**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**Form
      10-QSB**











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





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





**OR**





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





For
      the
      transition period from __________ to ___________




**Commission
      file number: 005-50985**







**GigaBeam
      Corporation**


**(Exact
      name of small business issuer as specified in its charter)**










**Delaware**
            
            
            
            **20-0607757****(State
                or other jurisdiction of**
              **incorporation
                or organization)**
            
            
            
            **(I.R.S.
                Employer**
              **Identification
                No.)**





**4021
      Stirrup Creek Drive, Suite 400**


**Durham,
      NC 27703**


**(Address
      of principal executive offices)**





**(919)
      206-4426**


**(Issuer’s
      telephone number)**







Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days.    Yes
xNo o
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act) Yes oNo x
 
 As
        of
        August 13, 2007, there were 6,762,997 shares of the issuer’s common stock
        outstanding.


Transitional
      Small Business Disclosure Format (check one): Yes oNo x









**GigaBeam
      Corporation**


**Form
      10-QSB**


**For
      the Quarter Ended June 30, 2007**


**Table
      of Contents**





PagePART
                I- FINANCIAL INFORMATION - UNAUDITED
            3Item
                1 - Financial Statements (unaudited).Condensed
                Consolidated Balance Sheets as of June 30, 2007 and December 31,
                2006
            3Condensed
                Consolidated Statements of Operations for the three months ended
                June 30,
                2007 and 2006 and the six months ended June 30, 2007 and
                2006
            4Condensed
                Consolidated Statements of Cash Flows for the six months ended June
                30,
                2007 and 2006
            5Notes
                to Condensed Consolidated Financial Statements
            7Item
                2 - Management’s Discussion and Analysis or Plan of
                Operation.
            24Item
                3 - Controls and Procedures.
            34PART
                II - OTHER INFORMATION
            35Item
                1 - Legal Proceedings.
            35Item
                2 - Issuance of Unregistered Securities.
            35Item
                3 - Defaults Upon Senior Securities.
            35Item
                4 - Submission of Matters to a Vote of Security Holders.
            35Item
                5 - Other Information.
            35Item
                6 - Exhibits.
            35




2




**Part
      I - Financial Information - Unaudited.**





**Item
      1. Financial Statements - (unaudited)**


**GigaBeam
      Corporation**


**Condensed
      Consolidated Balance Sheets**


(Unaudited)





**June
                30,**
            
            **December
                31,****2007**
            
            **2006(a)****ASSETS****Current
                assets:**Cash
                and cash equivalents
            
            $
            53,084
            
            $
            653,734Accounts
                receivable, net of allowance of $580,852 and $533,766 at June 30,
                2007 and
                December 31, 2006, respectively
            
            
            1,189,826
            
            
            807,500Inventories,
                net of allowance of $1,654,834 and $933,554 at June 30, 2007 and
                December
                31, 2006, respectively
            
            
            4,230,506
            
            
            7,621,574Prepaid
                expenses and other current assets
            
            
            219,035
            
            
            568,711**Total
                current assets**
            
            
            5,692,451
            
            
            9,651,519Inventories
                - non current, net
            
            
            1,999,983
            
            
            —Property
                and equipment, net
            
            
            1,643,440
            
            
            1,986,735Other
                assets
            
            
            455,347
            
            
            445,630Debt
                issuance costs
            
            
            52,556
            
            
            181,976**Total
                assets**
            
            $
            9,843,777
            
            $
            12,265,860**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                liabilities:**Accounts
                payable
            
            $
            2,856,150
            
            $
            1,891,077Accrued
                liabilities
            
            
            1,267,587
            
            
            1,416,716Current
                portion of capital lease obligations
            
            
            28,899
            
            
            29,125Convertible
                notes payable, net of discount
            
            
            218,636
            
            
            —Notes
                payable, other current
            
            
            651,866
            
            
            —Note
                payable, related party
            
            
            65,000
            
            
            —**Total
                current liabilities**
            
            
            5,088,138
            
            
            3,336,918Capital
                lease obligations, non-current
            
            
            26,996
            
            
            41,159Convertible
                notes payable, net of discount
            
            
            —
            
            
            1,051,036**Total
                liabilities**
            
            
            5,115,134
            
            
            4,429,113**Stockholders’
                equity:**Series
                A redeemable preferred stock, $0.001 par value, 20,000 shares authorized;
                11,277 shares issued and outstanding at June 30, 2007 and December
                31,
                2006
            
            
            11
            
            
            11Series
                B convertible preferred stock, $0.001 par value; 20,000 shares authorized;
                15,100 shares issued and outstanding at June 30, 2007 and December
                31,
                2006
            
            
            15
            
            
            15Series
                C convertible preferred stock, $0.001 par value; 10,000 shares authorized;
                10,000 shares issued and outstanding at June 30, 2007 and December
                31,
                2006
            
            
            10
            
            
            10Common
                stock, $0.001 par value, 40,000,000 shares authorized; 6,680,540
                and
                6,099,279 shares issued and outstanding at June 30, 2007 and December
                31,
                2006, respectively
            
            
            6,681
            
            
            6,099Additional
                paid-in capital
            
            
            53,193,686
            
            
            50,876,530Accumulated
                deficit
            
            
            (48,471,760
            )
            
            (43,045,918
            )**Total
                stockholders’ equity**
            
            
            4,728,643
            
            
            7,836,747**Total
                liabilities and stockholders’ equity**
            
            $
            9,843,777
            
            $
            12,265,860


(a)
              Condensed
                  consolidated balance sheet as of December 31, 2006, has been derived
                  from
                  audited consolidated financial
                  statements.
  *See
        notes to condensed consolidated financial statements*


3




**GigaBeam
      Corporation**


**Condensed
      Consolidated Statements of Operations**


**(Unaudited)**




Three
                  Months Ended
              
              
              Six
                  Months EndedJune
                  30,
              
              
              June
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006Net
                  sales
              
              $
              2,068,563
              
              $
              696,657
              
              $
              2,352,705
              
              $
              2,355,198Cost
                  of sales
              
              
              1,709,697
              
              
              267,556
              
              
              1,871,789
              
              
              1,753,190Gross
                  margin
              
              
              358,866
              
              
              429,101
              
              
              480,916
              
              
              602,008Operating
                  expenses:Research
                  and development
              
              
              850,557
              
              
              1,290,675
              
              
              1,506,438
              
              
              2,632,357General
                  and administrative
              
              
              894,338
              
              
              2,009,840
              
              
              2,109,671
              
              
              3,543,383Selling
                  and marketing
              
              
              395,625
              
              
              1,361,636
              
              
              955,063
              
              
              2,536,456Service,
                  install and link operations
              
              
              308,679
              
              
              877,202
              
              
              676,113
              
              
              1,545,395Total
                  operating expenses
              
              
              2,449,199
              
              
              5,539,353
              
              
              5,247,285
              
              
              10,257,591Operating
                  loss
              
              
              (2,090,333
              )
              
              (5,110,252
              )
              
              (4,766,369
              )
              
              (9,655,583
              )Other
                  income (expense):Interest
                  income
              
              
              1,512
              
              
              55,950
              
              
              2,043
              
              
              149,783Interest
                  expense
              
              
              (225,966
              )
              
              (288,636
              )
              
              (661,516
              )
              
              (618,002
              )Loss
                  before provision for income taxes
              
              
              (2,314,787
              )
              
              (5,342,938
              )
              
              (5,425,842
              )
              
              (10,123,802
              )Provision
                  for income taxes
              
              
              —
              
              
              —
              
              
              —
              
              
              —Net
                  loss
              
              
              (2,314,787
              )
              
              (5,342,938
              )
              
              (5,425,842
              )
              
              (10,123,802
              )Series
                  B convertible preferred stock dividend
              
              
              (306,000
              )
              
              (371,311
              )
              
              (604,000
              )
              
              (602,345
              )Series
                  C convertible preferred stock dividend
              
              
              (216,000
              )
              
              —
              
              
              (400,000
              )
              
              —Increasing
                  rate preferred stock non-cash dividend
              
              
              (176,384
              )
              
              —
              
              
              (529,152
              )
              
              —Net
                  loss allocated to common stockholders
              
              $
              (3,013,171
              )
              $
              (5,714,249
              )
              $
              (6,958,994
              )
              $
              (10,726,147
              )Basic
                  and diluted loss per share to common stockholders
              
              $
              (0.46
              )
              $
              (0.99
              )
              $
              (1.09
              )
              $
              (1.98
              )Basic
                  and diluted weighted average shares outstanding
              
              
              6,480,280
              
              
              5,749,024
              
              
              6,381,597
              
              
              5,419,978
  *See
                  notes to condensed consolidated financial
                  statements*




4




**GigaBeam
      Corporation**


**Condensed
      Consolidated Statements of Cash Flows**


**(Unaudited)**




**Six
                Months Ended****June
                30,****2007**
            
            
            **2006****Cash
                flows from operating activities:**Net
                loss
            
            $
            (5,425,842
            )
            $
            (10,123,802
            )Adjustments
                to reconcile net loss to net cash used for operating
                activities:Amortization
                of debt discount and beneficial conversion feature
            
            
            559,820
            
            
            520,445Provision
                for doubtful accounts
            
            
            47,086
            
            
            122,331Increase
                in inventory provision for obsolescence
            
            
            812,524
            
            
            492,054Increase
                (decrease) in reserve for warranty costs
            
            
            (35,723
            )
            
            146,000Depreciation
                and amortization
            
            
            315,504
            
            
            241,378Loss
                on sale of property and equipment
            
            
            36,698
            
            
            —Non-cash
                compensation expense
            
            
            655,386
            
            
            1,383,407Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (429,413
            )
            
            (212,929
            )Inventories
            
            
            578,560
            
            
            (4,848,539
            )Prepaid
                expenses and other current assets
            
            
            462,236
            
            
            145,792Deposits
            
            
            (33,749
            )
            
            (13,743
            )Accounts
                payable
            
            
            965,073
            
            
            997,818Accrued
                liabilities
            
            
            (123,894
            )
            
            (98,284
            )**Net
                cash used in operating activities**
            
            
            (1,615,734
            )
            
            (11,248,072
            )**Cash
                flows from investing activities:**Purchases
                of property and equipment
            
            
            (3,279
            )
            
            (657,708
            )Acquisition
                of patents & intangibles
            
            
            (18,650
            )
            
            (72,865
            )**Net
                cash used in investing activities**
            
            
            (21,929
            )
            
            (730,573
            )**Cash
                flows from financing activities:**Repayments
                of capital lease obligations
            
            
            (14,389
            )
            
            (168,526
            )Proceeds
                from note payable to related party
            
            
            65,000
            
            
            —Exercise
                of common stock warrants
            
            
            —
            
            
            2,011,036Exercise
                of common stock options
            
            
            —
            
            
            78,900Series
                B convertible preferred stock dividend paid
            
            
            —
            
            
            (602,345
            )Proceeds
                from note payable, other current
            
            
            986,402
            
            
            —**Net
                cash provided by financing activities**
            
            
            1,037,013
            
            
            1,319,065**Net
                decrease in cash and cash equivalents**
            
            
            (600,650
            )
            
            (10,659,580
            )Cash
                and cash equivalents at beginning of period
            
            
            653,734
            
            
            12,726,986**Cash
                and cash equivalents at end of period**
            
            $
            53,084
            
            $
            2,067,406




5


**GigaBeam
      Corporation Condensed** **Consolidated
      Statements of Cash Flows**


**(Unaudited)**





**Six
                Months Ended****June
                30,****2007**
            
            
            **2006**Supplemental
                disclosures for cash flow information:Interest
                paid
            
            $
            2,908
            
            $
            64,585Non-cash
                investing and financing activities:Conversion
                of convertible notes payable into shares of common stock
            
            $
            1,262,800
            
            $
            253,667Conversion
                of Series B convertible preferred stock into shares of common
                stock
            
            
            —
            
            
            472Fair
                value adjustment of options granted
            
            $
            (180,664
            )
            $
            277,642Fair
                value of warrants issued with common stock
            
            $
            368,874
            
            
            —Stock
                issued for Series B and Series C convertible preferred stock
                dividend
            
            $
            1,004,000
            
            
            —Non-cash
                increasing rate preferred stock dividend
            
            $
            529,152
            
            
            —




*See
      notes to condensed consolidated financial statements.*




6




**GigaBeam
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


June
      30, 2007


**(Unaudited)**




**1.
      Description of the Business:**




The
      Company and its wholly-owned subsidiary, GigaBeam Service Corporation, designs,
      develops, markets, sells, leases, installs and services advanced point-to-point
      wireless communication solutions for commercial and government customers. The
      Company’s communication links are capable of transmission speeds at or above one
      gigabit-per-second under the trade name “WiFiber®.” The Company’s products
      operate in the 71-76 GHz and 81-86 GHz spectrum bands. The Company’s management
      believes that the unprecedented amounts of bandwidth provided by these spectrum
      blocks and the quality of its proprietary product designs will provide for
      wireless communications at previously unattainable fiber-equivalent speed and
      reliability.




The
      Company’s solutions address the requirements of fixed wireless carriers, service
      providers, enterprises, and government institutions through broadband wireless
      networks. WiFiber, by providing the last mile access and backhaul, is
      complementary to both wireless fiber (“WiFi”) and worldwide interoperability for
      microwave access (“WIMAX”).




GigaBeam
      Corporation (the “Company”) was incorporated under the laws of the State of
      Delaware on January 5, 2004. The Company’s primary activities to date have
      consisted of securing financing, developing strategic alliances associated
      with
      the development of its technology, design, development and deployment of
      its Series Gig*E* and WiFiber G Series Gig*E* products as well as
      initial sales, marketing, production and installation of these products. In
      October 2004, the Company completed its initial public offering (“IPO”),
      generating net proceeds of approximately $5,491,000. Since that date, the
      Company has completed various private placements of its debt and equity
      securities generating net proceeds of approximately $37,123,602. Additionally,
      the Company has received approximately $3,297,000 to date from the exercise
      of
      common stock purchase warrants and options.




*Basis
      of Presentation*





The
      condensed consolidated financial statements include the Company’s accounts and
      those of its wholly-owned subsidiary, GigaBeam Services Corporation.
      Intercompany accounts and transactions have been eliminated in
      consolidation.





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in conformity with accounting principles accepted in the United States
      of America for interim financial information. Accordingly, they do not include
      all the information and notes required by accounting principles generally
      accepted in the United States of America for complete financial statements.
      In
      the opinion of management, all adjustments and reclassifications considered
      necessary for a fair and comparable presentation have been included and are
      of a
      normal recurring nature. The accompanying condensed consolidated financial
      statements should be read in conjunction with the Company’s most recent annual
      report on Form 10-KSB for the year ended December 31, 2006. The condensed
      consolidated results of operations for the interim periods presented are not
      necessarily indicative of the results to be experienced for the entire fiscal
      year.





