Summary of MACHINETALKER INC

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CAUTIONARY STATEMENTS

This Form 10-Q contains financial projections and other "forward-looking statements," as that term is used in federal securities laws, about MachineTalker, Inc.'s ("we," "us," or the "Company") financial condition, results of operations and business. These statements include, among others:
statements concerning the potential for revenues and expenses and other matters that are not historical facts. These statements may be made expressly in this Form 10-Q. You can find many of these statements by looking for words such as "believes," "expects," "anticipates," "estimates," or similar expressions used in this Form 10-Q. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause the Company's actual results to be materially different from any future results expressed or implied by the Company in those statements. The most important facts that could prevent the Company from achieving its stated goals include, but are not limited to, the following:

(a) volatility or decline of the Company's stock price;

(b) potential fluctuation in quarterly results;

(d) inadequate capital and barriers to raising the additional capital or to obtaining the financing needed to implement its business plans;

(e) inadequate capital to continue business;

(f) changes in demand for the Company's products and services;

(g) rapid and significant changes in markets;

(h) litigation with or legal claims and allegations by outside parties; and

(i) insufficient revenues to cover operating costs.

Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. The Company cautions you not to place undue reliance on the statements, which speak only as of the date of this Form 10-Q. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that the Company or persons acting on its behalf may issue.

The Company does not undertake any obligation to review or confirm analysts' expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

The following discussion should be read in conjunction with our condensed financial statements and notes to those statements. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking information that involves risks and uncertainties.

OVERVIEW

In February 2008, we completed development and began to conduct demonstrations of Talker(R) products for wireless Condition-Based Maintenance ("CBM") applications. These Talkers(R) are equipped with vibration sensors to monitor changes in the characteristics of motors and bearing supports located throughout large industrial facilities where the typical wired systems are difficult to install. A change in the vibration pattern of a rotating device indicates that the device requires immediate maintenance. We believe that our products for the CBM market will enable us to field complete systems that gather data automatically and transmit that data over a wireless connection to a center where the CBM analysis can be made. We believe that CBM eliminates the expense of unnecessary periodic repairs and also eliminates labor costs associated with having to manually test these rotating devices in order to determine potential failure.

Our second area of focus is developing a more capable sensor using variations of Ultra-Wide Band ("UWB") to maintain the security of cargo in shipping containers. Our UWB technology is now able to detect any minimal

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movement which means that if anything moves inside a container, or opens a hole or intrudes in any way, the change can be detected and the Talker(R) can send an alert. Our acquisition of 100% of Wideband Detection Technologies, Inc. ("WDT") and its license from Lawrence Livermore National Laboratory that covers this UWB intrusion detector (and other UWB technology) permits us to place this new product into service for the security application.

We currently have four full time employees as compared to six employees during 2007. This change reflects reduction of administration and reliance upon OEMs and Systems Integrators as marketing representatives and technical consultants, all of whom are consultants and not employees.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of property, plant and equipment, intangible assets, deferred tax assets and fair value computation using the Black Scholes option pricing model. We base our estimates on historical experience and on various other assumptions, such as the trading value of our common stock and estimated future undiscounted cash flows, that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.

USE OF ESTIMATES

In accordance with accounting principles generally accepted in the United States, management utilizes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to recording net revenue, collectibility of accounts receivable, useful lives and impairment of tangible and intangible assets, accruals, income taxes, inventory realization, stock-based compensation expense and other factors. Management believes it has exercised reasonable judgment in deriving these estimates. Consequently, a change in conditions could affect these estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Our cash, cash equivalents, investments, accounts receivable and accounts payable are stated at cost which approximates fair value due to the short-term nature of these instruments.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, Share-based Payment. SFAS 123R revises SFAS 123 and supersedes APB 25. SFAS 123R will be effective for the year ending December 31, 2006, and applies to transactions in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are to follow a fair value of those equity instruments. Under SFAS 123R, we will be required to follow a fair value approach using an option-pricing model, such as the Black Scholes option valuation model, at the date of a stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option. The adoption of SFAS 123R will not have a material impact on our results of operations.

REVENUE RECOGNITION

We recognize revenue in accordance with the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" ("SAB 104"). We recognize revenue upon delivery, provided that evidence of an arrangement exists, title, and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. We record revenue net of estimated product returns, which is based upon our return policy, sales agreements, management estimates of potential future product returns related to current period revenue, current economic trends, changes in customer composition and historical experience. We accrue for warranty costs, sales returns, and other allowances

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based on our experience which tells us we have less than $25,000 per year in warranty returns and allowances. Generally, we extend credit to our customers and do not require collateral. We perform ongoing credit evaluations of our customers and historic credit losses have been within our expectations. We do not ship a product until we have either a purchase agreement or rental agreement signed by the customer with a payment arrangement. This is a critical policy, because we want our accounting to show only sales which are "final" with a payment arrangement. We do not make consignment sales, nor inventory sales subject to a "buy back" or return arrangement from customers. Accordingly, original equipment manufacturers do not presently have a right to return unsold products to the Company.

We also grant exclusive licenses for the use of the technology required to operate our products. We recognize revenue from software licensing arrangements under SOP 97-2 "Software Revenue Recognition," as amended by SOP-98-9, Modification of SOP 97-2, "Software Revenue Recognition with Respect to Certain Transactions." For those contracts that either do not contain a services component or that have services which are not essential to the functionality of any other element of the contract, software license revenue is recognized over the contract period.

