##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 
 
 Amendment No 2 to
 
 FORM 10-KSB
 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 2004 Commission File Number 0-50918 AIRBEE WIRELESS, INC. 
  DELAWARE
    
    46-0500345(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)9400 Key West Avenue, Rockville, MD
    
    20850-3322(Address of principal executive offices)
    
    (Zip Code)
 (301) 517-1860 
  Securities registered under Section 12(b) of the Exchange Act: None. Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.00004 par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 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 þ No o Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. þ Airbees revenue for its most recent fiscal year ended December 31, 2004 was $70,000. As of March 30, 2005, the aggregate market value of the shares of common stock held by
non-affiliates (based on the closing price of $0.60 for the common stock as quoted on that date)
was approximately $7,134,421. 
 As of December 31, 2004, the Company had 41,216,913 shares of its common stock,
$0.00004 par value per share, outstanding.




---



TABLE OF CONTENTS ITEM NUMBER AND CAPTION
    
    PAGEPART IItem 1. Description of Business
    
    1Item 2. Description of Property
    
    11Item 3. Legal Proceedings
    
    12Item 4.
Submission of Matters to a Vote of Security Holders
    
    12PART IIItem 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchase of Equity Securities
    
    12Item 6.
Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    14Item 7. Financial Statements
    
    21Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    47Item 8A. Controls and Procedures
    
    47Item 8B. Other Information
    
    47PART IIIItem 9. Directors and Executive Officers of the Registrant
    
    47Item 10. Executive Compensation
    
    50Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    55Item 12. Certain Relationships and Related Transactions
    
    56Item 13. Exhibits and Reports on Form 8-K
    
    57Item 14. Principal Accountant Fees and Services
    
    58Section 302 Principal Executive Officer CertificationSection 302 Principal Financial Officer CertificationSection 906 Principal Executive Officer CertificationSection 906 Principal Financial Officer Certification




---



##### Table of Contents



FORWARD LOOKING STATEMENTS This Annual Report and Form 10-KSB, including the Managements Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking statements regarding
future events and our future results that are subject to the safe harbors created under the
Securities Act of 1933 and the Securities Exchange Act of 1934. 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,
including those identified below, under Quantitative and Qualitative Disclosures About Risk.
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. 
 PART I 
 ITEM 1. BUSINESS Overview  
  
 We were organized under the laws of the state of Delaware in 2002 to develop a portfolio of
embedded wireless connectivity software. In October 2002, we acquired Connexus Technologies (Pte.)
Ltd. and its wholly-owned subsidiary, Connexus Technologies (India) Pvt. Ltd., with the intention
of securing complementary wireless technology to further enhance our operating platform. In March 2004, we became a member of the ZigBee Alliance, an international industry group
formed to facilitate the development of a global standard for the wireless data and voice
communications industry. As indicated on the ZigBee Alliance website, the ZigBee Alliance has
defined a standard for reliable, short-range, cost-effective, low-power wireless applications. The
standard is described on the ZigBee Alliance website at www.ZigBee.com. The ZigBee standard
current release of version 1.0 was formally released to the wireless industry on December 14, 2004.
It specifies a short-range, low-power, secure wireless data and voice transmission baseline. With
over 130 member companies, we believe the ZigBee standard based on the IEEE 802.15.4 standard for
remote monitoring and control applications [released by the Institute of Electrical and Electronic
Engineers in May 2003] is emerging as a wireless standard for a host of industrial controls,
telemetry, and in-building and home automation networking needs.




---



##### Table of Contents



The Market 
 To date the ZigBee standard has had no significant penetration into the commercial market.
The current market for wireless communication is dominated by two major technologies: (1)
Bluetooth and (2) the IEEE 802.11b standard (more commonly known as WiFi). WiFi technology is
based on the 2.4 GHz unlicensed transmission frequency band. We have targeted products in the
niche 900 MHz unlicensed transmission frequency band, typically for the North American market, and
the niche 2.4 GHz frequency band for the rest of the world. WiFi is built to a different set of
requirements (the IEEE 802.11b standard) than that which we are currently working, namely IEEE
802.15.4. As such, we believe that we will not compete for the same product users as WiFi. 
 
 As to Bluetooth, we believe that Bluetooth devices are limited in that they are: (1)
relatively expensive; (2) serve a simple function of only one-to-one connectivity; (3) support only
simple features; and (4) are lower in performance than the expectations of the piconet. A network
of devices connected in an ad hocfashion using Bluetooth technology is a piconet. It is formed
when at least two devices, such as a portable PC and a cellular phone, connect. A piconet can
support up to eight devices [as compared with the Airbee/ZigBee technology which can support up to
64,000 devices]. When a piconet is formed, one device acts as the master while the others act as
slaves for the duration of the piconet connection. A piconet is sometimes called a PAN or
Personal Area Network. 
 
 Our ZigBee-Ready software is different from Bluetooth standard software. Bluetooth standard
product applications need to be built on the originally conceived Bluetooth standard
microprocessor, which is expensive, bulky, and generally less reliable. Alternatively, Airbee
software is highly customizable, has a very compact software code size and is platform
agnosticmeaning it can be ported to run on most microprocessors and operating systems. Moreover,
users of products with Airbee software embedded inside can also, we believe, achieve benefits in
other areas. For instance, by eliminating the need for wires when installing backup alarm systems
in cars, the auto manufacturer saves on the cost of components and labor, while reducing assembly
times, and providing the public with a safer car at affordable prices. The same is true for a
homebuilder when installing centrally monitored smoke alarms, home security systems, or other
monitoring devices. Example product applications include personal digital appliances
(PDA), home networking, automotive networks, automated meter reading, agriculture and healthcare. The ZigBee website provides several comparisons between the Bluetooth and our
technologies which support our assertion as to reduced cost of the ZigBee solution to the end user.
The battery power consumption, battery life, microprocessor cost and range of operation all are
factors in the cost comparison. 
 2




---



##### Table of Contents



The chart below depicts the comparison of the various technologies mentioned in this report.
The frequency band in which the Airbee products operate is at the lower left and is in the lower
data rate space (the 802.15.4 space). Future efforts and products fall into the other two yellow
oval spectrums. 
 
 (AIRBEE PRODUCT FOCUS CHART) 
 
 
 Connexus Acquisition In October 2002, we acquired a wholly-owned interest in Connexus Technologies (Pte.) Ltd. from
an unrelated third party in consideration of 1,662,562 shares of our common stock. We acquired
Connexus because we believed it was developing wireless technologies that were complementary to the
software technologies that we were also developing. We believe that our embedded software could be
developed at a faster rate via this acquisition because of its compatible technologies with the
additional benefits of lower product cost and shorter time to market. Connexus Technologies (Pte.) Ltd. was incorporated in Singapore under The Companies Act on
July 8, 2000 as a limited liability company. Connexus Technologies (India) Pvt. Ltd. was
incorporated in India as a wholly-owned subsidiary of Connexus Technologies (Pte.) Ltd. on June 14,
2001. Subsequent to this acquisition, Connexus Technologies (Pte.) Ltd. changed its name to Airbee
Wireless Pte. Ltd. and Connexus Technologies (India) Pte. Ltd. changed its name to Airbee Wireless
(India) Pvt. Ltd. 3




---



##### Table of Contents



Products 
 We have completed the development of six core products: (1) Airbee Peer-to-Peer, (2) Airbee
Star, (3) Airbee Mesh, (4) ZigBee-ready Peer-to-Peer, (5) ZigBee-ready Star, and (6) ZigBee-ready
Mesh. In addition, we have developed and are also marketing our ZigBee Network Management System
(ZNMS) for managing mesh networks. 
 We have developed software with a focus on short-range wireless communications and platform
technologies such as hand-held devices. We believe the integration of short-range and long-range
connectivity is not very well developed today. We believe these two markets present unique
opportunities for seamless communication regardless of the distance. We also believe that when
embedding is realized, the combination is expected to thrive on devices which are integrated into
building automation, automated meter reading, instrumentation schemes, and similar uses. Our portfolio of software products is identified as ZigBee Network Software (ZNS) [the ZigBee
Network System implementation of the mesh network topology] generally connected over the emerging
Wireless Personal Area Network (WPAN) or the Wireless Local Area Network (WLAN), building
automation and automotive technology space. The table below identifies our current software
portfolio. The completed Airbee proprietary peer-to-peer, star and mesh topologies are being
marketed to customers not requiring ZigBee-compliant protocols. ZigBee compliant protocols refer
to standards in procedure or software. ZigBee-compliant products refer to commercially ready for
sale products which have been tested and certified as compliant with the ZigBee specifications.
ZigBee-ready refers to commercially ready for sale products which have been designed and produced
to the ZigBee specifications but have not been test certified as ZigBee-compliant. There could be
no difference in a product between the two designations but it is known only after certification.
There may be minor changes in a certified product upon completion of the certification testing.
There have been no products from any vendor certified as ZigBee compliant to date. ZigBee-ready software has been designed and is ready for customer use. The In Development
designation is applied until such time as the software undergoes certification by an independent
testing facility and can then be called ZigBee-compliant. Until the software is
ZigBee-compliant, it may be referred to as being ZigBee-ready. Our ZigBee-ready software is
currently available for sale and use. The sale of our products is not dependent on certification
by an independent third party. The majority of our products are for sale at this time and are
designated as ZigBee-ready in conformity with the guidance given by the ZigBee Alliance. Our
other products are software supplements to ZigBee compliant products and as such do not require
certification and labeled as ZigBee-compliant. The products may be sold separately or together as a
group. This will depend on the customer and its requirements for its marketplace. The following is a chart showing the status of the Airbee Proprietary and ZigBee compliant protocols: Name/Protocol
    
    Airbee Proprietary
    
    ZigBee Ready
    
    ZigBee-CompliantPeer-to-Peer
    
    Completed
    
    Completed
    
    Testing PendingStar
    
    Completed
    
    Completed
    
    Testing PendingMesh
    
    Completed
    
    Completed
    
    Testing PendingMobile Mesh
    
    In Development
    
    In Development
    
    In Development
 
 The peer-to-peer, star, mesh and mobile mesh protocols function in the following manner: 
 Peer to Peer Topology The peer-to-peer topology facilitates mutual communication between any two Airbee enabled
devices. Any device that has some data to be transmitted to the peer initially joins and gets
synchronized with that peer. Once the authentication is complete, the Media Access Controller
(MAC) [the software engine] will start its service by exchanging the data fragments between the two
peers. Each data fragment is validated after receiving from the peer device before further
processing. Fragmentation/de-fragmentation of data packets is done to reduce the packet error 4




---



##### Table of Contents



rate. Data transfer is done in half duplex mode with full handshake facilitating transfer
reliability. Retransmission of data fragments is done as an error recovery mechanism. Airbee software in a peer-to-peer configuration operates in power save mode. The device is
fully awake during communication with a peer and will be in sleep mode once the communication is
over. The device will have low power consumption due to this power save mode. Peer-to-Peer (PEER-TO-PEER IMAGE) Star Topology The star topology facilitates mutual communication between any two Airbee enabled devices.
Any device that has some data to be transmitted to the peer initially joins and gets synchronized
with that peer. Media Access Control (MAC) service starts exchanging the data fragments between
the two peers after the peer authenticates the device. Each data fragment is validated after
receiving from the peer device before further processing. Fragmentation/de-fragmentation of data
packets is done to reduce the packet error rate. Data transfer is done in half duplex mode with
full handshake. Retransmission of data fragments is done as an error recovery mechanism. It is a
network topology in which all the nodes are connected to a base station. Star Topology (STAR TOPOLOGY IMAGE) 5




---



##### Table of Contents



Mesh and Mobile Mesh Topology Mesh networks are multi hop networks in which devices assist each other in transmitting and
receiving the data through the network. Mesh network does not need a controlling device to control
links; instead each device acts as a controller. 
 (MESH NETWORKS IMAGE) 
 
 Mesh network in Airbee has a proprietary algorithm for connecting multiple devices. Each node
will maintain a Route tableto reach the other nodes with a number of hops. Routes between two
mobile nodes in a mesh network may consist of hops through other host nodes in the network. Host
mobility [mobile mesh] can cause unpredictable change in the route. Alternative route is chosen when
current route fails. 
 
 Route tableallows the nodes to calculate the shortest path using the number of hops.
Acknowledgement time needs to be calculated dynamically based on the hops. 
 
 Route table 
 S .No
    
    
    Route table of I1.
    
    
    LK, LM, LO2.
    
    
    LL, LM, LO3.
    
    
    LJ, LK, LM, LO
 
 All Airbee mesh network devices are provided with the static route table that is prefixed
during the commissioning of the devices. 
 
 Shortest Route 
 
 Consider the above routing table; source has three routes to reach destination. Route 1, 2
has one intermediate node to reach destination and route 3 has two intermediate nodes to reach the
destination. Source can choose either route 1 or route 2; now the source node can compare the hop
time and choose route 2. 
 
 Alternative Route 
 
 As soon as source node decides to send the packet through route 2, it uses LK as a
relay and transmits the packet. If LKgoes out of the network, the source will wait for
ACK timeout and look for another route to reach the destinationnode. 
 
 Data exchange 
 
 When a source node needs to send the data to the destination node, it can look for the
shortest path and send the data using the relay node. To accomplish this, the source node needs to
wait for availability of relay nodes medium and then transmit the packet. When the relay node
receives the packet it looks into the route table and finds 
 6




---



##### Table of Contents



the shortest route and transmits the
packet. The relay node will not acknowledge the packet since the destination node will perform the
acknowledgement. 
 
 Unstable routes 
 
 When a node finds that a particular node is unstable and has a higher mobility then route via
that node will be called as an unstable route. 
 
 Hidden node 
 
 Node that is not responding for RDP will be considered as hidden node. None of the packets
will be routed via that node. 
 Technology Critical to the success of new devices in these areas is their ability to interoperate or
talk to each other based on industry-adopted standards. Our software is designed and developed
to be compliant with Zigbee/802.15.4 WPAN standards (approved by IEEE in May 2003). Our
patent-pending technology, in conjunction with a wireless network, allows a computer to work with a
printer or a PDA and/or headset accessory to work with a mobile phone. Based on research reports
provided by On World and West Technology Research Solutions, we believe we can leverage the
widespread market awareness created by Bluetooth, but offer similar products at less than half the
cost, greater operating range and better reliability. The technology on which we are focused is called spread spectrum, a form of Code Division
Multiplexed Access (CDMA). Our ZigBee-ready software operates in the unlicensed radio frequency bands worldwide,
including 2.4GHz (Global), 915Mhz (Americas) and 868Mhz (Europe). Raw data throughput rates of
250kbs can be achieved at 2.4GHz (16 channels), 40kbs at 915Mhz (10 channels) and 20kbs at 868Mhz
(1 channel). Transmission distance ranges from 10 meters to 1.6 kilometers, depending on power
output of the transceiver and environmental characteristics. While battery life is ultimately a
function of battery capacity and application usage, the ZigBee protocol was designed to support
very long life battery applications. Since our software products are designed to the ZigBee
specification and all other vendors products are designed to the same specification, upon
successful completion of the certification testing, we expect that products which use our software
will meet the expected ZigBee battery life called for in the specifications. Based upon
information contained in the ZigBee Alliance website, users can expect a multi-year battery life
when using standard batteries in a typical monitoring application. Our embedded software stack on microprocessor and transceiver hardware works in pairseach
device interacting with the other operates as embedded chips. The overall platform facilitates
both machine-to-machine and people-to-machine voice and data connections over short distances.
Airbees typical range is 274 meters for
voice and 73 meters for data (depending on the hosting transceiver hardware platform).
Depending upon energy source and transceiver, we have the capability to transmit voice out to 1.6
kilometers. This compares very favorably to Bluetooths 9 meter range for both voice and data.
All of our products have a variant compliant with the ZigBee/IEEE 802.15.4 WPAN standards and
exceed the ZigBee standards. The statements contained in this paragraph are based upon
specifications contained in IEEE 802.15.4. Our patent-pending software stack [a layered microprocessor software architecture common in
the embedded software technology space] is available in both a standard IEEE 802.15 and a
proprietary stack. For dedicated applications, where conformity to a standard (e.g., toys,
specific industrial automation applications) is not crucial, a proprietary stack is to be supplied
which reduces the cost and time to market to the end user when compared to the standard IEEE
802.15.4. Where conformity to a standard is key (e.g.: interoperability with another device
conforming to the IEEE 802.15.4 standard), our own IEEE 802.15.4 stack is supplied along with the
Airbee software core. 7