**2.
      Summary of Significant Accounting Policies:**







7




*Inventories*





Inventories
      are valued at lower of cost (first-in, first-out method) or market. The Company
      regularly reviews parts and finished goods inventories on hand and, when
      necessary, records a provision for excess or obsolete inventories based
      primarily on current selling price and sales prices in confirmed backlog orders.
      The Company also regularly reviews the period over which its inventories will
      be
      converted to sales. Any
      inventories expected  to convert to sales beyond 12 months from the balance
      sheet date are classified as non-current.


The
        Company has classified $1,999,983 of its inventory as non-current based on
        the
        Company’s forecast for sales during the next 12 months. Products that will not
        be sold in the next 12 months have been classified as non-current
        inventory.




Inventories include the following:




June
                30,
              2007
            
            
            December
                31,
              2006Raw
                material
            
            $
            4,795,679
            
            $
            4,765,145Finished
                goods
            
            
            3,089,644
            
            
            3,789,9837,885,323
            
            
            8,555,128Less
                provision for obsolescence
            
            
            (1,654,834
            )
            
            (933,554
            )$
            6,230,489
            
            $
            7,621,574




Classification
      of  Inventories:


Current
              
              $
              4,230,506
              
              $
              7,621,574Non-Current
              
              
              1,999,983
              
              
              –$
              6,230,489
              
              $
              7,621,574





8




The
      Company has shipped products with a cost basis of approximately $300,000 to
      one
      customer for evaluation purposes. These products are carried in inventory on
      the
      accompanying condensed balance sheet. The Company believes these products will
      convert to sales and the Company will be fully paid prior to the end of 2007.
      However, because this customer is not heavily capitalized, the customer could
      experience financial difficulties precluding them from paying for the Company’s
      products. If the customer experiences such difficulties, the Company believes
      it
      will be able to recover some or all of these products. The Company currently
      has
      no knowledge of any specific financial issues with this customer and
      therefore no reserve has been provided.





*Intangibles*





Intangible
      assets consist primarily of patents and trademarks. The Company has adopted
      the
      guidelines for accounting for these assets as set forth in SFAS No. 142,
“Goodwill and Other Intangible Assets” (“SFAS 142”). Under the requirements as
      set out in SFAS 142, the Company amortizes the costs of acquired patents
      purchased over their remaining legal lives. Costs for current patent
      applications based on internally developed processes, primarily legal costs,
      are
      capitalized pending disposition of the individual patent application, and are
      subsequently either amortized based on initial patent life granted or evaluated
      for impairment periodically by the Company’s management. At June 30, 2007,
      patent application costs of $259,652 were included in other assets, compared
      to
      $241,002 at December 31, 2006. For the six months ended June 30, 2007,
      amortization expense totaled $4,456, compared to $5,013 for the six months
      ended
      June 30, 2006.





At
      June
      30, 2007, intangible assets totaled$365,526 consisting of $105,874 in patent costs and $259,652 in
      patent pending costs.  Intangible Assets are included in
      non-current Other Assets. At December 31, 2006, intangible assets totaled
      $361,682 and included $125,400 in patent costs and $241,002 in patent pending
      costs.





*Impairment
      of Long-Lived Assets*





SFAS
      No.144, “Accounting for the Impairment of Long-lived Assets and for Long-lived
      Assets to be disposed of” addressed financial accounting and reporting for the
      impairment or disposal of long-lived assets.





The
      Company reviews its long-lived assets, other than goodwill, for impairment
      wherever events or circumstances indicate the carrying value of such assets
      may
      not be recoverable through the estimated undiscounted future cash flows from
      the
      use of these assets. If the carrying value is more than the undiscounted future
      cash flow, the carrying value is then compared to the discounted future cash
      flow. Considerable judgment is required to estimate the appropriate
      discounting of future cash flows, if such comparisons can be reasonably
      ascertained. Factors that could indicate an impairment may exist include
      significant under performance relative to long-term projections, strategic
      changes in business strategy or significant negative economic trends in an
      industry. When and if such impairment exists, the related assets are written
      down to fair value. At June 30, 2007, management has determined that there
      were
      no indicators requiring review for impairment and therefore no adjustments
      have
      been made to the carrying value of long-lived assets. There can be no assurance,
      however, that market conditions will not change or demand for the Company’s
      products or services will continue which could result in impairment of
      long-lived assets in the future.




There
      were no leasehold improvements at the
      Company’s Waltham, MA location. Herndon, VA leasehold improvements with a
      net book value of $18,570 have been written off.




*Accrued
      Liabilities*





Accrued
      liabilities include the following:




**June
                30,**
            
            **December
                31,****2007**
            
            
            **2006**Estimated
                contract based costs
            
            $
            225,000
            
            $
            500,000Accrued
                interest payable
            
            
            216,351
            
            
            171,221Accrued
                payroll and benefits
            
            
            398,505
            
            
            466,751Accrued
                warranty costs
            
            
            226,035
            
            
            233,723Accrued
              rent
              Waltham
            
            
            118,837
            
            
            —Accrued
              franchise
              and other taxes
            
            
            68,020
            
            
            —Other
            
            
            14,839
            
            
            45,021$
            1,267,587
            
            $
            1,416,716




9




*Net
      Loss Per Share*


Basic
        loss per share is computed by dividing loss available to common shareholders
        by
        the weighted average number of common shares outstanding for the period.
        Diluted
        loss per share reflects, in periods in which they have a dilutive effect,
        the
        effect of common shares issuable upon the exercise of stock options and warrants
        or conversion of any convertible equities securities. Diluted loss per share
        amounts are the same as basic amounts because the impact of the stock
        equivalents was anti-dilutive. The following securities were excluded from
        the
        computation of diluted loss per common share for the period because their
        effect
        is anti-dilutive. Although the grant price of the 2007 options at the May
        23,
        2007 grant date is below the weighted average stock price for the three months
        ended June 30, 2007, none of these options are vested as of the June 30 date,
        and thus none of the 669,500 options issued can be converted as of the June
        30,
        2007 balance sheet date.
 
 **Number
                  of Shares**Notes
                  convertible into common stock
              
              
              67,500Options
                  to purchase common stock
              
              
              2,036,422Warrants
                  to purchase common stock
              
              
              7,219,148Shares
                  underlying Series B convertible preferred stock
              
              
              2,475,412Shares
                  underlying Series C convertible preferred stock
              
              
              1,639,344
 
 *Share-Based
        Compensation*
 
 Effective
        January 1, 2006, the Company adopted SFAS 123R which establishes standards
        for
        transactions in which an entity exchanges its equity instruments for goods
        or
        services. SFAS 123R focuses primarily on accounting for transactions in which
        an
        entity obtains employee services in share-based payment transactions, including
        issuances of stock options to employees. As a result of the adoption of SFAS
        123R utilizing the Modified Prospective method, the Company recorded charges
        of
        $828,831 in the six months ended June 30, 2007, representing the effect on
        income from continuing operations, income before income taxes, and net income.
        The Company recorded charges of $1,098,547 in the six months ended June 30,
        2006, representing the effect on income from continuing operations, income
        before income taxes, and net income.
 
 A
        total
        of 559,500 stock options were granted by the Company to employees and directors
        during the six months ended June 30, 2007. All options in the six months
        ended
        June 30, 2007 were granted with an exercise price of $2.84. Compensation
        expense
        recognized during the six months ended June 30, 2007 amounted to $828,831.
        These
        amounts were charged to operations and added to paid-in capital in accordance
        with SFAS 123R. The Company granted 852,250 options to employees and directors
        during the six months ended June 30, 2006 with exercise prices ranging from
        $8.00 per share to $12.03 per share. Compensation expense recognized during
        the
        six months ended June 30, 2006 amounted to $1,098,547. As of June 30, 2007,
        a
        total of 1,373,833 options were available for grant under the combined 2004
        and
        2006 plans.
 
 10
  A
        summary
        of employee options activity under the Company’s plans as of June 30, 2007 and
        changes during the six-month period then ended is presented below:
 
 Options
              
              Shares
              
              Weighted-Average
                  Exercise Price
              
              Weighted-Average
                  Remaining Contractual Terms (Years)
              
              Aggregate
                  Intrinsic Value**Balance,
                  January 1, 2007**
              
              1,444,355
              
              $8.71Granted
                  during the period
              
              559,500
              
              —Exercised
                  during the period
              
              —
              
              —Expired
                  during the period
              
              (471,305)
              
              —**Outstanding,
                  June 30, 2007**
              
              1,532,550
              
              $6.68
              
              6.64
              
              $10,239,715**Exercisable,
                  June 30, 2007**
              
              468,637
              
              $6.14
              
              7.96
              
              $1,646,085
 
 The
        closing market value of the Company’s common stock as of June 30, 2007 was $2.69
        per share.
 
 The
        fair
        value of each option award during the six months ended June 30, 2007 is
        estimated on the date of grant using the Black-Scholes option valuation model
        that uses the assumptions noted in the following table:
 
 June
                  30, 2007Expected
                  volatility
              
              
              101%Weighted-average
                  volatility
              
              
              98%Expected
                  dividends
              
              
              0.0%Expected
                  term (in years)
              
              
              6
                  yearsRisk-free
                  rate
              
              
              4.76%
 
 Options
        to purchase 1,532,550 shares of the Company’s common stock were outstanding
        during the six month period ended June 30, 2007, but were not included in
        the
        computation of diluted EPS, as the effect would be anti-dilutive.
 
 *Recent
        Accounting Pronouncements*
 
 **FASB
        Interpretation No. 48 “** ***Accounting
        for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
        109”***
 In
          July
          2006, the Financial Accounting Standards Board (FASB) issued Interpretation
          No.
          48 (FIN 48), *Accounting for Uncertainty in Income Taxes*, which
          prescribed a recognition threshold and measurement process for recording
          in the
          financial statements uncertain tax positions taken or expected to be taken
          in a
          tax return. Additionally, FIN 48 provides guidance on the de-recognition,
          classification, accounting in interim periods and disclosure requirements
          for
          uncertain tax positions. FIN 48 is effective for fiscal years beginning
          after
          December 15, 2006 so the Company adopted FIN 48 as of January 1, 2007.
          The
          cumulative impact of applying the provisions of FIN 48 is an adjustment
          to the
          opening balance of retained earnings. See Note 5 in the accompanying
          condensed consolidated financial statements for more
          information.
 11
  The
        Company’s practice is to classify any interest and penalties related to income
        tax matters in income tax expense. As of June 30, 2007, the Company had no
        accrued penalty payments in unrecognized tax benefits.
 
 ***SFAS
        No. 157 “Fair Value Measurements”***
 
 SFAS
        157
        was issued in September 2006 and will be effective for the first quarter
        of the
        Company’s 2008 fiscal year. This standard clarifies the definition of fair
        value, establishes a framework for measuring fair value and expands disclosure
        about fair value measurements. The Company is in the process of reviewing
        the
        impact, if any, that SFAS 157 will have on its financial
        statements.
 
 ***SFAS
        No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities,
        Including an Amendment of FASB Statement No. 115”***
 
 SFAS
        159
        was issued in February 2007 and permits entities to choose to measure many
        financial instruments and certain other items at fair value that are not
        currently required to be measured at fair value. The objective of this Statement
        is to reduce both complexity in accounting for financial instruments and
        the
        volatility in earnings caused by measuring related assets and liabilities
        using
        different measurement techniques. The fair value measurement provisions are
        elective and can be applied to individual financial instruments. SFAS 159
        requires additional disclosures related to the fair value measurements included
        in the entity’s financial statements. This Statement is effective for the
        Company as of the beginning of the 2008 year. The Company has not yet determined
        if it will elect to adopt the fair value measurement provisions of this
        Statement and what impacts such adoption might have on the Company’s financial
        statements.
 
 12
  **3.
        Going Concern Consideration**
 
 The
        Company’s condensed consolidated financial statements have been presented on the
        basis that they are a going concern which contemplates the realization of
        assets
        and the satisfaction of liabilities in the normal course of business. During
        the
        years ended December 31, 2006 and 2005 and through June 30, 2007, the Company
        has been unable to generate cash flows from operations and has been
        dependent on debt and equity raised from qualified individual investors.
 
 At
        June
        30, 2007, the Company had cash and cash equivalents of $53,084. The Company’s
        net working capital (current assets less current liabilities) as of June
        30,
        2007 was $604,313.  The Company’s accounts payable liabilities were
        $2,856,150 at June 30, 2007. Management believes the Company will continue
        to
        incur net losses from operating activities through at least December 31,
        2007.
 
 These
        factors raise substantial doubt about the Company’s ability to continue as a
        going concern. The financial statements contained herein do not include any
        adjustments relating to the recoverability and classification of recorded
        asset
        amounts or amounts and classification of liabilities that might be necessary
        should the Company be unable to continue as a going concern. The Company’s
        ability to continue as a going concern is dependent upon its ability to generate
        sufficient cash flows to meet its obligations on a timely basis, to obtain
        additional financing as may be required, and ultimately to attain profitable
        operations. However, there is no assurance that profitable operations or
        sufficient cash flows will occur in the future. The Company’s independent
        auditors issued a going concern qualification in their report on the
        consolidated financial statements included with the Company’s December 31,
        2006 annual report on Form 10-KSB.
 
 To
        date,
        the Company has supported its operations by: 1) selling its products and
        related
        services, 2) raising additional operating cash through the private sale of
        its
        redeemable preferred and convertible preferred stock, 3) selling convertible
        debt in a private sale, 4) issuing common stock shares upon conversion of
        common
        stock warrants issued at the time of the Company’s IPO and 5) issuing notes to
        existing investors.
 
 These
        steps have provided the Company with the cash flows to continue its business
        through the date of this report, but have not resulted in significant
        improvement in the Company’s current financial position. The following efforts
        have been undertaken or are in process as part of the Company’s efforts to
        secure suitable financings, improve working capital and increase cash flows
        with
        the objective to improve its long-term financial viability:
 
 -
              On
                  January 5, 2007, the Company reduced its total work force levels from
                  53 to 26 persons.
 
 -
              With
                  the agreement of the Company’s landlord, and with no further lease payment
                  obligations, the Company closed its Lewisville, Texas location
                  in early
                  January 2007 and combined these operations into the Company’s Durham, NC
                  facility.  In July 2007, the Company relocated its corporate offices,
                  including its administrative, finance and accounting functions to the
                  Durham facility.
 
 -
              Vigorous
                  collection of accounts receivable balances, and in certain cases,
                  the
                  Company requiring substantial money in advance of shipment of
                  links.
 