PROVISION FOR SALES RETURNS, ALLOWANCES AND BAD DEBTS

We maintain a provision for sales allowances, returns and bad debts. Sales returns and allowances result from equipment damaged in delivery or customer dissatisfaction, as provided by agreement. The provision is provided for by reducing gross revenue by a portion of the amount invoiced during the relevant period. The amount of the reduction is estimated based on historical experience.

RESERVE FOR OBSOLETE/EXCESS INVENTORY

Inventories are stated at the lower of cost or market. We regularly review our inventories and, when required, will record a provision for excess and obsolete inventory based on factors that may impact the realizable value of our inventory including, but not limited to, technological changes, market demand, regulatory requirements and significant changes in our cost structure. If ultimate usage varies significantly from expected usage, or other factors arise that are significantly different than those anticipated by management, inventory write-downs or increases in reserves may be required.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board issued two FASB Staff Positions - FSP FAS 109-1, Application of FASB Statement 109 "Accounting for Income Taxes" to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, and FSP FAS 109-2 Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. Neither of these affected us as it does not participate in the related activities.

In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and Error Corrections." This new standard replaces APB Opinion No. 20, "Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements," and represents another step in the FASB's goal to converge its standards with those issued by the IASB. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and (2)
correction of errors in previously issued financial statements should be termed a "restatement." The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. We have evaluated the impact of the adoption of Statement 154 and do not believe the impact will be significant to our overall results of operations or financial position.

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RESULTS OF OPERATIONS FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2007

REVENUE

Total revenue for the three months ended September 30, 2008 was $10,000 as compared to $10,000 for the three months ended September 30, 2007. Total revenue decreased by $1,730 or 5.45% to $30,000 for the nine months ended September 30, 2008 compared to $31,730 for the nine months ended September 30, 2007. This decrease in revenue was a result of focusing on research and development.

COST OF SALES

Cost of Sales ("COS") decreased by $(818) or (92.64)% to $65 for the three months ended September 30, 2008 compared to the prior period. COS decreased by $(31,726) or (99.73)% to $86 for the nine months ended September 30, 2008 compared to the prior period. This decrease in COS was a result of a decrease in raw materials and labor.

SELLING AND MARKETING EXPENSES

Selling and marketing ("S&M") expenses decreased by $(49,080) or
(71.58)%, to $19,491 for the three months ended September 30, 2008 compared to the prior period. S&M expenses decreased by $(123,280) or (52.78)%, to $110,302 for the nine months ended September 30, 2008 compared to the prior period. This decrease in S&M expenses was the result of a decrease in salaries and marketing services.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative ("G&A") expenses decreased by $(923) or
(1.35)%, to $67,433 for the three months ended September 30, 2008 compared to the prior period. G&A expenses increased by $3,254 or 1.34%, to $246,219 for the nine months ended September 30, 2008 compared to the prior period. This increase in G&A expenses for the nine months ended September 30, 2008 was the result of an increase in professional fees and salaries paid by the Company.

RESEARCH AND DEVELOPMENT

Research and Development ("R&D") costs decreased by $(69,759) or
(74.14)%, to $24,338 for the three months ended September 30, 2008 compared to the prior period. R&D costs decreased by $(171,427) or (65.35)%, to $90,904 for the nine months ended September 30, 2008 compared to the prior period. This decrease in R&D costs was the result of purchasing wireless technology through equity financing.

NET LOSS

Net Loss decreased by $122,620 or 49.49% to $(125,153) for the three months ended September 30, 2008, compared to the prior period. Net Loss increased by $(1,415,943) or (176.26)% to $(2,219,260) for the nine months ended September 30, 2008, compared to the prior period. This increase in Net Loss for the nine months ended September 30, 2008 resulted mainly from the loss impairment of goodwill, and also from operational costs. Currently operating costs exceed revenue because sales are not yet significant. We cannot assure when or if revenue will exceed operating costs.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2008, we had a working capital deficit of $889,580 as compared to a working capital deficit of $418,986 as of December 31, 2007. This increase of $470,594 was due primarily to use of funds for operational costs.

Cash flow used in operating activities was $321,903 for the nine months ended September 30, 2008, as compared to cash used of $612,215 for the prior period. This decrease of $290,312 was primarily attributable to a decrease in research and development and general and administrative expenses.

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Cash used by investing activities was $0 for the nine months ended September 30, 2008, as compared to cash used of $6,560 for the prior period. The cash used in investing activities in the prior period was primarily due to an investment in subsidiary.

Cash provided from financing activities during the nine months ended September 30, 2008 was $329,000 as compared to cash provided of $573,410 for the prior period. The decrease of $244,410 was due to a decrease in loans received from an officer of the Company and equity financing.

PLAN OF OPERATION AND FINANCING NEEDS

We have completed the development of Talker(R) units that track and report over the Internet the position of any moving cargo along with information from sensors that accompany the Talkers while en-route. Reports are now issued over cellular connection. These remote tracking units are being demonstrated in refrigeration trailers to assure that produce and other perishable contents are handled in a timely manner. Management estimates that we will require additional cash resources during the remainder of 2008 and into the first quarter of 2009 in order to increase our marketing and sales activity so that introduction of our completed products to customers will result in sales. If we are unable to obtain sufficient funds during the next six months, we may be forced to reduce the size of our organization, which could have a material adverse impact on, or cause us to curtail and/or cease, the development and marketing of our products.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.