Airbee Wireless 10QSB/A 2006 Q1 Quarterly report (small business) (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB/A

(Mark One)

R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

OR

£ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934

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 R No £

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

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: 62,571,955 shares of Common Stock par value of $0.00004 as of May 1, 2006.

Transitional Small Business Disclosure Form (check one): Yes £ No R

AIRBEE WIRELESS, INC.

FORM 10-QSB

INDEX

	PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 2006 (Unaudited)	4
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005 (Unaudited)	5
Condensed Consolidated Statement of Accumulated Other Comprehensive Income for the Three Months Ended March 31, 2006 (Unaudited)	6
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (Unaudited)	7
Notes to the Condensed Consolidated Financial Statements (Unaudited)	9
Item 2. Management’s Discussion and Analysis or Plan of Operations	24
Item 3. Controls and Procedures	31
PART II OTHER INFORMATION
Item 1. Legal Proceedings	32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3. Defaults Upon Senior Securities	34
Item 4. Submission of Matters to a Vote of Security Holders	34
Item 5. Other Information	34
Item 6. Exhibits	34
SIGNATURES	35

2

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2006 AND 2005

(UNAUDITED)

3

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

MARCH 31, 2006

(UNAUDITED)

	Restated
	2006
ASSETS
Current Assets:
Cash and cash equivalents	$	15,845
Accounts receivable		27,110
Prepaid expenses and other current assets		5,538
Total Current Assets		48,493
Fixed assets, net of depreciation		63,919
Intangible assets		718,000
Deferred financing costs		27,051
Other assets		28,097
		773,148
TOTAL ASSETS	$	885,560
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
LIABILITIES
Current Liabilities:
Notes payable - related party	$	97,394
Notes payable - other		140,000
Montgomery settlement liability		516,287
Fair value of derivatives		611,514
Warrants liability		617,871
Accounts payable and accrued expenses		1,198,121
Total Current Liabilities		3,181,187
Long-term Liabilities:
Convertible debentures, net of discount of $310,817		39,183
Total Long-term Liabilities		39,183
Total Liabilities		3,220,370
COMMITMENTS AND CONTINGENCIES		—
STOCKHOLDERS' DEFICIT
Common stock, $.00004 Par Value; 200,000,000 shares authorized;
77,155,956 shares issued, 13,586,956 shares held in escrow;
62,571,955 outstanding		2,503
Additional paid-in capital		5,791,125
Unearned compensation		(34,530	)
Other accumulated comprehensive loss		728
Accumulated deficit		(7,886,805	)
		(2,126,979	)
Less: stock subscription receivable		(5,000	)
Less: treasury stock, 997,045 shares at cost		(202,831	)
Total Stockholders' Deficit		(2,334,810	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	885,560
The accompanying notes are an integral part of these condensed consolidated financial statements.

4

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005

(UNAUDITED)

	Restated 2006			Restated 2005
OPERATING REVENUES
Sales	$	51,600		$	—
COST OF SALES		—			—
GROSS PROFIT		51,600			—
OPERATING EXPENSES
Compensation and professional fees		1,562,361			246,426
Research and development		—			273,525
Selling, general and administrative expenses		130,155			62,129
Depreciation and amortization		12,056			3,082
Total Operating Expenses		1,704,572			585,162
LOSS BEFORE OTHER INCOME (EXPENSE)		(1,652,972	)		(585,162	)
OTHER INCOME (EXPENSE)
Gain on derivatives		427,532			—
Interest expense		(64,740	)		(28,574	)
Total Other Income (Expense)		362,792			(28,574	)
NET LOSS BEFORE PROVISION FOR INCOME TAXES		(1,290,180	)		(613,736	)
Provision for Income Taxes		—			—
NET LOSS APPLICABLE TO COMMON SHARES	$	(1,290,180	)	$	(613,736	)
NET LOSS PER BASIC AND DILUTED SHARES	$	(0.02	)	$	(0.01	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		60,230,066			41,849,373

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

5

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2006

(UNAUDITED)

Balance, December 31, 2005	$	734
Loss on foreign currency translations		(6	)
Balance, March 31, 2006	$	728

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

6

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005

(UNAUDITED)

	Restated 2006			Restated 2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,290,180	)	$	(613,736	)
Adjustments to reconcile net loss to net cash (used in) operating activities
Depreciation and amortization		12,055			3,082
Common stock issued for services		90,500			85,230
Common stock issued for compensation		25,000			—
Gain on valuation of derivatives		(427,532	)		—
Amortization of discount on convertible debenture		39,183			—
Stock options vested during period		1,015,141			—
Amortization of financing fees		3,864			—
Gain (loss) on foreign currency translations		(6	)		203
Amortization of unearned compensation		3,992			3,437
Changes in assets and liabilities
(Increase) decrease in accounts receivable		(17,110	)		—
(Increase) decrease in prepaid expenses and other assets		40,128			(14,641	)
(Increase) in other assets		(383	)		—
Increase in accounts payable and accrued expenses		272,614			67,989
Total adjustments		1,057,466			145,300
Net cash (used in) operating activities		(232,714	)		(468,436	)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of intangible assets		(36,298	)		61,455
Acquisitions of fixed assets		(1,897	)		(14,321	)
Net cash (used in) investing activities		(38,195	)		47,134

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

7

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005

(UNAUDITED)

	Restated 2006			Restated 2005
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock issuances	$	96,400		$	471,580
Proceeds from stock subscriptions receivable		122,500			—
Proceeds from notes payable — other		40,000			—
Proceeds from notes payable — related party, net		—			(45,990	)
Net cash provided by financing activities		258,900			425,590
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(12,009	)		4,288
CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD		27,854			87,362
CASH AND CASH EQUIVALENTS — END OF PERIOD	$	15,845		$	91,650
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest expense	$	4,659		$	217
Income taxes	$	—		$	—
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Common stock issued for compensation	$	25,000		$	—
Stock options vested during period	$	1,015,141		$	—
Common stock issued for services	$	90,500		$	85,230
Conversion of note payable — other and accrued interest to common stock	$	73,085		$	—
Conversion of related party notes payable, accounts payable, accrued salaries payable and accrued interest to common stock	$	1,870,972		$	—
Use of pledged collateral for settlement of note payable and accrued interest	$	191424		$	—
Common stock issued for subscription receivable	$	5,000		$	—

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

8

AIRBEE WIRELESS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2006 AND 2005

(UNAUDITED)

NOTE 1 — ORGANIZATION AND 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-QSB 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, 2005 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 period presented.

Airbee Wireless, Inc. (“Airbee” or the “Company”), was incorporated in Delaware in 2002 to develop and supply cutting edge intelligent software that is generally embedded into microprocessors thereby allowing manufacturers (OEM’s) of various products to create advanced wireless communications systems.

Focusing on its core competencies in the design and engineering of advanced, embedded short-range wireless data and voice communications software, the Company believes that it is positioned to play a pivotal role in the convergence of various wireless communications applications through software embedded on silicon and in niche applications for its software.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Liquidity

The condensed consolidated interim 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 $7.9 million as of March 31, 2006. The Company’s operations have been financed primarily through a combination of issued equity and debt. For the three months ended March 31, 2006, the Company had a net loss of approximately $1,290,200 and cash used in operations of approximately $233,000.

