Airbee Wireless 10QSB 2006 Q3 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

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

For the quarterly period ended September 30, 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 x  No £

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

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: 77,360,769 shares of Common Stock par value of $0.00004 as of October 30, 2006,

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

AIRBEE WIRELESS, INC.

FORM 10-QSB

INDEX

	PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheet as of September 30, 2006 (Unaudited)	4
Condensed Consolidated Statements of Operations for the Nine and Three Months Ended September 30, 2006 and 2005 (Unaudited)	5
Condensed Consolidated Statement of Accumulated Other Comprehensive Income for the Nine Months Ended September 30, 2006 (Unaudited)	6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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	25
Item 3. Controls and Procedures	33
PART II OTHER INFORMATION	34
Item 1. Legal Proceedings	34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3. Defaults Upon Senior Securities	34
Item 4. Submission of Matters to a Vote of Security Holders	34
Item 5. Other Information	35
Item 6. Exhibits	35
SIGNATURES	36

2

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)

3

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2006

(UNAUDITED)

	2006
ASSETS
Current Assets:
Cash and cash equivalents	$	11,436
Prepaid expenses and other current assets		49,625
Total Current Assets		61,061
Fixed assets, net of depreciation		145,366
Intangible assets		704,858
Deferred financing costs		19,323
Other assets		59,098
		783,279
TOTAL ASSETS	$	989,706
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
LIABILITIES
Current Liabilities:
Notes payable - related party	$	96,061
Notes payable - other		635,663
Montgomery settlement liability		320,475
Fair value of derivatives		710,833
Warrants liability		537,602
Accounts payable and accrued expenses		1,457,065
Total Current Liabilities		3,757,699
Long-term Liabilities:
Convertible debentures, net of discount of $218,750		131,250
Total Long-term Liabilities		131,250
Total Liabilities		3,888,949
COMMITMENTS AND CONTINGENCIES		-
STOCKHOLDERS' DEFICIT
Common stock, $.00004 Par Value; 200,000,000 shares authorized;
90,176,353 shares issued, 13,586,956 shares held in escrow;
75,592,352 outstanding		3,024
Additional paid-in capital		6,624,327
Unearned compensation		(26,546	)
Other accumulated comprehensive income		724
Accumulated deficit		(9,297,941	)
		(2,696,412	)
Less: stock subscription receivable		-
Less: treasury stock, 997,045 shares at cost		(202,831	)
Total Stockholders' Deficit		(2,899,243	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	989,706

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

4

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)

	NINE MONTHS ENDED						THREE MONTHS ENDED
	SEPTEMBER 30,						SEPTEMBER 30,
				Restated						Restated
	2006			2005			2006			2005
OPERATING REVENUES
Sales	$	127,800		$	1,021			-			-
COST OF SALES		1,092			-			361			-
GROSS PROFIT		126,708			1,021			(361	)		-
OPERATING EXPENSES
Compensation and professional fees		1,447,550			1,108,252			542,809			343,900
Stock option compensation expense		1,254,956			-			27,326			-
Research and development		-			173,017			-			12,512
Selling, general and administrative expenses		386,407			445,811			99,850			114,833
Bad debt		-			521,416			-			(15,079	)
Depreciation and amortization		40,841			101,165			16,687			74,269
Total Operating Expenses		3,129,754			2,349,661			686,672			530,435
LOSS BEFORE OTHER INCOME (EXPENSE)		(3,003,046	)		(2,348,640	)		(687,033	)		(530,435	)
OTHER INCOME (EXPENSE)
Gain on derivatives/warrants		724,904			-			216,276			-
Interest income		119			-			-			-
Interest expense		(423,293	)		(327,163	)		(258,590	)		(216,987	)
Total Other Income (Expense)		301,730			(327,163	)		(42,314	)		(216,987	)
NET LOSS BEFORE PROVISION FOR INCOME TAXES		(2,701,316	)		(2,675,803	)		(729,347	)		(747,422	)
Provision for Income Taxes		-			-			-			-
NET LOSS APPLICABLE TO COMMON SHARES	$	(2,701,316	)	$	(2,675,803	)	$	(729,347	)	$	(747,422	)
NET LOSS PER BASIC AND DILUTED SHARES	$	(0.04	)	$	(0.06	)	$	(0.01	)	$	(0.02	)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING		67,728,836			43,702,551			74,124,876			45,471,801