 -
              In
                    January 2007, to conserve cash, the Company requested a waiver
                    from the
                    Series B and Series C preferred shareholders to pay their quarterly
                    dividend in shares of the Company’s common stock in lieu of a cash
                    dividend.Additionally,
                    in consideration for agreeing to the waiver, the Company offered
                    to the
                    holders of the Series B and Series C stock a number of common
                    stock
                    purchase warrants equal to 50% of the number of shares of common
                    stock as
                    payment for the January 2007 dividends.All
                    of the Series B and Series C preferred shareholders agreed to
                    the waiver
                    and the Company issued 118,259 shares of its common stock and
                    59,134
                    common stock purchase warrants.  The shares of common stock were
                    valued at $4.2449 (90% of the average of the Volume Weighted
                    Average Price
                    for the 20 consecutive trading days ending December 29,
                    2006).  The Company accounted for this transaction by ascribing
                    a portion of the consideration to the warrants which were treated
                    as
                    equity under the provisions of EITF
                    00-19.
  13
  -
              In
                  April 2007, again to conserve cash, the Company requested a waiver
                  from
                  the Series B and Series C shareholders to receive their quarterly
                  dividend
                  in shares of the Company's common stock in lieu of a quarterly
                  cash dividend. Additionally, in consideration for agreeing to the
                  waiver,
                  the Company offered to the holders of the Series B and Series C
                  stock a
                  number of common stock purchase warrants equal to 50% of the number
                  of
                  shares of common stock issued as payment for the April dividend.
                  All of
                  the Series B and Series C shareholders agreed to the waiver and
                  the
                  Company issued 173,660 shares of its common stock and 86,829 common
                  stock
                  purchase warrants. The common stock shares were valued at $2.8907
                  (90% of
                  the VWAP for the 20 consecutive trading days ending March 30, 2007). 
                  The Company accounted for this transaction by ascribing a portion
                  of the
                  consideration to the warrants which were treated as equity under
                  the
                  provisions of EITF 00-19.
 -
                In
                    July 2007, the Company again requested a waiver from the Series
                    B and
                    Series C shareholders to pay their quarterly dividend in shares
                    of the
                    Company’s common stock in lieu of a cash payment. Additionally, in
                    consideration for agreeing to the waiver, the Company offered
                    to the
                    holders of the Series B and Series C stock a number of common
                    stock
                    purchase warrants equal to 50% of the number of shares of common
                    stock as
                    payment for the July 2007 dividends. Should all of the Series
                    B and Series
                    C shareholders accept the offered stock for the July dividend,
                    the Company
                    would issue 198,474 shares of its common stock and 99,237 common
                    stock
                    purchase warrants equal to 50% of this amount.
 -
              On
                  April 17, 2007, the Company received proceeds of $500,000 under
                  a note payable from an existing investor. On May 22, 2007, the
                  Company
                  received $493,210 additional proceeds from the same investor. These
                  two
                  loans were rolled into a $1 million short term financing, due on
                  May 23,
                  2008. In August 2007, the Company announced a financing agreement
                  with the
                  same investor under which the investor would invest an additional
                  $500,000
                  and the $1 million short-term facility will be converted into a
                  new class
                  of convertible preferred stock. Additionally, the Company will
                  issue
                  common stock purchase warrants to the investor.
 
 -
              The
                  Company has reduced cash operating expenses to levels that are in
                  line with current revenues. The Company may seek reductions in
                  certain
                  operations expenses through the issuance of additional common shares
                  of its stock in lieu of cash payments to key vendors.  The
                  Company has no assurance that it will enter into any such
                  arrangements with any of its vendors.
 
 These
        alternatives could result in substantial dilution of existing shareholders.
        There can be no assurances that the Company's current financial position
        can be
        improved, that the Company can raise additional working capital or
        that it can achieve positive cash flows from operations. The Company's
        short and long-term viability as a going concern is dependent upon the
        following:
 
 -
              The
                  Company's ability to locate sources of debt or equity funding to
                  meet
                  current commitments and near-term future
                  requirements.
 
 -
              The Company's ability
                  to achieve profitability and ultimately generate sufficient cash
                  flow from
                  operations to sustain its continuing
                  operations.
 
 14
  **4.
        Debt and other credit arrangements:**
  The
          Company's total borrowings were comprised of the following:
  As
                    ofJune
                    30,
                
                December
                    31,2007
                
                2006Note
                    payable, related party
                
                $
                65,000
                
                $
                -Note
                    payable, other
                
                $
                1,000,000
                
                $
                -Less:
                    unamortized discount on note to investor
                
                
                (348,134
                )
                
                -$
                651,866
                
                $
                -Convertible payable
                    notes
                
                $
                540,000
                
                $
                1,802,800Less:
                    unamortized discount
                
                
                (187,966
                )
                
                (433,170
                )Less:
                    unamortized beneficial conversion feature
                
                
                (133,398
                )
                
                (318,594
                )$
                218,636
                
                $
                1,051,036Capital
                    lease obligations
                
                $
                55,895
                
                $
                70,284Less:
                    current portion of capital lease obligations
                
                
                (28,899
                )
                
                (29,125
                )Capital
                    lease obligations, non-current
                
                $
                26,996
                
                $
                41,159
  15
  **Convertible
        notes payable**
 
 On
        January 28, 2005 and February 1, 2005, the Company issued 8% senior convertible
        notes and common stock warrants with an aggregate principal amount of
        $2,500,000, due January 28, 2008 (“Notes”), in an asset-backed financing.
        Additionally, warrants to purchase common stock were issued in connection
        with
        the financing.
 
 The
        principal amount of the Notes is convertible at the election of the holders
        into
        shares of the Company’s common stock at $8.00 per share. One-half of the
        interest on the Notes is payable in cash, semi-annually beginning July 31,
        2005,
        and the balance is payable, on the earlier of the Note’s maturity or conversion,
        in cash or, at each holder’s option, in shares of the Company’s common stock
        valued at the lesser of (i) $10.00 per share and (ii) the volume weighted
        average per-share price of the common stock for the ten trading days ended
        five
        business days prior to the applicable interest payment date. The Notes are
        collateralized by substantially all of the Company’s assets as well as by the
        personal pledge of shares of common stock of the Company by each of the
        Company’s Chief Executive Officer and Chief Technical Officer.
 
 The
        warrants issued in conjunction with the Notes are exercisable to purchase
        an
        aggregate of 446,429 shares of common stock at an exercise price of $7.00
        per
        share through January 28, 2011. The Company estimated the fair value of the
        warrants using the Black-Scholes model. The resulting fair value of $1,194,761
        was recorded as a debt discount, which is being amortized over the term of
        the
        debt. The debt discount was recorded as a reduction to convertible Notes
        payable
        and the amortization of the debt discount is being recorded as a component
        of
        interest expense. During the six months ended June 30, 2007 and 2006,
        the Company recorded amortization of $245,204 and $197,490, respectively.
 
 In
        connection with the issuance of the Notes, the Company paid issuance costs
        of
        $330,519. In addition, the placement agent received warrants (identical to
        the
        warrants issued to the investors in the financing) to purchase 44,642 shares
        of
        common stock and options to purchase 31,250 shares of common stock for $8.00
        per
        share. The Company estimated the fair value of the placement agent warrants
        and
        options using the Black-Scholes model to be $384,835. The resulting aggregate
        debt issuance costs of $715,354 are being amortized as a component of interest
        expense over the term of the debt. During the six months ended June 30, 2007
        and
        2006, the Company recorded amortization of $559,820 and $520,445, respectively.
 
 The
        proceeds from the issuance of the Notes and warrants were allocated between
        the
        Notes and the warrants based on the relative fair values of the components.
        The
        portion of the proceeds allocated to the warrants was classified as additional
        paid-in capital. The proceeds allocated to the Notes were compared to the
        fair
        value of the common stock that would be received on the conversion and the
        Company determined that a beneficial conversion feature existed. The Company
        has
        estimated the fair value of such beneficial conversion feature to be
        approximately $882,261 and recorded such amount as a debt discount. Such
        discount is required to be amortized to interest expense over the period
        from
        the date of issuance of the Notes until the stated redemption date, January
        28,
        2008. During the three months ended June 30, 2007, the Company recorded interest
        expense of $10,920 related to the amortization of the beneficial conversion
        feature. The unamortized balance of $133,398 and $318,594 has been recorded
        as a
        reduction to convertible notes payable at June 30, 2007 and December 31,
        2006,
        respectively.
  During
        the six months ended June 30, 2007, note holders exercised conversion rights
        with respect to $1,262,800 in face value of notes to shares of common stock.
        During the year ended December 31, 2006, note holders exercised conversion
        rights with respect to $540,867 in face value of Notes to shares of common
        stock. Shares of common stock were issued and the related Notes were retired
        or
        reduced in face value.
 
 The
        carrying values as of June 30, 2007 and December 31, 2006 of $218,636 and
        $1,051,036, respectively, are comprised of the aggregate principal amount
        outstanding, net of unamortized discount and the net unamortized beneficial
        conversion feature. The net decrease in the carrying value at June 30, 2007
        is
        due to conversion of the $1,262,800 principal amount of the notes to common
        stock shares during the first quarter, and is offset by the amortization
        of the
        debt discount and beneficial conversation feature during the
        quarter.
  At
        June
        30, 2007 and December 31, 2006, the Company estimated the fair value of the
        Notes to be equal to their face value of $540,000 and $1,802,000,
        respectively.
  As
        of
        August 1, 2007, the Company had not paid a total of $201,267 that was due
        and payable in cash to note holders as of the January 31, 2007 interest payment
        due date.
 **Note
          payable to related party**
 
 On
          March
          27, 2007, Louis Slaughter, the Company's Chairman and Chief Executive Officer,
          loaned $65,000 to the Company through an interest-bearing note. The note
          bears
          interest at 7% per annum. The maturity date is March 26, 2008, with interest
          accruing to and payable on the maturity date. Interest expense on the loan
          through June 30, 2007 was $1,140.
 
 16
  **Note
        Payable to Investor**
  On
        April
        17, 2007, the Company issued a 14% secured promissory note in the principal
        amount of $500,000 to Midsummer Investment, Ltd., an existing investor. The
        principal purpose for the note issuance and related funding was to fund
        short-term working capital needs of the Company. The note was secured by
        the
        personal pledge of the Company’s common stock shares owned by each of the
        Company’s Chief Executive Officer and its Chief Technical Officer. The principal
        and related accrual interest was due upon the earlier of (1) written demand
        to
        the Company by Midsummer, or (2) December 31, 2007, or such later date as
        agreed
        to in writing by Midsummer. Midsummer maintained certain rights to convert
        the note amount plus any accrued interest into securities that might be issued
        subsequently by the Company in future equity or debt financings. This note
        was
        re-financed and canceled on May 22, 2007 as part of a $1 million one-year
        note.
  On
        May
        22, 2007, the Company issued a 14% secured debenture (the “Debenture”) in the
        principal amount of $1 million to Midsummer. Additionally, the Company issued
        a
        total of 326,787 common stock warrants at an exercise price of $6.40. The
        warrants are exercisable immediately upon issuance and for a period thereafter
        of five years. The Debenture is governed by a securities purchase agreement
        and
        supplemental documents dated May 22, 2007. The Debenture is guaranteed by
        the
        Company’s wholly-owned subsidiary, Gigabeam Service Corporation, through a
        subsidiary guarantee agreement.
 
 The
        Debenture principal and related interest are collateralized by a security
        interest in all of the Company’s inventories, as well as a pledge of the
        Company’s common stock shares owned by each of the Company’s Chief Executive
        Officer and its Chief Technical Officer. The principal and all accrued interest
        from the date of the Debenture are due and payable on May 22, 2008, or earlier
        if the Company receives a minimum of $2 million of other debt financings
        prior
        to the May 22, 2008 date. The Company has the right to prepay the Debenture
        and
        related accrued interest to date upon five business day notice to Midsummer
        without penalty.
 
 The
        Debenture is subordinated to any outstanding principal and related interest
        payment related to the Company’s 8% convertible Notes due February, 2008, but is
        senior to any future subordinated debt issued.
 
 The
        common stock warrant exercise price is subject to customary adjustments for
        certain events and provisions as defined in the documents related to the
        issue
        of the Debentures.
 
 Under
        the
        provisions of the Debentures, the existing $500,000 note between the Company
        and
        Midsummer, dated April 17, 2007, was merged into the $1 million Debenture
        and
        canceled. Net proceeds from the Debenture to the Company were $413,210, which
        represents the $1 million principal of the Debenture less the assumption
        of the
        existing $500,000 Note, and less accrued interest on the April 17, 2007 note
        as
        of the May 22, 2007 date of $6,790 and less legal and other fees of $80,000.
 
 The
        Company accounted for the Debenture transaction under the Provisions of SFAS
        No.
        133, EITF 00-19 and other GAAP requirements related to securities issued
        with
        detachable warrants. The Company estimated the fair value of the warrants
        issued
        as of the date of issuance using the Black-Scholes model. The resulting fair
        value of $390,431 was recorded as a debt discount, which is being amortized
        over
        the life of the Debenture as a component of interest expense. Through June
        30,
        2007, the Company has amortized $42,297 of the discount assigned.
  **Capital
        leases**
 
 The
        Company entered into various capital leases for test equipment. As of June
        30,
        2007, the future minimum payments under leases are as follows:
  17
  Year
          ended December 31,
  2007
                
                $
                17,9822008
                
                
                20,3932009
                
                
                9,7442010
                
                
                9,7442011
                
                
                6,498Total
                    payment obligation
                
                
                
                
                
                64,361Less
                    amount representing interest
                
                
                
                
                
                (8,466)Present
                    value of net minimum obligation
                
                
                
                
                
                55,895Less
                    current portion
                
                
                
                
                
                (28,899)Non
                    current portion
                
                
                
                
                $
                26,996
  **5.** **Income
        Taxes** ****
 The
          Company adopted the provisions of FIN 48 on January 1, 2007. The adoption
          of FIN
          48 did not result in an adjustment to the beginning balance  of retained
          earnings and also did not result in any material adjustments to reserves
          for
          uncertain tax positions.
  At
          January 1, 2007, the Company had a U.S. net operating loss carry forward
          (NOL)
          of approximately $33 million. The Company also had a net deferred tax asset
          of  approximately $16.5 million related to these NOLs. Due to the
          uncertainties surrounding the Company's ability to generate future taxable
          income to realize these assets, a full valuation reserve has been established
          to
          offset the net deferred tax asset. Additionally future utilization of the
          NOL to offset future taxable income may be subject to a substantial annual
          limitation as result of Section 382 ownership changes that may have occurred
          previously or that may occur in the future.
  The
          Company's policy for recording interest and penalties associated with tax
          audits
          is to record such items as a component of the provision for income taxes.
          In
          conjunction with the adoption of FIN 48, the Company did not accrue any
          interest
          or penalties at January 1, 2007. To the extent interest and penalties are
          not
          ultimately incurred with respect to uncertain tax positions, amounts accrued
          will be reduced and reflected as a reduction of the overall income tax
          provision.
  In
          all of
          the significant federal and state jurisdictions where it is required to
          file
          income tax returns, the Company has analyzed filing positions for all tax
          years
          where the statute is open. The only periods subject to examination by the
          major
          tax jurisdictions where the Company does business are the 2004 through
          2006 tax
          years. The Company does not believe that the outcome of any examination
          will
          have a material impact on its financial statements.
  The
          Company does not currently estimate any additional material reasonably
          possible
          uncertain tax positions occurring within the next twelve months.
  No
          provision for federal or state income taxes has been recorded for the three
          and
          six months ended June 30, 2007 as the Company incurred net operating losses
          for
          all periods presented for all jurisdictions in which it
          operates.
 18




There
        is
        no increase recorded through June 30, 2007 related to material changes to
        the
        measurement of unrecognized tax benefits in various taxing jurisdictions.
        There
        have been no tax audit or reviews initiated by the IRS or any state tax
        authority during the three months ended June 30, 2007 or through the date
        of
        this report.
 