---



##### Table of Contents



Current Applications 
 To date, we have operated and demonstrated our products on the microprocessors from the
following manufacturers: Texas Instruments, Atmel, Zilog, Motorola and any 8051 processor. They are all
microprocessors on which our ZNS software stack operates. The products are designed to work
together as a system or they may be used independent from each other and work with other vendors
products. 
 Additional Software Products We recently announced a series of additional software products which augment and extend the
features of the core software embedded products. These products fall outside of ZigBee
specifications and do not require ZigBee compliance. Each software product has been announced and
literature distributed at trade shows and conferences in November and December of 2004 and in March
of 2005. All of the products are operational, commercially available and have been demonstrated at
trade shows. They are separate products and licensed separately. They are designed to work
together as a system but can operate separately. We have designated the principal software product as Airbee-ZNS, which enables target hardware
ZigBee module providers, OEMS, integrators and silicon vendors to imbed our proven ZigBee protocol
stack software. This approach enables device makers to quickly bring ZigBee compliant products to
market. Airbee-ZNS is a comprehensive protocol stack suite that is designed to be portable across
microcontrollers, radios and real-time operating systems. Airbee-ZNS adapted image can be created
for any microcontroller, radios and real-time OS environment. We have successfully demonstrated
the platform agnostic assertion on five separate hardware platforms and have done so at the WiCon
American Conference, the ZigBee open house in Seoul, Korea and recently at the ZigBee open house in
San Francisco. Airbee-ZNMSZigBee Network Management System Airbee-ZNMS network management software is a centralized service and network management
system that delivers sophisticated, standards-based management and control of ZigBee mesh networks
and proprietary mesh sensor networks. The system manages ZigBee networks, non-ZigBee networks and
interconnecting ZigBee and Internet Protocols (IP) networks. Featuring what management believes is the industrys first fully distributed, platform
independent and multiservice manager, Airbee-ZNMS software provides a complete management
solution, enabling clients to easily integrate and interoperate with ZigBee enabled devices. Airbee-ZNMS provides the foundation needed to meet our customers needs for rapid deployment
of new services, while streamlining their ability to provide and monitor key network resources in
deploying large networks with tens-of-thousands of nodes by doing the following:  
    
    Reduce operational expenses by simplifying and integrating device management processes;
    
    Streamline management through a common interface and speed device provisioning with
point-and-click operations to rapidly establish end-to-end device and network connectivity;
    
    Ensure consistent, simplified logical provisioning of individual devices through a
series of pull-down menus;
    
    Provide performance quality and reliability by establishing a variety of traps for alarm
indications and statistics logging for all objects in a WPAN network;
    
    Provide secure access to a network with password protection on three levels and audit
trails that record activities such as addition or modification of devices, Airbee-ZNS
version updates, and Airbee-ZAgent, application code and sensor interfaces;
    
    Present network statistics for real-time status information on devices, radio frequency
(RF) performance, link-quality and data routing;
    
    View key usage data on sensor interfaces for network planning and trend analysis. 
 Airbee-ZNMS can be set-up and integrated to automatically discover and map existing IP and
wireless devices that support SNMP, Wireless Network Management Protocol (WNMP), extensible markup
language 8




---



##### Table of Contents



(XML). Airbee-ZNMS will display this information, intermingled with other device
information from the ZigBee network. Within an integrated short-range wireless data network management solution, these core
management functions are available across all areas of the mobility enterprise software. Fault
detection and isolation is resolved through the wireless application infrastructure into the ZigBee
enabled device and down to the device application or register setting. Configuration parameters are
managed by customer policy and uniquely monitored for unsolicited exception reporting. Network and
device usage and performance data is collected into a centralized database, where it is available
for analytical review and processing. Airbee-ZAgent Airbee-ZAgent is designed as an open software standard that can be embedded in any third-party
ZigBee enabled device for seamless management from an Airbee-ZNMS platform. In addition,
Airbee-ZNMS interacts with simple network management protocol (SNMP) agents for control and
visibility into IP LAN infrastructure connected to Airbee-ZNMS mesh network environment.
Airbee-ZAgent runs seamlessly in both offline and online mode. Airbee-ZAgent collects and stores
management data in a format defined as Airbee-ZMIB (ZigBee Management Information Base). Airbee
enabled devices and systems (with ZNS) feature embedded mobility services agents (Airbee-ZAgents)
that collect monitoring and asset information to enable the configuration, provisioning, monitoring
and troubleshooting of ZigBee devices in a ZigBee network (i.e. ZAgent is embedded into Airbee ZNS
stack). Airbee-ZStack This software enables ZigBee module providers, OEMs, integrators and microprocessors to
integrate proven ZigBee protocol stack software with built-in Airbee-ZAgent software ready for out
of the box management of their modules. Airbee-ZStack is a comprehensive protocol stack suite that
is designed to be portable across microcontrollers, radios and real-time operating systems.
Airbee-ZStack adapted image can be created (ported) for any microcontroller, ZigBee radio and
real-time OS environment. Airbee-ZStudio This software enables application developers to develop new applications and extend existing
back-end applications to a large variety of mobile computing devices with faster time to market and
lower cost than custom coding and point solutions. In addition to offloading complex mobile
run-time middleware, organizations can take advantage of Airbee-ZStudios visual programming
environment to empower developers to focus on transactional applications. This product is not yet
available but has been announced. 
 Competition 
 
 While we have not generated any license sales to date, we believe that we currently have one
direct competitor for ZigBee-ready software which is also active in licensing its intellectual
property. The company, which is privately held, has developed a device which it calls a mote.
This device is supposedly capable of simple evaluation of conditions and events, and wireless
communication to relay information and raise alerts. 
 
 In addition, Figure 8 Wireless, a subsidiary of Chipcon A.S., a Norwegian semiconductor
company that designs, produces and markets high-performance standard radio frequency integrated
circuits (RF-ICs) for use in a variety of wireless applications, currently provides embedded
software for wireless sensors and control networks based on the ZigBee standard. Its principal
product is the Z-stack. Figure 8s target markets include home automation, building automation,
industrial automation, consumer electronics (including, but not limited to, wireless remote
controls and gaming consoles), and asset management. 
 
 Although, to our knowledge, there are currently no software only vendor competitors to
Airbee, there are tangential competitors that are mostly hardware-based, but also offer software
solutions that are either proprietary or licensed from companies such as Airbee. Several silicon
and module manufacturers have built their own software 
 9




---



##### Table of Contents



stack, unique to their hardware solution.
We expect other competitors to emerge if the Airbee technology becomes well understood and accepted
by solutions providers and users in various application areas. 
 
 To the best of our present knowledge, there are no dominant competitors within our target
market for licensing ZigBee-compliant applications for wireless voice, data and video
communications. As the ZigBee ready software market is in the early stages of development, we
expect the competitive field to broaden markedly. To date the ZigBee standard has had no
penetration into the embedded wireless communication commercial market because the global ZigBee
standard was only released on December 14, 2004. 
 
 We face varying degrees of competition in the overall short range, low energy embedded
communication software industry, which is currently dominated by Bluetooth and WiFi technology.
However, we believe that the ZigBee technology will not compete for the same product users and
applications as Bluetooth and WiFi. 
 
 We do not believe that ZigBee and Bluetooth technologies are convergent because of divergent
technological specifications. Bluetooth standard product applications need to be built on the
originally conceived Bluetooth standard microprocessor, which is expensive, bulky, and generally
less reliable. Alternatively, Airbee software is highly customizable, has a very compact software
code size and is platform agnosticmeaning it can be ported to run on most microprocessors and
operating systems. 
 
 WiFi is built to the requirements of the IEEE 802.11b standard. Our products will be built
principally to the requirements of the IEEE 802.15.4 standard. WiFi technology is based on the 2.4
GHz frequency range. We have targeted products in the 900 MHz frequency range, typically for the
North American market, and the 2.4 GHz frequency range products for the rest of the world. While
IEEE 802.11b is an established data communication standard, it operates at higher data rates and
its current applications are much different from those envisioned by the ZigBee standard. 
 The embedded wireless communication software industry is characterized by rapid change, new
and complex technology and intense competition. Our ability to develop market share depends upon
our ability to satisfy customer requirements, enhance customers existing products and develop and
introduce new products. We expect the intensity of competition to increase in the future. Increased
competitiveness may result in reductions in the price of our products, services,
lower-than-expected gross margins or loss of market share, any of which would harm our business. Our primary competition comes from internal research and development departments of companies
that develop embedded systems in-house and in several cases may be our prospective customers. In
many cases, companies that develop wireless systems in-house have already made significant
investments of time and effort in developing their own internal systems, making acceptance of our
products as a replacement more difficult. Additionally, we may compete with independent software
vendors who have yet to enter the market space we are in.
Some of the companies that develop embedded systems in-house and some of these independent
software vendors, such as Microsoft Corporation, have significantly greater financial, technical,
marketing, sales and other resources and significantly greater name recognition than we do. Demands for rapid change and the increasing complexity of the technology in our industry
intensify the competition we face. In addition, our competitors may consolidate or establish
strategic alliances to expand product offerings and resources or address new market segments. As a
result, they may be able to respond more quickly to new or emerging technologies and changes in
customer requirements or to devote greater resources to the development, promotion, sale and
support of their products. These factors favor larger competitors that have the financial and
technical resources to develop new technologies or to respond more quickly with new product
offerings or product enhancements. We may be unable to meet the pace of rapid development set by the competitive field or may
incur additional costs attempting to do so, which may cause declines in our operating results. Our
competitors may foresee the course of market developments more accurately than we do and could in
the future develop new technologies that compete with our products or even render our products
obsolete, any of which could adversely affect our competitive position. 10




---



##### Table of Contents



We believe that the primary competitive factors in our product space today is the single
hardware platform on which other vendors software solutions operate as compared with our
multiplatform capability and whether a prospective customer considers itself a software or hardware
manufacturer. Business Strategy Evolution Technological feasibility for the Airbee UltraLiteTM (forerunner to our current and
more developed software) was established on November 20, 2002, with completion of the detailed
product design (V1.0). Working models for the Airbee UltraLiteTM proprietary 900 MHz
and the UltraLite 2.4GHz were delivered on March 7, 2003 and April 3, 2003 respectively. Our
ZigBee standard software built on the IEEE 802.15.4 WPAN standard was released at the end of
October 2004. 
 Our software is designed with the purpose of facilitating connectivity: people-to-people,
things-to-things and people-to-things. We do not manufacture products in which our connectivity
software is embedded. Instead, we license our connectivity software to third parties, such as
microprocessor manufacturers and various OEM manufacturers. Our internal quality assurance effort
is vested with the test team comprised of three employees, which operates separately from the
development team. Data is collected and documented by the test team and fed back to the developers
for fixes as necessary. Further, the certification effort planned will also insert another level
of quality control to the product evolution. We are also in support of our customer for an initial
period of time to assure the customer understands how to use our products in his development
efforts. We will also rely upon the quality assurance programs and internal monitoring of quality
control of our customers. However, since the software will be embedded at the customer location
and the application software is written by the customer to its customer requirements, the proper
application of our software will be the responsibility and under the control of our customers. 
 Intellectual Property 
 Our success and ability to compete is dependent in large part upon our unique technology. As
of this date we have filed one patent and there are no other patents or copyrights pending at this
time. Plans exist for several more patents dealing with the various protocols and features of the
software system. We believe that our success is more dependent upon our technical expertise than
our proprietary rights. We will rely upon a combination of patent, copyright, trademark and trade
secret laws and contractual restrictions to protect our proprietary technology. As a result of the
likelihood of competition from other companies, protecting the Companys intellectual property is
essential. It may be possible for a third party to copy or otherwise obtain and use our products
or technology without authorization or develop similar technology independently. Our first filed
patent is entitled System and Method for Data Transmission (application number 60/502,346). 
 Governmental Approvals We do not believe that there is a need for any specific governmental approval for any of our
software products. Our radio frequency integrated circuit software product will be sold to OEM
customers who will embed the software into their own products. They may be required to adhere to
certain Federal Communications Commission section requirements because their devices/products
contain a radio transmitter. We believe that the OEM customers will obtain any required licensing
as applicable in any particular country. Employees As of December 31, 2004, we employed 21 full-time employees and one part-time employee. From
time to time, we utilize various contractors. We have no collective bargaining agreements with our
employees. 
 ITEM 2. PROPERTY Our principal executive offices are located in approximately 624 square feet of office
space at 9400 Key West Avenue, Rockville, MD 20850. The term of the lease is month-to-month at
$2,120 per month. 11




---



##### Table of Contents



We lease approximately 3,000 square feet of office space at 92 Dr. Natesan Road,
2nd Floor, Mylapore, Chennai 600004, Tamil Nadu, India. The lease commenced on May 1,
2004 and is for a term of 36 months at $1,571 per month for the first 24 months and $1,650 for the
subsequent 12 months. We have no plans to renovate any of our current facilities and believe that our current
facilities are sufficient to maintain our current and anticipated operations. 
 ITEM 3. LEGAL PROCEEDINGS In an action commenced in Denver, Colorado, on July 13, 2004, we received a summons to
appear on July 29, 2004 in County Court, Denver County or file an answer to the summons by that
date. The complaint alleges that the company used a telephone facsimile machine, computer or other
device to send unsolicited advertisements to the facsimile machine of Buddy Brown without having
obtained prior express permission to do so. The case was dismissed by the court on February 17,
2005. The case is currently under appeal. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this
report to a vote of security holders. 
 PART II  
 ITEM 5.
    
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
 ISSUER PURCHASE OF EQUITY SECURITIES
 Our common stock is quoted on the Pink Sheets Over-the-Counter securities market under
the symbol ABEW. On December 30, 2004, the closing sale price of our common stock was $0.21. The following table sets forth the high and low bid prices for the common stock for each
calendar quarter since our stock began trading on January 28, 2004, as reported by the National
Quotation Bureau, and represent interdealer quotations, without retail markup, markdown or
commission and may not be reflective of actual transactions. High
    
    
    Low2004January 2004  March 2004
    
    $
    1.00
    
    
    $
    0.20April 2004  June 2004
    
    $
    0.62
    
    
    $
    0.30July 2004  September 2004
    
    $
    0.34
    
    
    $
    0.20October 2004  December 2004
    
    $
    0.30
    
    
    $
    0.17
 
 As of June 9, 2005, there are currently 53,462,373 shares of our common stock outstanding.
10,701,986 of our outstanding shares of common stock are free-trading. The remaining shares of our
common stock are defined as restricted stock under the Securities Act. Of the 53,462,373 shares
currently outstanding, 39,424,213 shares are owned by our affiliates, as that term is defined under
the Securities Act. Absent registration under the Securities Act, the sale of our remaining
outstanding shares is subject to Rule 144. Under Rule 144, if certain conditions are satisfied, a
person (including any of our affiliates) who has beneficially owned restricted shares of common
stock for at least one year is entitled to sell within any three month period a number of shares up
to the greater of 1% of the total number of outstanding shares of common stock, or if the common
stock is quoted on NASDAQ, the average weekly trading volume during the four calendar weeks
preceding the sale. A person who has not been an affiliate of ours for at least three months
immediately preceding the sale, and who has beneficially owned the shares of common stock for at
least two years, is entitled to sell the shares under Rule 144 without regard to any of the volume
limitations described above. 
 12




---



##### Table of Contents



Stockholders As of December 31, 2004, we believe there were approximately 1050 holders of record of our
common stock. Dividends We have never declared or paid cash dividends on our common stock. We currently intend to
retain all available funds and any future earnings to fund the development and growth of our
business and do not anticipate declaring or paying any cash dividends on our common stock in the
foreseeable future. Equity Compensation Plan Information The table below provides information relating to all of our outstanding options and warrants,
including options authorized for issuance under our compensation plans as of December 31, 2004. Number of securitiesremaining available forNumber of securities
    
    
    
    
    
    
    
    
    future issuance underto be issued upon
    
    
    
    Weighted-average
    
    
    
    equity compensationexercise of
    
    
    
    exercise price of
    
    
    
    plans (excludingoutstanding options,
    
    
    
    outstanding options,
    
    
    
    securities reflected inwarrants and rights
    
    
    
    warrants and rights
    
    
    
    column (a)(a)
    
    
    
    (b)
    
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    
    48,639,275
    
    
    
    $
    0.1355
    
    
    
    
    31,499,096Equity compensation
plans not approved
by security holders
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    0Total
    
    
    
    48,639,275
    
    
    
    
    
    
    
    
    
