UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

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

For the transition period from to .

Commission file number 0-50918

AIRBEE WIRELESS, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company þ

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

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

AIRBEE WIRELESS, INC.

FORM 10-Q

INDEX

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

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007

(UNAUDITED)

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)			(Audited)
	September 30,			December 31,
	2008			2007
ASSETS
Current Assets:
Cash and cash equivalents	$	7,805		$	1,925
Accounts receivable, net		40,000			89,960
Deferred financing costs - current		28,824			-
Prepaid expenses and other current assets		70,845			4,589

Total Current Assets		147,474			96,474

Fixed assets, net of depreciation		174,740			212,793

Intangible assets		12,598			268,913
Deferred financing costs		28,823			79,265
Other assets		49,679			68,656
		91,100			416,834

TOTAL ASSETS	$	413,314		$	726,101

LIABILITIES AND STOCKHOLDERS' DEFICIT

LIABILITIES
Current Liabilities:
Notes payable - related party	$	50,127		$	133,580
Notes payable - other		506,713			2,024,952
Litigation liability		-			718,411
Fair value of derivatives		444,942			458,167
Convertible debentures, net of discount		13,300			484,892
Warrants liability		897,328			62,229
Liability for stock to be issued		-			10,000
Accounts payable and accrued expenses		3,210,612			2,903,222

Total Current Liabilities		5,123,022			6,795,453

Long-term Liabilities:
Convertible debentures, net of discount		2,768,246			-

Total Liabilities		7,891,268			6,795,453

COMMITMENTS AND CONTINGENCIES		-			-

STOCKHOLDERS' DEFICIT
Common stock, $.00004 Par Value; 200,000,000 shares authorized; 154,660,701 and 121,091,538 shares issued; 14,142,511 and 14,142,511 shares held in escrow; and 138,858,154 and 105,288,991 shares outstanding		5,554			4,650
Additional paid-in capital		11,953,659			15,625,500
Unearned compensation		(5,000	)		(6,660	)
Prepaid consulting		-			(83,333	)
Other accumulated comprehensive income		(48,005	)		63,938
Shares issued for deferred financing, net of $3,450,069 discount		-			(4,216,751	)
Accumulated deficit		(19,086,623	)		(17,159,157	)
		(7,180,415	)		(5,771,813	)
Less: treasury stock, 1,660,036 and 1,660,036 shares at cost		(297,539	)		(297,539	)
Total Stockholders' Deficit		(7,477,954	)		(6,069,352	)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	413,314		$	726,101

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

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(UNAUDITED)

	NINE MONTHS ENDED						THREE MONTHS ENDED
	SEPTEMBER 30,						SEPTEMBER 30,
				Restated						Restated
	2008			2007			2008			2007

OPERATING REVENUES
Sales	$	80,000		$	29,163		$	40,000		$	5,925

COST OF SALES		-			-			-			-

GROSS PROFIT		80,000			29,163			40,000			5,925

OPERATING EXPENSES
Compensation and professional fees		2,000,031			2,711,749			333,786			925,068
Stock option compensation expense		16,274			27,965			14,753			-
Research and development		60,000			10,556			-			124
Selling, general and administrative expenses		531,084			1,136,354			86,581			451,587
Depreciation and amortization		500,259			146,955			95,837			47,966
Total Operating Expenses		3,107,648			4,033,579			530,957			1,424,745

LOSS BEFORE OTHER INCOME (EXPENSE)		(3,027,648	)		(4,004,416	)		(490,957	)		(1,418,820	)

OTHER INCOME (EXPENSE)
Fair value adjustments on derivatives and warrants		351,303			368,213			(10,760	)		306,205
Other income		1,420,361			19,682			-			723
Interest expense		(671,482	)		(755,522	)		(186,041	)		(289,233	)
Total Other Income (Expense)		1,100,182			(367,627	)		(196,801	)		17,695