 The
        Company estimates that it is reasonably possible that no reduction in
        unrecognized benefits may occur in the next twelve months due primarily to
        the
        expiration of the statute of limitations in various state and local
        jurisdictions. The
        Company does not currently estimate any additional material reasonably
        possible uncertain tax positions occurring within the next twelve-month time
        frame.
  **6.
        Equity Issues**
 
 During
        the period May 6, 2005 through July 26, 2005, the Company completed a
        private placement of 11,277 shares of its 10% Series A Redeemable Preferred
        Stock (“Series A Stock”), with a stated value of $700 per share, and 1,127,700
        common stock purchase warrants for aggregate proceeds of $7,950,285, before
        payment of approximately $1,250,000 in placement and legal fees. Dividends
        are
        payable, at the rate of 10% per year, semi-annually, commencing November
        15,
        2005. Dividends can be paid, at the Company's option, in either
        cash or shares of its common stock. At any dividend date, if the
        Company chooses to make the dividend payment in shares of common stock, the
        number of shares to be issued will be based on a ten trading days volume
        weighted average price per share of the common stock ending five trading
        days
        before the dividend date.
 
 Each
        warrant is exercisable to purchase one share of common stock at an exercise
        price of $7.00 per share until January 28, 2011.
 
 In
        the
        event the Company conducts a financing with gross proceeds of $30
        million or more (a “Qualified Financing”), holders of the Series A Stock will
        have the right to exchange all or a portion of their then outstanding shares
        into securities identical to those issued in the Qualified Financing, at
        an
        exchange rate per share equal to the then-applicable redemption price of
        the
        shares. Following the completion of a Qualified Financing, shares of Series
        A
        Stock still outstanding are mandatority redeemable, in accordance with the
        terms
        of the Certificate of Designation governing the Series A Stock.  Prior to
        the completion of a Qualified Financing, the Company may redeem all or
        any of the outstanding shares of the Series A Stock in cash, and upon notice
        annually on May 15 at a stipulated premium price, which declines annually
        until
        May 15, 2010, when the redemption price will be at the $700 per share stated
        price.
 
 In
        June
        and July 2005, the Company issued 92,500 shares of its common
        stock in an offshore offering as part of a transaction that included 92,500
        common stock purchase warrants for aggregate proceeds of $652,125, before
        payment of approximately $75,000 in placement and legal fees. The stated
        price
        of each unit was $705. Each warrant is exercisable to purchase one share
        of
        common stock at an exercise price of $7.00 per share until January 28, 2011.
        The
        warrants have been listed together with warrants issued with the Series A
        stock
        and with warrants issued in February 2005 related to the
        Company's $2,500,000 Notes financing (the “Z warrants”) on the Nasdaq
        Capital Market under the symbol “GGBMZ”.
 
 On
        November 15, 2005, the Company paid the first required dividend on the
        Series A stock in shares of common stock. The total shares issued to holders
        of
        the Series A stock were 42,392 based on the formula as noted above. On May
        15,
        2006 and November 15, 2006, the Company paid the semi-annual required
        dividend through the issuance of 31,798 shares and 59,941 shares of common
        stock, respectively, based on the stated formula.
  The
        common stock, the Z warrants described above and the IPO warrants commenced
        trading on the Nasdaq Capital Market on March 27, 2006. Prior to March 27,
        2006 the common stock, Z warrants and IPO warrants were traded on the
        Over-the-Counter Bulletin Board.
 
 19
  On
        November 7, 2005, the Company issued 18,900 shares of its
        variable dividend series B convertible preferred stock (“Series B stock”), and
        1,302,191 common stock purchase warrants at a price of $1,000 per unit for
        gross
        proceeds of $18,900,000 before payment of placement fees of approximately
        $1,323,000 and other related expenses of approximately $125,000, resulting
        in
        net proceeds to the Company of approximately $17,452,000 in a private placement
        of such securities to institutional investors. The proceeds from the issuance
        of
        the Series B stock and warrants were allocated between the Series B stock
        and
        the warrants based on the relative fair value of the components. The proceeds
        allocated to the shares were compared to the par value of the common stock
        that
        would be received upon conversion and the Company determined that a
        beneficial conversion feature existed. The Company estimated the fair
        value of such beneficial conversion feature, through use of the Black-Scholes
        model, to be $3,936,794. The value of the beneficial conversion feature is
        recognized as interest expense.
 
 Pursuant
        to the anti-dilution provisions contained in the Certificate of Designation
        of
        Preferences, Rights and Limitations of the Series B stock, at the time of
        any
        issuance of common stock or common stock equivalents at an effective price
        below
        the conversion price then in effect, the conversion price of the Series B
        Stock
        shall be adjusted to the effective price of the subsequently issued common
        stock
        or common stock equivalents as of the date of such issue. On August 21,
        2006, the Company issued 10,000 shares of its variable dividend Series
        C convertible preferred stock (“Series C stock”) with a conversion price of
        $6.10 which was below the Series B stock conversion price. Consequently,
        the
        original conversion price of the Series B Stock of $7.6199 per share was
        adjusted to equal the effective price of the variable dividend Series C stock
        of
        $6.10 that the Company issued in August 2006. Based upon the adjusted
        conversion price of $6.10 per share, and based upon the number of outstanding
        shares of Series B stock at August 21, 2006 (15,300), the number of common
        shares issuable upon conversion of the Series B Stock was adjusted from
        2,007,906 shares to 2,508,204 shares.
 
 Additionally,
        pursuant to the anti-dilution provisions of the warrants issued to the holders
        of the Series B stock, the number of shares of common stock issuable upon
        exercise of the warrants issued to the Series B Stock shareholders has been
        adjusted from 1,274,630 shares to 1,668,032 shares and the exercise price
        has
        been adjusted from $7.9827 to $6.10.
 
 The
        variable dividend rate on the Series B stock is 8% per annum for the first
        three
        years, then 11% for the fourth year, and 14% thereafter.
 
 The Company may
        redeem any then outstanding shares of the Series B stock in whole or in part,
        after November 7, 2008, subject to certain conditions and limitations, upon
        appropriate notice, at a cash redemption price equal to 110% of the stock’s
        stated value if redeemed prior to November 7, 2009, and at 100% of the stated
        value after November 7, 2009.
 
 Under
        terms of the Series B stock, so long as any shares of the Series B stock
        remain
        outstanding, the Company is prohibited from paying dividends on
        its common
        stock or other designated junior securities, other than dividend payments
        in the
        ordinary course under its Series A stock provided the Company
        is current in its obligations under our Series B stock, and the terms
        of its Series A stock have not been amended since November 7, 2005.
 
 Dividends
        on the Series B stock are due quarterly on the first day of January, April,
        July
        and October to shareholders of record on the immediately preceding day of
        the
        prior month. Dividends are payable in cash unless certain stipulated events
        have
        occurred or are reached, and unless the daily trading volume for the Company's
        common stock on the trading market exceeds 20,000 shares per trading day
        for 20
        consecutive trading days prior to the specified dividend date. Should the
        stipulated events occur and the minimum trading volume noted reached, and
        if
        funds required for the quarterly dividend payment are legally available,
        solely
        at the Company's election, the dividend may be paid in cash or in shares
        of the Company's common stock.
 
 On
        January 3, 2006, April 1, 2006, July 3, 2006 and October 2, 2006, the
        Company paid the quarterly dividend to holders of Series B stock in cash
        amounting to $231,034, $371,311, $319,067, and $314,781, respectively, since
        the
        20 trading days' average trading volume in the Company's stock did not exceed
        the threshold 20,000 share figure noted above. In January 2007, to conserve
        cash, the Company requested a waiver from the Series B shareholders to
        receive their quarterly dividend in shares of the Company's common
        stock in lieu of a cash dividend. All of the Series B preferred shareholders
        agreed to the waiver except one, who elected a cash dividend. Consequently,
        in
        January 2007, the Company issued 70,203 shares of its common stock and
        agreed to pay the non-waiving shareholder $4,000 in cash. Subsequently, the
        non-waiving shareholder agreed to take the dividend in shares as well. In
        April
        2007, the Company issued a total of 941 shares of the
        Company's common stock to this shareholder in lieu of cash. The shares of
        common stock were valued at $4.2449 (90% of the average of the Volume Weighted
        Average Price (“VWAP”) for the 20 consecutive trading days ending December 29,
        2006). In addition, in consideration for agreeing to the waiver, the
        Company agreed to issue a number of its common stock purchase warrants
        equal to 50% of the number of shares of common stock issued as payment for
        the
        January 2007 stock dividend. The Company issued, with the dividend
        shares, a total of 35,572 common stock warrants to the Series B shareholders
        at
        an exercise price of $6.39 per share. The Company has treated the
        warrants as equity securities under the requirements of EITF 00-19. Using
        the
        Black-Scholes model, the Company has calculated the fair value of the
        warrants issued, and included the fair value in the equity section of its
        balance sheet as of June 30, 2007.
 
 20




On
        August
        21, 2006, the Company issued 10,000 shares of its Series C stock
        with a conversion price of $6.10 per common share and warrants to purchase
        an
        aggregate of 860,651 shares of common stock for gross proceeds of $10 million
        resulting in net proceeds of $9,224,705 after payment of placement fees and
        other expenses of $775,295. The proceeds from the issuance of the Series
        C stock
        and warrants were allocated between the Series C stock and the warrants based
        on
        the relative fair value of the components. The proceeds allocated to the
        shares
        were compared to the par value of the common stock that would be received
        upon
        conversion and the Company determined that a beneficial conversion
        feature existed. The Company has estimated the fair value of such
        beneficial conversion feature, through use of the Black-Scholes model, to
        be
        $2,252,398. The value of the beneficial conversion feature is recognized
        as
        interest expense.
 
 The
        conversion price of the Series C stock is $6.10 per share, subject to adjustment
        as set forth in the Certification of Designation of Preferences, Rights and
        Limitations covering the Series C stock.
 
 The
        exercise price of the common stock purchase warrants issued to holders of
        the
        Series C stock is $6.39, subject to adjustment.
 
 The
        variable dividend rate on the Series C stock is 8% per annum for the first
        three
        years, 11% for the fourth year and 14% thereafter.
 
 The
        Company may redeem the outstanding Series C stock in whole or in part after
        August 21, 2009, subject to certain conditions and limitations upon appropriate
        notice at a cash redemption price equal to 110% of the stated value if redeemed
        prior to August 21, 2010, and at 100% of the stated value if redeemed after
        August 21, 2011.
 
 Under
        terms of the Series C stock, so long as any shares of the Series C stock
        remain
        outstanding, the Company is prohibited from paying dividends
        on its common stock or other designated junior securities, other than
        dividend payments in the ordinary course under the Company's Series A stock
        and
        Series B stock provided the Company is current in its obligations
        under our Series C stock, and that the terms of the Series A stock have not
        been amended since November 7, 2005.
 
 Dividends
        on the Series C stock are due quarterly on the first day of January, April,
        July
        and October to shareholders of record on the immediately preceding day of
        the
        prior month. Dividends are payable in cash unless certain stipulated events
        have
        occurred or are reached, and unless the daily trading volume for the
        Company's common stock on the trading market exceeds 20,000 shares per
        trading day for 20 consecutive trading days prior to the specified dividend
        date. Should the stipulated events occur and the minimum trading volume noted
        reached, and if funds required for the quarterly dividend payment are legally
        available, solely at the Company's election, the dividend may be paid
        in cash or in shares of the Company's common stock.
 
 On
        October 2, 2006, the Company paid the quarterly dividend to holders of
        Series C stock in cash, amounting to $91,111, since the 20 trading days average
        trading volume in its stock did not exceed the threshold 20,000 share
        figure noted above. In January 2007, in order to conserve cash, the
        Company requested a waiver from the Series C preferred shareholders in
        order to pay their quarterly dividend in shares of the Company's common stock
        in
        lieu of a cash dividend. All of the Series C preferred shareholders agreed
        to
        the waiver except two, who elected a cash dividend. Consequently, in January
        2007, the Company issued 43,344 shares of its common stock and
        agreed to pay the non-waiving shareholders $16,000 in cash. Subsequently,
        the
        non-waiving shareholders agreed to take the dividend in shares as well. In
        April
        2007, the Company issued a total of 3,771 shares of its common
        stock to these shareholders in lieu of cash. The shares of common stock were
        valued at $4.2449 (90% of the average of the VWAP for the 20 consecutive
        trading
        days ending December 29, 2006). In addition, in consideration for agreeing
        to
        the waiver, the Company agreed to issue a number of its common
        stock purchase warrants equal to 50% of the number of shares of common stock
        issued as payment for the January 2007 dividend. The Company issued,
        with the dividend shares, a total of 23,558 common stock warrants to the
        Series
        C shareholders at an exercise price of $6.39 per share. The Company
        has treated the warrants as equity securities under the requirements of
        EITF 00-19. Using the Black-Scholes model, the Company calculated the
        fair value of the warrants issued, and included the fair value in the equity
        section of its balance sheet at June 30, 2007.
 
 21
  In
        April
        2007, again to conserve cash, the Company requested a waiver from the
        Series B and Series C shareholders to receive their quarterly dividend for
        the
        quarter ended March 31, 2007 in shares of its common stock in lieu of a
        quarterly cash dividend. Additionally, in consideration for agreeing to the
        waiver, the Company offered to the holders of the Series B and Series
        C stock a number of its common stock purchase warrants equal to 50% of the
        number of shares of common stock issued as payment for the April 2007
        dividend.
 