    31,499,096
 Employee Stock Option Plan Effective August 18, 2002, our board of directors and a majority of our shareholders approved
the Airbee 2002 Stock Option Plan. On May 1, 2003, we adopted the Airbee Wireless, Inc. 2003
Outside Directors Stock Option Plan. We have designated 12,500,000 shares of common stock for the
plan. As of December 31, 2004, no options were granted under this plan. On January 1, 2005, a new
outside director was seated on the board and has been granted 150,000 incentive options under the
plan. The plan has essentially the same parameters as the employee stock option plan and
terminates on May 31, 2013. Related Stockholder Matters On January 23, 2004, we issued an aggregate of 4,999,240 shares of our common stock to Dolphin
Bay Capital, Inc. in consideration of a promissory note in the amount of $568,914, which has been
paid in full ($0.1138 per share). The investor was deemed an accredited investor as defined under
Regulation D. The shares were issued pursuant to the exemption from registration provided by
Regulation D, Rule 504 and Section 5.I of the Texas Security Act, Rule 109.3.C.1 of the Texas
Administrative Code. The investor received current information concerning our company and had the
ability to ask questions about our company at the time of their investment. On June 9, 2004, we issued 31,230 shares of our common stock and warrants to purchase 18,750
shares of our common stock to one investor in consideration of $10,000 under a private placement
memorandum. There were no commissions paid nor were there any placement agents involved. This
investor was deemed accredited as defined under Regulation D. The shares were issued pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act. The shares issued
to the investor contain a legend restricting their transferability absent registration or
applicable exemption. The investor had access to information concerning our company and had the
ability to ask questions about our company at the time of the stock purchase. 13




---



##### Table of Contents



On July 1, 2004, we issued options to purchase 3,000,000 shares of our common stock to
Srinivansan Krishnamurthy, an executive officer of the Company, exercisable at $0.38 per share.
The options were issued pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act. The options contain the appropriate legends restricting their transferability
absent registration or applicable exemption. The officer received information concerning our
company and had the ability to ask questions concerning our company. On November 18, 2004, we issued options to purchase 27,000,000 shares of our common stock to
five executive officers. The options are exercisable at $0.22 per share for a period of four years
from the date of issuance. The options were issued pursuant to the terms of employment agreements
with our officers. The options were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act. The options
contain the appropriate legends restricting their transferability absent registration or
applicable exemption. The officers received information concerning our company and had the ability
to ask questions concerning our company. 
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Airbee Wireless, Inc. is a developer of intelligent connectivity software for wireless voice,
data and video communications primarily designed to comply with the ZigBee standard. We believe
our software will enable consumer and business devices to connect to each other over short
distances without requiring the use of cables or wires. We intend to license our software
communications products to manufacturers of microprocessors and OEM manufacturers, thereby enabling
them to develop an increasing number of wireless communications applications using Airbees
software, including consumer electronics, medical equipment, sensor and metering equipment, and
industrial automation equipment. We believe that by focusing on our strength in the design and
development of advanced wireless communications software, we can take advantage of the convergence
of various wireless communications applications through software embedded on silicon. 
 We will recognize 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) service revenues. To date, we have not recognized any revenues from these sources. 
 
 Licensing revenues (e.g., Airbee-ZNS, Airbee-ZMAC, and Airbee-ZNMS) consist of revenues from
licensing under the enterprise licensing model. This includes a combination of
product 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. All 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. 
 Plan of Operations 
 Our plan of operations is to enhance our software and market it to various users pursuant to
joint venture and license agreements. We plan on marketing our software through our own marketing
personnel, as well as at trade shows and conventions and through our customer (partner)
distribution channels. The sale of the majority of our products is not dependent on additional
capital. These products are for sale at this time and are designated as ZigBee-ready in
conformity with the global standards released by the ZigBee Alliance. No further development of
these products is currently required. The certification process only applies to our ZNS software
stack product, which is designed to comply with the ZigBee specifications. The cost of
certification is approximately $60,000. We currently have capital available to fund certification
of this product. Our other products do not require certification and have no required additional
development costs. The products may be sold separately or together as a group. This will depend on
the customer and the requirements for his marketplace. 
 
 Our research and development is conducted in Chennai, India. Since inception our research and
development expenses have been $1,284,556 (in accordance with generally accepted accounting
principles). Additionally, we have incurred expenses for salaries and general overhead in excess
of $1,310,341 during our 
 14




---



##### Table of Contents



development stage. We have extended our operations and added staff in the
last six months to expedite the development process and accelerate the availability of our software
to the market. 
 
 We have expanded our development center in Chennai, India by hiring twelve additional software
engineers. Another six software engineers are expected to join our development center during
2005. An additional 20 to 25 software engineers are expected to join us during the subsequent 12
months. We anticipate recruiting three more marketing and sales personnel to complement the two
people now on board. These sales and marketing personnel will be located in the U.S. and will
either work from their homes or out of our headquarters office in Maryland. While these additions
are subject in part to the availability of financing or revenues from software sales, because the
engineers are located in India, the cost of their compensation is far less than if they were in the
United States The actual cost of servicing the service contracts is variable and is dependent on the
softwares performance. However, costs should not exceed 50% of the service contract revenues. As
to the costs of software engineers, management has projected an aggregate per annum cost for 30 to
40 engineers at $350,000 to $450,000. 
 
 As previously disclosed, to permit us to more aggressively market our products and fund
further product enhancement, we intend to seek debt or equity financing or combination thereof
amounting to $5,000,000. Should we be unable to raise all or any part of that amount, our
marketing and product enhancement will be adversely affected and we will adjust our marketing and
enhancement activities accordingly. Subsequent to the period covered by this report we entered
into certain financing arrangements and entered into an agreement and plan of merger with Identity,
Inc., which we believe will provide us with a substantial portion of the internally generated
capital we require. 
 
 On April 26, 2005, we executed a promissory note in the amount of $750,000 in favor of
Montgomery Equity Partners, Ltd. Pursuant to the terms of the promissory note, Montgomery Equity
Partners disbursed us the entire $750,000 and an additional $250,000 will be disbursed to us after
our Companys common stock commences trading on the Over-the-Counter Bulletin Board. Also on April
26, 2005, we entered into a Standby Equity Distribution Agreement with Cornell Capital Partners,
LP, dated as of April 20, 2005. Pursuant to the Standby Equity Distribution Agreement, we may, at
our discretion, periodically sell to Cornell Capital Partners, LP shares of common stock for a
total purchase price of up to $20.0 million. For each share of common stock purchased under the
Standby Equity Distribution Agreement, Cornell Capital Partners, LP will pay us 97% of the lowest
volume weighted average price of our common stock as quoted by Bloomberg, LP on the
Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for
the 5 days immediately following the notice date. The price paid by Cornell Capital Partners, LP
for our stock shall be determined as of the date of each individual request for an advance under
the Standby Equity Distribution Agreement. Cornell Capital Partners obligation to purchase shares
of our common stock under the Standby Equity Distribution Agreement is subject to certain
conditions, including us obtaining an effective registration statement for shares of our common
stock sold under the Standby Equity Distribution Agreement and is limited to $300,000 per weekly
advance. 
 
 On May 2, 2005 we acquired Identity, Inc. under a merger agreement in consideration of
7,692,808 shares of our common stock. Half of the shares are in escrow, subject to the filing of
audited financial information for Identity, Inc. with the SEC. Identity, Inc., a Delaware
corporation, owns a wholly-owned interest in Identity, LLC, a distributor of automotive anti-theft
devices. Identity, LLC is based in Rancho Cordova, California. Identity, Inc. uses advance
short-range wireless technology to provide total immobilization of a vehicles ignition system to
prevent theft. Identitys current nationwide customer base includes dealerships representing
General Motors, Ford, Daimler-Chrysler, Dodge, Toyota, Lexus, Nissan, Honda, Accura, Suzuki,
Hyundai, Saturn, Infinity and Kia. The Identity products are endorsed by the International
Association of Auto Theft Investigators. 
 
 We believe that the $750,000 financing, potential financing and cash from potential future
software sales and revenues from Identitys operations will enable us to expand our operations and
increase product development and marketing over the next 12 months. Excluding our acquisition of
Identity, Inc. (which occurred subsequent to the period covered by this report) we do not have any
plans, proposal or arrangement pertaining to any material acquisitions during the next twelve
months. 
 It is not certain how the current and future development of Ultra Wide Band products will
affect our plan of operation. The effect, if any, will depend upon the establishment of
international standards. 15




---



##### Table of Contents



Results of Operations For the less than five months of operations during Fiscal 2002, the Company generated $5,027
of revenue from software project services to third parties relating to the Connexus acquisition
with an operating loss for the year of $173,633. Following the acquisition of Connexus
Technologies Pte. Ltd. (subsequently renamed Airbee Wireless Pte. Ltd.), management wrote down
acquired assets by the amount of $127,974. Net loss before taxes was $303,298, or $0.01 per
weighted average number of common shares outstanding. 
 For fiscal 2003, the Company generated consolidated revenues of $5,081 from software project
services provided to third parties. An operating loss of $1,039,174 was sustained for fiscal 2003
resulting from increased operating expense. All consulting for third parties (related solely to clients of Connexus
subsequently acquired by us) was halted in order to focus the Companys resources on developing its
own portfolio of software for wireless networks. 
 
 For fiscal 2004, our non-operating revenues were $70,000 resulting in a net loss applicable to
common shares of $1,136,743 or $0.03 net loss per share, compared to a net loss of $1,360,577 or
$0.05 net loss per share for fiscal 2003. These revenues were the result of the collection of
receivables previously written off at the time the Company acquired Connexus Technologies (Pte.)
Ltd. in 2002. Cumulative net loss since inception totaled $2,814,366. Strict management of
operating overheads helped to control costs broadly in line with the previous fiscal year, while
shifting our priorities from product research and development more toward sales and marketing of
finished software products. Consolidated assets rose to $331,863, while consolidated liabilities
stood at $1,613,329. Shareholders deficit rose to $1,281,466. 
 
 With the ZigBee Alliance releasing version 1.0 of its international standard for wireless
voice and data communications on December 14, 2004, management expects to begin booking revenues in
the third quarter of Fiscal 2005 following the testing and certification of Airbees software for
embedding on microprocessors. 
 
 To date, our financial results typically reflect a development stage company. We have signed
several licensing and joint development agreements with prospective clients and have successfully
embedded our software onto seven different hardware platforms (i.e., Motorola, Texas Instruments,
Chipcon, SupaRule, Zilog, Atmel and any 8051 processor). 
 
 The Company expanded its development center in Chennai, India by hiring 10 additional
technical software engineers. Another 6 software engineers are expected to join our development
center during the third and fourth quarters of 2005, with a further 20 to 25 software engineers
joining the Company during the subsequent 12 months. We also expect to recruit 3 more marketing
and sales personnel to complement the 2 people now on staff. Additional marketing personnel will
be deployed geographically to cover the European and Asian markets, as well as the US. 
 With the ZigBee Alliance releasing version 1.0 of its international standard for wireless
voice and data communications on December 14, 2004, management expects to begin booking revenues in
the second quarter of Fiscal 2005 following the testing and certification of Airbees software for
embedding on microprocessors. Liquidity and Capital Resources Our capital requirements depend on numerous factors including our research and development
expenditures, expenses related to selling, general and administrative operations and working
capital to support business growth. We anticipate that our operating and capital expenditures will
constitute a material use of our cash resources. As a result, our net cash flows will depend
heavily on (a) the level of our future sales (which depend, to a large extent, on general economic
conditions affecting us and our customers, as well as the timing of our products sales cycles
(especially for the newly introduced ZigBee global standard) and other competitive factors) and (b)
our ability to control expenses. 
 Since inception we have principally funded our operations from shareholder loans and
contributions of $2,682,111. During 2004 funding of approximately $569,000 was received in
connection with a private placement 
 16




---



##### Table of Contents



pursuant to Rule 504. Although it is difficult for us to
predict future liquidity requirements with certainty, we expect that our cash requirements for
working capital, product development and capital expenditures will be financed from our cash, cash
equivalents and supplemented by approximately $5,000,000 of debt or equity financing. Most of the
funding will be allocated principally for sales and marketing. It is anticipated that of the
$5,000,000, approximately $1,000,000 will be used for ongoing product enhancement. To the extent
that we are unable to raise all or a portion of the funding, we will first reduce our expenses,
including the sales and marketing budget and place initial priority on ongoing product enhancement.
It is not anticipated that any lack of funding will impact upon the license and development
agreements discussed above in the section entitled Licensing and Joint Development Agreements
since the software development has been completed for three of our products. 
 With regard to our current liabilities at December 31, 2004, $1,056,611 is payable to related
note holders and employees who have deferred repayment as well as interest. Such amounts are due
on June 30, 2005, but will be rolled over by the noteholders until September 30, 2005. Trade
payables at December 31, 2004, which are current at this time, of approximately $390,000 are
outstanding and will be paid as they come due or as payment may be extended by agreement of the
parties. In March 2005, we received an aggregate of $350,000 from five investors in consideration
of 979,143 shares of our common stock and 196,429 common stock purchase warrants. The proceeds
have been used to pay down current payables. A payment of $60,000 for certification of our ZNS
software stack is our only other current obligation (other than compensation). We are required to
submit payment within approximately 45 days of the date we submit our product for certification.
We have set aside $60,000 from our currently available cash for such purposes. We intend to submit
our product for certification by the end of July 2005. 
 
 While we believe that revenues will begin during the third quarter of 2005 from our licensing
and other agreements, we shall be dependent upon financing to accelerate our marketing activities
and continue product enhancement. Assuming we accelerate our marketing activities and continue
product enhancement, we anticipate monthly operating and capital expenses of approximately $131,000
per month for the next twelve months. This amount includes costs of our SEC reporting obligations,
which are expected to be approximately $182,000 for the year ending December 31, 2005. Cost
of SEC reporting obligations includes all filing costs and professional fees. We do not consider
the expense of SEC reporting to be material. Based on the funding described above, we believe that
sufficient funds will be available until adequate revenues are generated to cover operating and
capital expenses as cash flow allows. If funding is not available we will be required to limit or
suspend our marketing and product development. There are no known trends that are likely to have a
material impact on liquidity. 
 Key Operating Metrics Members of our senior management regularly review key financial information including net
revenues, operating income or loss, earnings or loss per share, changes in deferred revenue, cash
flow from operations and free cash. We define free cash as the sum of cash and cash equivalents,
short and long-term investments and restricted investments less long-term debt. This information
allows us to monitor the profitability of our business and evaluate the effectiveness of
investments that we have made in the areas of customer support, product development, marketing and
site operations. We believe that an understanding of key financial information and how it changes
over time is important to investors, analysts and other parties analyzing our business results and
future market opportunities. Critical Accounting Policies and Estimates General Managements discussion and analysis of our financial condition and results of operations are
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, Summary of 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. 17




---



##### Table of Contents



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 policies and estimates that we believe are most critical to an understanding of
our financial results and condition and that require a higher degree of judgment and complexity
are:  
    
    Revenue recognition
    
    Estimating sales returns and other allowances, and allowance for doubtful accounts
    
    Valuation of long-lived assets, including goodwill and purchased intangibles
    
    Accounting for income taxes Revenue Recognition 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 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 18




---



##### Table of Contents



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. Off-Balance Sheet Arrangements As of December 31, 2004, we did not have any off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of SEC Regulation S-K. Recently Issued Accounting Pronouncements In September 2001, the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, the
pooling of interests method of accounting for business combinations are no longer allowed, and
goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will
be subject to annual impairment tests in accordance with the Statements. Other intangible assets
will continue to be amortized over their useful lives. The Company adopted these new standards
effective August 9, 2002. On October 3, 2001, the FASB issued Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS 144) that is applicable to
financial statements issued for fiscal years beginning after December 15, 2001. The FASBs new
rules on asset impairment supersede SFAS 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of,and portions of Accounting Principles Board Opinion
30, Reporting the Results of Operations. This Standard provides a single accounting model for
long-lived assets to be disposed of and significantly changes the criteria that would have to be
met to classify an asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of fair value and
carrying amount. This Standard also requires expected future operating losses from discontinued
operations to be displayed in the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. In June 2003, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities.This statement covers restructuring type activities beginning with plans
initiated after December 31, 2002. Activities covered by this standard that are entered into after
that date will be recorded in accordance with provisions of SFAS No. 146. The adoption of SFAS No.
146 did not impact on the Companys results of operations or financial position. In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123(SFAS 148). SFAS
148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. It also amends the disclosure
provisions of that Statement to require prominent disclosure about the effects on reported net
income of an entitys accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends Accounting Principles Board (APB) Opinion No. 28,
Interim Financial Reporting, to require disclosure about those effects in interim financial
information. SFAS 148 is effective for financial statements for fiscal years ending after December
15, 2002. The Company will continue to account for stock-based employee compensation using the
intrinsic value method of APB Opinion No. 25, Accounting for Stock Issued to Employees, but has
adopted the enhanced disclosure requirements of SFAS 148. In April 2003, the FASB issued SFAS Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities,which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities.This Statement is
effective for contracts entered into or modified after June 30, 2003, except 19