LOSS BEFORE PROVISION FOR INCOME TAXES		(1,927,466	)		(4,372,043	)		(687,758	)		(1,401,125	)
Provision for Income Taxes		-			-			-			-

NET LOSS APPLICABLE TO COMMON SHARES	$	(1,927,466	)	$	(4,372,043	)	$	(687,758	)	$	(1,401,125	)

NET LOSS PER BASIC AND DILUTED SHARES	$	(0.02	)	$	(0.05	)	$	(0.01	)	$	(0.01	)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		115,070,420			93,081,086			128,661,796			101,686,807

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

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(UNAUDITED)

				Restated
	2008			2007

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,927,466	)	$	(4,372,043	)
Adjustments to reconcile net loss to net cash (used in) operating activities


Depreciation and amortization		320,557			146,955
Common stock and warrants issued for services		571,473			1,229,828
Common stock and warrants issued for interest payments		172,174			-
Liability for stock to be issued for services		(10,000	)		-
Common stock issued for penalty returned		(680,000	)		-
Forgiveness of debt		(740,264	)		-
Gain on valuation of derivatives		(351,303	)		(368,213	)
Amortization of derivative discounts		-			131,250
Stock & stock option compensation expense 123R		16,274			27,222
Exercised stock options returned by shareholders		-			(723	)
Amortization of financing costs		179,702			11,592
Gain (Loss) on foreign currency translations		(111,943	)		55,128
Amortization of unearned compensation		1,660			11,976
Extension and late payment fees on bridge loans		294,312			269,435
Litigation settlement		(253,411	)		337,839
Amortization of prepaid consulting		83,333			291,667
Excess tax benefits from share-based payment arrangement		(5,694	)		(9,788	)

Changes in assets and liabilities
Decrease in accounts receivable		49,960			-
Decrease (Increase) in prepaid expenses and other current assets		(66,256	)		19,312
(Increase) Decrease in other assets		18,977			(9,492	)
Increase in accounts payable and accrued expenses		421,474			1,119,692
Total adjustments		(88,975	)		3,263,680

Net cash (used in) operating activities		(2,016,441	)		(1,108,363	)

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of fixed assets		(14,057	)		-
Acquisitions of intangible assets		(12,132	)		(67,926	)

Net cash (used in) investing activities		(26,189	)		(67,926	)

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

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(UNAUDITED)

				Restated
	2008			2007

CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from common stock issuances	$	-		$	210,000
Proceeds from convertible debentures		2,051,169			-
Proceeds from notes payable - other		130,100			717,564
(Payments of) notes payable - other		(55,000	)		-
Proceeds from secured convertible debenture		-			150,000
Proceeds from (Payments of) notes payable - related party, net		(83,453	)		37,844
Excess tax benefits from share-based payment arrangement		5,694			9,788

Net cash provided by financing activities		2,048,510			1,125,196

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		5,880			(51,093	)

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		1,925			59,298

CASH AND CASH EQUIVALENTS - END OF PERIOD	$	7,805		$	8,205

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

CASH PAID DURING THE PERIOD FOR:
Interest expense	$	25,055		$	27,570
Income taxes	$	-		$	-

SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:

Common stock and warrants issued for services	$	571,473		$	1,229,828

Common stock inssued for deferred financing (Mercatus), net of discount	$	-		$	4,216,751

Stock grants and stock options vested during period	$	16,274		$	27,222

Reverse issuance of common stock; overruled by court order	$	-		$	131,268

Common stock returned upon cancellation of deferred financing, net of discount	$	4,216,751		$	-

Warrants converted to liability	$	1,047,405		$	-

Warrants removed from liability	$	-		$	59,621

Conversion of note payable - other and accrued interest to common stock	$	378,100		$	60,225

Use of pledged collateral for settlement of note payable and accrued interest	$	-		$	276,298

Conversion of related party notes payable, accrued salaries payable and accrued interest to common stock	$	-		$	46,968