 All
        of
        the Series B and Series C shareholders agreed to the waiver and to payment
        of
        the dividends in shares with the related issuance of warrants. Consequently,
        in
        April 2007, the Company issued 104,473 shares of its common stock
        to the Series B stockholders and 69,187 shares to the Series C stockholders.
        The
        shares of common stock were valued at $2.8907 (90% of the VWAP for the 20
        consecutive trading days ending March 30, 2007), and issued common stock
        purchase warrants to such stockholders equal to 50% of the number of common
        stock shares issued in payment for the April 2007 dividends.
 
 In
        July
        2007, the Company requested an additional waiver from the Series B and
        Series C shareholders to receive their quarterly dividend for the quarter
        ended
        June 30, 2007 in shares of its common stock in lieu of a quarterly cash
        dividend. Additionally, in consideration for agreeing to the waiver, the
        Company offered to the holders of the Series B and Series C stock a number
        of its common stock purchase warrants equal to 50% of the number of shares
        of
        common stock that would be issued as payment for the July 2007 dividend.
        Should
        all of the Series B and Series C shareholders accept the offered stock, the
        Company would issue 198,474 shares of its common stock and common stock purchase
        warrants equal to 50% of this amount.
  On
        June
        29, 2007, the Company authorized a total of 475,000 warrants with an
        exercise price of $2.69 to Trilogy Capital Partners for consulting services
        to
        be performed after July 1, 2007. These warrants are accounted for in accordance
        with EITF 96-18; with expense recorded as services are provided.
  On
        June 29, 2007, the Company authorized a total of
        100,000 warrants with an exercise price of $2.69 to Sierra Equities for
        consulting services to be performed after July 1, 2007. These warrants are
        accounted for in accordance with EITF 96-18; with expense recorded as services
        are provided.
  **7.
        Commitments and contingencies**
 
 The
        Company leases certain office space, roof rental rights and equipment under
        non
        cancelable operating leases.
 
 Future
        minimum lease payments under these operating leases are as follows:
 
 2007
              
              $
              254,7252008
              
              
              285,4592009
              
              
              137,7612010
              
              
              135,6632011
              
              
              —$
              813,608
 
 Rental
        expense for operating leases was $456,155 and $300,854 through the six months
        ended June 30, 2007 and 2006, respectively.
 
 On
        October 13, 2004, the Company's employment agreements with Messrs. Slaughter
        and
        Lockie became effective. The Company's employment agreement with Mr. Peck
        commenced in May 2004. Each employment agreement establishes, among other
        things, base salary levels at amounts designed to be competitive with executive
        positions at similarly situated companies. Messrs. Slaughter, Lockie, and
        Peck
        are entitled to receive annual base salaries of $250,000, $225,000 and $194,250,
        respectively, effective January 1, 2006. These agreements were amended effective
        September 26, 2006, to reduce these officers’ salary levels to $125,000,
        $112,500 and $145,687, respectively. These annual base salaries will be reviewed
        annually and may be increased by the board of directors or compensation
        committee. In addition to their base salaries, each executive is eligible
        to
        participate in any bonus plans or incentive compensation programs that the
        Company may establish from time to time.
 
 22
  The
        Company may be obligated to make severance payments to these executives under
        their employment agreements. Pursuant to their employment agreements, the
        Company may terminate the agreements for cause at any time and without cause
        upon 30 days written notice. Any of these executives may terminate his
        employment agreement for good reason, upon 60 days written notice, if his
        duties
        are substantially altered or reduced, his salary is reduced or the
        Company materially breaches his agreement. If the
        Company terminates the employment of the executive without cause or if the
        executive terminates his agreement for good reason, the Company must
        pay the executive his base salary for a severance term of eighteen months
        in the
        case of Messrs. Slaughter and Lockie and twelve months in the case of Mr.
        Peck;
        provided, however, that in order to receive the severance payment, the executive
        officer must sign a general release.
 
 Each
        of
        the employment agreements contains restrictive covenants to protect the
        Company for non-competition, non-solicitation/non-piracy and non-disclosure
        during the term of the agreement and for a period of two years after its
        termination or expiration and requires the Company to indemnify the
        executive for liability incurred as a result of acts performed by him in
        his
        capacity as an officer of the Company, including reasonable legal
        expenses.
 
 As
        of May
        18, 2007, the Company and ThinKom Solutions, Inc. have agreed to terminate
        the
        2004 strategic supply agreement, as amended, between the companies, with
        the
        agreement that no further obligations are owed by either party.
  On
          or
          about April 24, 2007, the landlord of the Company's Waltham,
          Massachusetts office filed a breach of lease claim for non-payment of rent
          in
          the State of Massachusetts, Superior Court of Suffolk County seeking damages
          in
          the amount of approximately $174,637 and executed an attachment in the
          amount of
          $50,000. The Company has recorded liabilities for 100% of this claim in the
          accompanying condensed consolidated financial statements.
 
 On
          or
          about May 7, 2007, the Company was verbally notified by its
          customer, the Ministry of Interior for the Kingdom of Bahrain that a Bahraini
          court had ordered the Ministry of the Interior to cease payments under
          certain
          sales orders pending resolution of a claim filed by a former reseller
          for the Company in the Middle East and African region. The Company believes
          this case has no merit and plans to vigorously defend itself. No accrual
          has
          been recorded in the accompanying condensed consolidated financial
          statements.
 
 On
          or
          about August 3, 2007, Portside Growth and Opportunity Fund filed a complaint
          for
          the issuance of 222,057 shares of common stock in lieu of 56,066
          shares of common stock, due to a triggering event claimed by Portside Growth
          and
          Opportunity Fund in the agreements between the Company and Portside
          Growth and Opportunity Fund. The Company is disputing with Portside
          Growth and Opportunity Fund on the existence of the triggering event and
          the fact that no harm was caused. The Company plans to vigorously defend
          itself
and
          believes it will be successful in such defense. No accrual has been
          recorded in the accompanying condensed consolidated financial
          statements.
  **8.
        Subsequent Events**
  In
        July
        2007, the Company requested an additional waiver from the Series B and Series
        C
        shareholders to receive their quarterly dividend for the quarter ended June
        30,
        2007 in shares of the Company’s common stock in lieu of a quarterly cash
        dividend. Additionally, in consideration for agreeing to the waiver, the
        Company
        offered to the holders of the Series B and Series C stock a number of common
        stock purchase warrants equal to 50% of the number of shares of common stock
        that would be issued for the July 2, 2007 dividend
        due. Should all of the Series B and Series C shareholders accept the offered
        stock, the Company would issue, based upon a formula contained in the preferred
        stock documents, 198,474 shares of its common stock and common stock purchase
        warrants equal to 50% of this amount.
 
 On
        July
        27, 2007, the Company accepted the resignation of Leighton J. Stephenson,
        its
        Chief Financial Officer since June 2005. He resigned his position effective
        July
        31, 2007 in order to return to his residence in Denver, Colorado to pursue
        other
        interests in lieu of relocating to the Company’s newly relocated corporate
        offices in North Carolina.
 
 On
        July
        25, 2007, the Company entered into an employment agreement with Mark Hahn
        to serve as its Chief Financial Officer and Vice President of Administration
        effective August 14, 2007.
 
 On
        August
        10, 2007, the Company announced that it has entered into an Agreement with
        Midsummer under which the Company would issue Midsummer 1,500 shares of Series
        D
        Convertible Preferred Stock and 375,000 common stock purchase warrants; in
        return, Midsummer would pay the Company $500,000 in cash, less outstanding
        interest to date on a 14% Secured Debenture of $1 million issued by the Company
        on May 22, 2007. Additionally, Midsummer would agree, as part of the
        transaction, to cancel the outstanding $1 million debenture from the Company.
 
 Additionally,
        under the Agreement, common stock warrants would be issued to
        Midsummer with an exercise price of $6.40 per share, subject to certain
        adjustments, and expire three years from the date of issuance. The Series
        D
        Convertible Preferred Stock will have a stated value of $1,000 per share,
        and
        pay dividends at a rate of 8% per year. The Series D stock will be non-voting
        and must be redeemed by the Company 18 months from the date of issuance.
 
 23
  **9.
        Related Party Transactions**
 
 On
        March
        27, 2007, Louis Slaughter, the Company’s Chairman and Chief Executive Officer,
        loaned $65,000 to the Company through an interest-bearing note. The note
        bears
        interest at 7% per annum. The maturity date is March 26, 2008, with interest
        accruing to and payable on the maturity date. Interest expense on the loan
        through June 30, 2007 was $1,140.
  **ITEM
        2. MANAGEMENT’S DISCUSSION OR PLAN OF OPERATION**
 
 You
          should read this section together with our Condensed Consolidated Financial
          Statements and related notes thereto included elsewhere in this
          report.
 
 **CAUTIONARY
          STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS**
 
 This
          report contains forward-looking statements that involve risks and uncertainties.
          We generally use words such as “believe,” “may,” “could,” “will,” “intend,”
“expect,” “anticipate,” “plan,” and similar expressions to identify
          forward-looking statements, including statements regarding our expansion
          plans.
          You should not place undue reliance on these forward-looking statements.
          Our
          actual results could differ materially from those anticipated in the
          forward-looking statements for many reasons, including the risks described
          in
          this report, our annual report on Form 10-KSB and other filings we made
          from
          time to time filed with the Securities and Exchange Commission. Although
          we
          believe the expectations reflected in the forward-looking statements are
          reasonable, they relate only to events as of the date on which the statements
          are made, and our future results, levels of activity, performance or
          achievements may not meet these expectations. We do not intend to update
          any of
          the forward-looking statements after the date of this document to conform
          these
          statements to actual results or to changes in our expectations, except
          as
          required by law.
  **OPERATIONS
        REVIEW**
  Our
        primary business is to design, develop, market, sell, lease, install and
        service
        advanced point-to-point wireless communications links capable of transmission
        speeds at or in excess of one gigabit-per-second. Our products operate in
        the
        71-76 GHz and 81-86 GHz spectrum bands. We believe that the unprecedented
        amounts of bandwidth provided by these spectrum blocks and the quality of
        our
        proprietary product designs allows for wireless communications at previously
        unattainable fiber-equivalent speed and reliability. Our target customers
        are
        telecom operators, carriers and network operators, communications and IT
        service
        providers, including WiLECs, system integrators and value added resellers,
        government agencies and other enterprises including financial services
        organizations seeking cost-effective millimeter wave wireless
        solutions.
 
 Our
        focus
        has been primarily on the design, continuing development, production, sale
        and
        installation of our Series Gig *E* and
        WiFiber G Series Gig *E* marketing product lines, developed internally and through our strategic
        partnering activities, as well as obtaining debt and equity financings and
        conversions of our IPO common stock warrants to fund such efforts. Our financing
        activities have totaled, net to us, approximately $49.3 million since January
        2004.
 
 We
        have
        not yet generated significant sales or achieved a cash flow breakeven level
        from operations. Consequently, we continue to depend on debt and equity
        financings to fund our cash requirements.
 At
          June
          30, 2007, we had cash and cash equivalents of $53,084. Our net working
          capital (current assets less current liabilities) as of June 30, 2007 was
          $604,313. Our accounts payable liabilities were $2,856,150 at June 30,
          2007. Management believes we will continue to incur net losses from
          operating activities through at least December 31, 2007.
 
 To
          date, we have supported our operations by: 1) selling our
          products and related services, 2) raising additional operating cash through
          the
          private sale of our redeemable preferred and convertible preferred stock,
          3) selling convertible debt in a private sale, 4) issuing common stock
          shares
          upon conversion of common stock warrants issued at the time of our IPO and
          5) issuing notes to existing investors.
 
 These
          steps have provided us with the cash flows to continue our business
          through the date of this report, but have not resulted in significant
          improvement in our current financial position. The following efforts have
          been undertaken or are in process as part of our efforts to secure suitable
          financings, improve working capital and increase cash flows with the objective
          to improve its long-term financial viability:
 
 -
                On
                    January 5, 2007, we reduced our total work force levels from 53 to 26
                    persons.
 
 -
                With
                    the agreement of our landlord, and with no further lease payment
                    obligations, we closed our Lewisville, Texas location in early
                    January, 2007 and combined these operations into our Durham, NC
                    facility. In July 2007, we relocated our corporate offices,
                    including our administrative, finance and accounting functions
                    to the
                    Durham facility.
 
 -
                Vigorous
                    collection of accounts receivable balances, and in certain cases, we
                    require substantial money in advance of shipment of
                    links.
 
 -
                In
                    January 2007, to conserve cash, we requested a waiver from the Series
                    B and Series C shareholders to receive their quarterly dividend
                    in shares
                    of our common stock in lieu of a cash dividend. All of the Series
                    B
                    preferred stockholders agreed to the waiver. We issued 71,144 shares
                    of our common stock. The shares of common stock were valued at
                    $4.2449 (90% of the average of the Volume Weighted Average Price
                    (“VWAP”)
                    for the 20 consecutive trading days ending December 29,
                    2006.)
 -
                  In
                      January 2007, in order to conserve cash, we requested a waiver from
                      the Series C preferred stockholders in order to pay their quarterly
                      dividend in shares of our common stock in lieu of a cash dividend.
                      All of
                      the Series C preferred stockholders agreed to the waiver and we
                      issued 47,115 shares of our common stock. The shares of common stock
                      were valued at $4.2449 (90% of the average of the VWAP for
                      the 20
                      consecutive trading days ending December 29, 2006). In addition,
                      in
                      consideration for agreeing to the waiver, we agreed to issue a number
                      of common stock purchase warrants equal to 50% of the number
                      of shares of
                      common stock issued as payment for the January 2007
                      dividend.
  -
                In
                    April 2007, again to conserve cash, we requested a waiver from the
                    Series B and Series C shareholders to receive their quarterly
                    dividend in
                    shares of our common stock in lieu of a quarterly cash dividend.
                    Additionally, in consideration for agreeing to the waiver, we offered
                    to the holders of the Series B and Series C stock a number of
                    common stock
                    purchase warrants equal to 50% of the number of shares of common
                    stock
                    issued as payment for the April 2007 dividends. All of the Series
                    B and
                    Series C shareholders agreed to the waiver and we issued 173,660
                    shares of our common stock and 86,829 common stock purchase warrants.
                    The common stock shares were valued at $2.8907 (90% of the VWAP
                    for the 20
                    consecutive trading days ending March 30, 2007).
 -
                  In
                      July 2007, we again requested a waiver from the Series B and Series C
                      shareholders to pay their quarterly dividend in shares of our common
                      stock in lieu of a cash payment. Additionally, in consideration
                      for
                      agreeing to the waiver, we offered to the holders of the Series B and
                      Series C stock a number of common stock purchase warrants equal
                      to 50% of
                      the number of shares of common stock as payment for the July
                      2007
                      dividends. Should all of the Series B and Series C shareholders
                      accept the
                      offered stock for the July dividend, we would issue 198,474 shares
                      of our common stock and 99,237 common stock purchase warrants
                      equal
                      to 50% of this amount.
  -
                On
                    April 17, 2007, we received proceeds of $500,000 under a note
                    payable from
                    an existing investor. On May 22, 2007, we received $493,210
                    additional proceeds from the same investor. These two loans were
                    rolled
                    into a $1 million short-term financing, due in May 23, 2008.
                    In August
                    2007, we announced a financing agreement with the same investor under
                    which the investor would invest an additional $500,000 and the
                    $1 million
                    short-term facility will be converted into a new class of convertible
                    preferred stock. Additionally, we will issue common stock purchase
                    warrants to the investor.
 