---



##### Table of Contents



for certain hedging
relationships designated after June 30, 2003. Most provisions of this Statement should be applied
prospectively. The adoption of this statement did not have a significant impact on the Companys
results of operations or financial position. In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others.FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial
liability for the fair value of obligations assumed under the guarantees and elaborates on existing
disclosure requirements related to guarantees and warranties. The recognition requirements are
effective for guarantees issued or modified after December 31, 2002
for initial recognition and initial measurement provisions. The adoption of FIN 45 did not
have a significant impact on the Companys results of operations or financial position. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51.FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all new variable
interest entities created or acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the
first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not
impact on the Company results of operations or financial position. Factors That May Affect Future Results Our business faces significant risks. The risks described below may not be the only risks we face.
Additional risks that we do not yet know of or that we currently think are immaterial may also
impair our business operations. If any of the events or circumstances described in the following
risks actually occur, our business, financial condition or results of operations could suffer, and
the trading price of our common stock could decline. Because a significant portion of our revenue is to be derived from software licenses, we are
dependent upon the ability of our customers to develop and penetrate new markets successfully. Our software license revenues depend both upon our ability to successfully negotiate production
license agreements with our customers and, in turn, upon our customers successful
commercialization of their underlying products. In particular, we shall derive significant revenue
from customers that develop products in highly competitive and technologically complex markets such
as consumer electronics, medical devices, homeland security, home automation, industrial control
and automotive markets. If these customers sell fewer products or otherwise face significant
economic difficulties, our revenues will be impacted. We cannot control our customers product
development or commercialization or predict their success. In addition, we depend on our customers
to accurately report the use of their products in order for us to collect our revenues from
production licenses. If our customers are not successful with their products or do not accurately
report use of their products to us, our software license revenues may be adversely impacted. Numerous factors may cause our total revenues and operating results to fluctuate significantly from
period to period. These fluctuations increase the difficulty of financial planning and forecasting
and may result in decreases in our 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. These fluctuations may result in unanticipated decreases
in our available cash, which could negatively impact our operations. As discussed more fully
below, these fluctuations also could 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
recently announced ZigBee global standard for short-range wireless voice and data communications 20




---



##### Table of Contents




    
    the number and timing of orders we receive, including disproportionately higher receipt and shipment of orders in the
last month of the quarter;
    
    changes in the length of our products sales cycles, which increase 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 as 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 our competitors;
    
    the impact of, and our ability to react to, natural disasters and/or events of terrorism;
    
    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. Legislative actions may cause our operating expenses to increase. The Sarbanes-Oxley Act of 2002 and newly proposed or enacted rules and regulations of the
Securities and Exchange Commission or the National Association of Securities Dealers impose new
duties on us and our executives, directors, attorneys and independent accountants. In order to
comply with the Sarbanes-Oxley Act and such new rules and regulations, we may be required to hire
additional personnel and use additional outside legal, accounting and advisory services. Any of
these developments could materially increase our operating expenses and accordingly reduce our net
income or increase our net losses. 
 ITEM 7. FINANCIAL STATEMENTS 21




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page(s)Report of Independent Registered Public Accounting Firm
    
    
    23Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    24Consolidated Statements of Operations for the Years Ended December 31, 2004 and 2003 with Cumulative Totals Since Inception
    
    
    25Consolidated Statement of Changes in Stockholders Equity (Deficit) for the period August 9, 2002 (inception) through
December 31, 2004
    
    
    26Consolidated Statement of Accumulated Comprehensive Income for the period August 9, 2002 (inception) through December 31, 2004
    
    
    27Consolidated Statements of Cash Flow for the Years Ended December 31, 2004 and 2003 with Cumulative Totals Since Inception
    
    
    28Notes to Consolidated Financial Statements
    
    
    30
 22




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders of
Airbee Wireless, Inc.
Rockville, MD 20850 We have audited the accompanying consolidated balance sheets of Airbee Wireless, Inc., a
development stage company (the Company) as of December 31, 2004 and 2003, and the related
consolidated statements of operations, changes in stockholders equity (deficit), accumulated
comprehensive income and cash flows for the years then ended and the period of inception, August 9,
2002 (inception) through December 31, 2004, with cumulative totals since the Companys inception,
for the statements of operations, changes in stockholders equity (deficit), accumulated
comprehensive income and cash flows. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying consolidated financial statements have been prepared assuming the Company will
continue as a going concern. As discussed in Note 13 to the consolidated financial statements, the
Company has sustained operating losses and capital deficits that raise substantial doubt about its
ability to continue as a going concern. Managements operating and financing plans in regards to
these matters are also discussed in Note 13. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Airbee Wireless, Inc., a development stage company as
of December 31, 2004 and 2003, and the results of its operations, and cash flows for the years then
ended, and the cumulative totals since the Companys inception, in conformity with accounting
principles generally accepted in the United States of America. 
 As noted in Note 14, the Company had amended its previously issued consolidated financial
statements for the year ended December 31, 2003 and period ended August 9, 2002 (inception) through
December 31, 2002 on its report dated May 20, 2004, as well as the previously issued consolidated
financial statements for the year ended December 31, 2004. 
 
 The Company had amended these consolidated financial statements to recognize an additional $381,513
and $48,168 in compensation and interest expense for the year ended December 31, 2003 and period
August 9, 2002 (inception) through December 31, 2002. In addition, certain issuances of common
stock have been restated due to valuation adjustments, the recording of unearned compensation due
to the issuance of options below the fair market value (including amortization of unearned
compensation of $13,748 in 2003 and 2002, respectively) and 2002 common share information has been
restated to retroactively account for the stock split that occurred in September 2003. These
transactions resulted in an increase in net loss applicable to common shares of $380,554 and
$32,189 for the year ended December 31, 2003 and period August 9, 2002 (inception) through December
31, 2002 to a net loss of $1,360,577 and $317,046 as restated, and an increase in the deficits
accumulated during the development stage to $1,677,623 and $317,046, respectively The December 31,
2004 financial statements have been restated for the amortization of unearned compensation for the
year ended December 31, 2004 by $13,748 and this has increased the loss for the year then ended to
$1,136,743 as restated, and the accumulated deficit during the development stage to $2,814,366. 
 
 /s/ BAGELL, JOSEPHS & COMPANY, L.L.C.
BAGELL, JOSEPHS & COMPANY, L.L.C.
Gibbsboro, New Jersey 
 
 March 20, 2005, except for Note 14 dated June 1, 2005 
 23




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY) 
 CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
 Restated
    
    
    Restated2004
    
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    87,362
    
    
    $
    23,488Prepaid expenses and other current assets
    
    
    25,559
    
    
    
    9,553Total Current Assets
    
    
    112,921
    
    
    
    33,041Fixed assets, net of depreciation
    
    
    51,362
    
    
    
    8,215Intangible assets
    
    
    165,975
    
    
    
    164,727Other assets
    
    
    1,605
    
    
    
    1,545167,580
    
    
    
    166,272TOTAL ASSETS
    
    $
    331,863
    
    
    $
    207,528LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)LIABILITIESCurrent Liabilities:Notes payable  related party
    
    $
    1,056,611
    
    
    $
    625,422Notes payable  other
    
    
    50,000
    
    
    
    50,000Liability for stock to be issued
    
    
    76,000
    
    
    
    Accounts payable and accrued expenses
    
    
    389,791
    
    
    
    256,888Total Current Liabilities
    
    
    1,572,402
    
    
    
    932,310Long-term Liabilities:Due officers
    
    
    40,927
    
    
    
    39,076Total Long-term Liabilities
    
    
    40,927
    
    
    
    39,076Total Liabilities
    
    
    1,613,329
    
    
    
    971,386STOCKHOLDERS EQUITY (DEFICIT)Common stock, $0.00004 Par Value; 200,000,000 shares authorized
41,216,913 and 36,078,979 shares issued and outstanding
at December 31, 2004 and 2003, respectively
    
    
    1,648
    
    
    
    1,443Additional paid-in capital
    
    
    1,623,852
    
    
    
    1,013,518Unearned compensation
    
    
    (41,241
    )
    
    
    (54,989
    )Accumulated comprehensive income
    
    
    730
    
    
    
    5,882Deficit accumulated during the development stage
    
    
    (2,814,366
    )
    
    
    (1,677,623
    )(1,229,377
    )
    
    
    (711,769
    )Less: Treasury stock, 704,362 shares at cost
    
    
    (52,089
    )
    
    
    (52,089
    )Total Stockholders Equity (Deficit)
    
    
    (1,281,466
    )
    
    
    (763,858
    )TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
    
    $
    331,863
    
    
    $
    207,528
 The accompanying notes are an integral part of these consolidated financial statements 24




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY) 
 CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
 (WITH CUMULATIVE TOTALS SINCE INCEPTION) Cumulative TotalsRestated
    
    
    Restated
    
    
    August 9, 20022004
    
    
    2003
    
    
    to December 31, 2004OPERATING REVENUESSales
    
    $
    
    
    
    $
    5,081
    
    
    $
    10,108COST OF SALES
    
    
    
    
    
    
    5,520
    
    
    
    11,040GROSS PROFIT (LOSS)
    
    
    
    
    
    
    (439
    )
    
    
    (932
    )OPERATING EXPENSESCompensation and professional fees
    
    
    505,776
    
    
    
    589,828
    
    
    
    1,142,062Research and development
    
    
    502,853
    
    
    
    643,329
    
    
    
    1,284,556Selling, general and administrative expenses
    
    
    129,655
    
    
    
    38,500
    
    
    
    168,279Impairment
    
    
    
    
    
    
    
    
    
    
    127,974Depreciation and amortization
    
    
    4,188
    
    
    
    2,226
    
    
    
    8,346Total Operating Expenses
    
    
    1,142,472
    
    
    
    1,273,883
    
    
    
    2,731,217LOSS BEFORE OTHER (EXPENSE)
    
    
    (1,142,472
    )
    
    
    (1,274,322
    )
    
    
    (2,732,149
    )OTHER INCOME (EXPENSE)Other income
    
    
    70,000
    
    
    
    
    
    
    
    70,000Interest expense
    
    
    (64,271
    )
    
    
    (86,255
    )
    
    
    (152,217
    )Total Other Income (Expense)
    
    
    5,729
    
    
    
    (86,255
    )
    
    
    (82,217
    )NET LOSS BEFORE PROVISION FOR INCOME TAXES
    
    
    (1,136,743
    )
    
    
    (1,360,577
    )
    
    
    (2,814,366
    )Provision for Income Taxes
    
    
    
    
    
    
    
    
    
    
    NET LOSS APPLICABLE TO COMMON SHARES
    
    $
    (1,136,743
    )
    
    $
    (1,360,577
    )
    
    $
    (2,814,366
    )NET LOSS PER BASIC AND DILUTED SHARES
    
    $
    (0.029
    )
    
    $
    (0.048
    )WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
    
    
    38,578,861
    
    
    
    28,391,865
 The accompanying notes are an integral part of these consolidated financial statements 25




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY) 
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) 
FOR THE PERIOD AUGUST 9, 2002 (INCEPTION) THROUGH DECEMBER 31, 2004
 
 DeficitAccumulatedAdditional
    
    
    Accumulated
    
    
    
    
    
    
    During theCommon Stock
    
    
    Paid - In
    
    
    Comprehensive
    
    
    Unearned
    
    
    Development
    
    
    TreasuryDescription
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Income (Loss)
    
    
    Compensation
    
    
    Stage
    
    
    Stock
    
    
    TotalBalance, August 9, 2002
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Issuance of initial founders shares
    
    
    21,625,000
    
    
    
    865
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    865Shares issued for acquisition of Connexus Technologies
    
    
    4,156,405
    
    
    
    166
    
    
    
    99,834
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Issuance of founders shares to chief operating officer
    
    
    1,359,550
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55Issuance of common stock for cash
    
    
    50,000
    
    
    
    2
    
    
    
    9,998
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Options issued below fair market value
    
    
    
    
    
    
    
    
    
    
    82,485
    
    
    
    
    
    
    
    (82,485
    )
    
    
    
    
    
    
    
    
    
    
    Prior period adjustment, Note 14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,748
    
    
    
    (32,189
    )
    
    
    
    
    
    
    (18,441
    )Net loss for the period, as originally stated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (284,857
    )
    
    
    
    
    
    
    (284,857
    )Balance, December 31, 2002, as restated
    
    
    27,190,955
    
    
    
    1,088
    
    
    
    192,317
    
    
    
    
    
    
    
    (68,737
    )
    
    
    (317,046
    )
    
    
    
    
    
    
    (192,378
    )Issuance of common stock in private placement
    
    
    1,000,000
    
    
    
    40
    
    
    
    87,960
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,000Issuance of common stock in conversion of note payable
    
    
    56,668
    
    
    
    2
    
    
    
    11,831
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,833Issuance of founders shares to chief financial officer
    
    
    125,000
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Shares issued for services
    
    
    3,617,854
    
    
    
    144
    
    
    
    411,568
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    411,712Shares issued for cash
    
    
    166,960
    
    
    
    7
    
    
    
    18,993
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,000Shares of common stock issued in exercise of options
    
    
    4,465,450
    
    
    
    179
    
    
    
    80,048
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80,227
    )
    
    
    Contribution of capital by officer
    
    
    
    
    
    
    
    
    
    
    17,517
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,517Options issued below fair market value
    
    
    
    
    
    
    
    
    
    
    221,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    221,400Prior period adjustment, Note 14
    
    
    (543,908
    )
    
    
    (22
    )
    
    
    (28,116
    )
    
    
    
    
    
    
    13,748
    
    
    
    (380,554
    )
    
    
    28,138
    
    
    
    (366,806
    )Net loss for the year, as originally stated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,882
    
    
    
    
    
    
    
    (980,023
    )
    
    
    
    
    
    
    (974,141
    )Balance, December 31, 2003, as restated
    
    
    36,078,979
    
    
    
    1,443
    
    
    
    1,013,518
    
    
    
    5,882
    
    
    
    (54,989
    )
    
    
    (1,677,623
    )
    
    
    (52,089
    )
    
    
    (763,858
    )Issuance of common stock for cash
    
    
    5,030,490
    
    
    
    201
    
    
    
    581,838
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    582,039Shares issued for services
    
    
    107,444
    
    
    
    4
    
    
    
    28,496
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,500Prior period adjustment, Note 14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,748
    
    
    
    (13,748
    )
    
    
    
    
    
    
    Net loss for the year, as originally stated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,152
    )
    
    
    
    
    
    
    (1,122,995
    )
    
    
    
    
    
    
    (1,128,147
    )Balance, December 31, 2004, as restated
    
    
    41,216,913
    
    
    $
    1,648
    
    
    $
    1,623,852
    
    
    $
    730
    
    
    $
    (41,241
    )
    
    $
    (2,814,366
    )
    
    $
    (52,089
    )
    
    $
    (1,281,466
    )
 
 The accompanying notes are an integral part of these consolidated financial statements 26




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY) 
 CONSOLIDATED STATEMENT OF ACCUMULATED COMPREHENSIVE INCOME
FOR THE PERIOD AUGUST 9, 2002 (INCEPTION) THROUGH DECEMBER 31, 2004
 Balance, August 9, 2002
    
    $
    Gain on foreign currency translation
    
    
    Balance, December 31, 2002
    
    
    Gain on foreign currency translation
    
    
    5,882Balance, December 31, 2003
    
    
    5,882Loss on foreign currency translation
    
    
    (5,152
    )Balance, December 31, 2004
    
    $
    730
 The accompanying notes are an integral part of these consolidated financial statements 27




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY) 
 CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2004 AND 2003
 (WITH CUMULATIVE TOTALS SINCE INCEPTION) Cumulative TotalsRestated
    
    
    Restated
    
    
    August 9, 2002 to2004
    
    
    2003
    
    
    December 31, 2004CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (1,136,743
    )
    
    $
    (1,360,577
    )
    