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 NINE MONTHS ENDED SEPTEMBER 30, 2006

(UNAUDITED)

Balance, December 31, 2005	$	734
Loss on foreign currency translations		(10	)
Balance, September 30, 2006	$	724

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 NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)

				Restated
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(2,701,316	)	$	(2,675,803	)
Adjustments to reconcile net loss to net cash
(used in) operating activities
Depreciation and amortization		40,841			101,165
Provision for bad debts		-			536,495
Common stock issued for services		341,267			298,994
Common stock issued for compensation		55,000			13,000
Use of pledged collateral for settlement of interest expense		-			150,000
Gain on valuation of derivatives		(443,213	)		-
Amortization of derivative discounts		131,250			-
Stock options vested during period		1,254,956			-
Amortization of financing fees		11,592			-
(Loss) on foreign currency translations		(10	)		(2,401	)
Amortization of unearned compensation		11,976			10,382
Extension and late payment fees on bridge loans		92,663			-
Use of pledged collateral for settlement of note payable and interest expense		(387,236	)		-
Excess tax benefits from share-based payment arrangement		(439,235	)		-
Changes in assets and liabilities
Decrease in accounts receivable		10,000			-
(Increase) decrease in prepaid expenses and other assets		36,041			(95,258	)
(Increase) in other assets		(31,384	)		(536,446	)
Increase in accounts payable and
and accrued expenses		490,245			1,049,415
Total adjustments		1,174,753			1,525,346
Net cash (used in) operating activities		(1,526,563	)		(1,150,457	)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of intangible assets		(38,256	)		(426,586	)
Acquisitions of fixed assets		(97,030	)		(26,503	)
Net cash (used in) investing activities		(135,286	)		(453,089	)

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

7

AIRBEE WIRELESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)

				Restated
	2006			2005
CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from common stock issuances	$	480,296		$	670,559
Proceeds from stock subscriptions receivable		127,500			-
Proceeds from notes payable - other		483,000			850,000
Proceeds from derivative notes payable		115,000			-
Proceeds from stock option exercise		400			-
Payment on notes payable - related party, net		-			37,243
Excess tax benefits from share-based payment arrangement		439,235
Payments for issuance costs		-			(25,000	)
Net cash provided by financing activities		1,645,431			1,532,802
NET (DECREASE) IN
CASH AND CASH EQUIVALENTS		(16,418	)		(70,744	)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD		27,854			87,362
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	11,436		$	16,618
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest expense	$	30,625		$	-
Income taxes	$	-		$	-
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES:
Common stock issued for compensation	$	55,000		$	13,000
Common stock issued for services	$	341,267		$	298,994
Common stock issued for issuance costs	$	-		$	740,000
Stock options vested during period	$	1,254,956		$	-
Conversion of note payable - other and accrued interest to common stock	$	113,085		$	-
Use of pledged collateral for settlement of note payable, accrued interest and settlement of interest expense	$	387,236		$	937,500
Conversion of related party notes payable, accrued salaries payable and accrued interest to common stock	$	1,870,972		$	-

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

8

AIRBEE WIRELESS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 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 $9.3 million as of September 30, 2006. The Company’s operations have been financed primarily through a combination of issued equity and debt. For the nine months ended September 30, 2006, the Company had a net loss of approximately $2,701,316 and cash used in operations of approximately $1,526,563.

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 provided the Company’s stock is traded on the OTC Bulletin Board. 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 the Company and its wholly owned subsidiaries Airbee Wireless (Pte.) Ltd., located in Singapore, and Airbee Wireless (India) Pvt. Ltd., located in India, for the nine months ended September 30, 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 September 30, 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, determined that this specific intellectual property relating to Airbee UltraLite^tm should be amortized beginning with the second quarter of 2005 in accordance with SFAS No. 86. The Company plans to begin amortizing the capitalized R&D costs related to our ZigBee stack (the MAC, Network and Security layers) when the software is available for general release. 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 of $30,915were 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 nine months ended September 30, 2006, the Company amortized $11,592 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 September 30, 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 nine month period ended September 30, 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 September 30, 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:

	September 30, 2006			September 30, 2005
Net Loss		(2,701,316	)		(2,675,803	)
Weighted-average common shares outstanding (Basic)		67,728,836			43,702,551
Weighted-average common stock Equivalents:
Stock options		—			—
Warrants		—			—
Weighted-average common shares outstanding (Diluted)		67,728,836			43,702,551

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/warrants, a separate component of the other income (expense).