Liability for stock to be issued for prepaid consulting fees	$	-		$	500,000

Liability for stock to be issued for services	$	(10,000	)	$	70,000

Conversion of accrued interest (included in accounts payable and accrued expenses) to common stock	$	38,284		$	-

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

AIRBEE WIRELESS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007

(UNAUDITED)

GENERAL

1. Basis of Presentation

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

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

2. Presentation of Financial Statements

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

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

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

3. Use of Estimates

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

4. Income Taxes

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

5. Fixed Assets

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

6. Earnings (Loss) Per Share of Common Stock

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

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

	September 30, 2008			September 30, 2007 Restated

Net Loss	$	(1,927,466	)	$	(4,372,043	)

Weighted-average common shares outstanding (Basic)		115,070,420			93,081,086

Weighted-average common stock Equivalents:
Stock options		-			-
Warrants		-			-

Weighted-average common shares outstanding (Diluted)		115,070,420			93,081,086

7. Stock-Based Compensation

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

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

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

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

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

	Shares		Weighted Average Exercise Price		Weighted Average Contractual Term (Years)
Outstanding, December 31, 2007		1,728,000		0.2995		4.69

Options granted		-		-		-

Options reinstated		-		-		-

Options exercised		-		-		-

Options cancelled		33,000		0.2995		3.70

Options forfeited or expired		-		-		-

Outstanding, September 30, 2008		1,695,000		0.3037		3.27

Options exercisable, September 30, 2008		1,465,125		0.3132		2.91

8. Goodwill and Other Intangible Assets

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

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

The main components of intangible assets are as follows:

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

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

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

9. Recent Accounting Pronouncements

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

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

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

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

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

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

10. Debt

Notes Payable - Other

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

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

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

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

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

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

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

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

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

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

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

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

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

Convertible Debentures

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

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

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

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

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

Bridge Loan Derivatives

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

Notes Payable - Related Parties

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

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

11. Stockholders’ Equity

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

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

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

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

On July 18, 2008, the Company issued 415,921 restricted shares of stock to Rudolph Cane, Jr., an accredited investor, to settle a note payable totaling $10,731 including accrued interest. The securities were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act and contain the appropriate legends restricting their transferability absent registration or applicable exemption. The accredited investor received information concerning the Company and had the ability to ask questions about the Company.

On July 31, 2008, the Company issued 481,781 restricted shares to Allen & Associates LLC for corporate finance and strategic counsel services worth $12,500 when incurred. The securities were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act and contain the appropriate legends restricting their transferability absent registration or applicable exemption. The organization received information concerning the Company and had the ability to ask questions about the Company.

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

On August 5, 2008, the Company issued 1,735,186 restricted shares to Golden Gate Investors, Inc. for the conversion of the balance of the $350,000 secured convertible debentures issued October 5, 2007 plus accrued interest. The total amount converted was $23,324. The securities were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act and contain the appropriate legends restricting their transferability absent registration or applicable exemption. The organization received information concerning the Company and had the ability to ask questions about the Company.

On August 14, 2008, the Company issued 2,791,000 restricted shares to 44 employees of the Company’s India subsidiary as a stock bonus fair valued as $14,748 when incurred. The securities were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act and contain the appropriate legends restricting their transferability absent registration or applicable exemption. The recipients received information concerning the Company and had the ability to ask questions about the Company.

On August 15, 2008, the Company issued 297,197 restricted shares to the Catherine Zimmer in payment of $4,953 in interest due pursuant to the Debenture and Warrant Purchase Agreements dated April 15, 2008, which included an adjustment of 33,730 restricted shares to correct the shares under-issued in May 2008. The securities were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act and contain the appropriate legends restricting their transferability absent registration or applicable exemption. The accredited investor received information concerning the Company and had the ability to ask questions about the Company.

On August 31, 2008, the Company issued 781,250 restricted shares to Allen & Associates LLC for corporate finance and strategic counsel services worth $12,500 when incurred. The securities were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act and contain the appropriate legends restricting their transferability absent registration or applicable exemption. The organization received information concerning the Company and had the ability to ask questions about the Company.