The Company regularly evaluates its working capital needs and existing burn rate to make appropriate adjustments to operating expenses. On December 29, 2005, the Company executed a $500,000 convertible debenture with Montgomery by which Montgomery disbursed $350,000 to the Company with the remaining $150,000 to be disbursed two days before the Company files a Form SB-2 with the U.S. Securities and Exchange Commission. The convertible debenture has a two-year term and accrues monthly interest at 15% per year.

9

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Airbee Wireless, Inc. and its wholly owned subsidiaries (“Airbee” or the “Company”) Airbee Wireless (Pte.) Ltd., located in Singapore, and Airbee Wireless (India) Pvt. Ltd., located in India, for the three months ended March 31, 2006 and 2005 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.

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.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents.

The Company maintains cash and cash equivalent balances at financial institutions in the United States of America, Singapore and India. The financial institution in the United States of America is insured by the Federal Deposit Insurance Corporation up to $100,000.

Accounts Receivable

The Company conducts business and extends credit based on an evaluation of the customers’ financial condition, generally without requiring collateral. Exposure to losses on receivables is expected to vary by customer due to the financial condition of each customer. The Company monitors exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances. The Company has an allowance for doubtful accounts of $0 at March 31, 2006. Accounts receivable are generally due within thirty (30) days and collateral is not required.

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.

Intangible Assets

Intellectual property assets represent technology and are amortized over the periods of benefit, ranging from two to five years, generally on a straight-line basis.

10

Identified intangible assets are regularly reviewed to determine whether facts and circumstances exist which indicate that the useful life is shorter than originally estimated or the carrying amount of assets may not be recoverable. The Company assesses the recoverability of its identifiable intangible assets by comparing the projected discounted 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.

Intellectual Property

Costs incurred in creating products are charged to expense when incurred as research and development until technological feasibility is established upon completion of a working model. Thereafter, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product.

In accordance with SFAS No. 2, “Accounting for Research and Development Costs”, SFAS No. 68, “Research and Development Arrangements”, and SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or OtherwiseMarketed”, technological feasibility for the Airbee UltraLite™, a pre-ZigBee certified product, was established on November 20, 2002 with completion of the detailed program design. Several working models were delivered at various points through July of 2003. We demonstrated the Media Access Control (“MAC”) layer performance at trade shows in October 2004. The Network and Security layers of the ZigBee certified stack were completed and demonstrated for customers in April of 2005 with certification achieved in November 2005.

Trademarks and patents are regularly reviewed to determine whether the facts and circumstances exist to indicate that the useful life is shorter than originally estimated or the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of its trademarks and patents by comparing the projected discounted net cash flows associated with the related asset, over their remaining lives, in comparison to their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.

Intangible assets pertain to the Company’s intellectual property, more specifically software code for both IEEE 802.15.4 and the ZigBee standard version 1.0 and the upcoming ZigBee standard version 1.1.

The software serves as the core code (i.e., one of the key building blocks) for current and future products that must comply with both of these international standards. Hence, core software based upon the global standards of IEEE and ZigBee to enable the rest of our software to function has an undefined, but not necessarily infinite, useful life. Management, with the assistance of its technical staff, has determined that this specific intellectual property should be amortized beginning with the current financial period in accordance with SFAS No. 86. The status of that intellectual property is reviewed for impairment annually or more frequently if events and circumstances indicate that the asset may be impaired. The Company believes that at this point in time, impairment is impractical because (a) the IEEE 802.15 global standard was only finalized in October 2003; (b) the ZigBee global standard was only finalized on December 14, 2004; and (c) the Company’s software written in conformity with both global standards is vital to making the rest of its software function and therefore be in compliance with these global standards.

Revenue and Cost Recognition

The Company currently recognizes revenues from four primary sources: (1) time-based product license fees, (2) time-based license royalties, (3) product revenues for software development tools and kits, and (4) software development services.

Licensing revenues (e.g., Airbee-ZNS™, Airbee-ZMAC™, and Airbee-ZNMS™) consist of revenues from licensing under the enterprise licensing model of Airbee platforms, which include a combination of products and services, and items such as development tools, an operating system, various protocols and interfaces and maintenance and support services, such as installation and training, which are licensed over a limited period of time, typically 12-36 months. Service revenues are derived from fees for professional services, which include design and development fees, software maintenance contracts, and customer training and consulting.

11

The Company accounts 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.” The Company recognizes 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 for the following reasons:

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.

The Company expects to enter into software 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. If the Company provides 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 (OEM’s) is based on the time-based licensing agreement with an OEM and recognized when the OEM ships licensed products to its customers.

The Company assesses probability of collection based on a number of factors, including its past transaction history with the customer and the creditworthiness of the customer. New customers are subject to a credit review process that evaluates the customers’ financial position and ultimately its ability to pay according to the original terms of the arrangement. Based on this review process, if it is determined from the outset of an arrangement that collection of the resulting receivable is not probable, revenue is then recognized on a cash-collected basis.

Cost of revenue includes direct costs to produce and distribute products and direct costs to provide product support and training.

12

Deferred Financing Costs

Deferred financing costs were incurred in connection with the convertible debenture with Montgomery (see discussion in Note 5). These costs will be amortized over the life of the convertible debenture (24 months). During the three months ended March 31, 2006, the Company recognized $3,864 in deferred financing costs.

Research and Development

Research and development costs are related primarily to the Company developing its intellectual property. Research and development costs were expensed as incurred prior to the Company’s demonstration of technical feasibility of its ZigBee-based products in April 2005. Research and development costs incurred to produce a product master have been capitalized in accordance with Statement No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, orOtherwise Marketed” issued by the Financial Accounting Standards Board.

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 three month period ended March 31, 2006 and 2005.

Advertising

The Company’s policy is to expense the costs of advertising as incurred. The Company had no such cost for the three month period ended March 31, 2006 and 2005 respectively.

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 March 31, 2006 and 2005 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:

	March 31, 2006			March 31, 2005
Net Loss	$	(1,290,180	)	$	(613,736	)
Weighted-average common shares outstanding (Basic)		60,230,066			41,849,373
Weighted-average common stock Equivalents:
Stock options		—			—
Warrants		—			—
Weighted-average common shares outstanding (Diluted)		60,230,066			41,849,373

Fair Value of Financial Instruments

The carrying amount reported in the condensed consolidated balance sheet for cash and cash equivalents, accounts payable and accrued expenses approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported for notes payable approximates fair value because, in general, the interest on the underlying instruments fluctuates with market rates.

13

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Derivative Instruments

The Company has an outstanding convertible debt instrument that contains free-standing and embedded derivatives. The Company accounts for these derivatives in accordance with SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”, and EITF Issue No. 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock.” In accordance with the provisions of SFAS No. 133 and EITF Issue No. 00-19, the embedded derivatives are required to be bifurcated from the debt instrument and recorded as a liability at fair value on the condensed consolidated balance sheet. Changes in the fair value of the derivatives are recorded at each reporting period and recorded in net gain (loss) on derivative, a separate component of the other income (expense). As of March 31, 2006, the fair value of the derivatives was $611,514, a decrease of $427,532 from December 31, 2005. The Company has recorded a net gain on derivatives in the Other Income (Expense) section of its Condensed Consolidated Statements of Operations.

Stock-Based Compensation

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-BasedCompensation- 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 three months ended March 31, 2006 and 2005 was $3,992 and $3,437, 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 Instrumentsthat are Issued to Other Than Employees for Acquiring, or in Conjunction withSelling, 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.