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 nine months ended September 30, 2006 and 2005 was $11,976 and $10,311, 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.

	Nine Months Ended
	9/30/06			9/30/05
Net loss, as reported		(2,701,316	)		(2,675,803	)
Add: Stock-based employee compensation expense included in reported net income,
net of related tax effects		1,254,956			-
Deduct: Total stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects		(1,254,956	)		(5,987,688	)
Net income, pro forma		(2,701,316	)		(8,663,491	)
Earnings per share:
Basic, as reported	$	(0.04	)	$	(0.20	)
Basic, pro forma	$	(0.04	)	$	(0.20	)
Diluted, as reported	$	(0.04	)	$	(0.20	)
Diluted, pro forma	$	(0.04	)	$	(0.20	)

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
	9/30/06			9/30/05
Dividend yield		0.00	%		0.00	%
Expected volatility		156.59	%		136.58	%
Risk-free interest rate		4.00	%		4.00	%
Expected life in years		3.25 - 4.50			3.75 - 4.67

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The following table summarizes the stock option activity for the nine months ended September 30, 2006:

			Sept. 30, 2006		Weighted
			Weighted		Average
			Average		Contractual
	Shares		Exercise Price		Term (Years)
Outstanding, December 31, 2005		40,490,010		0.2050
Options granted		3,465,000		0.3200
Options reinstated		-		-
Options exercised		10,000,000		0.00004		1.12603
Options forfeited or expired		-		-		-
Outstanding, September 30, 2006		33,955,010		0.2771		4.0998
Options exercisable, September 30, 2006		16,672,510		0.2769		4.1189

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 nine months ended September 30, 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.

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 five year period. The amount amortized for the nine months ended September 30, 2006 is $22,650.

The main components of intangible assets are as follows:

	Nine Months Ended September 30, 2006
	Gross Carrying Amount		Accumulated Amortization
Intellectual Property		152,569		45,300
Capitalized Research & Development		597,589		-
Total Intangible Assets		750,158		45,300

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.

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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 condensed 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.

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 forConditional 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.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140.” FAS No. 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract under a transfer of the servicer’s financial assets that meets the requirements for sale accounting, a transfer of the servicer’s financial assets to a qualified special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale or trading securities in accordance with FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates.

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Additionally, FAS No. 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, permits an entity to choose either the use of an amortization or fair value method for subsequent measurements, permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights and requires separate presentation of servicing assets and liabilities subsequently measured at fair value and additional disclosures for all separately recognized servicing assets and liabilities. FAS No. 156 is effective for transactions entered into after the beginning of the first fiscal year that begins after September 15, 2006.

The Company is currently evaluating the effect the adoption of FAS No. 156 but believes it will not have a material impact on its financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements,(“FAS 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of FAS 157 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

The FASB also issued in September 2006 Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106 and 132(R), (“FAS 158”) . This Standard requires recognition of the funded status of a benefit plan in the statement of financial position. The Standard also requires recognition in other comprehensive income certain gains and losses that arise during the period but are deferred under pension accounting rules, as well as modifies the timing of reporting and adds certain disclosures. FAS 158 provides recognition and disclosure elements to be effective as of the end of the fiscal year after December 15, 2006 and measurement elements to be effective for fiscal years ending after December 15, 2008. The Company has not yet analyzed the impact FAS 158 will have on its financial condition, results of operations, cash flows or disclosures.

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 September 30, 2006 consist of the following:

Computer and office equipment $ 132,1235

Leasehold improvements 51,503

Less: accumulated depreciation and amortization (38,260 )

Net book value  $ 145,366

Depreciation expense for the nine months ended September 30, 2006 and 2005 was $18,191 and $10,885, respectively.

