ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS

Overview

O2 Secure Wireless, Inc. is a leading provider of wireless internet services to residential communities and mobile customers. Our goal is to provide best-in-market connectivity and infrastructure to communities and customers who need access to the internet and network applications in fixed-location, roaming and mobile environments.

We continue to focus our efforts on growing our customer base to the potential customers of our services which primarily include:

Communities. Residential property managers and property owners. The companies that manage or own residential communities provide O2 Secure Wireless' services as an amenity to their residents.

Users. We provide users with wireless internet services at their residence or on-the-go with "hot zone" and mobile applications using Wi-Fi and 3G technologies.

How We Generate Revenue

Wireless internet services generated 87% of our revenues in 2008 (up from 75% during the previous fiscal year) and the balance of our revenues are generated by consulting services (11%) and hardware sales (2%).

The wireless services that we provide are primarily directed towards high-density residential communities, with the bulk of our service revenues derived from "amenity" packages that are provided to community residents by their property managers and owners, and the balance provided by "subscription" packages and mobile services.

Our "amenity" packages are bulk-rate internet services delivered to the property through high-speed connectivity, billed to the property manager or owner, and then provided to residents as an amenity by the community.

We also provide a "subscription" service, where the property manager does not provide the wireless amenity to the residents directly. Rather, the residents of the community directly sign up for services with O2 Secure Wireless using a credit card, and are billed individually on a monthly basis for the service.

The mobile services that we provide are a combination of hardware and services delivered via 3G cellular technologies. Our "O2 Anywhere" product, based on "AirCards" used in laptops, and our REACTOR product, a 3G-to-Wi-Fi gateway which provides a mobile hotspot, are used by customers who require internet connectivity while mobile or in locations without adequate wireline internet services.

Consulting services, which include the design, engineering and maintenance of wireless internet services for third-parties generated 11% of our revenues in 2008. Relying on the expertise demonstrated by our engineers on our residential wireless services, our consulting customers utilize O2 engineers to provide our services on an hourly consulting basis. The advisory services that we provide in a consulting capacity leverage the hardware, design philosophy and engineering experience that O2 has developed over the course of providing residential wireless internet services since our inception.

Hardware sales comprised less than 2% of our revenues in 2008, a substantially smaller percentage than the 24% provided in the previous fiscal year. Going forward, we do not intend to heavily invest our time or resources into hardware sales as a major part of our business, but will continue to maintain our online store and current hardware sales customers.

We strongly believe that the success of our wireless internet services and consulting services rely on the following factors:

º The quality, consistency and performance of the network services we provide.
º The cost-effective and competitive methods we use to provision and provide high-speed bandwidth to communities via fiber-optic (or similar) backhaul connections.
º The expertise gained and demonstrated by our engineers.
º The speed at which we adapt to the changing marketplace.

We believe that the opportunities to increase our operating revenues in the residential community market are most affected by the following factors:

º The demonstrable higher rental rates that can be attained by property managers who offer our services as an amenity.
º The correspondingly higher property values achieved by property owners due to increased NOI.
º The perceived and actual benefits provided to residents of communities by having access to wireless internet services on the entirety of a residential property.
º The cost-competitive and bulk-rate pricing provided to property managers and owners for our services.

Results of Operations

During the years ended September 30, 2008 and 2007, we generated $534,891 and $437,707 of revenues, respectively, an increase of 22% over the prior year. During the same periods, we incurred net losses of ($665,568) and ($854,340), respectively, a 64% decrease in net loss over the prior year. During the fiscal year ended September 30, 2008, we were receiving revenues from three main lines of business: twenty operational networks (versus seventeen the prior year), mobile customers, and two large consulting clients. Our net loss for our 2008 fiscal year decreased in line with our revenue increase, as expected, and we expect the decrease to continue.

Costs and Expenses

Significant expenses during the fiscal years ended September 30, 2008 and 2007 were as follows:

Professional Fees

Professional fees represent significant expenses necessary for outside accounting, audit, legal and shareholder services fees. These fees primarily relate to regulatory compliance. The majority of these fees for this fiscal year were borne during the first quarter of the fiscal year (October 1 through December 31, 2007) and partially during the second fiscal quarter. These two quarters' significant expenses were due to the high cost of an outside accounting consultant whose services are no longer used by the Company. Our total professional fees cost for this fiscal year was $281,718, which made it our largest expense component for that period. Of that amount, 95% was incurred in the first two quarters of this fiscal year.

Capitalized material labor costs

During the year ended September 30, 2008, we completed two "hot zone" deployments in the Atlanta area and augmented several installations to increase the level of service at those locations, and capitalized $17,868.49 in equipment and labor costs.