Effective December 31, 2005, the Company adopted the provisions of Financial Accounting 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 for awards issued under the Company’s stock option plans in the Compensation and professional fees 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.

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SFAS No. 123(R) requires disclosure of pro-forma information for periods prior to the adoption. The pro-forma disclosures are based on the fair value of awards at the grant date, amortized to expense over the service period. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, for the period prior to the adoption of SFAS No. 123(R), and the actual effect on net income and earnings per share for the period after the adoption of SFAS No. 123R.

	Three Months Ended
	03/31/06			03/31/05
Net loss, as reported	$	(1,290,180	)	$	(613,736	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		1,015,141			0
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,015,141	)		(616,839	)
Net income, pro forma	$	(1,290,180	)	$	(1,230,575	)
Earning per share:
Basic, as reported	$	(0.02	)	$	(0.01	)
Basic, pro forma	$	(0.02	)	$	(0.03	)
Diluted, as reported	$	(0.02	)	$	(0.01	)
Diluted, pro forma	$	(0.02	)	$	(0.03	)

For the purpose of the above table, the fair value of each option granted is estimated as of the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended
	March 31, 2006			March 31, 2005
Dividend yield		0.0	%		0.0	%
Expected volatility		118.16	%		104.99	%
Risk-free interest rate		4.0	%		4.0	%
Expected life in years		3.75 - 5.0			4.25 -5.0

The following table summarizes the stock option activity for the three months ended March 31, 2006:

	Shares		March 31, 2006 Weighted Average Exercise Price		Weighted Average Contractual Term (Years)
Outstanding, December 31, 2005		40,490,010		0.2050
Options granted		3,465,000		0.3200
Options reinstated		—		—
Options exercised		—		—
Options forfeited or expired		—		—
Outstanding March 31, 2006		43,955,010		0.2141		4.2844
Options exercisable, March 31, 2006		25,610,010		0.1520		4.3250

Product Warranty

The Company’s product warranty accrual includes specific accruals for known product issues and an accrual for an estimate of incurred but unidentified product issues based on historical activity. Due to effective product testing and the short time between product shipment and the detection and correction of product failures, the warranty accrual based on historical activity and the related expense were not significant as of and for the three months ended March 31, 2006 and 2005, respectively.

Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards Board issued Statement No. 142, “Goodwill and Other Intangible Assets.” This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board (“APB”) Opinion No. 17, “IntangibleAssets.” It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recorded in the financial statements.

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The identifiable intangible assets presented on the condensed consolidated balance sheet represent the intellectual property that was capitalized post-technological feasibility. Management will continue to monitor and assess any impairment charges against those assets in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Beginning with the second quarter of 2005, the Company began amortizing its intellectual property costs over a sixteen year period. The amortization amount for the current quarter is calculated based upon the ending balance of intellectual property from the preceding quarter. The amount amortized for the three months ended March 31, 2006 is $2,500. The Company did not begin amortizing its Intellectual Property until the second quarter of 2005.

The main components of intangible assets are as follows:

	Three Months Ended March 31, 2006
	Gross Carrying Amount		Accumulated Amortization
Intellectual Property	$	152,058	$	30,200
Capitalized Research & Development		596,142		—
Total Intangible Assets	$	748,200	$	30,200

Currency Risk and Foreign Currency Translation

The Company transacts business in currencies other than the U.S. Dollar, primarily the Singapore Dollar and the Indian Rupee. All currency transactions occur in the spot foreign exchange market and the Company does not use currency forward contracts, currency options, currency borrowings interest rate swaps or any other derivative hedging strategy at this point in time.

The Company has determined that based on the cash flow, sales price, sales market, expense, financing, and inter-company transactions and arrangements indicators set forth in FASB 52, “Foreign Currency Translation,” that the functional currency of the Company is that of the parent company and is US Dollars. The Company has reported its gain on foreign currency in its consolidated statements of accumulated other comprehensive income due to the fact that these translation adjustments result from the translation of all assets and liabilities at the current rate, while the stockholder equity accounts were translated by using historical and weighted-average rates.

Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) published Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS 123R, as amended, are effective for small business issuers beginning as of the next fiscal year after December 15, 2005. Accordingly, the Company will implement the revised standard in the first quarter of fiscal year 2006. Previously, the Company accounts for its share-based payment transactions under the provisions of APB 25, which does not necessarily require the recognition of compensation cost in the financial statements (note 3(e)). FASB 123R had a material impact on its results or financial statements.

In November 2004, the FASB issued Financial Accounting Standards No. 151 (FAS 151), “Inventory Costs - an amendment of ARB No. 43, Chapter 4”. FASB 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. In addition, FASB 151 requires companies to base the allocation of fixed production overhead to the costs of conversion on the normal capacity of production facilities. FASB 151 is effective for the Company in 2006. FASB 151 did not have a material impact on its results or financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and ErrorCorrections.” SFAS No. 154 replaces Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes inInterim Financial Statements.” SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of changing to the new accounting principle in net income in the period of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 did not have a material impact on the Company’s financial position or results of operations.

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In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain HybridFinancial Instruments, an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized FinancialAssets,” and permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect the adoption of SFAS No. 155 will have on its financial position or results of operations.

In March 2005, the FASB issued Statement of Financial Accounting Standards Interpretation Number 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations.” FIN 47 provides clarification regarding the meaning of the term “conditional asset retirement obligation” as used in SFAS 143, “Accounting for Asset Retirement Obligations.” FIN 47 is effective for the year ended December 31, 2005. The implementation of this standard did not have a material impact on its financial position, results of operations or cash flows.

NOTE 3- CONCENTRATION OF CREDIT RISK

The Company’s trade receivables are derived from sales to original equipment manufacturers and manufacturers of microprocessors. The Company endeavors to keep pace with the evolving computer and communications industries, and has adopted credit policies and standards intended to accommodate industry growth and inherent risk. Management believes that credit risks are moderated by the diversity of the Company’s end customers and geographic sales areas. The Company performs ongoing credit evaluations of its customers’ financial condition and requires collateral as deemed necessary.

NOTE 4- FIXED ASSETS

Fixed assets as of March 31, 2006 consist of the following:

Computer and office equipment	$	91,395
Leasehold improvements		1,321
Less: accumulated depreciation and amortization		(28,797	)
Net book value	$	63,919

Depreciation expense for the three months ended March 31, 2006 and 2005 was $4,506 and $3,082, respectively.

NOTE 5- DEBT

Note Payable - Other

In August 2002, the Company entered into a note payable, principal amount of $50,000 payable August 31, 2005. The Company entered into this note in connection with the 2002 acquisition of Connexus Technologies (Pte.) Ltd. The note was non-interest bearing if it was paid prior to August 31, 2003 and if the note was paid between September 1, 2003 and August 31, 2004 the total payment due was $100,000. If the note was paid between September 1, 2004 and August 31, 2005, total payment due was $150,000. Beginning in September 2005, the Company began discussions with the note holder regarding settlement of this note payable, it being the Company’s position that the note was usurious and therefore unenforceable. By December 31, 2005, the note holder had agreed in principle to accept Company stock in lieu of cash and agreed to restructure the note so that interest accrued at 12% per annum from the original date on the original principal amount. The Company recorded $76,915 of the original $100,000 of accrued interest as forgiveness of debt and recorded this transaction in additional paid-in capital in 2005. The remaining accrued interest of $23,085 was added to the outstanding principal amount of $50,000 and the Company issued 182,714 shares of common stock in January 2006 to settle this note payable.