NOTE 5- DEBT

Montgomery Settlement Liability

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 September 30, 2006, the lender has sold 2,558,844 of the 9.4 million pledged shares and realized net proceeds of $617,025, leaving an outstanding balance of $320,475, which appears as Montgomery settlement liability on the balance sheet.

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Note Payable- Other

In September 2005, a former director loaned the Company $100,000 in return for an unsecured demand promissory note. The terms of the note provide for interest at 6.5% per annum. Payment of the note is guaranteed by an affiliate of the Company. On September 19, 2006, the Company issued its promissory note for $100,000 due December 31, 2006 to replace the prior note. The terms of the note provide for interest at 10.0% per annum. The note is secured by 555,555 pledged shares of stock which are held by an escrow agent pursuant to a written escrow agreement.

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 was payable in cash or Company restricted common stock; if paid in stock the price would 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. On June 5, 2006, the note was converted to 172,414 restricted shares of common stock (see Note 9).

On May 18, 2006, a shareholder accepted the Company’s term sheet for senior secured bridge loan by providing a total of $385,000 in cash to the Company. The terms of this bridge loan are: interest at 12% per annum, compounded monthly; repayable in ninety (90) days but the Company has the option of extending for another 30 days for a fee of 8% of the amount provided the Company. If the bridge loan remained unpaid at the end of 90 or 120 days if the Company extended the term, the Company was to pay a 10% penalty plus an additional 10% for every quarter the loan remained unpaid The shareholder also received 577,500 warrants to purchase common stock exercisable over three years at $0.50 per share. The Company valued these warrants using the Black-Scholes option pricing model resulting in a discount on debt of $84,626 which was amortized over the life of the bridge loan (90 days). The Company extended the term for 30 days but failed to repay the loan and therefore incurred the 10% penalty. The total amount due at September 30, 2006 is $477,663.

In July 2006, an individual loaned the Company $58,000 in return for an unsecured promissory note due March 31, 2007. The terms of the note provide for interest at 8% per annum.

Convertible Debenture

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 had until September 30, 2006 to file the registration statement which must be declared effective no later than December 31, 2006. On September 29, 2006, the Company filed the registration statement .

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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 $334,997 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	$	0.2000
Exercise price	$	0.13
Dividend yield		0.00	%
Risk free interest rate		4.00	%
Expected volatility		123	%
Expected life		1.25 Years

As of September 30, 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 $219,002 and $99,547, respectively based on a Black-Scholes pricing model using the following assumptions:

Fair market value of stock	$	0.2000
Exercise price	$	0.13
Dividend yield		0.00	%
Risk free interest rate		4.00	%
Expected volatility		123	%
Expected life		2.25 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 September 30, 2006, the fair value of the embedded and freestanding derivatives had decreased by $472,082 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 nine months ended September 30, 2006 is $131,250. The unamortized discount on debt at September 30, 2006 is $218,750.

Bridge Loan Derivatives

Between April 16, 2006 and May 5, 2006, five accredited investors accepted the Company’s term sheet for convertible senior secured bridge loans by providing a total of $115,000 cash to the Company. The terms of these bridge loans are: interest at 12% per annum, compounded monthly; repayable in ninety (90) days but the Company has the option of extending for another 30 days for a fee of 8% of the amount provided the Company; these five accredited investors have the option to convert their bridge loans to restricted shares of common stock at an exercise price of the lower of the average closing bid price of the Company’s stock for the five trading days preceding the date of the conversion or the market price of the stock on the trading day preceding the conversion. The Company exercised its option to extend the term for an additional thirty (30) days for these five loans. If the bridge loans are not repaid or converted by the end of their terms plus the optional extension, the Company will pay a penalty of 10% of the dollar value of the amount outstanding; the Company will pay an additional 10% penalty for each quarter thereafter that the bridge loans remain unpaid. These five accredited investors also received warrants to purchase common stock at the ratio of 1 common share for each $2.00 loaned. All warrants have a three year term and an exercise price of $0.50 per share. The warrants and any shares converted have piggyback registration rights. The Company has not repaid the bridge loans. As a result of the conversion rights, the Company recorded these bridge loans as a derivative liability valued at $156,834.