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

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

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

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

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

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

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

12. Commitments and Contingencies

Repayment Agreement

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

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

Litigation

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

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

13. Fair Value Measurements

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

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

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

Level 3 Inputs- Instruments with primarily unobservable value drivers.

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

Fair Value Measurements on a Recurring Basis as of September 30, 2008

	Level I		Level II		Level III		Total
Assets	$	-	$	-	$	-	$	-
Total Assets	$	-	$	-	$	-	$	-

Liabilities	$	-	$	4,630,529	$	-	$	4,630,529
Total Liabilities	$	-	$	4,630,529	$	-	$	4,630,529

14. Going Concern

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

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

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

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

15. Restatement

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

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

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

16. Subsequent Events

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

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

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

Forward Looking Statements

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

Executive Summary

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

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

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

Risk factors include -

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

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

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

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

Overview

Organizational History

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

Our Business

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

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

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

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

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

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

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

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

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

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

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

With regard to our current liabilities at September 30, 2008, $50,127 is payable to a related note holder who has deferred repayment. However, as he left the Company during the second quarter of 2008, this related party note payable will have to be repaid soon. Trade payables at September 30, 2008 of $1,183,470 are outstanding and will be paid as they come due or as payment may be extended by agreement of the parties. Given the age of some of these payables, the Company will attempt to settle some of these outstanding payables at less than their full amount. One vendor, MindTree Consulting Pvt. Ltd. (“MindTree”), accounted for 27% of the Company’s accounts payable. MindTree provided services to the Company under a Time and Materials Contract dated March 30, 2005 (the T&M Contract”). On a monthly basis, MindTree invoiced the Company for work it performed. Payment terms were net 30 days. The Company was unable to pay the invoices as they became due and, by informal agreement, extended the repayment terms monthly. On December 15, 2005, the Company entered into a written agreement with MindTree by which it agreed to pay MindTree $200,000 on or before December 23, 2005 and $100,000 per month on the last business day of each succeeding month until the outstanding indebtedness of approximately $580,000 was fully paid. The Company’s performance was secured by the software code then in existence (the “Intellectual Property”) MindTree developed under the T&M Contract; the ZigBee version 1.0 software. If the Company defaulted in making any payment when due and such default was not cured within five business days after receipt of a notice of default, MindTree would be entitled to co-own the Intellectual Property, with any revenue the Company realized from the Intellectual Property during the co-ownership period to be split 50-50 with MindTree. To date, the Company has paid MindTree $275,000 pursuant to this agreement. As of September 30, 2008, the Company is behind in making the scheduled payments. MindTree has not yet issued any notice of default and has extended the deadline to substantially complete the repayment until November 30, 2008. The parties are attempting to restructure this arrangement and expect to conclude it in the fourth quarter of 2008.

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

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

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

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

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

Critical Accounting Estimates

General

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

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

Revenue Recognition

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

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

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

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

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

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

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

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

Factors That May Affect Future Results

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Announcements, product introductions and price reductions by competitors;

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

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

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

Foreign currency exchange rates; and

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

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

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

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

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

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

Off-Balance Sheet Arrangements

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

Contractual Obligations

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

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

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

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

Changes in Internal Controls

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

Management’s Report on Internal Control over Financial Reporting

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

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

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

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

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

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

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

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

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

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

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

Item 3. Defaults upon Senior Securities.

None

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

None

Item 5. Other Information.

Item 6. Exhibits.

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

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

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

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

SIGNATURES

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

Dated: November 19, 2008

AIRBEE WIRELESS, INC.

By:	/s/ Sundaresan Raja
	Sundaresan Raja
	Chief Executive Officer
	(Principal Executive Officer)

By:	/s/ E. Eugene Sharer
	E. Eugene Sharer
	Interim Principal Financial Officer

Airbee Wireless, Inc. 10-Q