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On April 20, 2005, the Company executed a promissory note for $750,000 to Montgomery Equity Partners, Ltd. Pursuant to the terms of the promissory note, Montgomery Equity Partners disbursed the entire $750,000 to the Company upon the date the note was executed and an additional $250,000 was to be disbursed to the Company after the Company’s common stock commences trading on the Over-the-Counter Bulletin Board. The promissory note was secured by substantially all of the assets of the Company and shares of stock of an affiliate of the Company. The promissory note had a one-year term and accrued interest monthly at 24% per year. The Company had difficulty meeting the payment schedule called for by the promissory note and by virtue of a settlement with the lender, the obligation, which together with interest and liquidated damages totaled $937,500, is being repaid by the affiliate’s collateral. Because the settlement with the lender permits it to take any action necessary to recover any deficiency should liquidation of the pledged shares fail to recoup the entire agreed payoff amount, the Company continues to recognize this liability on its balance sheet. As of March 31, 2006, the lender has sold 1,404,194 of the 9.4 million pledged shares and realized net proceeds of $421,213, leaving an outstanding balance of $516,287, which appears as Montgomery settlement liability on the balance sheet.

In September 2005, a former director loaned the Company $100,000 in return for an unsecured demand promissory note. The terms of the note provide for interest at 6% per annum. Payment of the note is guaranteed by an affiliate of the Company.

In March 2006, a shareholder loaned the Company $40,000 in return for an unsecured promissory note due on or before July 31, 2006. The note is payable in cash or Company restricted common stock; if paid in stock the price will be the five-day average closing bid price on the days preceding payment. The note is nominally non-interest bearing; however, the Company issued 50,000 shares of its restricted common stock as a financing fee valued at approximately $11,500.

Convertible Debentures

On December 29, 2005, the Company executed a convertible debenture for $500,000 to Montgomery Equity Partners, Ltd. Pursuant to the terms of the convertible debenture, Montgomery disbursed $350,000 upon the date the debenture was executed with an additional $150,000 to be disbursed two days before the Company files a Form SB-2 with the U.S. Securities and Exchange Commission. 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.

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. The pledged shares are held by an escrow agent pursuant to a written escrow agreement. The convertible debenture has a two-year term and accrues interest monthly at 15% per year. In connection with this transaction, the Company executed an Investor Registration Rights Agreement by which it agreed to file a registration statement with the SEC for at least the pledged shares held by the escrow agent and the 2 million warrants. The registration statement was to be filed within 30 days of the execution of the convertible debenture and declared effective within 90 days of filing. Failure to file or be declared effective within the agreed timeframe subjected the Company to liquidated damages equal to two percent (2%) of the liquidated value of the convertible debenture for each thirty (30) day period after the scheduled filing or effective date deadline. By written agreement, these deadlines have been extended. The Company has until August 31, 2006 to file the registration statement which must be declared effective no later than November 30, 2006.

In accordance with SFAS 133, “Accounting for Derivative Instruments and HedgingActivities” and EITF 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock”, the conversion feature associated with the $500,000 convertible debenture represents an embedded derivative. The Company has recognized the embedded derivative in the amount of $383,737 as a liability in the accompanying condensed consolidated balance sheet and has measured it at its estimated fair value. The estimated fair value of the embedded derivative has been calculated based on a Black-Scholes pricing model using the following assumptions:

Fair market value of stock	$	0.21
Exercise price	$	0.13
Dividend yield		0.00	%
Risk free interest rate		4.00	%
Expected volatility		118	%
Expected life		1.75 Years

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As of March 31, 2006, the freestanding warrants with a variable exercise price (derivatives) and fixed warrants issued in connection with the $500,000 convertible debenture have been valued at $227,777 and $104,559, respectively based on a Black-Scholes pricing model using the following assumptions:

Fair market value of stock	$	0.21
Exercise price	$	0.17
Dividend yield		0.00	%
Risk free interest rate		4.00	%
Expected volatility		118	%
Expected life		2.75 Years

Changes in the fair value of the embedded and freestanding warrants with a variable price (derivatives) are calculated at each reporting period and recorded in net gain (loss) on derivative, a separate component of other income (expense). As of March 31, 2006, the fair value of the embedded and freestanding derivatives had decreased by $427,532 from its fair value at December 31, 2005 of $1,039,046.

The allocation of the proceeds of the convertible debenture to the warrants with a fixed exercise price and the recognition of the embedded derivative resulted in discounts to the convertible debenture of $109,597 and $240,403, respectively. The discount on debt of $350,000 is being amortized to interest through December 31, 2007 using the effective interest method. Interest expense recognized in the three months ended March 31, 2006 is $39,183. The unamortized discount on debt at March 31, 2006 is $310,817.

NOTE 6- PROMISSORY NOTES - RELATED PARTY

On March 12, 2003 and April 30, 2003, Sundaresan Raja advanced approximately $22,412 and $17,591, respectfully, to Airbee Wireless (India) Pvt. Ltd. (“Airbee India”), the Company’s wholly-owned subsidiary in India. Airbee India has issued Mr. Raja a promissory note due on demand. The note accrues interest at 11.25% per year, which is below the local Indian market rates of 14% to 16%. On June 20, 2005, Mr. Raja advanced approximately $11,100 to Airbee India, which has issued Mr. Raja another demand promissory note. This note accrues interest at 12.0% per year, which is below the local Indian market rates of 14% to 16%. At March 31, 2006, $51,103 was due under the notes, plus accrued interest of $9,443. The Company has guaranteed repayment of the advances.

Airbee India has also issued demand promissory notes to Ram Satagopan in exchange for funds advanced to the Airbee India. This note accrues interest at 12.0% per year, which is below the local Indian market rates of 14% to 16%. At March 31, 2006, approximately $46,291 was due under the notes plus accrued interest of $931.

During January 2006, the Company converted $1,056,816 in related party promissory notes and accrued interest when it issued 6,498,527 restricted shares to current officers in payment of promissory notes, accrued salaries and accrued interest totaling $1,748,599 at the time of issuance. In addition, the Company converted promissory notes and accrued interest due a former officer totaling $122,373 when it issued 271,939 restricted shares. See Note 9, below.

NOTE 7- PROVISION FOR INCOME TAXES

Deferred income taxes will be determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes will be measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s consolidated tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.

At March 31, 2006 and 2005, deferred tax assets consist of the following:

	March 31, 2006			March 31, 2005
Deferred tax asset	$	2,760,382		$	1,009,994
Less: valuation allowance		(2,760,382	)		(1,009,994	)
	$	—		$	—

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At March 31, 2006 and 2005, the Company had deficits accumulated during the development stage in the approximate amount of $7,886,805 and $3,366,647, respectively, available to offset future taxable income through 2024. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.