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NOTE 6- NOTES PAYABLE- 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 September 30, 2006, $52,925 was due under the notes, which includes accrued interest of $25,187. 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 September 30, 2006, approximately $52,041 was due under the notes. The Company is current with its interest payments to Mr. Satagopan.

Various other related party demand notes payable with interest rates ranging from 12% to 16% have a principal balance of $16,282 as of September 30, 2006.

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 September 30, 2006 and 2005, deferred tax assets consist of the following:

	September 30, 2006			September 30, 2005
Deferred tax asset	$	3,254,279		$	1,921,559
Less: valuation allowance		(3,254,279	)		(1,921,559	)
	$	—		$	—

At September 30, 2006 and 2005, the Company had accumulated deficits in the approximate amount of $9,297,941 and $5,490,169, respectively, available to offset future taxable income through 2025. 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 September 30, 2006 consist of the following:

	Sept. 30, 2006
Accounts payable	$	812,109
Accrued salaries payable		507,019
Withholding taxes payable		53,437
Accrued interest payable		44,152
Accrued expenses		40,000
Other		348
Total	$	1,457,065

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Trade payables are paid as they become due or as payment terms are extended with the consent of the vendor. At September 30, 2006, one vendor, MindTree Consulting Pvt. Ltd. (“MindTree”) accounted for 49% 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 5% of its trade payables as current (under 30 days), 7% are between 31-90 days, 7% are between 91-150 days, and 81% are over 150 days.

NOTE 9- STOCKHOLDERS’EQUITY

The Company has 200,000,000 shares of common stock authorized at September 30, 2006 with a par value of $0.00004.

At September 30, 2006, the Company has 90,176,353 common shares issued, 13,586,956 common shares held in escrow, 997,045 common shares in treasury and 75,592,352 common shares outstanding.

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

On September 7, 2006, the Company issued 1,000,000 restricted shares of stock to an organization for services valued at $170,000 at the time of issuance. The shares were issued in return for providing investor relations and public relations 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 organization received information concerning the Company and had the ability to ask questions about the Company.

Throughout the quarter ended September 30, 2006, the Company issued 1,077,722 restricted shares of common stock to 10 accredited investors for cash totaling $189,000. In addition, the Company issued 718,901 warrants to these investors at a strike prices ranging between $0.40 and $0.49 per share. The warrants will expire at varying dates from January 7, 2008 through March 27, 2008. The securities were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act and contain the appropriate legends restricting their transferability absent registration or applicable exemption. The accredited investors received information concerning the Company and had the ability to ask questions about the Company.

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., entered into a three-year lease agreement for 6,000 sq. ft. of office space in Chennai, India for a term commencing July 1, 2006. Monthly rent in the US Dollar equivalent is $4,266 for the first year of the lease, increasing 10% each succeeding year.

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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 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. This deadline has been extended to January 31, 2007.

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 September 30, 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 moved to dismiss Sommerfeld’s claims. The motion was the subject of a hearing on June 7, 2006. On June 9, 2006, the court granted the individual defendants’ motion to dismiss Sommerfeld’s complaint against them. On June 15, 2006, Sommerfeld filed a motion for partial reconsideration of the court’s order, which has been denied by the court.

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 does not believe it breached the terms of the promissory notes as it 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.

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The discovery phase of this case began in August of 2006.

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 nine month period ended September 30, 2006. There is no guarantee whether the Company will be able to generate enough revenue and/or raise capital to satisfy past due obligations, support current operations and expand sales. This raises substantial doubt about the Company’s ability to continue as a going concern.

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 nine months ended September 30, 2005 to recognize an additional $61,455 in research and development costs that was improperly capitalized in 2005. An additional $10,100 in amortization expense was recognized as the result of a change in accounting policy reducing the amortization period of the Company’s intellectual property from sixteen years (the life of a patent) to five years (the estimated life of software). These changes have increased the loss for the nine months ended September 30, 2005 to $2,675,803 and the accumulated deficit during the development stage to $5,551,624.