    $
    (2,814,366
    )Adjustments to reconcile net loss to net cash
used in operating activitiesDepreciation
    
    
    4,188
    
    
    
    2,226
    
    
    
    8,346Amortization of unearned compensation
    
    
    13,748
    
    
    
    13,748
    
    
    
    41,244Common stock issued for services and compensation
    
    
    28,500
    
    
    
    633,117
    
    
    
    661,612Interest expense converted to note payable  other
    
    
    50,000
    
    
    
    50,000
    
    
    
    100,000Services for stock to be issued
    
    
    76,000
    
    
    
    
    
    
    
    76,000Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    127,974(Loss) gain on foreign currency transactions
    
    
    (5,152
    )
    
    
    5,882
    
    
    
    730Changes in assets and liabilitiesDecrease in accounts receivable
    
    
    
    
    
    
    9,861
    
    
    
    19,373(Increase) decrease in prepaid expenses and other
assets
    
    
    (16,006
    )
    
    
    (7,946
    )
    
    
    (23,952
    )Net change in net assets in acquisition of Connexus
    
    
    
    
    
    
    
    
    
    
    (22,865
    )(Increase) in other assets
    
    
    (60
    )
    
    
    
    
    
    
    (60
    )Increase in accounts payable and
and accrued expenses
    
    
    82,903
    
    
    
    163,726
    
    
    
    255,284Total adjustments
    
    
    234,121
    
    
    
    870,614
    
    
    
    1,243,686Net cash (used in) operating activities
    
    
    (902,622
    )
    
    
    (489,963
    )
    
    
    (1,570,680
    )CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of intangible assets
    
    
    (1,248
    )
    
    
    (139,727
    )
    
    
    (165,975
    )Acquisitions of fixed assets
    
    
    (47,335
    )
    
    
    (2,713
    )
    
    
    (50,048
    )Net cash (used in) investing activities
    
    
    (48,583
    )
    
    
    (142,440
    )
    
    
    (216,023
    )
 The accompanying notes are an integral part of these consolidated financial statements 28




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (WITH CUMULATIVE TOTALS SINCE INCEPTION) 
 Cumulative TotalsRestated
    
    
    Restated
    
    
    August 9, 2002 to2004
    
    
    2003
    
    
    December 31, 2004CASH FLOWS FROM FINANCING ACTIVITIESProceeds from common stock issuances
    
    $
    582,039
    
    
    $
    124,488
    
    
    $
    716,527Services rendered converted to notes payable  related party
    
    
    431,189
    
    
    
    476,234
    
    
    
    1,056,611Proceeds from notes payable  other
    
    
    
    
    
    
    
    
    
    
    60,000Amounts due to officers, net
    
    
    1,851
    
    
    
    39,076
    
    
    
    40,927Net cash provided by financing activities
    
    
    1,015,079
    
    
    
    639,798
    
    
    
    1,874,065NET INCREASE IN
CASH AND CASH EQUIVALENTS
    
    
    63,874
    
    
    
    7,395
    
    
    
    87,362CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD
    
    
    23,488
    
    
    
    16,093
    
    
    
    CASH AND CASH EQUIVALENTS  END OF PERIOD
    
    $
    87,362
    
    
    $
    23,488
    
    
    $
    87,362SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:CASH PAID DURING THE YEAR FOR:Interest expense
    
    $
    
    
    
    $
    
    
    
    $
    SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITIES:Exercise of cashless stock options
    
    $
    
    
    
    $
    59,089
    
    
    $
    59,089Common stock issued for services and compensation
    
    $
    28,500
    
    
    $
    633,112
    
    
    $
    661,612Interest expense converted to note payable  other
    
    $
    50,000
    
    
    $
    50,000
    
    
    $
    100,000Services rendered converted to notes payable  demand
    
    $
    431,189
    
    
    $
    476,234
    
    
    $
    1,056,611Services for stock to be issued
    
    $
    76,000
    
    
    $
    
    
    
    $
    76,000Conversion of notes payable and accrued interest to common stock
    
    $
    
    
    
    $
    11,833
    
    
    $
    11,833Impairment of goodwill
    
    $
    
    
    
    $
    
    
    
    $
    127,974Unearned compensation on cashless options
    
    $
    
    
    
    $
    
    
    
    $
    82,485
 
 The accompanying notes are an integral part of these consolidated financial statements 29




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY) 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2004 AND 2003
 NOTE 1 -
    
    ORGANIZATION AND BASIS OF PRESENTATIONAirbee Wireless, Inc. (the Company), was incorporated in Delaware in 2002 to
develop and supply cutting edge intelligent software that is generally embedded
into microprocessors, thereby allowing chip manufacturers, original equipment
manufacturers (OEMs) and integrators 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, voice and video 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.
The Company focuses on developing advanced technological solutions tailored to
enable customer requirements for specific end-user applications, providing the
unwired features people want at work and at home.In March 2004, Airbee became a member of The ZigBee Alliance which has defined a
global standard for reliable, cost-effective, low-power, low data rate, wireless
applications. With over 130 international member companies, the ZigBee standard,
based on the IEEE 802.15.4 standard is emerging as a dominant wireless standard for
a host of industrial controls, telemetry, and in-building and home automation
networking needs.Airbees portfolio of products is generally connected over the rapidly emerging
Wireless Personal Area Network (WPAN) or the Wireless Local Area Network (WLAN)
technology space. Critical to the success of new products in these areas is the
ability to interoperate or talk to each other based on industry-adopted
standards. Airbees products are designed and engineered to be compliant with
ZigBee/802.15.4 WPAN standards (approved by IEEE on 8/7/03). Airbees
patent-pending software technology, in conjunction with an Airbee enabled wireless
network, allows a computer to work with a printer or a PDA and/or headset accessory
to work with a mobile phone. Airbee leverages the widespread market awareness
created by Bluetooth, but offers similar products at less than half the cost, three
times the operating range and better reliability per the ZigBee specifications.As stated in Note 14, the Company had amended its previously issued consolidated
financial statements for the year ended December 31, 2003 and period ended August
9, 2002 (inception) through December 31, 2002 on its report dated May 20, 2004, as
well as the previously issued consolidated financial statements for the year ended
December 31, 2004.The Company had amended these consolidated financial statements to recognize
additional compensation and interest expense for the year ended December 31, 2003
and period August 9, 2002 (inception) through December 31, 2002. Additionally,
certain issuances of common stock have been restated due to valuation adjustments,
the recording of unearned compensation due to the issuance of options below the
fair market value (including amortization of unearned compensation of $13,748 in
2004 and 2003, respectively), and 2002 common share information has been restated
to retroactively account for the stock split that occurred in September 2003. These
transactions resulted in an increase in net loss applicable to common shares of
$380,554 and $32,189 for the year ended December 31, 2003 and period August 9, 2002
(inception) through December 31, 2002 to a net loss of $1,360,577 and $317,046 as
restated, and an increase in the deficits accumulated during the development stage
to $1,677,623 and $317,046, respectively. The December 31, 2004 financial
statements have been restated for the amortization of unearned compensation for the
year ended December 31, 2004 by $13,748 and this has increased the loss for the
year then ended to $1,136,743 as restated, and the accumulated deficit during the
development stage to $2,814,366.
 30




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 2 -
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESDevelopment Stage CompanyThe Company is considered to be in the development stage as defined in Statement of
Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by
Development Stage Enterprises. The Company has devoted substantially all of its
efforts to business planning, patent applications, research and development,
recruiting management and technical staff, acquiring operating assets and raising
capital. With the release of the ZigBee/IEEE 802.15.4 standard on December 14,
2004, the Company is anticipating that sales will be generated in fiscal 2005, at
which time it will emerge from the development stage.Principles of ConsolidationThe consolidated financial statements include the accounts of Airbee Wireless, Inc.
and its wholly-owned subsidiaries Airbee Wireless (Pte.) Ltd., located in Singapore
and Airbee Wireless (India) Pvt. Ltd., located in India for the years ended
December 31, 2004 and 2003. All significant inter-company accounts and
transactions have been eliminated in consolidation. Accounts denominated in non-US
currencies have been re-measured using the US Dollar as the functional currency.Use of EstimatesPreparation of 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 EquivalentsThe 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.Fixed AssetsFixed 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,
 31




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 2 -
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)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.Identified Intangible AssetsIntellectual property assets represent technology and are amortized over the
periods of benefit, ranging from two to ten years, generally on a straight-line
basis.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.Segment ReportingThe Company follows the provisions of SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. This standard requires that companies
disclose operating segments based on the manner in which management disaggregates
the Company in making internal operating decisions. As of December 31, 2004 and
2003, there were no operating segments.Start-up CostsIn accordance with the American Institute of Certified Public Accountants Statement
of Position 98-5, Reporting on the Costs of Start-up Activities,the Company
expensed all costs incurred in connection with the start-up and organization of the
Company.Revenue and Cost RecognitionThe Company 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) service revenues.Licensing revenues (e.g., Airbee-ZNS, Airbee-ZMAC, and Airbee-ZNMS) consist of
revenues from the licensing under the enterprise licensing model, of Airbee
platforms, which include a combination of product 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.
 32




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 2 -
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Revenue and Cost Recognition (Continued)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.
 33




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 2 -
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Revenue and Cost Recognition (Continued)The Company expects 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. 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.Research and DevelopmentResearch and development costs are related primarily to the Company developing its
intellectual property. Research and development costs are expensed as incurred.Income TaxesIncome 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 years ended December 31, 2004 and 2003,
respectively.AdvertisingThe Companys policy is to expense the costs of advertising and marketing as they
are incurred. The Company had no such cost for 2004 and 2003.
 34




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 2 -
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Earnings (Loss) Per Share of Common StockHistorical 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 December 31,
2004 and 2003 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.All shares shown give rise to the retroactive treatment of the 2.5:1 stock split
that occurred in September 2003.The following is a reconciliation of the computation for basic and diluted EPS:
 December 31,
    
    
    December 31,2004
    
    
    2003Net Loss
    
    
    ($1,136,743
    )
    
    
    ($1,360,577
    )Weighted-average common shares
outstanding (Basic)
    
    
    38,578,861
    
    
    
    28,391,865Weighted-average common stock
equivalents:Stock options
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    Weighted-average common shares
outstanding (Diluted)
    
    
    38,578,861
    
    
    
    28,391,865
 Fair Value of Financial InstrumentsThe carrying amount reported in the consolidated balance sheets 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.
 35




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 2 -
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Fair Value of Financial InstrumentsStock-Based CompensationEmployee stock awards 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-Based Compensation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 years ended December 31, 2004 and 2003 were $13,748 and $13,748,
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 Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
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.Product WarrantyThe 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 years ended December 31,
2004 and 2003, respectively.Goodwill and Intangible AssetsThe Company follows Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. All goodwill associated with the acquisition of Connexus Technologies
(Pte.) Ltd. was impaired in 2002 ($127,974), due to the company being acquired
mainly for its development and anticipated future development which management
has determined to have no material fair value as of the balance sheet dates.
 36




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 2 -
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Goodwill and Intangible Assets (Continued)The identifiable intangible assets presented on the consolidated balance sheets
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 142,
Goodwill and Other Intangible Assets and SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.Currency Risk and Foreign Currency TranslationThe Company transacts business in currencies other than the U.S. Dollar,
primarily the Singapore Dollar and the Indian Rupee. All currency transactions
occur in the spot foreign exchange market and the Company does not use currency
forward contracts, currency options, currency borrowings interest rate swaps or
any other derivative hedging strategy at this point in time.The Company has determined that based on the cash flow, sales price, sales
market, expense, financing, and inter-company transactions and arrangements
indicators set forth in FASB 52, Foreign Currency Translation, that the
functional currency of the Company is that of the parent company and is US
Dollars. The Company has reported its gain on foreign currency in its
consolidated statements of accumulated other comprehensive income due to the fact
that these translation adjustments result from the translation of all assets and
liabilities at the current rate, while the stockholder equity accounts were
translated by using historical and weighted-average rates.Recent Accounting PronouncementsIn September 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, the pooling of interests method of
accounting for business combinations are no longer allowed, and goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized but
will be subject to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful lives.
The Company adopted these new standards effective August 9, 2002.On October 3, 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS
144) that is applicable to financial statements issued for fiscal years
beginning after December 15, 2001. The FASBs new rules on asset impairment
supersede SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of,and portions of Accounting Principles Board
Opinion 30, Reporting the Results of Operations. This Standard provides a
single accounting model for long-lived assets to be disposed of and significantly
changes the criteria that would have to be met to classify an asset as
held-for-sale. Classification as held-for-sale is an important distinction since
such assets are not depreciated and are stated at the lower of fair value and
carrying amount. This Standard also requires expected future operating losses
from discontinued operations to be displayed in the period(s) in which the losses
are incurred, rather than as of the measurement date as presently required.
 37




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 2 -
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Recent Accounting Pronouncements (Continued)In June 2003, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement covers restructuring type
activities beginning with plans initiated after December 31, 2002. Activities
covered by this standard that are entered into after that date will be recorded
in accordance with provisions of SFAS No. 146. The adoption of SFAS No. 146 did
not impact on the Companys results of operations or financial position.In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123
(SFAS 148). SFAS 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on reported net
income of an entitys accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends Accounting Principles
Board (APB) Opinion No. 28, Interim Financial Reporting, to require
disclosure about those effects in interim financial information. SFAS 148 is
effective for financial statements for fiscal years ending after December 15,
2002. The Company will continue to account for stock-based employee
compensation using the intrinsic value method of APB Opinion No. 25, Accounting
for Stock Issued to Employees, but has adopted the enhanced disclosure
requirements of SFAS 148.In April 2003, the FASB issued SFAS Statement No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities,which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement is effective for contracts entered into or modified
after June 30, 2003, except for certain hedging relationships designated after
June 30, 2003. Most provisions of this Statement should be applied
prospectively. The adoption of this statement did not have a significant impact
on the Companys results of operations or financial position.In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires a company, at the time
it issues a guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantees and elaborates on existing disclosure
requirements related to guarantees and warranties. The recognition requirements
are effective for guarantees issued or modified after December 31, 2002 for
initial recognition and initial measurement provisions. The adoption of FIN 45
did not have a significant impact on the Companys results of operations or
financial position.
 38




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 2 -
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Recent Accounting Pronouncements (Continued)In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The adoption of FIN 46 did not
impact on the Company results of operations or financial position.NOTE 3-
    
    CONCENTRATION OF CREDIT RISKThe 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 ASSETSFixed assets consist of the following at December 31, 2004 and 2003:
 2004
    
    
    2003Computer and office equipment
    
    $
    59,708
    
    
    $
    12,373Less: accumulated depreciation
    
    
    (   8,346
    )
    
    
    (4,158
    )Net book value
    
    $
    51,362
    
    
    $
    8,215
 Depreciation expense for the years ended December 31, 2004 and 2003 was $4,188
and $2,226, respectively.NOTE 5-
    
    NOTE PAYABLEThe Company entered into a note payable, principal amount of $50,000
payable August 31, 2005. The Company entered into this note in connection with
the 2002 acquisition of Connexus Technologies (Pte.) Ltd. The note was
non-interest bearing if it was paid prior to August 31, 2003. If the note is
paid between September 1, 2003 and August 31, 2004 the total payment due is
$100,000, and between September 1, 2004 through August 31, 2005, total payment
due is $150,000. The Company, at December 31, 2004 and 2003, has reflected the
value of the note payable, which includes interest at $150,000 and $100,000,
respectively. The accrued interest is included in accounts payable and accrued
expenses.
 39




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 6-
    
    PROMISSORY NOTES  RELATED PARTYThe Company entered into a note payable for $10,000 with an unrelated third
party in November 2002, at an interest rate of 10.0% annually. The note accrued
interest through August 2003, at which time principal, accrued interest and fees
were converted into 22,667 shares of common stock.The Company entered into promissory notes with some of its officers (see Note 9)
who have amounts outstanding with the Company. These amounts accrue interest at
rates between 6.0% and 9.5% annually. As of December 31, 2004 and 2003, the
Company has $1,038,040 and $625,422 outstanding under these notes, including
$84,918 and $36,255 in accrued interest. The notes are short-term notes and are
therefore reflected as current liabilities on the consolidated balance sheets.
The notes relate to services rendered to the Company.NOTE 7-
    