NOTE 8- ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses at March 31, 2006 consist of the following:

	March 31, 2006
Accounts payable	$	755,860
Accrued salaries payable		305,484
Reimbursements owed officers		64,146
Withholding taxes payable		50,768
Accrued interest payable		21,683
Other		180
Total	$	1,198,121

Trade payables are paid as they become due or as payment terms are extended with the consent of the vendor. At March 31, 2006, one vendor, MindTree Consulting Pvt. Ltd. (“MindTree”) accounted for 53% of the Company’s accounts payable. The Company and MindTree have entered into a repayment agreement more fully described in Note 10. The Company classifies 18% of its trade payables as current (under 30 days), 8% are between 31-90 days, 20% are between 91-150 days, and 54% are over 150 days.

NOTE 9- STOCKHOLDERS’EQUITY

The Company has 200,000,000 shares of common stock authorized at March 31, 2006 with a par value of $0.00004.

At March 31, 2006, the Company has 77,155,956 common shares issued, 13,586,956 common shares held in escrow, 997,045 common shares in treasury and 62,571,955 common shares outstanding.

The following stock transactions occurred in 2006:

Effective January 1, 2006, the Company issued options to purchase 250,000 shares of common stock to an individual in conjunction with his re-appointment to the board of directors. The options vest over one year in equal quarterly installments. The options are exercisable at $0.32 per share for a period of five years from the date of issuance. The options were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The options contain the appropriate legends restricting their transferability absent registration or applicable exemption. The executive officers received information concerning the Company and had the ability to ask questions about the Company.

Effective January 1, 2006, the Company issued options to purchase 3,000,000 shares of common stock to two executive officers of the Company exercisable at $0.32 per share. The options are exercisable until January 1, 2011. The options vest over one year in equal quarterly installments. The options are exercisable at $0.32 per share for a period of five years from the date of issuance. The options were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The options contain the appropriate legends restricting their transferability absent registration or applicable exemption. The executive officers received information concerning the Company and had the ability to ask questions about the Company.

Effective January 1, 2006, the Company issued options to purchase 215,000 shares of common stock to 28 employees of the Company’s India subsidiary exercisable at $0.32 per share. The options are exercisable until January 1, 2011. The options vest over four years in equal quarterly installments on the anniversary date. The options are exercisable at $0.32 per share for a period of five years from the date of issuance. The options were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The options contain the appropriate legends restricting their transferability absent registration or applicable exemption. The executive officers received information concerning the Company and had the ability to ask questions about the Company.

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On January 5, 2006, the Company issued 257,159 restricted shares to an executive officer in partial payment of accrued salary valued at $63,452 at the time of issuance. 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 executive officer received information concerning the Company and had the ability to ask questions about the Company.

On January 10 and 11, 2006, the Company issued 200,000 restricted shares to two organizations for services valued at $79,000 at the time of issuance. The shares were issued to the organizations in return for providing investment banking services. 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 organizations received information concerning the Company and had the ability to ask questions about the Company.

On January 11, 2006, the Company issued 271,939 restricted shares to a former employee in payment of promissory notes and accrued interest totaling $122,373 at the time of issuance. The Company also issued another 19,767 restricted shares to the same individual in payment of $8,895 in advances made to the Company plus 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 executive officer received information concerning the Company and had the ability to ask questions about the Company.

On January 12, 2006, the Company issued 6,498,527 restricted shares to current officers in payment of promissory notes, accrued salaries and accrued interest totaling $1,603,456 at the time of issuance. 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 executive officers received information concerning the Company and had the ability to ask questions about the Company.

On January 12, 2006, the Company issued 182,714 restricted shares to an organization to settle a note payable and accrued interest totaling $73,085 on the date of issuance. 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 January 31, February 28 and March 31, 2006, the Company issued 20,000, 37,411 and 47,619 restricted shares, respectively, to an officer for accrued compensation of $5,000, $10,000 and $10,000, respectively, on the dates of issuance. 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 executive officer received information concerning the Company and had the ability to ask questions about the Company.

On March 30, 2006, the Company issued 50,000 restricted shares to an accredited investor in return for his assistance in raising capital and providing short-term loans to the Company. The investor provided the Company with comments regarding the financial structure of the Company as such issues related to the Company’s equity securities and made limited introductions of the Company to potential accredited investors. His services were isolated services which were not solicited by the Company. The investor did not negotiate for the sale of any the Company's securities; discuss details of the nature of the securities sold or whether recommendations were made concerning the sale of the securities; engage in due diligence activities; provide advice relating to the valuation of or the financial advisability of any investments in the Company; or handle any funds or securities on behalf of the Company.The value of these services and consideration for providing the short term loans was an aggregate of$11,500 at the time of issuance. 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.

Throughout the quarter ended March 31, 2006, the Company issued 352,065 restricted shares of common stock to 10 accredited investors for cash totaling $96,400. In addition, the Company issued 147,202 warrants to these investors at strike prices ranging between $0.24 and $0.53 per share. The warrants will expire at varying dates from July 24, 2007 through September 29, 2007. 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.

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NOTE 10- COMMITMENTS AND CONTINGENCIES

Employment Agreements

The Company has entered into employment agreements with key members of management and some officers. Most of these employment agreements are for a period of one to five years. Since 2002, the Company has granted stock options to these individuals that vest over a three-to-five year period. On January 1, 2006, the Company granted additional options as more fully detailed in the Stock-Based Compensation section of Note 2, above.

Lease Agreements

A subsidiary, Airbee Wireless (India) Pvt. Ltd., has entered into a three-year lease agreement for office space in Chennai, India. Monthly rent in the US Dollar equivalent is $1,505. The building owner gave notice in March 2006 that it was exercising its option to sell the property to a developer who intends to build a new building on the site. Accordingly, the Company occupied new office space effective July 31, 2006.

Repayment Agreement

MindTree Consulting Pvt. Ltd. (“MindTree”), an India corporation, 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 (the “Intellectual Property”) 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 Intellectual Property, with any revenue the Company realized from the Intellectual Property during the co-ownership period to be split 50-50 with MindTree. If full payment is made on or before April 30, 2006, full ownership of the Intellectual Property reverts to the Company. This deadline has been extended to October 31, 2006.

To date, the Company has paid MindTree $200,000 pursuant to this agreement. MindTree has not yet issued any notice of default. The amount due MindTree as of March 31, 2006 is $400,091.

PFK Electronics and the Identity Supply Contract

On May 19, 2005, Airbee Automotive Group, Inc. (the operating entity resulting from the now-rescinded merger of the Company and Identity, Inc.) entered into a supply contract with PFK Electronics Pty Ltd. (PFK), a South Africa corporation, for the parts Identity required for its business. In addition to the standard terms and conditions, PFK inserted contract language purporting to have the Company act as surety for its subsidiary. With the August 2005 rescission of the Company’s merger with Identity, Identity expressly assumed the Company’s obligation to PFK. At PFK’s request, the Company sent a termination agreement to PFK in November 2005. To date, PFK has failed to return the signed termination agreement.

Litigation

On October 3, 2005, Richard P. Sommerfeld, Jr., the Company’s former chief financial officer (“Sommerfeld”) filed suit against the Company. On December 9, 2005, the Company filed an Answer to the Complaint, Affirmative Defenses and Counterclaims. On January 6, 2006, Sommerfeld amended his claims by filing an Amended Complaint and at the same time joining the Company’s two inside directors, E. Eugene Sharer (President and Chief Operating Officer) and Sundaresan Raja (Chief Executive Officer), and its outside director, Mal Gurian, as individual defendants. On February 7, 2006, the Company denied the primary allegations in the amended complaint by filing its Answer to Amended Complaint, Affirmative Defenses and Counterclaims. The individual defendants have moved to dismiss Sommerfeld’s claims. The motion has been set for a hearing on June 7, 2006.