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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 $2,701,316 net loss before provision for income taxes in the first nine months of 2006. Accounting rules drove much of this loss, most of which was non-cash. We recorded $1,254,956 as stock option compensation expense due to the operation of SFAS 123R which required us to expense stock options granted and vesting to date this year. We also recorded a $724,904 gain in other income (expense) from the re-valuation of derivatives required under SFAS 133. We raised $189,000 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 $0 of revenue from planned operations in the third quarter of 2006 and a total of $127,800 for the nine months ended September 30, 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 IEEE 802.15.4 radio companies, having previously announced agreements with several microchip manufacturers. We believe this will lead to two types of revenues - service revenue from customized stack work, integration support and application development and royalty revenue from the licensing of our stack. We also announced a new product that facilitates low-power radio frequency (“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. We focus our core competencies in the design and engineering of intelligent wireless communications software that is platform agnostic, ultra-low in energy consumption with complete portability across all controllers, radios, and operating system platforms. Our software is licensed to various global manufacturers of radio chips, radio frequency modules, and microprocessors used in an increasing number of wireless communications applications and devices.

We operate in highly innovative environments characterized by a continuing and rapid introduction of new products that offer improved performance at lower prices. With the trend toward convergence in wireless communications products, our software will likely cross over multiple categories, offering us new opportunities, but may also result in more businesses that compete with us. Competition tends to increase pricing pressure on our products, which may mean that we must offer our products at lower prices than we had anticipated, resulting in lower profits This is a two-step approach: (a) become an approved third-party vendor and achieve recognition in the manufacturer’s documentation, website and sales force (i.e. distributors for Texas Instruments and Radiocrafts as examples); 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 believe TI will become a significant customer. Since the announcement of our agreement with TI, we have downloaded nearly 500 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 35 OEMs using our ZNS stack and ZAPP (SPPIO) application. We anticipate many of these will go into production in the coming quarters.

We began training programs for Infineon to train their field application engineers. We expect this will result in increased opportunities with our partners’ customers. In addition, we participated in the ZigBee Developers program this June where we taught 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

Nine Months Ended September 30, 2006 Compared to the Nine Months Ended September 30, 2005

During the first nine months of 2006 we had operating revenues of $127,800, resulting in a net loss applicable to common shares of $2,701,316, or $0.04 net loss per share, compared to a net loss of $2,675,803 or $0.06 net loss per share for the same period in 2005. The net loss during the first nine months of 2006 was substantially reduced by the realization of $724,904 as gain from the re-valuation of derivatives in accordance with accounting rules. However, we also recorded a $1,254,956 expense from the granting and vesting of stock options during this nine-month period. Cumulative net loss since inception totals $9,297,941.

Our net revenue for the nine months ended September 30, 2006 significantly increased to $127,800 as compared to $1,021 for the nine months ended September 30, 2005. The application development agreements we signed with Infineon during 2005 and with SensiTool in 2006 accounted for the revenue we reported for the nine months ended September 30, 2006. These agreements require us to embed our software in the customer’s application for a fixed fee, generally paid in stages as benchmarks specified in the contracts are met. However, due to the release to members of a new, enhanced standard by the ZigBee Alliance on September 27, 2006, our customers delayed plans to embed our software in their applications until the new standard was announced.

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Operating expenses for the nine months ended September 30, 2006 were $3,129,754 as compared to $2,349,661 for the nine months ended September 30, 2005, an increase of 33% or $780,093. This increase, as further explained below, is principally due to increases in compensation and professional fees. Operating expenses increased as the Company developed and implemented its business plan.

Our overall increase in compensation and professional fees for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 was $339,298, to $1,447,550 from $1,108,252. This was due to increased compensation expense of approximately $278,744, which reflects a much larger payroll in India both in terms of people (42 vs 32) and pay ($146,574) plus full year-to-date salaries of two highly compensated officers in 2006 who were only on staff for part of the corresponding period in 2005. Legal and accounting fees decreased $10,238 to $241,676 from $251,914. Financing costs increased $70,792 to $329,767 from $258,975. 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.

Stock option compensation expense required by SFAS 123R was $1,254,956 as the Company is now required to expense stock options granted and vesting in the period. This is a non-cash expense. There was no comparable expense in 2005.