 -
                Reducing
                    cash operating expenses to levels that are in line with current
                    revenues.
                    We may seek reductions in certain operations expenses through
                    the issuance
                    of additional common shares of our stock in lieu of cash payments
                    to key
                    vendors. We have no assurance that we will enter into any such
                    arrangements with any of our
                    vendors.
 -
                Offering
                    discounts on the exercise of certain
                    warrants.
  Our
        ability to obtain additional working capital required for funding our operations
        over the next 12 month period is dependent on our ability to increase
        significantly our product sales volume and commence accounts receivable
        financings, generate cash through the exercise of our outstanding stock
        warrants, as well as obtain future financing from public and/or private debt
        and/or equity markets including current investors or shareholders. Any
        assumption as to obtaining cash through the exercise of our outstanding stock
        warrants is dependent upon the price of our common shares exceeding the exercise
        price of any of the outstanding warrants. Our inability to obtain additional
        capital could require us to change our business strategy, which could include
        a
        further reduction, curtailment or cessation of our operations to conserve
        cash
        and maintain liquidity until such time, if ever, that sufficient cash proceeds
        from operations are realized. Any future sale of our equity securities would
        dilute the ownership and control of our existing shareholders.
 
 24
  For
        the
        six months ended June 30, 2007, our net sales totaled $2,352,705 primarily
        from
        the sale of our WiFiber G Series Gig *E* products. Sales for the six months ended June 30, 2006 totaled $2,355,198.
        Subsequent to the June 30, 2007 balance sheet date, we have announced several
        orders for our WiFberTM product, including orders from customers in the U.S.,
        Africa and the Middle East.
 
 **Trends
        and uncertainties affecting our revenue**
 
 The
        following are key factors currently and potentially affecting our
        revenue:
 ·
                Economic
                    conditions - An important factor affecting our ability to generate
                    revenue
                    is the effect of general economic conditions on our customers’ willingness
                    to spend on wireless technology, and particularly, last mile
                    implementation and enterprise communication technology. As economic
                    conditions have globally improved since our inception, we have
                    seen
                    indications that enterprises may be more willing to spend capital
                    on
                    communication technology. While the world economy is expected
                    to grow,
                    variability in corporate profit growth, interest rates, energy
                    prices and
                    other factors in specific markets could impact the willingness
                    of
                    corporate, governmental and enterprise target markets to spend
                    capital on
                    communication technology in the near term. Additionally, the
                    by-country
                    variability in worldwide economic growth could also impact our
                    business as
                    growth rates of developed and more stable economies tend to be
                    lower than
                    that of emerging economies, where there could be more variables
                    affecting
                    the economic growth.
 
 ·
                Competitive
                    environment - Although we believe that we are one of the first
                    entrants
                    into the higher spectrum bands and at the speeds of our current
                    millimeter
                    wave product, other companies are marketing products using the
                    same
                    spectrum bands as of June 30, 2007. As the carrier, reseller
                    and
                    enterprise communication markets evolve, we expect more companies,
                    who may
                    not currently compete with us, to enter the high speed bandwidth
                    wireless
                    communication sector in the future.
 
 ·
                The
                    period from initial customer trials of our links to date of purchase
                    commitment and sale is unpredictable and can often cover several
                    months.
 
 **Research
        and development**
 
 Research
        and development expenditures include payrolls and benefits, engineering and
        product design fees paid to contractors and for software and material costs
        used
        by employees and contractors in the development of new or enhanced product
        offerings. Research and development expenses also include depreciation of
        capitalized testing and production equipment purchased.
 
 Depending
        on our overall liquidity position, we expect to continue investing resources
        to
        introduce and commercially deploy our products, develop subsequent generations
        of these products and identify and address demand for new solutions with
        additional products. We are currently devoting resources to completing the
        development of our WiFiber G series *OC-48* ,
        which
        we expect to introduce in mid-2008 and to initiatives related to product
        unit
        cost reduction.
 
 **Manufacturing
        plan**
 
 Our
        products have a modular design. The detailed designs of our initial products
        have been completed and the necessary components and modules (subassemblies)
        to
        produce these products have been developed for commercial production. We
        outsource the manufacture of key components and modules to leading companies
        in
        their respective fields, including some of our strategic partners, who are
        currently adapting their particular components and/or modules to fit within
        our
        product designs. The final assembly of our products’ modules and final quality
        control testing of the finished products, however, will occur at our facilities.
        Currently, our final assembly is handled at our Sunnyvale, CA facility.
        Depending on the ultimate scale of our operation, we may contract out
        significant aspects of assembly and testing of our products.
 
 25
  We
        slowed
        our inventory acquisition program in mid-2006 due to uncertainties in our
        sales
        forecasts in the second half of the year and through the quarter ended June
        30,
        2007. All of the WiFiber G Series Gig *E* finished
        goods and parts are in good condition and we expect to use substantially
        the
        entire inventory in our operations. We expect to continue our on premises
        manufacturing activities during the next twelve months as we consider
        outsourcing substantial parts of our manufacturing assembly and test activities
        for commercial production.
 
 **General
        and administrative**
 
 General
        and administrative expenses consists primarily of salaries and related costs
        for
        legal, accounting, auditing, administration, human resources, information
        systems, travel and the costs of operating as a publicly traded
        company.
 
 **Selling
        and marketing**
 
 Selling
        and marketing expenses consists primarily of travel, trade shows, salaries
        and related costs and expenses to pursue new market opportunities domestically
        and abroad.
 
 **Service,
        install and link operations**
 
 Expenses
        are primarily related to site analysis, installation and after sales maintenance
        for our products. The link operations group supports our global sales
        activities; expenses consist primarily of salaries and related benefits,
        contract worker expenses, travel costs and supplies for daily
        operations.
  **CRITICAL
        ACCOUNTING POLICIES**
 
 We
        have
        identified the policies below as critical to our business operations and
        the
        understanding of our results of operations. The impact and any associated
        risks
        related to these policies on our business operations are discussed throughout
        this section where such policies affect our reported and expected financial
        results. Our preparation of our Condensed Consolidated Financial Statements
        requires us to make estimates and assumptions that affect the reported amounts
        of assets and liabilities, disclosure of contingent assets and liabilities
        at
        the date of our financial statements, and the reported amounts of revenue
        and
        expenses during the reporting period. There can be no assurance that actual
        results will not differ from those estimates.
 
 Our
        accounting policies that are the most important to the portrayal of our
        financial condition and results, and which require the highest degree of
        management judgment are included below.
 
 ***Inventories***
  Inventories
        are valued at lower of cost (first-in, first-out method) or market. We regularly
        review parts and finished goods inventories on hand and, when necessary,
        record
        a provision for excess or obsolete inventories based on primarily on current
        selling prices and sales prices in confirmed backlog orders.
 
 ***Property
        and Equipment***
 
 Property
        and equipment and web-site development are recorded at cost less accumulated
        depreciation and amortization. Depreciation and amortization are computed
        using
        the straight-line method over the estimated useful lives, ranging from three
        to
        seven years. Maintenance and repairs are expensed as incurred.
 
 ***Intangibles
        and Long-Lived Assets***
 
 Intangible
        assets consist primarily of patents and trademarks. We have adopted the
        guidelines for accounting for these assets as set out in Statement of Financial
        Accounting Standards (“SFAS”) No. 142, “Goodwill and Other intangible Assets”
(“SFAS 142”). Under the requirements as set out in SFAS 142, we amortize the
        costs of acquired patents purchased over their remaining legal lives. Costs
        for
        current patent applications based on internally developed processes, primarily
        legal costs, are capitalized pending disposition of the individual patent
        application, and are subsequently either amortized based on initial patent
        life
        granted or evaluated for impairment periodically by our management.
 
 26
  SFAS
        No.
        144 “Accounting for Impairment or Disposal of Long-Lived Assets,” requires that
        long-lived assets be considered impaired if the sum of the expected future
        cash
        flows, undiscounted and without interest charges, is less than the carrying
        value of such assets. If impairment exists, an impairment loss is recognized,
        by
        a charge against earnings, equal to the amount by which the carrying value
        of
        the assets exceeds the fair value of the property. Long-lived assets to be
        disposed of are reported at the lower of carrying amount or fair value less
        cost
        to sell.
  ***Revenue
        Recognition***
 
 We
        commenced revenue recognition in the quarter ended June 30, 2005. Revenue
        is
        recognized pursuant to SEC Staff Accounting Bulletin No. 104 “Revenue
        Recognition in Financial Statements” (“SAB 104”). Accordingly, revenue is
        recognized when all four of the following criteria are met: (i) persuasive
        evidence that an arrangement exists, (ii) delivery of the product and/or
        services has occurred, (iii) the selling process is fixed or determinable,
        and
        (iv) collectibility is reasonably assured. Further, if an arrangement other
        than
        a long-term contract requires the delivery or performance of multiple deliveries
        or elements under a bundled sale, we determine whether the individual elements
        represent “separate units of accounting” under the requirements of Emerging
        Issues Task Force Issue 00-21, (“EIFT 00-21”) “Multiple Delivery Revenue
        Arrangements.” Shipping and handling fees billed to customers are classified on
        the Consolidated Statement of Operations as “Net sales” and the associated costs
        are classified in “Cost of sales.”
 
 If
        the
        separate elements within a bundled sale are not considered separate units
        of
        accounting, the delivery of individual elements is considered not to have
        occurred if there are undelivered elements that are essential to the over
        functionality of the bundled sale transaction.
 
 In
        accordance with SAB 104, revenues from product sales are generally recognized
        when title and risk of loss pass to the customer, except when product sales
        are
        combined with significant post-shipment installation services or unless the
        terms of the sale specifically call for formal acceptance by the customer.
        Under
        this exception, revenues will be deferred until such services have been
        performed and/or acceptance is acknowledged. Unearned income on service
        contracts is amortized by the straight-line method over the term of the
        individual contract. Installation revenue is recognized when the related
        services are performed.
 
 ***Warranty
        Reserves***
 
 As
        revenues have occurred beginning in 2005, we have established an accrual
        for
        warranty work associated with link sales, recognized as a component of cost
        of
        sales. Our standard warranty has been established generally for a period
        of twelve months from the date of installation if the customer utilizes our
        personnel or any of our approved installer group to install the product;
        otherwise it is twelve months from the date of shipment. The warranty
        accrual at present represents our best estimate of the cost to settle existing
        and future claims on products sold and currently in warranty as of the periodic
        balance sheet date. The year ended December 31, 2006 was the first fiscal
        year
        for sales of our WiFiber G Series Gig *E* products. As of yet, we are evaluating the potential for warranty returns
        and
        our location repair work, which is likely to change over time as we improve
        our
        product reliability. As the number of product sales increase, we will accumulate
        more correlative information on current and forecast return incidences and
        average costs to repair. As with any estimate that requires application of
        judgment, amounts estimated in the warranty accrued to be payable could differ
        materially from what will actually transpire in the future.
 
 ***Accounting
        for Share-Based Compensation***
 
 During
        fiscal 2005 and prior years, we accounted for stock options in accordance
        with
        Accounting Principles Board Opinion No. 25 and disclosed the pro forma effect
        of
        expensing stock options in accordance with SFAS 123. Effective January 1,
        2006,
        we adopted SFAS 123(R), “Share-Based Payments” (“SFAS 123(R)”) which requires us
        to recognize compensation expense in our financial statements for the fair
        value
        of stock options we issue. Both SFAS 123 and SFAS 123(R) require management
        to
        make assumptions regarding the expected life of the options, the expected
        volatility of the options and other items in determining estimated fair value.
        Changes to the underlying assumptions may have significant impact on the
        underlying value of the stock options, which could have a material impact
        on our
        consolidated financial statements.
 
 27
 
 **RESULTS
        OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THE THREE
        MONTHS ENDED JUNE 30, 2006**
 
 ***Net
        sales, gross margin and net loss***
 
 Three
                  Months
              
              Three
                  MonthsEnded
              
              EndedJune
                  30, 2007
              
              June
                  30, 2006Net
                  sales
              
              $
              2,068,563
              
              $
              696,657Gross
                  margin
              
              $
              358,866
              
              $
              429,101Net
                  loss
              
              $
              (2,314,787
              )
              $
              (5,342,938
              )
  For
        the
        three months ended June 30, 2007, our sales totaled $2,068,563, primarily
        from
        the sale of our WiFiber G series Gig *E* links.
        Sales for the three months ended June 30, 2006 totaled $696,657, primarily
        from
        the sale of WiFiber G links and installation contracts. Sales for the three
        months ended June 30, 2007 were 196.9% greater as compared to the same period
        in
        2006. Unit
        sales of WiFiber G links were 221.7% higher for the three months ended June
        30,
        2007, compared to June 30, 2006, and the average selling price increased
        36.4%
        in the same period. Also, we sold $32,663 of parts, components and
        installation to certain customers.
 
 Gross
        margin as a percentage of net sales for the three months ended June 30, 2007
        was
        17.3%, compared to 61.6 % for the three month period ended June 30, 2006.
        The
        change in gross margin in the quarter ended June 30, 2007, was due to an
        additional $150,000 to the reserve for inventory obsolescence related to
        our
        WiFiber II carrying value, and established an
        additional reserve of $612,524 as a result of a review of our entire
        inventory stock for possible obsolescence. We also recorded a commission
        related
        to the Ministry
        of the Interior ofBahrain sale of $211,146 in the 2007 quarter. These
        charges to cost of goods sold impacted our gross margin for the quarter by
        a
        total of $974,670, or a total of 47.1 %, compared to the gross margin realized
        in the 2006 quarter. For the three months ended June 30, 2006, we accrued
        $146,000 for potential warranty expenses based on links shipped in the period.
        For the three months ended June 30, 2007, our warranty expense net addition
        was
        minimal due to the significant number of links whose warranty period had
        expired
        during the quarter.
 