    INTELLECTUAL PROPERTYCosts 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 Otherwise
Marketed, technological feasibility for the Airbee UltraLite 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.Since, the Company had no sales, other than the execution of an inherited
software contract for a previous Connexus Technologies (Pte.) Ltd. customer that
had nothing to do with their current products, amortization of their its
software being developed at that time for other purposes is not required.
Additionally, the 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. This 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. The status of that
intellectual property is reviewed annually for impairment, 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. Therefore, at this point in time, tests for impairment of the
intangible assets being intellectual property indicate no amortization is
required.
 40




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 8-
    
    ACQUISITIONSThe Companys acquisition of Connexus Technologies (Pte.) Ltd. has been
accounted for using the purchase method of accounting. The Company acquired
100% of the common stock of Connexus for 4,156,405 shares of common stock valued
at $100,000, and assumed a promissory note which at the time of acquisition (as
of October 1, 2002) was valued at $50,000, subsequently with accrued interest is
valued at $150,000 as of December 31, 2004. Connexus had a net book value of
$22,026 (US dollar equivalent) resulting in $127,974 in goodwill, which
management determined to be impaired based on the fact that the purchase price
was determined based on what Connexus had been developing. The primary reason
that the Company acquired Connexus was the working model and software code that
it had been developing fits nicely into the current business model and software
code of the Company. The Company did not pay any cash for Connexus and there
are no contingent payments, options, or commitments specified in the purchase
agreement.The book value of $22,026 of Connexus at the time of acquisition consisted of:
 
 Current assets
    
    $
    42,638Fixed assets
    
    
    18,190Accounts payable and other accrued expenses
    
    
    (38,802
    )Total
    
    $
    22,026
 
 NOTE 9-
    
    RELATED PARTY TRANSACTIONSAs discussed in Note 6, the Company has short-term promissory notes with
some of its officers for services rendered to the Company. Interest is accrued
at rates between 6.0% and 9.5% annually on these notes. As of December 31, 2004
and 2003, the Company has $1,038,040 and $625,422 outstanding under these notes,
including $84,918 and $36,255 in accrued interest.NOTE 10-
    
    PROVISION FOR INCOME TAXESDeferred income taxes are 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 December 31, 2004, deferred tax assets consist of the following:
 Net operating loss carry-forwards
    
    $
    844,310Less: valuation allowance
    
    
    (844,310
    )$
    -0-
 At December 31, 2004, the Company had deficits accumulated during the
development stage in the approximate amount of $(2,814,366), available to offset
future taxable income through 2023. 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.
 41




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 11-
    
    STOCKHOLDERS (DEFICIT)The Company has 200,000,000 shares of common stock authorized at December
31, 2004 and 2003, respectively. The par value at December 31, 2004 and 2003 is
$0.00004.At December 31, 2004 and 2003, the Company has 41,216,913 and 36,078,979 common
shares issued and outstanding.The following stock transactions occurred in 2002:The Company issued 21,625,000 to one of its founders for $865 (par).In the acquisition of Connexus Technologies (Pte.) Ltd., the Company issued
4,156,405 shares of stock in exchange for Connexus stock.The Company issued 1,359,550 shares to its chief operating officer as founders
shares for running the Company. These shares were issued for $55 (par).The Company issued 50,000 shares of stock for $10,000 cash at a value of $0.20
per share.The following stock transactions occurred in 2003:The Company raised $88,000 from a board member in two tranches of $44,000 each
for a total of $88,000. The Company issued a total of 1,000,000 shares of stock
for these amounts at a value of $0.088 per share.The Company converted a note payable of $10,000 plus accrued interest and fees
from an unrelated third party to 56,668 shares of stock valued at $0.20 per
share.The Company issued 125,000 shares of stock to its chief financial officer as
founders shares. These shares were issued for $5 (par).On September 30, 2003, the Companys board of directors approved a 2.5:1 forward
stock split. It split the then issued and outstanding 11,349,049 shares into
28,372,622 shares. With the stock split, the par value of the Companys stock
went from $0.0001 to $0.00004.The Company issued 3,784,814 shares of stock valued at $0.1138 per share for
cash (166,960 for $19,000) and services (3,617,854 for $411,712) for a total
value of $430,712.The Company issued 3,921,542 shares of stock from the exercise of stock options
from its officers. This was a cashless exchange. In this exchange 704,362
shares were returned to the Company and are included in its treasury and
reflected as treasury stock on the consolidated balance sheets.The Companys officers also contributed $17,517 as capital reflected as
additional paid-in capital. No stock was issued in these exchanges.
 42




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 11-
    
    STOCKHOLDERS (DEFICIT)(CONTINUED)The following stock transactions occurred in 2004:The Company issued 4,999,240 shares of stock valued at $0.1138 per share for cash
in the amount of $568,914; 31,250 shares for $13,125 in cash and 107,444 shares
for services valued at $28,500. In addition, the Company authorized the issuance of
400,000 shares for services in December 2004, however, the shares were not issued
as of December 31, 2004 and are reflected as a liability for stock to be issued.
The shares were valued at $76,000.Stock Option Plan and WarrantsIn August 2002, the Companys Board of Directors established the Airbee Wireless,
Inc.2002 Stock Option Plan. The Board authorized up to 75,000,000 common shares
(post-split) to be authorized and issued to officers, directors and employees.The Company granted post-split options totaling 21,375,000 shares of which
4,625,904 options were exercised as cashless options resulting in 3,921,542 shares
of stock. In the cashless exchange, 704,362 shares of stock were recorded as
treasury stock. All of these options were granted to officers and key members of
the management team of the Company.Under the Black-Scholes option pricing model, the total value of the stock options
granted in 2003 and 2004 is reflected for pro forma presentation due to the Company
following APB 25 for the expensing of its stock options. SFAS No. 123, Accounting
for Stock-Based Compensation, encourages adoption of a fair-value-based method for
valuing the cost of stock-based compensation. However, it allows companies to
continue to use the intrinsic-value method for options granted to employees and
disclose pro forma net loss.The following tables summarize the activity of the Companys stock option plan:
 Year EndedDecember 31, 2004Weighted-averageNumber of
    
    
    exerciseOptions
    
    
    priceOutstanding  beginning of period
    
    
    16,749,096
    
    
    $
    0.01004Granted below fair value
    
    
    0
    
    
    
    0Granted at fair value
    
    
    30,000,000
    
    
    
    0.22Converted
    
    
    0
    
    
    
    (0.000
    )Outstanding  end of period
    
    
    46,749,096
    
    
    $
    $0.1205Exercisable at end of period:
    
    
    24,187,500
    
    
    $
    0.01004
 43




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 11-
    
    STOCKHOLDERS (DEFICIT)(CONTINUED)Stock Option Plan and Warrants (Continued)
 
 Year EndedDecember 31, 2003Weighted-Number
    
    
    averageof
    
    
    exerciseOptions
    
    
    priceOutstanding  beginning of period
    
    
    18,375,000
    
    
    $
    0.00004Granted below fair value
    
    
    3,000,000
    
    
    
    0.04Granted at fair value
    
    
    0
    
    
    
    0Cancelled
    
    
    4,625,904
    
    
    
    (0.043
    )Outstanding  end of period
    
    
    16,749,096
    
    
    $
    0.01004Exercisable at end of period
    
    
    3,662,500
    
    
    $
    0.01004
 
 For disclosure purposes, the fair value of each stock option granted is estimated on
the date of grant using the Black-Scholes option-pricing model, which approximates
fair value, with the following weighted-average assumptions used for stock options
granted in 2004 and 2003; no annual dividends, volatility of 100%, risk-free
interest rate of 5.50%, and expected life of 4 to 6 years.The stock options vest over a period of 4 to 6 years upon the granting pursuant to
the employees respective employment agreements. The Company anticipates that the
remaining options available are anticipated to be held until they are fully vested.
For 2004 and 2003, the average years remaining on the options was 4.5 years and 3.5
years, respectively. These represent the weighted average contractual life of the
options. If compensation expense for the Companys stock-based compensation plans
had been determined consistent with SFAS 123, the Companys net income and net
income per share including pro forma results would have been the amounts indicated
below:
 
 Year Ended December 31,2004
    
    
    2003Net loss:As reported
    
    ($
    1,136,743
    )
    
    ($
    1,360,577
    )Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    ( 3,704,277
    )
    
    
    0Pro forma
    
    ($
    4,841,020
    )
    
    ($
    1,360,577
    )Net loss per share:As reported:Basic
    
    ($
    0.03
    )
    
    ($
    0.05
    )Diluted
    
    ($
    0.03
    )
    
    ($
    0.05
    )Pro forma:Basic
    
    ($
    0.12
    )
    
    ($
    0.05
    )Diluted
    
    ($
    0.12
    )
    
    ($
    0.05
    )
 
 
 44




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 NOTE 11-
    
    STOCKHOLDERS (DEFICIT) (CONTINUED)Stock Option Plan and Warrants (Continued)The Company issued 18,750 and 1,750,000 warrants as of December 31, 2004 and 2003.
These warrants were issued in connection with the equity financing the Company
entered into in April and August 2003. None of the warrants have been exercised as
of December 31, 2003.The Company also issued 50,000 warrants in connection with a note payable to a
non-related third party in October 2002.The fair value of these warrants was estimated using the Black-Scholes pricing model
with the following assumptions: interest rate 5.5%, dividend yield 0%, volatility
100% and expected life of four years.The Company has the following warrants exercisable for the purchase of its common
stock. All warrants and prices are reflected retroactive to the stock split:
 
 Year EndedExercise
    
    
    
    
    
    December 31,Price
    
    
    Expiration Date
    
    2004
    
    
    2003$
    0.20
    
    
    October 18, 2005
    
    
    50,000
    
    
    
    50,0000.012
    
    
    August 22, 2006
    
    
    500,000
    
    
    
    500,0000.012
    
    
    April 22, 2006
    
    
    1,250,000
    
    
    
    1,250,0001.00
    
    
    August 31, 2007
    
    
    6,250
    
    
    
    1.75
    
    
    August 31, 2007
    
    
    6,250
    
    
    
    2.75
    
    
    August 31, 2007
    
    
    6,250
    
    
    
    1,818,750
    
    
    
    1,800,000
 
 In addition, all of these warrants are outstanding as of December 31, 2004, and no
warrants to date have been exercised.NOTE 12-
    
    COMMITMENTS AND CONTINGENCIESEmployment AgreementsThe Company has entered into employment agreements with key members of management
and some officers. Most of these employment agreements are for a period of three to
five years. As part of the employment agreements, the Company has granted stock
options to these individuals that vest over a three to five-year period of time.
The Company, in an effort to incentivize its officers, granted additional options
and accelerated the vesting schedules. The officers were not compensated during the
initial start-up of operations. However, they did exercise stock options in 2003.A subsidiary, Airbee Wireless (India) Pvt. Ltd., has entered into a three-year lease
agreement for office space in Chennai, India. Monthly rent in the US Dollar
equivalent is $1,505. The lease runs from April, 2004 to March, 2007.NOTE 13-
    
    GOING CONCERNAs shown in the accompanying 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, 2004 and 2003. The Company is currently
 45




---



##### Table of Contents



AIRBEE WIRELESS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 in the development stage, and there is no guarantee whether the Company will be able
to generate enough revenue and/or raise capital to support current operations and
expand sales. This raises substantial doubt about the Companys ability to continue
as a going concern.Management believes that the Companys capital requirements will depend on many
factors including the success of the Companys sales efforts. The Company has been
successful in recent months in raising capital to fund its operating costs and is in
the due diligence phase with respect to a convertible debenture agreement that will
yield the Company some working capital equity to fund operations in the near term.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 proper bridge financing and potential permanent financing they anticipate, the
viability of the Company remains very positive in excess of one year.The 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 14-
    
    RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTSThe Company had amended its previously issued consolidated financial statements
for the year ended December 31, 2003 and period August 9, 2002 (inception) through
December 31, 2002 on its report dated May 20, 2004. The Company had amended these
consolidated financial statements to recognize an additional $381,513 and $48,168 in
compensation and interest expense for the year ended December 31, 2003 and period
August 9, 2002 (inception) through December 31, 2002. In addition, certain
issuances of common stock have been restated due to valuation adjustments, the
recording of unearned compensation due to the issuance of options below the fair
market value (including amortization of unearned compensation of $13,748 in 2003 and
2002, respectively) and 2002 common share information has been restated to
retroactively account for the stock split that occurred in September 2003. These
transactions resulted in an increase in net loss applicable to common shares of
$380,554 and $32,189 for the year ended December 31, 2003 and period August 9, 2002
(inception) through December 31, 2002 to a net loss of $1,360,577 and $317,046 as
restated, and an increase in the deficits accumulated during the development stage
to $1,677,623 and $317,046, respectively. The December 31, 2004 financial
statements have been restated for the amortization of unearned compensation for the
year ended December 31, 2004 by $13,748 and this has increased the loss for the year
then ended to $1,136,743 as restated, and the accumulated deficit during the
development stage to $2,814,366.
 46




---



##### Table of Contents



ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE None. 
  ITEM 8A.
    
    CONTROLS AND PROCEDURES 
 Evaluation of Disclosure Controls and Procedures 
 
 The Companys management, with the participation of the Companys chief executive officer and
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 chief financial officer concluded that,
as of such date, the Companys disclosure controls and procedures were effective. 
 
 Changes in Internal Controls 
 
 No change in the Companys internal control over financial reporting occurred during the last
fiscal quarter of the period covered by this report that has materially affected, or is reasonably
likely to materially affect, the Companys internal controls over financial reporting. 
 
 
  ITEM 8B.
    
    OTHER INFORMATION 
 None. 
 PART III 
  ITEM 9.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Our directors hold office until the next annual meeting of our shareholders and until
their successors have been elected and qualified. Our officers are appointed by our directors. Our directors and executive officers and their ages are as follows: Name
    
    Age
    
    PositionSundaresan Raja
    
    
    42
    
    
    President and Chief Executive Officer, DirectorE. Eugene Sharer
    
    
    71
    
    
    Chief Operating Officer, Secretary, DirectorRamanujam Satagopan
    
    
    40
    
    
    Vice President & Chief Technology OfficerRichard P. Sommerfeld, Jr.
    
    
    51
    
    
    Chief Financial OfficerSrinivasan Krishnamurthy
    
    
    46
    
    
    Vice President-Business DevelopmentMal Gurian
    
    
    78
    
    
    Director
 The following is a brief description of the background of our directors and executive
officers. 47