Selling, general and administrative expenses decreased to $386,407 in the first nine months of 2006, down $59,404 or 13% from the first nine months of 2005 of $445,811. This decrease was due primarily from loan transaction fees in connection with the now-terminated Standby Equity Distribution Agreement with Cornell Capital Partners LP entered into in April 2005. 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 nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 was $173,017. 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 $188,852, net of amortization, from September 30, 2005 to September 30, 2006 to $704,858 as we increased our overall expenditures in research and development programs to ensure that our products continue to meet our customer demands.

Depreciation expense for the nine months ended September 30, 2006 increased $7,126 to $18,191 from $11,065 for the nine months ended September 30, 2005. Amortization expense was $22,650 for the nine months ended September 30, 2006, down $15,450 from $38,100 for the nine months ended September 30, 2005. Interest expense for the nine months ended September 30, 2006 increased $96,130, almost entirely due to the amortization of the convertible debenture and convertible debt discounts to interest.

Three Months Ended September 30, 2006 Compared to the Three Months Ended September 30, 2005

During the third quarter of 2006 we had no operating revenues, resulting in a net loss applicable to common shares of $729,347, or $0.01 net loss per share, compared to a net loss of $747,422 or $0.02 net loss per share for the same period in 2005. This quarter’s net loss was substantially reduced by the realization of $216,276 as gain from the re-valuation of derivatives in accordance with accounting rules. However, we also recorded a $27,326 expense from the granting and vesting of stock options this quarter. Cumulative net loss since inception totals $9,297,941.

Our net revenue for the three months ended September 30, 2006 decreased to $0 as compared to $1,021 for the three months ended September 30, 2005. The ZigBee Alliance released its enhanced standard to its members on September 27, 2006, which is not backwards compatible with the previous standard. We believe potential customers delayed plans to embed our software in their applications until after the new standard was released.

Operating expenses for the three months ended September 30, 2006 were $686,672 as compared to $530,435 for the three months ended September 30, 2005, an increase of 29% or $156,237. This increase, as further explained below, is principally due to increases in compensation and professional fees and stock option compensation expense, which offset decreases in research and development costs, selling, general and administrative expenses, and depreciation and amortization.

Our overall increase in compensation and professional fees for the quarter ended September 30, 2006 compared to the quarter ended September 30, 2005 was $198,909, to $542,809 from $343,900. This increase consists of an increase of $166,557 in financing professional fees, a $30,230 increase in compensation, and a $2,122 increase in legal and accounting professional fees. 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.

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Stock option compensation expense required by SFAS 123R was $27,326 for the quarter ended September 30, 2006 as the Company is now required to expense stock options granted and vesting in the period. This is a non-cash expense. There was no comparable expense in the third quarter of 2005.

Selling, general and administrative expenses decreased to $99,850 in the third quarter of 2006, down $14,983 or 13% from $114,833 in the third quarter of 2005. This decrease was due primarily from decreases in travel and entertainment and marketing expense which offset increases in rent and other expenses. Our overall selling and marketing expenses consist primarily of marketing related expenses, compensation related expenses, sales commissions, facility costs and travel costs. Expenses, particularly certain marketing and compensation-related expenses, may vary going forward, depending in part on the level of revenue and profits.

The decrease in research and development expense for the three months ended September 30, 2006 compared to the three months ended September 30, 2005 was $12,512. 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 $188,852, net of amortization, from September 30, 2005 to September 30, 2006 to $704,858 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 September 30, 2006 decreased $57,582. We amortized $65,000 of financing costs during the third quarter of 2005 which we did not have in 2006. Interest expense for the three months ended September 30, 2006 increased $41,603 to $258,590 from $216,987 for the three months ended September 30, 2005, Decreased interest costs for related party and other notes payable were offset by costs associated with the bridge loans and the amortization of discount on the secured convertible debenture.

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 $3,959,364. This amount includes $500,000 in bridge loans from accredited investors made during the second quarter of 2006. As of September 30, 2006, we have $601,146 outstanding under notes payable - related parties, reimbursements due officers and accrued payroll. During the third quarter of 2006, we received an aggregate of $189,000 in cash from accredited investors in consideration of 1,077,722 shares of our common stock and 718,901 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 payment of outstanding obligations, 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 September 30, 2006 of $9,297,941 compared to $5,490,169 at September 30, 2005. We had negative working capital at September 30, 2006 of $3,695,794 compared to negative working capital of $3,520,625 at September 30, 2005. Our ability to continue as a going concern is dependent upon our obtaining adequate capital to fund losses until we become profitable.