 Net
        loss
        for the three months ended June 30, 2007, was $2,314,787 compared to $5,342,938
        for the three months ended June 30, 2006. We reduced our operating expenses
        significantly beginning in the first quarter of 2007 including:
 -
                On
                    January 5, 2007, we reduced our total work force levels from 53 to 26
                    persons.
 
 -
                With
                    the agreement of our landlord, and with no further lease payment
                    obligations, we closed our Lewisville, Texas location in early
                    January 2007 and combined these operations into our Durham, NC
                    facility. In July 2007, we relocated our corporate offices,
                    including our administrative, finance and accounting functions
                    to the
                    Durham facility.
  ***Research
          and development.*** Research
          and development expenses decreased from $1,290,675 for the three months
          ended
          June 30, 2006 to $850,557 for the three months ended June 30, 2007, a decrease
          of $440,118, or 34.1%. The decrease is attributable primarily to lower
          development costs paid to third party software development and design parties
          by
          $456,000 as we have decreased development activities as part of our cost
          reduction activities. These decreased expenses were partially offset by
          rent for
          the Durham research and development facility of $40,449.
 
 28
  ***General
        and administrative.*** **** For
        the
        quarter ended June 30, 2007, general and administrative expenses were $894,338,
        compared to $2,009,840 for the quarter ended June 30, 2006, a decrease of
        $1,115,502, or 55.5%. The reduction of expenses was due to a reduction in
        consultant and professional fee expenses of $306,708 in 2007 compared to
        2006,
        lower insurance premium expenses by $47,000, reduced
        travel expenses by $81,550,reduced salaries for all management personnel
        by $75,702 effective with fourth quarter of 2006, which levels have not
        been restored to date. The reduction amounted to a change of $111,000 over
        the
        comparable 2006 quarter. Stock-based compensation expense as required by SFAS
        123R was $175,000 lower in the three months ended June 30, 2007, compared
        to the
        same quarter in 2006.
 
 ***Selling
        and marketing.*** **** For
        the
        quarter ended June 30, 2007, selling and marketing expenses totaled $395,625,
        compared to $1,361,636 for the quarter ended June 30, 2006, a decrease of
        $966,011, or 70.9%. The decrease is attributable primarily to a reduction
        in the
        comparable sales and marketing staff levels between the periods resulting
        from the reduction in force from the first quarter. The impact of this
        reduction decreased related expense levels by a cumulative $833,000 compared
        to
        the three months ended June 30, 2006.
 
 ***Service,
        install and link operations.*** **** Expenses
        related to service operations, net of expenses charged to cost of sales,
        were
        $308,679 for the second quarter of 2007, compared to $877,202 for the second
        quarter of 2006, a decrease of $568,523, or 64.8%. The reduction is primarily
        related to a significant reduction in the number of employees in this area
        effective the beginning of the first quarter of 2007, commensurate with our
        previously announced relocation and re-organization of this group from the
        closed Lewisville, Texas facility to our engineering and operations center
        in
        Research Triangle Park in North Carolina. Due to these changes in the
        organization, expenses related to salaries and recruiting were reduced by
        $363,000. Travel-related expenses were reduced by $110,000 in the three months
        ended June 30, 2007 compared to the three months ended June 30,
        2006.
 
 ***Interest
        expense.*** Interest
        expense for the three months ended June 30, 2007 was $225,966, a decrease
        of
        $62,670 from the comparative quarter in 2006. The net decrease was due to
        the
        conversion of $1,262,800 in principal of the outstanding 8% convertible notes
        due January 2008 in the first quarter of 2007, offset by an increase due
        to the
        issuance of a new 14% debenture payable as of May 22, 2007.
  **RESULTS
        OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO THE SIX
        MONTHS
        ENDED JUNE 30, 2006**
 
 Six
                  Months
              
              
              Six
                  MonthsEnded
              
              
              EndedJune
                  30, 2007
              
              
              June
                  30, 2006Net
                  sales
              
              $
              2,352,705
              
              $
              2,355,198Gross
                  margin
              
              $
              480,916
              
              $
              602,008Net
                  loss
              
              $
              (5,425,842
              )
              $
              (10,123,802
              )
  ***Net
        sales, gross margin and net loss.*** For
        the
        six months ended June 30, 2007, our sales totaled $2,352,705, compared to
        $2,355,198 for the six months ended June 30, 2006, a decrease of $2,493,
        or
        0.1%. Sales in both years were comprised primarily from the sale of WiFiber
        G
        links and installation contracts. Unit
        sales of WiFiber G links were 30.3% lower for the six months ended June 30,
        2007, compared to June 30, 2006, and the average selling price increased
        33.7%
        in the same period. Also, we sold $194,800 of parts, components and installation
        to certain customers.
 
 Gross
        margin as a percentage of net sales for the six months ended June 30, 2007
        was
        20.4%, compared to 25.6% for the six month period ended June 30, 2006. In
        the
        six months ended June 30, 2007, we charged cost of sales with an additional
        $200,000 for reserve for inventory obsolescence related to our WiFiber II
        carrying value, and established a reserve of $612,524 as a result of
        review of our entire inventory stock for possible obsolescence. We also recorded
        a commission related to the Ministry of the Interior of Bahrain sale of
        $211,146 in the 2007 period. During the six months ended June 30, 2006, we
        charged cost of sales $492,054 for reserve for inventory obsolescence related
        to
        the WiFiber II inventory carrying value. The gross margin for the 2006 period
        reflects this charge.
  Net
        loss for the six months ended June 30, 2007 was
        $5,425,842, compared to $10,123,802 for the six months ended June 30, 2006.
        We
        reduced our operating expenses significantly beginning in the first quarter
        of
        2007 including a 50% reduction in workforce and consolidating certain operating
        facilities.
 
 29






***Research
      and development.*** Research
      and development expenses decreased from $2,632,357 for the six months ended
      June
      30, 2006 to $1,506,438 for the six months ended June 30, 2007, a decrease of
      $1,125,919, or 42.8%. The decrease is attributable primarily to lower
      development costs paid to third party software development and design parties
      by
      $848,777, reduced contract consultant payments by $252,476, and other
      reductions compared to the 2006 period as we have decreased development
      activities as part of our cost reduction activities. These decreased expenses
      were partially offset by rent for the Durham research and development facility
      of $79,830 during the 2007 period. This facility was not leased until November
      2006.





***General
      and administrative.*** **** For
      the
      six months ended June 30, 2007, general and administrative expenses were
      $2,109,671, compared to $3,543,383 for the six months ended June 30, 2006,
      a
      decrease of $1,433,712, or 40.5%. The reduction of expenses was due to a
      reduction in consultant and professional fee expenses of $401,030 in 2007
      compared to 2006, primarily related to the installation of our new Enterprise
      Resource Planning, or ERP, system through the 2006 year, lower insurance
      premium expenses by $47,000, reduced travel expenses by $109,405, reduced
      salaries for all management personnel by $164,021 effective with fourth quarter
      of 2006, which levels have not been restored to date. This reduction amounted
      to
      a change of $265,682 compared to the six months ended June 30, 2006. Stock-based
      compensation expense as required to be recorded under SFAS 123R was lower by
      $89,689 compared to the comparable period in 2006.





***Selling
      and marketing.*** **** For
      the
      six months ended June 30, 2007, selling and marketing expenses totaled
      $918,365 compared to $2,536,456 for the six months ended June 30, 2006, a
      decrease of $1,618,091, or 63.8%. The decrease is attributable primarily to
      a
      reduction in the overall sales and marketing staff levels between the periods
      as
      our marketing efforts were enhanced by the use of resellers. The impact of
      this
      reduction decreased salary and payroll taxes, travel expenses and stock based
      compensation expense by a cumulative $1,314,082.





***Service,
      install and link operations.*** **** Expenses
      related to service operations, net of expenses charged to cost of sales, were
      $676,113 for the six months ended June 30, 2007, compared to $1,545,395 for
      the
      six months ended June 30, 2006, a decrease of $869,282 or 56.2%. The reduction
      is primarily related to a significant reduction in the number of employees
      in
      this area effective the beginning of January 2007, commensurate with our
      previously announced relocation and re-organization of this group from the
      closed Lewisville, Texas facility to our engineering and operations center
      in
      Research Triangle Park in North Carolina. Due to these changes in the
      organization, expenses related to salaries, recruiting and benefits were reduced
      by $615,662. Travel-related expenses were reduced by $152,399 in the six months
      ended June 30, 2007 compared to the six months ended June 30, 2006.





***Interest
      expense.*** Interest
      expense for the six months ended June 30, 2007 was $661,516 compared to $618,002
      for the six months ended June 30, 2006. The net increase of $43,514, or 7.0%,
      was due to an acceleration of the note discount and beneficial conversion
      factors accretion related to the 8% notes due February 2008. A significant
      amount of the remaining principal of the outstanding notes was converted to
      common shares in the first quarter, causing the accelerated accretion. This
      was
      offset in part by the reduction of stated interest rate expense on these notes
      beginning in the first quarter of 2007.





**LIQUIDITY
      AND CAPITAL RESOURCES**




**Cash
      Flows**


**Six
                Months**
              **Ended**
              **June
                30, 2007**
            
            
            **Six
                Months**
              **Ended**
              **June
                30, 2006**Net
                cash used in operating activities
            
            $
            (1,615,734
            )
            $
            (11,248,072
            )Net
                cash used in investing activities
            
            
            (21,929
            )
            
            (730,573
            )Net
                cash provided by financing activities
            
            
            1,037,013
            
            
            1,319,065Net
                decrease in cash and cash equivalents****
            
            $
            (600,650
            )
            $
            (10,659,580
            )





***Cash
      and equivalents*** **.** Our
      cash
      and cash equivalents balance was $53,084 at June 30, 2007, and $653,734 at
      December 31, 2006. The decrease of $600,650 for the six months ended June 30,
      2007 was related to operating expenses incurred for the first two quarters
      and
      the timing of second quarter sales late in the period. Our operating
      expenses for the quarter ended June 30, 2007 were $2,449,199, compared to
      $5,539,353 for the quarter ended June 30, 2006, resulting in a significantly
      reduced use of cash in operations in the second quarter of 2007.





30




As
      of
      June 30, 2007, we did not have sufficient working capital to fully satisfy
      our
      upcoming obligations for the next twelve months. We are seeking additional
      financing. Additionally, we previously announced a $1.37 million sale of our
      WiFiber links to the Kingdom of Bahrain. We received  payment of $612,500
      of the total sale price prior to August 1, 2007. Payments for the remainder
      of
      this sale have been delayed at the time of this filing, since on or about May
      7,
      2007, we were verbally notified by our customer, the Ministry of the
      Interior, that a Bahrani court had ordered it to cease further payments
      to us related to this sale pending resolution of a claim by our former
      reseller for the Company in the region. Management and legal counsel believe
      that we will ultimately be paid the remaining amounts.





Our
      liquidity is dependent upon our ability to continue to meet our obligations,
      to
      control ongoing operating expenses, to obtain additional financings as may
      be
      required, and to reach and maintain cash flow break even and eventually
      profitability. If we are unable to maintain adequate cash balances or generate
      sufficient internal cash flows from sales of products or raise funds through
      the
      sale of debt and/or equity securities, and further reduce operating and capital
      expenditures to bring in line with sales over the next twelve months, we may
      be
      required to further reduce overhead, curtail or cease some or all of our
      operations, or otherwise significantly change our business development plans.





Our
      management consistently looks for opportunities to reduce operating expenses
      to
      conserve our cash balances. In January 2007, based on changing U.S. market
      demands and a refocusing of our service operations, we reduced our employee
      level from 53 to 26, primarily by re-organizing our link operations sales
      support staff and changing our sales strategy for 2007 to more focused domestic
      markets, including WiLEC projects. We also announced the closing of an after
      sales support office in Lewisville, Texas. On July 12, 2007 our corporate
      offices in Herndon, Virginia were consolidated into our Durham, North
      Carolina location. We have reduced our travel expenses across the organization.
      We expect these actions and a continual assessment of necessary costs to
      significantly reduce our operating overhead expense in 2007 compared to
      2006. Additionally, as discussed below, we have
      requested and received waivers from our Series B and Series C Preferred
      shareholders to pay their January 1, 2007 and April 1, 2007 quarterly dividends
      in stock rather than in cash. We have requested a similar waiver for
      the dividends that were due July 1, 2007.




Additionally,
      we are seeking to raise additional capital
      through sales of our common or preferred stock or debt securities and through
      the exercise of warrants for the purchase of our common stock by existing
      investors.




***Net
      cash used in operating activities.*** Net
      cash
      used in operations for the six months ended June 30, 2007 was $1,615,734,
      compared to $11,248,072 for the six months ended June 30, 2006. We were able
      to
      achieve these significant reductions through a combination of employee
      reduction, combining facilities, reducing capital expenditure levels and
      expenditures for outside consultants, as well as reducing the purchase levels
      of
      inventory parts and components.





***Net
      cash used in investing activities.*** Net
      cash
      used in investing activities for the six months ended June 30, 2007 was $21,929,
      compared to net cash used of $730,573 for the six months ended June 30, 2006.
      The net cash used in the 2006 period was primarily for the purchase of testing
      and production equipment. In the 2007 period, we purchased only $3,279 of
      equipment, offset by a loss on asset disposition of $36,698.





***Net
      cash provided by financing activities.*** Net
      cash provided by financing activities for the six months ended June
      30, 2007 was $1,037,013, compared to $1,319,065 for the six months ended June
      30, 2006. The cash provided in the current period included proceeds from a
      note
      payable issued for $1,000,000. In the six months ended June 30, 2006, we
      received proceeds from the exercise of common stock purchase warrants of
      $2,011,036, offset by the payment of preferred stock dividends of $602,345.





***Future
      Cash Requirements.*** Our
      primary cash requirements over the next twelve months will be to fund working
      capital requirements including any past due trade accounts, capital expenditures
      as necessary, preferred stock dividend requirements, interest on outstanding
      debt, and future product development activities as allowed by our ongoing cash
      position.





In
      January 2007 and again in April 2007, in order to conserve cash, we requested
      a
      waiver from the cash dividend requirements due to our Series B and
      Series C convertible preferred shareholders, and instead issued shares of our
      common stock in lieu of the cash amounts due at those dates. We received such
      waivers from all of the Series B and Series C shareholders. The total dividends
      due at January 1, 2007 and April 1, 2007 were $502,000 at each date. We issued
      a
      total of 118,259 shares of our common stock in connection with the January
      1
      dividend due, and an additional 173,660 shares of our common stock for the
      April
      1 dividend requirement, based on a formula contained in the respective documents
      underlying the Series B and Series C convertible preferred stock transactions. We
      intend
      to request similar waivers from the Series B and Series C shareholders for
      future dividend payments. There can be no assurance that the Series B and Series
      C shareholders will provide such waivers. In July 2007,
      we again requested a waiver from the cash dividend requirements due to our
      Series B and Series C convertible preferred shareholders. If accepted,
      we intend to issue common shares and warrants in lieu of the cash
      dividend.




