about the Company.





On
      September 15, 2008, the Company issued 380,321 restricted shares to the
      Catherine Zimmer in payment of $4,953 in interest due pursuant to the Debenture
      and Warrant Purchase Agreements dated April 15, 2008. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investor received information concerning the Company and had the ability to
      ask
      questions about the Company.





On
      September 30, 2008, the Company issued 1,010,426 restricted shares to Allen
      & Associates LLC for corporate finance and strategic counsel services worth
      $12,500 when incurred. The securities were issued pursuant to the exemption
      from
      registration provided by Section 4(2) of the Securities Act and contain the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The organization received information concerning the
      Company and had the ability to ask questions about the Company.





On
      September 30, 2008, the Company issued 679,006 restricted shares to the Empire
      Financial Investors in payment of $8,400in interest due pursuant to the
      Debenture and Warrant Purchase Agreements dated January 30, 2008. The securities
      were issued pursuant to the exemption from registration provided by Section
      4(2)
      of the Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investors received information concerning the Company and had the ability to
      ask
      questions about the Company.





On
      September 30, 2008, the Company issued 1,127,635 restricted shares to Richard
      P.
      Sommerfeld, Jr. in payment of $13,950 in interest due pursuant to the Promissory
      Note and Settlement Agreement dated April 15, 2008. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investor received information concerning the Company and had the ability to
      ask
      questions about the Company.





On
      September 30, 2008, the Company issued 404,170 restricted shares to Anita Green
      in payment of $5,000 in interest due pursuant to the Debenture and Warrant
      Purchase Agreements dated April 17, 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
      September 30, 2008, the Company issued 40,316 restricted shares to Bartfam
      in
      payment of interest due pursuant to the convertible debenture acquired from
      Montgomery on January 30, 2008. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The accredited investors received
      information concerning the Company and had the ability to ask questions about
      the Company.





On
      September 30, 2008, the Company issued 3,672,672 restricted shares to Bartfam
      in
      payment of $45,435 in interest due pursuant to the Debenture and Warrant
      Purchase Agreements dated January 30, 2008. The securities were issued pursuant
      to the exemption from registration provided by Section 4(2) of the Securities
      Act and contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The accredited investors received
      information concerning the Company and had the ability to ask questions about
      the Company.





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





None


33





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





None




**Item
      5. Other Information.**





In early
      September, 2008, a special committee of the Company’s Board of Directors began
      an investigation, for which it retained special counsel, into tax and accounting
      issues arising out of the issuance of common stock to certain officers of the
      Company in 2006 in payment for compensation deferred in prior years. The
      investigation was completed in October, 2008 and was reported to the Board
      of
      Directors on November 3, 2008. The special counsel, the board member who
      commissioned the review and the Company’s auditors concluded that the issue is
      not material even though several procedural errors (classified as significant
      deficiencies) were identified. As a result, the Company has determined that
      no
      restatement of operations for fiscal year 2006 is necessary, that the net loss
      per share for the period is not affected, and that it does not affect the
      Company’s financial condition as a whole.





**Item
      6. Exhibits.**





31.1
            Certification
                of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-4(a)
                of the
                Securities Exchange Act of 1934.31.2
            Certification
                of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-4(a)
                of the
                Securities Exchange Act of 1934.32.1
            Certification
                of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-4(a)
                of the
                Securities Exchange Act of 1934 and 18 U.S.C. Section
                1350.32.2
            Certification
                of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-4(a)
                of the
                Securities Exchange Act of 1934 and 18 U.S.C. Section
                1350.


34





**SIGNATURES**





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





Dated:
      November 19, 2008





AIRBEE
      WIRELESS, INC.





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


35