On December 29, 2005, we entered into a Securities Purchase Agreement with Montgomery pursuant to which we agreed to issue Montgomery secured convertible debentures in the principle amount of $500,000. Of these secured convertible debentures, $350,000 was funded on December 29, 2005. The remaining $150,000 has not yet been funded as of October 30, 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.

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

Cash at September 30, 2006 and 2005, respectively, was $11,436 and $16,618. At September 30, 2006 and 2005, respectively, we had total stockholders’ deficit of $2,899,243 and $2,915,735.

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 version 1.1) and other competitive factors) and (b) our ability to control expenses.

With regard to our current liabilities at September 30, 2006, $123,249 is payable to related note holders who have deferred repayment (one has deferred interest as well). Trade payables at September 30, 2006 of $812,109 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 49% 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. To date, the Company has paid MindTree $200,000 pursuant to this agreement. As of October 30, 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 January 31, 2007.

We believe that revenues will rebound during the second quarter of 2007 from our licensing and other agreements now that the enhanced ZigBee standard has been released to members of the Alliance. 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.

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 nine month period ended September 30, 2006. There is no guarantee whether the Company will be able to generate enough revenue and/or raise capital to satisfy past due obligations, support current operations and expand sales. This raises substantial doubt about the Company’s ability to continue as a going concern.

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

The Company expects to be able to satisfy its past-due accounts payable 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.

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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.

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 third quarter of 2006, as several customers have expressed an interest in moving forward after the release. The new specification was released on September 27, 2006.

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.

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.

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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.

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;

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• 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.

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.

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 nine month period ended September 30, 2006. There is no guarantee whether the Company will be able to generate enough revenue and/or raise capital to satisfy past due obligations, support current operations and expand sales. This raises substantial doubt about the Company’s ability to continue as a going concern.

Off-Balance Sheet Arrangements

As of September 30, 2006, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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Contractual Obligations

The table below lists our known contractual obligations at September 30, 2006.

Our long-term debt obligation consists of $350,000 of a $500,000 convertible debenture ($150,000 not funded as of October 30, 2006), plus interest payable monthly at 15% per annum. We are current in our interest payments through October 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 the lease for office space in Chennai, India for our India subsidiary. We have signed a three-year lease for 6,000 sq. ft. of office space expiring on June 30, 2009. The rent is approximately $4,266 per month with 10% increases in the second and third years of the lease.

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

	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) *	$	1,026,667		791,250		235,417		-		-
Long-Term Debt Obligations	$	350,000		-		350,000		-		-
Operating Lease Obligations **	$	156,653		52,472		104,181		-		-
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.

** Lease of 6,000 sq. ft. of office space in Chennai, India expiring June 30, 2009. The lease at our Rockville, MD office is month-to-month and therefore not included. Our Rockville rent is $1,687 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.

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.

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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 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 transaction 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. Cost 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 third quarter of 2006:

On September 7, 2006, the Company issued 1,000,000 restricted shares of stock to an organization for services valued at $170,000 at the time of issuance. The shares were issued in return for providing investor relations and public relations 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 organization received information concerning the Company and had the ability to ask questions about the Company.

Throughout the quarter ended September 30, 2006, the Company issued 1,077,722 restricted shares of common stock to 10 accredited investors for cash totaling $189,000. In addition, the Company issued 718,901 warrants to these investors at a strike prices ranging between $0.40 and $0.49 per share. The warrants will expire at varying dates from January 7, 2008 through March 27, 2008. The securities were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act and contain the appropriate legends restricting their transferability absent registration or applicable exemption. The accredited investors received information concerning the Company and had the ability to ask questions about the Company.

Item 3. Defaults upon Senior Securities.

None

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

None

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Item 5. Other Information.

None.

Item 6. Exhibits.

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

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

32.1Section 1350 Certification of Principal Executive Officer

32.2Section 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: November 14, 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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