31




Our
      reduced operating expense plan for 2007 is predicated on effective cost-cutting
      and cost control measures, including our January reduction in the number of
      overall employees, a more cost effective approach to sales support and after
      sales support activities, and a reduction in overall travel related expenses.
      Our continuing research and development program level will be dependent in
      part
      on our ability to control our overall operating expenses, our ability to attract
      additional equity and debt capital, and our quarter to quarter collections
      of
      sales proceeds.





***Future
      Sources of Liquidity.*** We
      expect
      our primary sources of cash receipts during the next twelve months to be (1)
      accessing public and private capital markets for additional equity and/or debt
      financings, (2) collection of accounts receivable balances, (3) common stock
      warrant exercise, and (4) increased sales and related collections based on
      anticipated funding for domestic WiLEC entities. We received approximately
      $437,000 from an existing investor on August 20, 2007 pursuant to an
      agreement to issue additional convertible preferred stock. There are no
      assurances of further capital funding commitments at this time. Any expectations
      as to cash that would arise from the exercise of common stock warrants is
      dependent upon the inherent conversion price of said warrants relative to the
      price at which our common stock trades in the future. Our ability to maintain
      the required level of liquidity for continuing operations is also
      dependent upon economic, financial, competitive, legislative, regulatory
      and other factors that are in large part beyond our control.





***Uncertainties
      Regarding our Liquidity.*** We
      believe the following uncertainties exist regarding our ability to maintain
      sufficient cash and operating capital liquidity:


·  *Ability
        to increase and maintain revenue levels* - Our
        ability to generate net cash from future sales of equipment and services
        is
        critical to our maintaining adequate operating liquidity. If our revenues
        were
        not to increase substantially and/or continue to fluctuate, our ability to
        generate net cash from operating activities in a sufficient amount to meet
        our
        cash needs and obligations can and would be adversely affected.
 
 ·  *Ability
        to access capital markets and debt markets* -To
        date, we have depended largely on our ability to obtain funding from capital
        markets to fund ongoing operations. If we are unable to access these markets
        at
        reasonable rates, or at all, it could require us to curtail or significantly
        further reorganize our planned business operations in order to conserve cash
        until such time, if ever, that sufficient proceeds from operations are
        generated.
 
 ·  *Ability
        to manage working capital requirements efficiently -* Maintaining
        adequate liquidity for operations needs includes timely and satisfactorily
        collecting of our outstanding trade receivables, obtaining satisfactory purchase
        and payment terms from our significant inventory and service suppliers, and
        the
        ability to achieve acceptable inventory turnover rates.
 
 ·  *Ability
        to manage current trade payables levels -* Our
        trade
        payable as of August 10, 2007 amounted to approximately $2,800,000. Several
        vendors have turned our accounts over to collection agencies, and we are
        out of
        terms with numerous services and product suppliers. The landlord at our vacated
        Waltham, Massachusetts office has filed a judgment lien against us for
        approximately $180,000 in past due and future rents payable through the end
        of
        the current lease period of February 15, 2008, including attaching $50,000
        from
        our operating bank account. It is critical that we will be able to satisfy
        vendors on an ongoing basis to insure uninterrupted delivery of critical
        supplies or services for our operations.


32




**Contingency:**





We
      have shipped products with a cost basis of approximately $300,000 to one
      customer for evaluation purposes. These products are carried in inventory on
      the
      accompanying balance sheet. We believe these products will convert to sales
      and we will be fully paid prior to the end of 2007. However, because this
      is not heavily capitalized, the customer could experience financial difficulties
      precluding them from paying for our products. If the customer experiences
      such difficulties we may not be able to recover some or all of these
      products.




**OFF-BALANCE
      SHEET ARRANGEMENTS**





As
      of
      June 30, 2007, we did not have any material off-balance sheet arrangements
      (as
      defined in Item 303(c)(2) of Regulation S-B).




33




**ITEM
      3. CONTROLS AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**




Our
        management, with the participation of the Chief Executive Officer and Chief
        Financial Officer, has evaluated the effectiveness of our disclosure controls
        and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
        under
        the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the
        quarter ended June 30, 2007. Based on such evaluation, the Chief Executive
        Officer and Chief Financial Officer have concluded that, as of June 30, 2007,
        our disclosure controls and procedures were not effective in ensuring that
        information we are required to disclose in reports that we file or submit
        under
        the Exchange Act is recorded, processed, summarized and reported, within
        the
        time periods specified by the SEC’s rules and forms, and accumulated and
        communicated to our management, including our Chief Executive Officer and
        Chief
        Financial Officer, as appropriate to allow timely decisions regarding required
        disclosure.
 
 We
        concluded that our disclosure controls and procedures were not effective
        as a
        result of a material weakness in our control over financial reporting due
        to a
        misstatement in the current period financial statements that was not initially
        identified by our internal controls over financial reporting. This misstatement
        was identified by our independent auditors and adjusted prior to filing this
        quarterly report on Form 10-QSB with the Securities and Exchange Commission.
        The
        misstatement related to the Company not fully evaluating its inventory for
        obsolescence and resulted in the recording of a valuation reserve of $521,275
        for our inventory.
 
 Management
        is responsible for establishing and maintaining adequate internal control
        over
        our financial reporting. Internal control over financial reporting is a process
        designed to provide reasonable assurance regarding the reliability of financial
        reporting and the preparation of financial statements for external purposes
        in
        accordance with accounting principles generally accepted in the United States
        of
        America.
 
 As
        defined by the Public Company Accounting Oversight Board’s Auditing Standard No.
        2, a material weakness is defined as a significant deficiency or combination
        of
        significant deficiencies, that results in more than a remote likelihood that
        a
        material misstatement of the annual or interim financial statements will
        not be
        prevented or detected.
 
 Remediation
        Plan
 
 In
        addition to controls and procedures consistent with prior practices, we have
        developed and are implementing remediation plans. In order to remediate the
        aforementioned material weakness, we have:
 
 ·
              Evaluated
                  the misstatement and concluded that it is non-recurring. At the
                  time of
                  the misstatement, we were relocating our offices from Virginia
                  to North
                  Carolina. As a result of the relocation, our Chief Financial Officer
                  determined not to relocate and we hired Mark Hahn as our new Chief
                  Financial Officer. Mr. Hahn was responsible for reporting on the
                  quarter
                  ended June 30, 2007; however he didn’t commence employment until August
                  14, 2007. During the transition period between the former Chief
                  Financial
                  Officer leaving the Company and the beginning of Mr. Hahn’s employment, we
                  did not have adequate accounting staff during and subsequent  to our
                  second quarter closing and reporting period. Additionally, some
                  of our
                  records were temporarily unavailable during our relocation. We
                  believe
                  this weakness was temporary and will be remediated as Mr. Hahn
                  fully
                  assumes his role.
 
 ·
              Initiated
                  a search for a Corporate Controller with the requisite experience
                  to
                  provide additional assistance in adequately addressing future accounting
                  and disclosure issues.
 
 We
        believe that for the reasons described above, we will be able to improve
        our
        disclosure controls and procedures and remedy the identified material
        weakness.
 
 Our
        management will continue to evaluate the effectiveness of our disclosure
        controls and procedures. Because of the inherent limitations in all control
        systems, controls can provide only reasonable, not absolute, assurance that
        all
        control issues and instances of fraud, if any, will be or have been detected.
        These inherent limitations include the realities that judgments in
        decision-making can be faulty, and that breakdowns can occur because of simple
        error or mistake. Additionally, controls can be circumvented by the individual
        acts of some persons, by collusion of two or more people, or by management
        override of the control. The design of any system of controls also is based
        in
        part upon certain assumptions about the likelihood of future conditions;
        over
        time, control may become inadequate because of changes in conditions , or
        the
        degree of compliance with the policies or procedures may deteriorate. Because
        of
        the inherent limitation in a cost-effective control system, misstatements
        due to
        error or fraud may occur and not be detected.
 
 Changes
        in Internal Control over Financing Reporting
 
 In
        connection with the evaluation required by paragraph (d) of Rule 13a-15 under
        the Exchange Act, there was no change identified in our internal control
        over
        financial reporting that occurred during the three months ended June 30,
        2007
        that has materially affected, or is reasonably likely to materially affect,
        our
        control over financial reporting.




34




**Part
      II. Other Information**




**Item
      1. Legal Proceedings**





On
      or
      about April 24, 2007, the landlord of our Waltham, Massachusetts office filed
      a
      breach of lease claim for non-payment of rent in the State of Massachusetts,
      Superior Court of Suffolk County, seeking damages in the amount of approximately
      $174,637 and executed an attachment in the amount of $50,000. We
      have recorded an accrued liability for 100% of this claim in the
      accompanying condensed consolidated financial statements.





On
      or
      about May 7, 2007, we were verbally notified by our customer, the Ministry
      of
      Interior for the Kingdom of Bahrain that a Bahraini court had ordered the
      Ministry of the Interior to cease payments to us under certain sales orders
      pending resolution of a claim filed by a former reseller for our Company in
      the
      Middle East and African regions. We
      believe this case has no merit and we plan to vigoursly defend it. No accrual
      has been recorded in the accompanying condensed consolidated financial
      statements.


On
        or
        about August 3, 2007, Portside Growth and Opportunity Fund filed a complaint
        for
        the issuance of 222,057 shares of common stock in lieu of 56,066 shares of
        common stock due to a triggering event claimed by Portside Growth and
        Opportunity Fund in the agreements between us and Portside Growth and
        Opportunity Fund. We are disputing with Portside Growth and
        Opportunity Fund on the existence of the triggering event and the fact that
        no
        harm was caused. We
        believe this case has no merit and plan to vigorously defend this case.
        No accrual has been recorded in the accompanying condensed
        consolidated financial statements.
  **Item
        2. Issuance of Unregistered Securities**





In
      May
      2007, we issued 173,660 shares of common stock and 86,829 common stock
      warrants to all of the holders of our Series B and Series C convertible
      preferred stock for the April 2, 2007 regular quarterly dividend due to these
      shareholders. The shares and warrants were issued based upon waivers requested
      and received from all such stockholders in lieu of cash payment for the
      dividends. The warrants have an exercise price of $6.40 per share and expire
      on
      May 22, 2012.




On
        June
        29, 2007, we issued a total of 475,000 warrants with an exercise price of
        $2.69
        per share to Trilogy Capital Partners for consulting services.
 
 On
        June
        29, 2007, we issued a total of 100,000 warrants with an exercise price of
        $2.69
        per share to Sierra Equities for consulting services.
  With
          respect to the sales of our securities described above, we relied on the
          Section
          4(2) exemption from securities registration under the federal securities
          laws
          for transactions not involving any public offering. No advertising or general
          solicitation was employed in offering the securities. The securities were
          sold
          to accredited investors. The securities were offered for investment purposes
          only and not for the purpose of resale or distribution, and the transfer
          thereof
          was appropriately restricted by us.


**Item
      3. Defaults Upon Senior Securities**





None.





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





None.





**Item
      5. Other Information**





As
      of
      March 27, 2007, Louis Slaughter, our Chairman and Chief Executive Officer,
      loaned us $65,000 as required for short term working capital needs. The note
      bears interest at 7% per annum. The maturity date is March 26, 2008, with
      interest accruing to and payable on the maturity date.





**Item
      6. Exhibits**





**EXHIBIT
      INDEX**





**Exhibit**
              **Number**
            
            **Exhibit
                Title**


3.1
              
              Amended
                  and Restated Certificate of Incorporation (included as Exhibit
                  3.1 to the
                  Form S-1 filed May 28, 2004, and incorporated herein by
                  reference).3.2
              
              Amended
                  and Restated Bylaws (included as Exhibit 3.2 to the Form S-1 filed
                  May 28,
                  2004, and incorporated herein by reference).3.3
              
              Certificate
                  of Designation of the 10% Series A Redeemable Preferred Stock,
                  dated May
                  6, 2005 (included as Exhibit 3.1 to the Form 8-K filed May 12,
                  2005, and
                  incorporated herein by reference).3.4
              
              Certificate
                  of Designation of the Series B Convertible Preferred Stock, dated
                  November
                  4, 2005 (included as Exhibit 3.1 to the Form 8-K filed November
                  8, 2005,
                  and incorporated herein by reference).3.5
              
              Certificate
                  of Designation of the Series C Convertible Preferred Stock, dated
                  August
                  21, 2006 (included as Exhibit 3.1 to the Form 8-K filed August
                  22, 2006,
                  and incorporated herein by reference).4.1
              
              Purchase
                  Option between the Company and HCFP/Brenner Securities LLC, dated
                  October
                  13, 2004 (included as Exhibit 4.1 to the Form 10-KSB filed April
                  15, 2005,
                  and incorporated herein by reference).4.2
              
              Purchase
                  Option between the Company and HCFP/Brenner Securities LLC, dated
                  January
                  28, 2005 (included as Exhibit 4.8 to the Form SB-2/A filed July
                  14, 2005,
                  and incorporated herein by reference).4.3
              
              Form
                  of Common Stock Purchase Warrants (included as Exhibit 4.1 to the
                  Form 8-K
                  filed May 12, 2005, and incorporated herein by
                  reference).4.4
              
              Purchase
                  Option between the Company and HCFP/Brenner Securities LLC, dated
                  November
                  7, 2005 (included as Exhibit 4.7 to the Form SB-2 filed December
                  7, 2005,
                  and incorporated herein by reference).4.5
              
              Purchase
                  Option between the Company and HCFP/Brenner Securities LLC, dated
                  November
                  7, 2005 (included as Exhibit 4.8 to the Form SB-2 filed December
                  7, 2005,
                  and incorporated herein by reference).4.6
              
              Registration
                  Rights Agreement between the Company and the Purchasers signatory
                  thereto,
                  dated November 7, 2005 (included as Exhibit 4.1 to the Form 8-K
                  filed
                  November 8, 2005, and incorporated herein by
                  reference).4.7
              
              Registration
                  Rights Agreement between the Company and the Purchasers signatory
                  thereto,
                  dated August 21, 2006 (included as Exhibit 4.1 to the Form 8-K/A
                  filed
                  August 22, 2006, and incorporated herein by
                  reference).


31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.32.1
            
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2
            
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.







35




**Signatures**





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




GigaBeam
                CorporationDate: September
                10, 2007
            By:
            /s/ Louis
              S.
              SlaughterLouis
                S. SlaughterChief
                Executive Officer






36