DARPA &hearts's cyborg spy moths.

And really, truly, who doesn't? Actually, this is pretty creepy. They cut off part of the moth's thorax while still in the larval stage. They then install MEMS (microelectromechanical systems) components. As the insect grows, its body grows around the MEMS, thus securing the components inside the insect's body. The end-goal is to have these parts be able to run off the insects natural body heat and/or kinetic energy to act as a power source for the components.

Insects with modified body structures and embedded micro-electromechanical systems (MEMS) have survived to adulthood in a US Defense Advanced Reseach Projects Agency (DARPA) programme.

DARPA wants to develop inexpensive micro air vehicles to find weapons and explosives inside buildings or caves. Mechanical and fluidic microsystems would allow remote control, could extend insect life, and provide for gas, audio and even imaging sensors.

In the latest work a Manduca moth had its thorax truncated to reduce its mass and had a MEMS component added where abdominal segments would have been, during the larval stage.

Images taken by x-ray of insects with these changes and others found that tissue growth around the inserted probes was good. One DARPA goal is to show that during locomotion the heat and mechanical power generated by the thorax could be harnessed to power the MEMS.

To give you an idea as to how small MEMS components can be:
A mite less than 1 mm on a MEMS device.

There are, however, a few drawbacks. Insects have notoriously short life spans, meaning that a single bug's use would be rather limited. Insects are also prevalent prey for many birds and other animals. I could easily see a sting operation foiled by a cat eating the surveillance moth. Also, the process is rather laborious and, I would imagine, rather costly. Irregardless, as the technology and process become more refined I'm sure the whole ordeal will be very mundane and expedient.

Giving the presentation on behalf of DARPA at the 1st US-Asian assessment and demonstration of micro aerial and unmannned ground vehicle technology, Georgia Institute of Technology Research Institute's aerospace, transportation and advanced systems laboratory's principal research engineer, emeritus, Robert Michelson said: "You'd like this [cyborg insect] to be created out where you need it rather than in a lab in California."

He added that drawbacks included the short life-span of insects, which means they could be dead before they are needed, and the fact that MEMS insertion was labour-intensive.

One of DARPA's goals is to remote-pilot a cyborg insect to within 100m (327ft) of a target. Control could be maintained using pheromones or mechano-sensor activation and direct muscle or neural interfaces using the embedded MEMS.
- Source

For shits and giggles, here's a vid of some other cyborg insects.