---



##### Table of Contents



Sundaresan Raja.Mr. Raja has served as our Director, President and Chief Executive Officer
since our founding in 2002. From 1992 through 2000, Mr. Raja founded and served as CEO of
Intelligent Systems, Inc. and Intelligent Systems (India) Pvt. Ltd., companies principally involved
in customizing software. Intelligent Systems, Inc. filed for Chapter 11 bankruptcy protection in
1998, which was subsequently moved to Chapter 7. Operations of Intelligent Systems, Inc. ceased in
March 2000. Mr. Raja had decided that the wireless industry was going to be a highly visible
technology and spent from 2000 through early 2002 studying and researching the wireless technology
marketplace. Mr. Raja has over 22 years experience in information technology related businesses and
as an independent consultant to both private and government organizations. In this capacity, he
provided technical resources as consultants to other technology companies and developed several
commercial software products for the mailing and shipping industry. He has provided consulting
services to several fortune 500 companies. He holds an MS (Management Information Systems) from
The American University, an MBA from Johns Hopkins University and an MS (Mathematics) from the
Madras University in India. E. Eugene Sharer. Mr. Sharer has served as our Chief Operating Officer and a Director since
our founding in 2002. Prior to joining our company, Mr. Sharer worked for more than 17 years as
President and/or Chief Operating Officer of information technology companies, most recently as
President and Vice Chairman of Complete Wellness Centers, Inc., a public health care company, from
March 1996 to February 1999. From February 1999 through August 2002 he formed Sharer Associates,
Inc., a management consulting company. Since 1999 Mr. Sharer has served as a director of Digital
Dominion, a financial services technology company. From 1991 to 1995, he was president of ROW
Sciences, a government contracting firm specializing in supporting the FDA and the Department of
Health and Human Services. He was President of Calculon Corporation from 1985 to 1989 and Director
of the ORI Group. Prior to that, he was executive Vice President and Director of Iverson
Technologies, a specialized computer manufacturer from 1989 to 1991. He was Vice President of
Systems Group, Computer Sciences Corporation from 1981 to 1985 and served with IBM in various
management positions. He has also served on the Executive Committee of the Technology Council of
Maryland and served two terms on the Industrial and Professional Advisory Committee of Penn States
Department of Computer Science and Engineering. He graduated from Penn State with a BS (Electrical
Engineering) and did graduate work at Syracuse University. Ramanujam Satagopan. Mr. Satagopan has served as our Chief Technology Officer since September
2002. From October 2000 through September 2002, he served as Chief Executive Officer of Connexus
Technologies (Singapore) Ptd. Ltd. and from October 2000 through September 2002 he also served as
Managing Director of Connexus Technologies (India) Pvt. Ltd. The Connexus Technologies entities
were acquired by our company in August of 2002. Prior to joining our company, Mr. Satagopan worked
for over 14 years with companies selling telecom software products, most recently serving as a
Technology Director of Motorola Electronics-Singapore, from January 1992 to September 2000. Mr.
Satagopan has led product teams to roll-out wireless products for Motorola worldwide, including its
popular Scriptor series of pager products and the latest low-cost Talk-about GSM cellular radios.
Mr. Satagopan played a key role in evolving the ISCLAP (Indian Standard Code for Language Paging)
paging protocol standard for the Indian market and in rolling out language pagers in India. Among
his 8 published patents, one is for synchronous dynamic code generation for secure remote access to
a computer system and another is for a method to achieve horizontal and vertical zoom on a display
device by selective segment duplication. Mr. Satagopan holds a BS (Electrical Engineering) from
India and an MA (Management of Technology) from the Graduate School of Business, National
University of Singapore. Richard P. Sommerfeld, Jr.Mr. Sommerfeld has served as Chief Financial Officer since
September 2003. Prior to joining our company, Mr. Sommerfeld served as Chief Executive Officer of
Digital Dominion, Inc., a financial services company from 2000 to 2003. He also served as Chief
Operating Officer of Data Mining Technologies, Inc., a Data Mining software company, from 1999 to
2000. From 1996 to 1998, Mr. Sommerfeld served as Chief Executive Officer of Dransfield Food &
Beverage Holdings, Ltd., an international consumer goods company based in Hong Kong. Mr.
Sommerfeld holds a Masters of Public and International Affairs from the University of Pittsburgh
and a BA (International Studies) from Virginia Tech. Mal Gurian.Mr. Gurian has served as a Director of the Company since January 1, 2005. Since
2002, he has served as President of Mal Gurian Associates, LLC. He has previously served as
President of Cellcom Cellular Corporation of New Jersey from 1989 to 1991. From 1991 through 1993
he served as Chief Executive Officer and Director of Universal Cellular Corporation. From 1994
through 1997 he served as Chairman of the Board and Chief Executive Officer of GlobalLink
Communications, Inc. From 1995 through 2002 he served as Chairman, Chief 48




---



##### Table of Contents



Executive Officer and President of Authentix Network, Inc and SimplySay, Inc. Mr. Gurian has
served as a corporate and strategic advisor to major corporations like OKI, Sony, TRW, and the
Communications Division of Murata. He is President Emeritus of the Radio Club of America and the
recipient of the clubs Sarnoff Citation, the Special Service Award and the Fred Link Mobile Award.
He is also the recipient of the National Association of Business and Educational Radios (now PCIA)
highest honor, the Chairmans Award. Mr. Gurian was previously on the Boards of Northeast Digital
Network and RangeStar International. He is a 1995 recipient of the Popov Scientific Society Medal
from the St. Petersburg Electrotechnical University in St. Petersburg, Russia. Mr. Gurian is
listed in Marquis Whos Who in Americaand Whos Who in the Worldand in May 2003, was inducted
into the RCR Wireless Hall of Fame. Audit Committee The Company does not presently have an audit committee or an audit committee financial expert
on its Board of Directors. The Company has not generated revenue from its operations nor had the
financial ability to attract the requisite Board expertise. Code of Ethics The Company has a Code of Business Conduct and Ethics. The Code of Ethics is as follows: Success without personal and professional integrity is essentially meaningless. At Airbee, we
subscribe to standards of ethical behavior that exceed legal minimums and we shall never ask any
member of the Airbee team to compromise those standards. We owe this to our shareholders, business
partners and colleagues.  
    
    Integrity We do the right thing without compromise and in the highest ethical manner.  
    
    Honesty We are open, transparent, truthful and avoid any conflict of interest.  
    
    Trust Our word is good and we adhere to our commitments.  
    
    Commitment We strive to deliver superior product performance and achieve personal
excellence and self-improvement.  
    
    Global Citizenship As an international company, we comply with the applicable laws and
regulations that govern our activities wherever we do business.  
    
    Accountability We accept the consequences of our actions, admit to our mistakes and
quickly rectify them.  
    
    Responsible Leadership We manage our business responsibly in order to earn and maintain
the confidence, respect and trust of our shareholders, business partners and colleagues. 49




---



##### Table of Contents



ITEM 10. EXECUTIVE COMPENSATION Executive Compensation Summary Compensation Table 
 The following table sets forth the annual and long-term compensation for services in all capacities
for the fiscal years ended December 31, 2004, December 31,
2003 and December 31, 2002, paid to our most highly
compensated executive officers. 
 Summary Compensation Table Annual Compensation
    
    
    Long Term CompensationAwardsRestricted
    
    
    SecuritiesStock
    
    
    Underlying
    
    
    All OtherName and Principal Position
    
    Year
    
    
    Salary
    
    
    Bonus
    
    
    Award(s)
    
    
    Options(#)
    
    
    CompensationSundaresan Raja (1)
    
    
    2004
    
    
    $
    150,000
    
    
    $
    50,000
    
    
    
    
    
    
    
    10,000,000
    
    
    
    Chief Executive Officer and
    
    
    2003
    
    
    $
    150,000
    
    
    $
    50,000
    
    
    
    
    
    
    
    
    
    
    
    President
    
    
    2002
    
    
    $
    150,000
    
    
    $
    18,750
    
    
    
    
    
    
    
    10,000,000E. Eugene Sharer (2)
    
    
    2004
    
    
    $
    120,000
    
    
    $
    50,000
    
    
    
    
    
    
    
    8,000,000
    
    
    
    Chief Operating Officer
    
    
    2003
    
    
    $
    120,000
    
    
    $
    50,000
    
    
    
    
    
    
    
    
    
    
    
    2002
    
    
    $
    120,000
    
    
    $
    18,750
    
    
    
    
    
    
    
    8,000,000Ramanujam Satagopan (3)
    
    
    2004
    
    
    $
    80,000
    
    
    $
    30,000
    
    
    
    
    
    
    
    3,000,000
    
    
    
    Chief Technology Officer
    
    
    2003
    
    
    $
    80,000
    
    
    $
    30,000
    
    
    
    
    
    
    
    
    
    
    
    2002
    
    
    $
    80,000
    
    
    $
    8,750
    
    
    
    
    
    
    
    375,000Richard P. Sommerfeld, Jr. (4)
    
    
    2004
    
    
    $
    100,000
    
    
    $
    25,000
    
    
    
    
    
    
    
    3,000,000
    
    
    
    Chief Financial Officer
    
    
    2003
    
    
    $
    100,000
    
    
    $
    8,333
    
    
    
    
    
    
    
    3,000,000
    
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Srinivasan Krishnamurthy (5)
    
    
    2004
    
    
    $
    50,000
    
    
    $
    12,500
    
    
    
    
    
    
    
    6,000,000
    
    
    
    Vice President
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Sundaresan Raja joined us in August 2002 as President and Chief Executive Officer. Mr. Raja
is paid a base salary of $150,000 and is eligible to receive an annual bonus with a formula
based on the operating results of the Company. During 2002, he was issued a stock option for
10,000,000 shares exercisable at $0.00004 per share. During 2004, he was issued an option to
purchase 10,000,000 shares exercisable at $0.22 per share.(2)
    
    E. Eugene Sharer joined us in August 2002 as Chief Operating Officer. Mr. Sharer is paid a
base salary of $120,000 per year and is eligible to receive an annual bonus with a formula
based on the operating results of the Company. During 2002, he was issued a stock option for
8,000,000 shares exercisable at $0.00004 per share. During 2004, he was issued an option to
purchase 8,000,000 shares exercisable at $0.22 per share.(3)
    
    Ramanujam Satagopan joined us in September 2002 as our Chief Technology Officer. Mr.
Satagopan is paid a base salary of S$136,000 (approx. US $80,000) and is eligible to receive
an annual bonus with a formula based on the operating results of the Company. During 2002, he
was issued a stock option for 375,000 shares exercisable at $0.00004 per share. During 2004,
he was issued an option to purchase 3,000,000 shares exercisable at $0.22 per share. 50




---



##### Table of Contents



(4)
    
    Richard P. Sommerfeld, Jr. joined us in September 2003 as Chief Financial Officer. Mr.
Sommerfeld is paid a base salary of $100,000 and is eligible to receive an annual bonus with a
formula based on the operating results of the Company. During 2003, he was issued a stock
option for 3,000,000 shares exercisable at $0.04 per share. During 2004, he was issued an
option to purchase 3,000,000 shares exercisable at $0.22 per share.(5)
    
    Srini Krishnamurthy joined us in July, 2004 as Vice President, Business Development. Mr.
Krishnamurthy is paid a base salary of $100,000 and is eligible to receive an annual bonus
with a formula based on the operating results of the Company. During 2004, he was issued
options to purchase 3,000,000 shares exercisable at $0.38 per share and 3,000,000 shares
exercisable at $0.22 per share. Stock Option Issuances During Fiscal Year 2004 The table below provides a summary of individual grants of stock options made during the last
fiscal year ended December 31, 2004 to each of the named officers included in the Summary
Compensation Table above. 
 Percentage of TotalNumber of Shares of
    
    
    Options Granted toCommon Stock
    
    
    Officers andName
    
    Underlying Options
    
    
    Employees
    
    
    Exercise Price
    
    
    Expiration DateSundaresan Raja
    
    
    10,000,000
    
    
    
    33
    %
    
    $
    0.22
    
    
    
    11/18/10Ramanujam Satagopan
    
    
    3,000,000
    
    
    
    10
    %
    
    $
    0.22
    
    
    
    11/18/10E. Eugene Sharer
    
    
    8,000,000
    
    
    
    26
    %
    
    $
    0.22
    
    
    
    11/18/10Richard P. Sommerfeld, Jr.
    
    
    3,000,000
    
    
    
    10
    %
    
    $
    0.22
    
    
    
    11/18/10Srinivasan Krishnamurthy
    
    
    3,000,000
    
    
    
    10
    %
    
    $
    0.22
    
    
    
    11/18/10Srinivasan Krishnamurthy
    
    
    3,000,000
    
    
    
    10
    %
    
    $
    0.38
    
    
    
    07/01/09
 
 Aggregated Option Exercises in Last Fiscal Year And Fiscal
Year-End Option Values The following table sets forth certain information concerning the number and value of
securities underlying exercisable and unexercisable stock options as of the fiscal year ended
December 31, 2004 by our executive officers listed in the Summary Compensation Table above. 
 Number of Securities UnderlyingNumber of Shares
    
    
    
    
    
    
    Unexercised Options at
    
    
    Value of Unexercised In-the-MoneyAcquired on
    
    
    
    
    
    
    December 31,
2004(1)
    
    
    Options at December 31,
2004(1)Name
    
    Exercise
    
    
    Value Realized
    
    
    Exercisable/Unexercisable
    
    
    Exercisable/UnexercisableSundaresan Raja
    
    
    0
    
    
    $
    0
    
    
    
    10,000,000
    
    
    
    /
    
    
    
    10,000,000
    
    
    $
    1,680,000
    
    
    
    /
    
    
    $
    525,000Ramanujam Satagopan
    
    
    0
    
    
    
    0
    
    
    
    812,510
    
    
    
    /
    
    
    
    2,385,000
    
    
    $
    52,502
    
    
    
    /
    
    
    $
    39,375E. Eugene Sharer
    
    
    0
    
    
    
    0
    
    
    
    7,502,135
    
    
    
    /
    
    
    
    8,000,000
    
    
    $
    1,155,448
    
    
    
    /
    
    
    $
    420,000Richard P. Sommerfeld,
Jr.
    
    
    0
    
    
    
    0
    
    
    
    1,746,951
    
    
    
    
    
    
    
    2,250,000
    
    
    $
    366,860
    
    
    
    /
    
    
    $
    0.00Srinivasan Krishnamurthy
    
    
    0
    
    
    
    0
    
    
    
    1,500,000
    
    
    
    
    
    
    
    4,500,000
    
    
    $
    0.00
    
    
    
    /
    
    
    $
    0.00
 
 
 (1)
    
    The value of unexercised in-the-money options at fiscal year end is calculated using the last
sale price of $0.21 per share as of December 31, 2004, the last trading day of fiscal year
2004 as reported on the Pink Sheets. 51




---



##### Table of Contents



Compensation of Directors We have no standard arrangement pursuant to which our directors are compensated for services
provided as a Director. Our inside directors are currently not compensated for their service on
our board of directors. Mr. Gurian, recently appointed as an independent director, will receive
$2,000 per meeting. He has also been granted an option to purchase 150,000 shares of common stock
at $0.22 per share. Commencing January 1, 2005, the options vest over 12 months in four equal
tranches. Employment Agreements We have entered into employment agreements with certain of our key executives as follows: Sundaresan Rajahas served as our Director, President and Chief Executive Officer since our
inception. Mr. Raja is paid a base salary of $150,000 per year and is eligible to receive an
annual bonus with a formula based on our operating results. Mr. Raja is guaranteed a minimum bonus
of $50,000 per annum and up to a maximum of 150% of his current base salary as further described
below. The agreement expires on September 1, 2005. In addition to his salary, Mr. Raja is
entitled to participate, to the extent he is eligible under the terms and conditions thereof, in
any profit sharing, pension, retirement, hospitalization, insurance, disability, medical service or
other employee benefit plan available to the executive officers of our company. Mr. Raja is also
entitled to four weeks of paid vacation in respect of each twelve month period during the term of
his employment agreement. Mr. Raja was issued 10,000,000 options with a $0.00004 strike price with
a cashless exercise provision, which are exercisable for a 5 year term, vesting as follows: 2.5 million vest immediately at effective date of employment agreement; 2.5 million vest after 1 year of service; 2.5 million vest after 2 years of service; remaining 2.5 million vest after 3 years of service. On November 18, 2004, he was granted a second 10,000,000 share option with like terms at a strike
price of $0.22 per share which was in excess of 115% of the closing bid price on that date and
vests as follows: 2.5 million shares vest immediately on the date of grant November 18, 2004; 2.5 million shares vest one year thereafter; 2.5 million shares vest two years thereafter; remaining 2.5 million shares vest three years thereafter. In the event that Mr. Raja is terminated without cause, all stock options above then earned
shall immediately be vested at the time of termination. Additionally, in the event of a Change of
Control of the Company, consisting of an entity, group, corporation, or individual acquiring over
50% of the voting shares of the company, or a Change of Control as defined by the Securities and
Exchange Commission, it is understood that all earned and as of then unvested options shall
immediately be vested. During the period of Mr. Rajas employment he shall not, directly or indirectly, accept
employment or compensation from, or perform services of any nature for, any business enterprise
other than the Airbee. He agrees that during the period of his employment and for two years
(unless he is terminated without cause in which case this covenant will not apply) thereafter, he
will not (a) directly or indirectly own, manage, operate, join, control, participate in, invest in,
or otherwise be connected with, in any manner, whether as an officer, director, employee, partner,
investor or otherwise, any business entity that is engaged in the technology industry or in any
other business in which the Airbee is engaged as of termination, (1) in all locations in which the
Airbee is doing business, and (2) in all locations in respect of which the Airbee is actively
planning for and/or pursuing a business opportunity; (b) for himself or on behalf of any other
person, partnership, Airbee or entity, call on any customer of the Airbee for the purpose of
soliciting, diverting or taking away any customer from the Airbee (1) in all locations in which the
Airbee is doing business, and (2) in all locations in respect of which the Airbee is actively
planning for and/or pursuing a business opportunity, or (c) induce, influence or seek to induce or
influence any person engaged as an employee, representative, agent, independent contractor or
otherwise by the Airbee, to terminate his or her relationship with the Airbee. Nothing contained
in his agreement shall be deemed to prohibit Mr. Raja from (x) investing his funds in securities of
an issuer if the securities of such issuer are listed for trading on a national securities exchange
or are 52