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The facts and circumstances surrounding this lawsuit and the history of the case can be found in greater detail in Litigation subheading of Note 9 to the Financial Statements for the years ended December 31, 2005 and 2004 contained in the Form 10-KSB filed on April 17, 2006. In summary, Sommerfeld alleges breach of contract of his employment agreement, violation of the Wage Payment and Collection Act, default on promissory notes, enforcement of security interest, injunction, breach of contract of stock option agreement, civil conspiracy, aiding and abetting, and constructive fraud. The latter three claims are asserted against the individual defendants only. Sommerfeld estimates his damages in excess of $1.5 million.

The Company, while admitting it owes Sommerfeld back wages totaling less than $70,000, has asserted counterclaims against him for declaratory judgment and injunctive relief, breach of contract of his employment agreement, breach of fiduciary duties, tortious interference with contractual and economic relations, replevin and injunction, and breach of contract of his stock option agreement. The Company has tendered payment of the promissory notes in shares of the Company’s common stock as permitted under the terms of the promissory notes. The Company therefore believes that its damage claims against Sommerfeld exceed the actual monetary value of his claims against the Company.

The discovery phase of this case will resume after the pending motions to dismiss are decided.

NOTE 11- 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, 2005 and 2004 and for the three month period ended March 31, 2006. 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 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.

NOTE 12- RESTATEMENT

The Company restated its condensed consolidated financial statements for the three months ended March 31, 2005 for amortization of unearned compensation of $3,747 and the reclassification of various selling, general and administrative expenses, and compensation to research and development expenses. The effect of these changes resulted in an increase of the loss for the three month period ended March 31, 2005 of $3,437 to a net loss of $552,281 and an increase in the accumulated deficit to $3,366,647.

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

Forward Looking Statements

This Form 10-QSB, 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,” “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. We undertake no obligation to revise or update any forward-looking statements for any reason.

Executive Summary

· Airbee Wireless, Inc. is no longer a development stage company concentrating on software development as the Company earned revenues from planned operations in the first quarter of 2006.

· We had a $1,290,180 net loss before provision for income taxes in the first three months of 2006. Accounting rules drove much of this loss. We recorded $1,015,141 as a component of compensation and professional fees due to the operation of SFAS 123R which required us to expense stock options granted and vesting during this quarter. We also recorded a $427,532 gain in other income (expense) from the re-valuation of derivatives required under SFAS 133. We raised almost $100,000 from the sale of stock to accredited investors.

· 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.

· We have created a new business unit in the fourth quarter of 2005 to take on development contracts using our software products as a base and creating the application solution for our customers. We delivered the first of our service projects to Sensormatics on April 17, 2006. There are several other such projects in the planning stage and which will further the Company’s objective of getting its software stack product into the end user’s operation sooner than we would otherwise realize.

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Overview

Airbee Wireless, Inc. (hereinafter called “Airbee” or “Company”) reported $51,600 of revenue from planned operations in the first quarter of 2006. As a result, it is no longer a development stage company. We have continued our go-to-market strategy of licensing the major microcontroller and 802.15.4 radio companies, announcing agreements with Infineon and ZMD. 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 and applications. We also announced a new product (ZAPP) that facilitates low power RF application development for mesh networks including ZigBee.

Our goal remains being a preeminent provider of intelligent software for short range wireless communications embedded into silicon chips and platform solutions. As part of our strategy to compete in each target market segment, 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 believe that with our software embedded inside and our advanced network management tools, our intelligent software will make our customers’ products perform better.

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. In terms of penetrating multiple market segments, we focus on silicon manufacturers, specifically controller manufacturers, module manufacturers and OEMs. 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 (including distributors for Texas Instruments and Radiocrafts); and (b) the overriding objective is to be embedded directly into the controller by the manufacturer and shipped directly with each controller.

As validation of our strategy, our engagement with Texas Instruments (“TI”) has picked up activity this quarter and we predict TI will become a significant customer. Since the announcement of our agreement with TI, we have downloaded nearly 400 copies of our limited network size stack to TI customers for evaluation. We operate an online help desk to support these prospective customers as they evaluate the product for their application and use, and we are working with ZMD and Infineon to set up a similar process. We note similar progress with our ZigBee module partner Radiocrafts, which now has more than 30 OEMs using our ZNS stack and ZAPP (SPPIO) application. We anticipate many of these will go into production in the coming quarters.

We expect to begin training programs for our licensees such as Infineon to train their field application engineers. We expect this will result in increased opportunities with our partners’ customers. In addition, we will be participating in the ZigBee Developers program this June where we will be teaching new developers how to use our stack to develop applications. 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.

Results of Operations

Three Months Ended March 31, 2006 Compared to the Three Months Ended March31, 2005

During the first quarter of 2006 we had operating revenues of $51,600, resulting in a net loss applicable to common shares of $1,290,180, or $0.02 net loss per share, compared to a net loss of $613,736 or $0.01 net loss per share for the same period in 2005. This quarter’s net loss was substantially reduced by the realization of $427,532 as gain from the re-valuation of derivatives in accordance with accounting rules. However, we also recorded a $1,015,141 expense from the granting and vesting of stock options this quarter. Cumulative net loss since inception totals $7,886,805.

Our net revenue for the three months ended March 31, 2006 significantly increased to $51,600 as compared to $0 for the three months ended March 31, 2005. During 2005, the Company signed license agreements with Radiocrafts, Texas Instruments, SoftBaugh, Jennic, Compel JSC and Wireless People. These license agreements may generate revenue during the second quarter of 2006 but depend upon sales of the licensees’ products containing our software. The application development agreements we signed with Infineon during 2005 and with SensiTool in 2006 accounted for the revenue we reported this quarter. These agreements require us to embed our software in the customer’s application for a fixed fee, generally paid in stages as benchmarks are met.

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Operating expenses for the three months ended March 31, 2006 were $1,704,572 as compared to $585,162 for the three months ended March 31, 2005, an increase of 191% or $1,119,410. This increase, as further explained below, is principally due to increases in compensation and professional fees and selling, general and administrative expenses. Operating expenses increased as the Company developed and implemented its business plan.

Our overall increase in compensation and professional fees for the quarter ended March 31, 2006 compared to the quarter ended March 31, 2005 was $1,315,935, to $1,562,361 from $246,426. Compensation expense required by SFAS 123R accounted for $1,015,141 of this increase as the Company is now required to expense stock options granted and vesting in the period. This is a non-cash expense. The rest of the increase was due to increased professional services costs of $74,160 of legal fees related to our financing from Montgomery Equity Partners Ltd. and legal defense costs for suits against the Company, $79,000 in financing costs, and legal and accounting fees in connection with our SEC reporting. Salaries rose due to the addition of new programming staff in India ($147,600) in accordance with the Company’s plan to improve the administrative function in India and to bring previously out-sourced software development work back in-house. 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.

Selling, general and administrative expenses increased to $130,155 in the first quarter of 2006, up $68,026 or 109% from 2005’s first quarter total of $62,129. This increase was due primarily from insurance costs and loan transaction fees. 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.