Liquidity and Capital Resources

At September 30, 2008, we had working capital deficit of $513,338. Our working capital is currently insufficient for us to fully implement our business plan and our commitment to break-even as outlined in our most recent Regulation S offering. Our principal business plan involves the installation of wireless Internet systems in multifamily properties at our expense, including all parts and labor associated with the systems, and we also sell network components. On the first systems we installed, our revenues came from the sale of Internet service to residents who subscribed to our service. On the latest systems we installed, and most future systems we install, our revenues will come from a flat fee charged the owner of the property. The present level of gross profit on subscriptions and component sales are insufficient to enable us to cover our recurring operating expenses unless such levels are dramatically increased.

Therefore, we must install many more systems, sell substantially more network components or increase consulting revenues in order for us to achieve a break-even level of operations. We will be unable to achieve this goal in the near term, and beyond that, we will need substantial additional capital as our installations generate negative cash flows until such time as they individually reach break-even level of subscriptions or guaranteed revenues from the owner, as applicable.

We believe our current working capital is insufficient to both sustain our current operations and planned growth through March 2009. We are currently using capital at an average monthly rate of $49,000 for operating expenses per month, although the actual monthly cash outlay varies. In addition, we must incur additional capital expenditures with each system that we install. This rate will accelerate significantly over the following twelve months if we reach agreements to install systems in the number of properties that we have projected in our business plan. Beginning in April 2006, we took measures to decrease our use of capital for operating expenses. These measures also included deferring officer salaries.

We project additional working capital needs of $200,000, exclusive of funds currently on hand, to fund our planned operations for the following twelve month period. To satisfy our future working capital needs, we are actively working with our existing investors to continue their support. We will continue to try to raise sufficient capital to meet our liquidity needs until we achieve profitable operations, because there is no contractually committed capital from these investors upon which we can rely. To date, we have relied upon investment proceeds to satisfy our working capital requirements. In the event we experience delays in raising additional capital, we plan to continue reducing our recurring cash outlay by deferring officer salaries, as well as reducing the rate of our planned installations as necessary in order to maintain adequate cash funds.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.

Summary

The past fiscal year has been difficult for the company due to tight cash constraints. Our continued net loss each quarter, while decreasing, has substantially increased our overall liabilities by 58% over the previous year. Despite increased revenues and substantially decreased expenses, we are still operating at a loss.

Our primary goal for the past year has been to substantially decrease our cost of service and our expenses, and to continue to increase our revenues. Unforeseen and higher-than-normal professional fees for the first quarter (which subsequently flowed partially into the second quarter) placed a large burden on our cash flow to fulfill obligations for ongoing operations. During that time however, there were no interruptions in service, and the level of service to our customers did not decrease. However, in that particular instance, it did delay the filing of our 10-KSB for fiscal year 2007 by a month, as we were not provided any flexibility on accounting compensation and also because our internet processes required an overhaul.

Our professional fees have been a large portion of our expenses since inception, and it was a large focus for management this year to reduce those expense levels by increasing efficiency, implementing better controls and procedures in accounting and reporting, and to minimize the need for outside consulting work for accounting.

Fortunately, for the last two quarters in this fiscal year, we were able to stabilize these costs. Comparing our professional fee expenses and overall expenses for the first two quarters with the last two quarters of this fiscal year, we can demonstrate a substantial 95% decrease between those six-month periods for professional fees ($268,235 and $13,482 respectively), and a decrease of 48% for overall expenses ($605,487 and $316,764, respectively). We expect these expense amounts going forward to remain similar to the fourth quarter of this fiscal year.

Regarding our revenue, there are several items which remain of concern to us. First, late-paying customers are beginning to have an impact on our ability to fulfill payment obligations, due to less predictable cash flow. The current economic climate, which impacts the residential market directly and contributes to the slow payments of some of our customers, may continue for an undetermined period of time. This may begin to provide additional complications in our ability to stay current on our financial obligations to vendors. We have been able to agree to receipt terms with some customers to ensure a more predictable cash flow on a month-to-month basis, but have no guarantee that these customers will continue to meet those agreements.

Second, during the 2008 fiscal year, we converted one large "amenity" property to a "subscription" property. The impact this will have on the 2008 fiscal year's reported financials is a decrease of amenity revenues by approximately $18,000, and an increase in subscriber revenue by approximately $7,000. We have started a direct marketing campaign to the residents of this community, but cannot estimate when or if revenues on the property will meet or exceed previously obtained monthly numbers.