---



##### Table of Contents



traded in the over-the-counter market and his holdings therein represent less than 2% of the
total number of shares or principal amount of the securities of such issuer outstanding, or (y)
owning securities, regardless of amount, of the Airbee. E. Eugene Sharerjoined us on August 16, 2002 as Chief Operating Officer and a member of our
Board of Directors. Mr. Sharer is paid a base salary of $120,000 per year and is eligible to
receive an annual bonus with a formula based on our operating results. Mr. Sharer is guaranteed a
minimum bonus of $50,000 per annum and up to a maximum of 150% of his current base salary, as
further described below. The agreement expires on September 1, 2005. In addition to his salary,
Mr. Sharer is entitled to participate, to the extent he is eligible under the terms and conditions
thereof, in any profit sharing, pension, retirement, hospitalization, insurance, disability,
medical service or other employee benefit plan available to the executive officers of our company.
Mr. Sharer is also entitled to four weeks of paid vacation in respect of each twelve month period
during the term of his employment agreement. Mr. Sharer was issued 8,000,000 stock options with a
$0.00004 strike price with a cashless exercise provision, which are exercisable for a 5 year
term, vesting as follows: 2.0 million vest immediately at effective date of employment agreement; 2.0 million vest after 1 year of service; 2.0 million vest after 2 years of service; remaining 2.0 million vest after 3 years of service. On November 18, 2004, he was granted a second 8,000,000 share option with like terms at a strike
price of $0.22 per share which was in excess of 110% of the closing bid price on that date and
which vests as follows: 2.0 million shares vest immediately on the date of grant November 18, 2004; 2.0 million shares vest one year thereafter; 2.0 million shares vest two years thereafter; remaining 2.0 million shares vest three years thereafter. In the event that Mr. Sharer is terminated without cause, all stock options above then earned
shall immediately be vested at the time of termination. Additionally, in the event of a Change of
Control of the Company, consisting of an entity, group, corporation, or individual acquiring over
50% of the voting shares of the company, or a Change of Control as defined by the Securities and
Exchange Commission, it is understood that all earned and as of then unvested options shall
immediately be vested. Ramanujam Satagopanjoined us on September 15, 2002 as our Chief Technology Officer. Mr.
Satagopan is paid a base salary of S$136,000 (approx. US $80,000) and is eligible to receive an
annual bonus with a formula based on our operating results. Mr. Satagopan is guaranteed a minimum
bonus of S$51,000 (approx. US $30,000) per annum and up to a maximum of 150% of his current base
salary, as further described below. The agreement expires on October 1, 2007. In addition to his
salary, Mr. Satagopan is entitled to participate, to the extent he is eligible under the terms and
conditions thereof, in any profit sharing, pension, retirement, hospitalization, insurance,
disability, medical service or other employee benefit plan available to the executive officers of
our company. Mr. Satagopan is also entitled to four weeks of paid vacation in respect of each
twelve month period during the term of his employment agreement. Mr. Satagopan was issued 375,000
stock options with a $0.00004 strike price with a cashless exercise provision, which are
exercisable for a 5 year term , vesting as follows: 62,500 vest immediately at effective date of employment agreement;
62,500 vest after 1 year of service;
62,500 vest after 2 years of service;
62,500 vest after 3 years of service;
62,500 vest after 4 years of service;
remaining 62,500 vest after 5 years of service. 
 On November 18, 2004, he was granted a 3,000,000 share option with like terms at a strike price of
$0.22 per share and which vests as follows: 
 53




---



##### Table of Contents



750,000 shares vest immediately on the date of grant November 18, 2004;
750,000 shares vest one year thereafter;
750,000 shares vest two years thereafter;
remaining 750,000 shares vest three years thereafter. In the event that Mr. Satagopan is terminated without cause, all stock options above then
earned shall immediately be vested at the time of termination. Additionally, in the event of a
Change of Control of the Company, consisting of an entity, group, corporation, or individual
acquiring over 50% of the voting shares of the company, or a Change of Control as defined by the
Securities and Exchange Commission, it is understood that all earned and as of then unvested
options shall immediately be vested. Richard P. Sommerfeld, Jr. joined us on September 1, 2003 as Chief Financial Officer. He
serves our company on a full time basis. Mr. Sommerfeld is paid a base salary of $100,000 and is
eligible to receive an annual bonus with a formula based on our operating results. Mr. Sommerfeld
is guaranteed a minimum bonus of $25,000 per annum and up to a maximum of 150% of his current base
salary, as further described below. The agreement expires on August 31, 2006. In addition to his
salary, Mr. Sommerfeld is entitled to participate, to the extent he is eligible under the terms and
conditions thereof, in any profit sharing, pension, retirement, hospitalization, insurance,
disability, medical service or other employee benefit plan available to the executive officers of
our company. Mr. Sommerfeld is also entitled to four weeks of paid vacation in respect of each
twelve month period during the term of his employment agreement. Mr. Sommerfeld was issued
3,000,000 stock options with a $0.04 strike price with a cashless exercise provision, which are
exercisable for a 5 year term all of which are currently vested by action of the board of
directors. On November 18, 2004, he was granted a 3,000,000 share option with like terms at a strike price of
$0.22 per share and which vests as follows: 750,000 shares vest immediately on the date of grant November 18, 2004;
750,000 shares vest one year thereafter;
750,000 shares vest two years thereafter;
remaining 750,000 shares vest three years thereafter. In the event that Mr. Sommerfeld is terminated without cause, all stock options above then
earned shall immediately be vested at the time of termination. Additionally, in the event of a
Change of Control of the Company, consisting of an entity, group, corporation, or individual
acquiring over 50% of the voting shares of the company, or a Change of Control as defined by the
Securities and Exchange Commission, it is understood that all earned and as of then unvested
options shall immediately be vested. Srinivasan Krishnamurthyjoined us on July 1, 2004 as Vice President, Business Development.
He serves our company on a full time basis. Mr. Krishnamurthy is paid a base salary of $100,000
and is eligible to receive an annual bonus with a formula based on our operating results. Mr.
Krishnamurthy is guaranteed a minimum bonus of $25,000 per annum and up to a maximum of 150% of his
current base salary, as further described below. The agreement expires on June 30, 2007. In
addition to his salary, Mr. Krishnamurthy is entitled to participate, to the extent he is eligible
under the terms and conditions thereof, in any profit sharing, pension, retirement,
hospitalization, insurance, disability, medical service or other employee benefit plan available to
the executive officers of our company. Mr. Krishnamurthy is also entitled to four weeks of paid
vacation in respect of each twelve month period during the term of his employment agreement. Mr.
Krishnamurthy was issued 3,000,000 stock options with a $0.38 strike price with a cashless
exercise provision, which are exercisable for a 5 year term. On November 18, 2004, he was granted a 3,000,000 share option with like terms at a strike price of
$0.22 per share and which vests as follows: 750,000 shares vest immediately on the date of grant November 18, 2004;
750,000 shares vest one year thereafter;
750,000 shares vest two years thereafter;
remaining 750,000 shares vest three years thereafter. 54




---



##### Table of Contents



In the event that Mr. Krishnamurthy is terminated without cause, all stock options above then
earned shall immediately be vested at the time of termination. Additionally, in the event of a
Change of Control of the Company, consisting of an entity, group, corporation, or individual
acquiring over 50% of the voting shares of the company, or a Change of Control as defined by the
Securities and Exchange Commission, it is understood that all earned and as of then unvested
options shall immediately be vested. Officer Bonuses As discussed above, under each employment agreement each officer shall also receive a
performance bonus up to a maximum of 150% of the then current base salary and evaluated on the
following three categories and weighted as indicated: 1. EBITDA (40%):
    
    Targets as provided in annual financial projections.2. Revenue (30%):
    
    Targets as provided in annual financial projections.3. Job Performance Objectives:
    
    Targeted 8 per year.
 If he achieves over 100% of target, he then receives a proportional amount to a limit of 150%
of then current base salary. If he achieves 100% of target, he then receives 100% of category
bonus. If he achieves 75% of target, he then receives 60% of category bonus. If he achieves 50% of
target, he then receives 30% of category bonus. There is currently no effective performance bonus schedule. Financial and performance
projections will be made if and when our company receives revenues from Airbee products. Bonus
amounts and allocations will be subject to the approval by the Board. In addition, our employment agreements with our officers initially provided for each officer
to receive additional compensation for successfully closing financing for our company. Such
compensation was terminated on September 10, 2004 by the consent of our officers and board of
directors. 
  ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth information regarding the beneficial ownership of our
common stock as of the date of this filing for: (a) each person known by us to own beneficially
more than 5% of our of common stock; (b) each of our directors; (c) each of our executive officers;
and (d) all directors and executive officers as a group. 
 The percentage of beneficial ownership for the following table is based on 41,216,913 shares
of common stock outstanding as of December 31, 2004. 
 Beneficial ownership is determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to securities. Shares of
common stock subject to options that are currently exercisable or exercisable within 60 days of the
date of this registration statement are deemed to be beneficially owned by the person holding such
options for the purpose of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated below, to our knowledge, all persons and entities listed below have
sole voting and investment power over their shares of common stock, except to the extent that
individuals share authority with spouses under applicable law. Unless otherwise indicated below,
the address for the persons and entities listed below is 9400 Key West Avenue, Rockville, MD
20850. 55




---



##### Table of Contents



SharesBeneficially
    
    
    
    PercentName and Address
    
    
    Owned
    
    
    
    of ClassSundaresan Raja
    
    
    
    31,625,000
    (1)
    
    
    
    61.7
    %E. Eugene Sharer
    
    
    
    9,359,350
    (2)
    
    
    
    20.0
    %Ramanujam Satagopan
    
    
    
    5,093,885
    (3)
    
    
    
    12.1
    %Richard P. Sommerfeld, Jr.
    
    
    
    3,714,756
    (4)
    
    
    
    8.6
    %Srinivasan Krishnamurthy
    
    
    
    1,500,000
    (5)
    
    
    
    3.5
    %Mal Gurian
    
    
    
    150,000
    (6)
    
    
    
    *All Directors and Officers as a Group (6 Persons)
    
    
    
    51,442,991
    
    
    
    
    84.4
    %
 
 
 *
    
    Less than 1%.(1)
    
    Includes 7,500,000 shares of common stock underlying options exercisable at $0.00004 per
share and 2,500,000 shares exercisable at $0.22 per share.(2)
    
    Includes 3,502,135 shares of common stock underlying options exercisable at $0.00004 per
share and 2,000,000 shares exercisable at $0.22 per share.(3)
    
    Includes 62,500 shares of common stock underlying options exercisable at $0.00004 per share
and 750,000 shares exercisable at $0.22 per share.(4)
    
    Includes 996,951 shares of common stock underlying options exercisable at $0.04 per share and
750,000 shares exercisable at $0.22 per share.(5)
    
    Includes 750,000 shares of common stock underlying options exercisable at $0.38 per share and
750,000 shares exercisable at $0.22 per share.(6)
    
    Includes 150,000 shares underlying options exercisable at $0.22 per share until January 1,
2010. Mr. Gurians address is: 5245 88th Street, Bradenton, FL 34211. 
  ITEM 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
 From 2003 through March 2005, the Company has entered into convertible promissory notes
with some of its officers as described below. The notes relate to services rendered to the
Company. These amounts initially accrued annual interest at 6.0%. At December 31, 2004, the
interest rate was 9.5% per year. On March 31,2005, the interest rate increased to 9.75% per year.
As of March 31, 2005, the Company has $1,010,621 outstanding under these notes, plus $74,888 of
accrued interest on the amounts outstanding. The notes are due June 30, 2005, however, noteholders
have agreed to extend the notes until September 30, 2005. The notes may be converted into shares
of our common stock at the option of our Company and with the consent of the noteholder, the value
of which will be the five-day trading average closing bid price of our common stock prior to date
of conversion. Amounts advanced by officers and amounts due to officers with interest at March 31,
2005 are as follows: 
 
 Principal andAmounts Advanced
    
    
    Interest DueSundaresan Raja
    
    $
    400,000
    
    
    $
    430,174E. Eugene Sharer
    
    $
    320,073
    
    
    $
    355,903Richard P. Sommerfeld, Jr.
    
    $
    128,638
    
    
    $
    130,039Ramanujam Satagopan
    
    $
    111,910
    
    
    $
    116,410Srinivasan Krishnamurthy
    
    $
    50,000
    
    
    $
    52,983
 
 
 In addition to the loans described above, on March 12, 2003 and April 30, 2003, Sundaresan
Raja advanced approximately $23,809 and $18,687, respectfully, to Airbee Wireless (India) Pvt.
Ltd., the Companys wholly-owned subsidiary in India. The Companys wholly-owned subsidiary 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%. At March 31, 2005, $49,910 was due
under the note, including $9,151 of interest. The Company has guaranteed repayment of the
advances. 
 56




---



##### Table of Contents



ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K 
 (a)      Exhibits 
 ExhibitNo.
    
    Description
    
    Location3.1
    
    Certificate of Incorporation, dated August 9, 2002 of Registrant
    
    
    (1
    )3.2
    
    Certificate of Amendment (forward split)
    
    
    (1
    )3.3
    
    By-Laws of Registrant
    
    
    (1
    )4.1
    
    Equity Incentive Plan
    
    
    (1
    )4.2
    
    Form of Promissory Note
    
    
    (1
    )4.3
    
    Outside Director Stock Option Plan
    
    
    (2
    )10.1
    
    Employment Agreement, dated August 16, 2002 between Sundaresan Raja
and Airbee Wireless.
    
    
    (1
    )10.2
    
    Employment Agreement, dated August 16, 2002 between Eugene Sharer and
Airbee Wireless.
    
    
    (1
    )10.3
    
    Employment Agreement, dated September 15, 2002 between Ramanujam
Satagopan and Airbee Wireless.
    
    
    (1
    )10.4
    
    Employment Agreement, dated September 1, 2003 between Richard
Sommerfeld and Airbee Wireless.
    
    
    (1
    )10.5
    
    Lease Agreement
    
    
    (1
    )14.0
    
    Code of Ethics
    
    
    (3
    )21.1
    
    Subsidiaries of Registrant
    
    
    (1
    )31.1
    
    Rule 13a-14(a)/15d-4(a) Certification of Principal Executive Officer31.2
    
    Rule 13a-14(a)/15d-4(a) Certification of Principal Financial Officer32.1
    
    Section 1350 Certification of Principal Executive Officer32.2
    
    Section 1350 Certification of Principal Financial Officer(1)
    
    Previously filed on Form 10SB Registration Statement.(2)
    
    Filed on Form 8-K Current Reported file with the SEC on March 15, 2005.(3)
    
    Previously filed on Amendment No. 1 to Form 10-KSB Annual Report for
year ended December 31, 2004.
 
  (b)
    
    Reports on Form 8-KNone. 57




---



##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES For the fiscal years ended December 31, 2004 and 2003, the aggregate fees billed by
Bagell, Josephs & Company, LLC were as follows: 2004
    
    
    
    2003Audit Fees
    
    
    $
    17,000
    
    
    
    $
    17,000Audit Related Fees
    
    
    $
    7,500
    
    
    
    $
    7,500Tax Fees
    
    
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    
    
    
 Audit Fees.Consists of fees billed for professional services rendered for the audit of our
annual consolidated financial statements and review of the quarterly condensed consolidated
financial statements and services that are normally provided by Bagell, Josephs & Company, in
connection with statutory and regulatory filings or engagements. Audit-Related Fees.Consists of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of our consolidated financial
statements and are not reported under Audit Fees. Tax Fees.Consists of fees billed for professional services for tax compliance, tax advice and
tax planning. All Other Fees.Consists of fees for products and services other than the services reported
above. 58




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized. AIRBEE WIRELESS, INC.By
    
    /s/Sundaresan RajaName: Sundaresan RajaTitle: President and Chief Executive OfficerDate: June 15, 2005
 
 In accordance with the requirements of Section 12 of the Securities Exchange Act of 1934, the
Registrant has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized. 
 
 SIGNATURE
    
    TITLE
    
    DATEPresident, Chief Executive Officer,/s/ Sundaresan Raja
    
    Principal Executive Officer and Director
    
    June 15, 2005Sundaresan Raja/s/ E. Eugene Sharer

E. Eugene Sharer
    
    Chief Operating Officer and Director
    
    June 15, 2005Chief Financial Officer, Principal Financial/s/Richard R. Sommerfeld, Jr.

Richard P. Sommerfeld, Jr.
    
    and Principal Accounting Officer
    
    June 15, 2005/s/ Ramanujam Satagopan
Ramanujam Satagopan
    
    Chief Technology Officer
    
    June 15, 2005/s/Mal Gurian
Mal Gurian
    
    Director
    
    June 15, 2005
 
 59