The decrease in research and development expense for the three months ended March 31, 2006 compared to the three months ended March 31, 2005 was $273,525. With the demonstration of technological feasibility in April 2005, we were permitted to capitalize research and development costs and amortize them going forward. Our intangible assets (primarily capitalized R&D) increased by $552,025, net of amortization, from March 31, 2005 to March 31, 2006 to $718,000 as we increased our overall expenditures in research and development programs to ensure that our products continue to meet our customer demands.

Depreciation and amortization expense for the quarter ended March 31, 2006 increased $8,974. Most of this increase is $7,550 for the amortization of intellectual property. Interest expense for the three months ended March 31, 2006 increased $36,166, almost entirely due to the amortization of the convertible debenture discount to interest.

Liquidity and Capital Resources

Since inception, we have principally funded our operations from private placements of securities and management and shareholder loans and contributions of $3,210,364. As of March 31, 2006, we have $467,024 outstanding under notes payable - related parties, reimbursements due officers and accrued payroll. During the first quarter of 2006, we received an aggregate of $96,400 in cash from accredited investors in consideration of 352,065 shares of our common stock and 147,202 common stock purchase warrants. Proceeds were used to pay down current payables. We will 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 three of our products.

We have incurred an accumulated deficit at March 31, 2006 of $7,886,805 compared to $3,366,647 at March 31, 2005. We had negative working capital at March 31, 2006 of $3,132,694 compared to negative working capital of $1,384,947 at March 31, 2005. Our ability to continue as a going concern is dependent upon our obtaining adequate capital to fund losses until we become profitable.

We entered into a note payable dated August 31, 2002, principal amount of $50,000 payable on or before August 31, 2005. We entered into this note in connection with the 2002 acquisition of Connexus Technologies (Pte.) Ltd. While nominally non-interest bearing, the amount to be repaid varied with each anniversary date of the note. If paid prior to August 31, 2003, only $50,000 was due. If the note was paid between September 1, 2003 and August 31, 2004 the total payment due was $100,000. If paid between September 1, 2004 and August 31, 2005, total payment due was $150,000. During the fourth quarter of 2005, we restructured the note with the lender to provide for interest from the date of the note until paid at 12% per annum. At December 31, 2005, principal ($50,000) and accrued interest ($23,085 of the $100,000 accrued interested booked as of September 30, 2005) on this note totaled $73,085, which was converted to common stock with the consent of the note holder in January 2006.

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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 has not yet been funded as of July 26, 2006. The secured convertible debentures are convertible, in whole or in part, at any time and from time to time before maturity 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 have a term of two (2) years, piggy-back registration rights and accrue interest monthly at the rate of fifteen percent (15%) per year. We are current with our interest payments.

In connection with the Securities Purchase Agreement we issued Montgomery three warrants to purchase a total of 2,000,000 shares of our common stock. The warrants are exercisable for a period of three years. The exercise price for the first warrant for 1,000,000 shares is the lesser of 80% of the lowest closing bid price for the five trading days immediately preceding the exercise date or $0.20 per share. The exercise price for the second warrant for 500,000 shares is the lesser of 80% of the lowest closing bid price for the five trading days immediately preceding the exercise date or $0.30 per share. The exercise price for the third warrant for 500,000 shares is $0.001 per share.

Our principle 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 March 31, 2006 and, 2005, respectively, was $15,845 and $91,650. At March 31, 2006 and 2005, respectively, we had total stockholders’ deficit of $1,818,523 and $1,197,298.

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 (especially for the newly introduced ZigBee global standard) and other competitive factors) and (b) our ability to control expenses.

With regard to our current liabilities at March 31, 2006, $57,391 is payable to a related note holder who has deferred repayment as well as interest. During January 2006, the Company converted $1,870,972 in related party notes payable, accrued salaries, accounts payable and interest payable and another note payable to equity, issuing 7,230,106 restricted shares of common stock. Trade payables at March 31, 2006 of $755,860 are outstanding and will be paid as they come due or as payment may be extended by agreement of the parties. One vendor, MindTree Consulting Pvt. Ltd. (“MindTree”), accounted for 53% 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 (the “Intellectual Property”) 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 Intellectual Property, with any revenue the Company realized from the Intellectual Property during the co-ownership period to be split 50-50 with MindTree. If full payment is made on or before April 30, 2006, full ownership of the Intellectual Property reverts to the Company.

To date, the Company has paid MindTree $200,000 pursuant to this agreement. As of July 26, 2006, 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 October 31, 2006.

We believe that revenues will increase during the second quarter of 2006 from our licensing and other agreements. However, we shall be dependent upon financing to accelerate our marketing activities and continue product enhancement. We anticipate monthly expenses of approximately $165,000 to $185,000 over the next several months. This amount includes costs of our SEC reporting obligations, which were approximately $190,000 for the year ending December 31, 2005. Cost of SEC reporting obligations includes all filing costs and professional fees.

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During the first quarter of 2006, we received an aggregate of $96,400 from accredited investors in consideration of 352,065 shares of our common stock and 147,202 common stock purchase warrants. The proceeds were used to pay down current payables.

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 when additional financing is obtained and intends to negotiate lump-sum payment reductions with the larger vendors (MindTree excepted). The bulk of the Contractual Obligations in the table below 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. The long-term debt listed in the table is the secured convertible debenture, 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 (but not eliminate) its obligations under these contracts. It will also consider overhead reductions at its headquarters and at its India subsidiary. This would be as a last resort as (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.

The Company participated in the technical meetings at the ZigBee Open House held in Milan, Italy in March 2006 where the focus of discussion was the emerging ZigBee specification standard 1.1. We are planning the process by which our stack will be certified to the new standard on a customer’s new hardware platform. The hope is to have the certification completed within two months after the new specification is released in the second or third quarter of 2006, as several customers have expressed an interest in moving forward after the release.

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, “Summaryof Significant Accounting Policies” of Notes to the Consolidated Financial Statements 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.

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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 bethe only risks we face. Additional risks that we do not yet know of or that wecurrently think are immaterial may also impair our business operations. If anyof the events or circumstances described in the following risks actuallyoccurs, our business, financial condition or results of operations couldsuffer, 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 softwarelicenses, we are dependent upon the ability of our customers to develop andpenetrate 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.

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Numerous factors may cause out total revenues and operating results tofluctuate significantly from period to period. These fluctuations increase thedifficulty of financial planning and forecasting and may result in decreases inour 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.

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.

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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 March 31, 2006, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Contractual Obligations

The table below lists our known contractual obligations at March 31, 2006.

Our long-term debt obligation consists of $350,000 of a $500,000 convertible debenture ($150,000 not funded as of July 26, 2006), plus interest payable monthly at 15% per annum. We are current in our interest payments through July 2006.

Our purchase obligations are limited to employment contracts with company executives and senior staff. These seven written contracts are for one to three years in duration and expire at various dates between December 31, 2006 and May 15, 2008.

The operating leases reported here are limited to three leases for office space in Chennai, India for our India subsidiary. Each lease was for three years with expiration dates from April 30, 2008 through July 31, 2008. However, our landlord has sold the building and given notice pursuant to the lease agreements that we must vacate the premises by July 31, 2006. We are presently searching for new office space and expect to find similar space at comparable rates. For purposes of disclosure requirements, we continue to report the lease commitments under the now-terminated leases.

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.

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Purchase Obligations (employment contracts)*	$	1,466,667		978,750		487,917		—		—
Long-Term Debt Obligations	$	350,000		—		350,000		—		—
Operating Lease Obligations **	$	72,230		42,015		30,215		—		—
Capital Lease Obligations	$	—		—		—		—		—
Other Long-Term Liabilities Reflected on Balance Sheet under GAAP	$	—		—		—		—		—

* Employment contracts with senior executives ranging in length from 1 year to 3 years, expiring on various dates from December 31, 2006 through May 15, 2008.

** Leases of office space in Chennai, India expiring at various times through July 2008. The lease at our Rockville, MD office is month-to-month and therefore not included. Our Rockville rent is $2,730 per month.

Item 3. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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 as of the end of the period covered by 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 disclosure. 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.

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During the period covered by this report the Company continued to remediate previously disclosed internal control deficiencies (improper amortization of capitalized intellectual property costs and accounting for unearned compensation arising from the issuance of stock options below market value) first identified during the third quarter 2005. 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. In addition, an internal control deficiency was discovered during the first quarter 2006 by the Company’s controller as a result of the Company’s failure to account for convertible instruments and derivatives under SFAS 133, SFAS 150 and EITF 00-19.

The Company’s interim chief financial officer and controller have worked diligently to properly account for convertible instruments and derivatives and will consult with outside consultants on an as-needed basis to enable the Company to make the proper disclosures. As disclosed above, the Company’s controller identified the internal control deficiencies during the third quarter 2005. As previously disclosed, the Company hired a controller in May 2005 to identify, remediate and eliminate prior internal control and disclosure control deficiencies. 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 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. While the Company has implemented an account analysis procedure and hired additional personnel, the aforementioned 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 the fiscal year ending December 31, 2006. Costs of the controller and finance manager and the practices implemented thus far are approximately $120,000 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

As disclosed above and under the Company’s annual report, as amended, changes in the Company’s internal control over financial reporting occurred during the last fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting, as the Company continues to implement the remediation measures and internal controls established during 2005.

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

See the Litigation subsection of Note 10 - Commitments and Contingencies to the Condensed Consolidated Financial Statements in Part 1 of this Form 10-QSB.

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

The following stock transactions occurred in the first quarter of 2006:

Effective January 1, 2006, the Company issued options to purchase 250,000 shares of common stock to an individual in conjunction with his re-appointment to the board of directors. The options vest over one year in equal quarterly installments. The options are exercisable at $0.32 per share for a period of five years from the date of issuance. The options were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The options contain the appropriate legends restricting their transferability absent registration or applicable exemption. The executive officers received information concerning the Company and had the ability to ask questions about the Company.

Effective January 1, 2006, the Company issued options to purchase 3,000,000 shares of common stock to two executive officers of the Company exercisable at $0.32 per share. The options are exercisable until January 1, 2011. The options vest over one year in equal quarterly installments. The options are exercisable at $0.32 per share for a period of five years from the date of issuance. The options were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The options contain the appropriate legends restricting their transferability absent registration or applicable exemption. The executive officers received information concerning the Company and had the ability to ask questions about the Company.

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Effective January 1, 2006, the Company issued options to purchase 215,000 shares of common stock to 28 employees of the Company’s India subsidiary exercisable at $0.32 per share. The options are exercisable until January 1, 2011. The options vest over four years in equal quarterly installments on the anniversary date. The options are exercisable at $0.32 per share for a period of five years from the date of issuance. The options were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The options contain the appropriate legends restricting their transferability absent registration or applicable exemption. The executive officers received information concerning the Company and had the ability to ask questions about the Company.

On January 5, 2006, the Company issued 257,159 restricted shares to an executive officer in partial payment of accrued salary valued at $63,452 at the time of issuance. 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 executive officer received information concerning the Company and had the ability to ask questions about the Company.

On January 10 and 11, 2006, the Company issued 200,000 restricted shares to two organizations for services valued at $79,000 at the time of issuance. The shares were issued to the organizations in return for providing investment banking services. 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 organizations received information concerning the Company and had the ability to ask questions about the Company.

On January 11, 2006, the Company issued 271,939 restricted shares to a former employee in payment of promissory notes and accrued interest totaling $122,373 at the time of issuance. The Company also issued another 19,767 restricted shares to the same individual in payment of $8,895 in advances made to the Company plus 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 executive officer received information concerning the Company and had the ability to ask questions about the Company.

On January 12, 2006, the Company issued 6,498,527 restricted shares to current officers in payment of promissory notes, accrued salaries and accrued interest totaling $1,603,456 at the time of issuance. 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 executive officers received information concerning the Company and had the ability to ask questions about the Company.

On January 12, 2006, the Company issued 182,714 restricted shares to an organization to settle a note payable and accrued interest totaling $73,085 on the date of issuance. 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 January 31, February 28 and March 31, 2006, the Company issued 20,000, 37,411 and 47,619 restricted shares, respectively, to an officer for accrued compensation of $5,000, $10,000 and $10,000, respectively, on the dates of issuance. 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 executive officer received information concerning the Company and had the ability to ask questions about the Company.

On March 30, 2006, the Company issued 50,000 restricted shares to an accredited investor in return for his assistance in raising capital and providing short-term loans to the Company. The investor provided the Company with comments regarding the financial structure of the Company as such issues related to the Company’s equity securities and made limited introductions of the Company to potential accredited investors. His services were isolated services which were not solicited by the Company. The investor did not negotiate for the sale of any the Company's securities; discuss details of the nature of the securities sold or whether recommendations were made concerning the sale of the securities; engage in due diligence activities; provide advice relating to the valuation of or the financial advisability of any investments in the Company; or handle any funds or securities on behalf of the Company.The value of these services and consideration for providing the short term loans was an aggregate of $11,500 at the time of issuance. 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.

Throughout the quarter ended March 31, 2006, the Company issued 352,065 restricted shares of common stock to 10 accredited investors for $96,400. In addition, the Company issued 147,202 warrants to these investors at strike prices ranging between $0.24 and $0.53 per share. The warrants will expire at varying dates from July 24 through September 29, 2007. 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.

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Item 3. Defaults upon Senior Securities.

In August 2002, the Company entered into a note payable, principal amount of $50,000 payable August 31, 2005. The Company entered into this note in connection with the 2002 acquisition of Connexus Technologies (Pte.) Ltd. The note was non-interest bearing if it was paid prior to August 31, 2003 and if the note was paid between September 1, 2003 and August 31, 2004 the total payment due was $100,000. If the note is paid between September 1, 2004 and August 31, 2005, total payment due is $150,000. Beginning in September 2005, the Company began discussions with the note holder regarding settlement of this note payable, it being the Company’s position that the note was usurious and therefore unenforceable. By December 31, 2005, the note holder had agreed in principle to accept Company stock in lieu of cash and agreed to restructure the note so that interest accrued at 12% per annum from the original date on the original principal amount. Accrued interest of $23,085 was added to the outstanding principal amount of $50,000 and the Company issued 182,714 shares of common stock in January 2006 to settle this note payable and the balance of the accrued interest ($76,915) was forgiven in 2005.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

31.1   Rule 13a-14(a)/15d-4(a) Certification of Principal Executive Officer

31.2   Rule 13a-14(a)/15d-4(a) Certification of Principal Financial Officer

32.1   Section 1350 Certification of Principal Executive Officer

32.2   Section 1350 Certification of Principal Financial Officer

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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: September 22, 2006

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

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