**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**





(Mark
      One)





R
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES****EXCHANGE
                ACT OF 1934**  **For the quarterly period ended
              June
              30, 2006**




**OR**





£
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE****ACT
                OF 1934**





**Commission
      file number 0-50918**





**AIRBEE
      WIRELESS, INC.**


(Exact
      name of registrant as specified in its charter)





**DELAWARE**
            **46-0500345**(State
                or other jurisdiction
            (IRS
                Employerof
                incorporation or organization)
            Identification
                No.)**9400
                Key West Avenue, Suite 100****Rockville,
                MD**
            **20850-3322**(Address
                of principal executive offices)
            (Zip
                Code)





Registrant’s
      telephone number, including area code: **(301)
      517-1860**





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





Yes R No £





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





APPLICABLE
      ONLY TO CORPORATE ISSUERS





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 73,597,963 shares of Common Stock par value
      of $0.00004 as of August 7, 2006,





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














AIRBEE
      WIRELESS, INC.





FORM
      10-QSB





INDEX





**PAGE**PART
                I FINANCIAL INFORMATIONItem
                1. Financial StatementsCondensed
                Consolidated Balance Sheet as of June 30, 2006 (Unaudited)
            4Condensed
                Consolidated Statements of Operations for the Six and Three Months
                Ended
                June 30, 2006 and 2005 (Unaudited)
            5Condensed
                Consolidated Statement of Accumulated Other Comprehensive Income
                for the
                Six Months Ended June 30, 2006 (Unaudited)
            6Condensed
                Consolidated Statements of Cash Flows for the Six Months Ended June
                30,
                2006 and 2005 (Unaudited)
            7Notes
                to the Condensed Consolidated Financial Statements
                (Unaudited)
            9Item
                2. Management’s Discussion and Analysis or Plan of
                Operations
            25Item
                3. Controls and Procedures
            33PART
                II OTHER INFORMATIONItem
                1. Legal Proceedings
            34Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            34Item
                3. Defaults Upon Senior Securities
            35Item
                4. Submission of Matters to a Vote of Security Holders
            35Item
                5. Other Information
            35Item
                6. Exhibits
            35SIGNATURES
            36







2




**PART
      I FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2006 AND 2005**


**(UNAUDITED)**


3






**AIRBEE
      WIRELESS, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2006 AND 2005**


**(UNAUDITED)**




**ASSETS****2006**Current
                    Assets:Cash
                    and cash equivalents
                
                $
                69,630Accounts
                    receivable
                
                
                65,820Prepaid
                    expenses and other current assets
                
                
                6,677Total
                    Current Assets
                
                
                142,127Fixed
                    assets, net of depreciation
                
                
                75,034Intangible
                    assets
                
                
                709,770Deferred
                    financing costs
                
                
                23,187Other
                    assets
                
                
                38,868771,825**TOTAL
                    ASSETS**
                
                $
                988,986**LIABILITIES
                    AND STOCKHOLDERS' (DEFICIT)****LIABILITIES**Current
                    Liabilities:Notes
                    payable - related party
                
                $
                85,903Notes
                    payable - other, net of discount of $56,417
                
                
                428,583Fair
                    value of derivatives
                
                
                834,716Warrants
                    liability
                
                
                537,997Accounts
                    payable and accrued expenses
                
                
                1,202,564Total
                    Current Liabilities
                
                
                3,089,763Long-term
                    Liabilities:Convertible
                    debentures, net of discount of $262,500
                
                
                87,500Total
                    Long-term Liabilities
                
                
                87,500**Total
                    Liabilities**
                
                
                3,177,263**COMMITMENTS
                    AND CONTINGENCIES**
                
                
                -**STOCKHOLDERS'
                    DEFICIT**Common
                    stock, $.00004 Par Value; 200,000,000 shares authorized;88,098,631
                    shares issued, 13,586,956 shares held in escrow;73,514,630
                    outstanding
                
                
                2,940Additional
                    paid-in capital
                
                
                6,610,021Unearned
                    compensation
                
                
                (30,538
                )Other
                    accumulated comprehensive loss
                
                
                725Accumulated
                    deficit
                
                
                (8,568,594
                )(1,985,446
                )Less:
                    stock subscription receivable
                
                
                -Less:
                    treasury stock, 997,045 shares at cost
                
                
                (202,831
                )**Total
                    Stockholders' Deficit**
                
                
                (2,188,277
                )**TOTAL
                    LIABILITIES AND STOCKHOLDERS' DEFICIT**
                
                $
                988,986
  The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.




4






**AIRBEE
                  WIRELESS, INC.****CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS****FOR
                  THE SIX AND THREE MONTHS ENDED JUNE 30, 2006 AND
                  2005****(UNAUDITED)**
  **SIX
                    MONTHS ENDED**
                
                **THREE
                    MONTHS ENDED****JUNE
                    30,**
                
                **JUNE
                    30,****Restated**
                
                
                
                **Restated****2006**
                
                **2005**
                
                **2006**
                
                **2005****OPERATING
                    REVENUES**Sales
                
                $
                127,800
                
                $
                1,021
                
                
                76,200
                
                
                1,021**COST
                    OF SALES**
                
                
                731
                
                
                -
                
                
                731
                
                
                -**GROSS
                    PROFIT**
                
                
                127,069
                
                
                1,021
                
                
                75,469
                
                
                1,021**OPERATING
                    EXPENSES**Compensation
                    and professional fees
                
                
                904,741
                
                
                764,352
                
                
                357,521
                
                
                517,926Stock
                    option compensation expense
                
                
                1,227,630
                
                
                -
                
                
                212,489
                
                
                -Research
                    and development
                
                
                -
                
                
                221,960
                
                
                -
                
                
                9,890Selling,
                    general and administrative expenses
                
                
                286,557
                
                
                330,978
                
                
                156,402
                
                
                268,849Bad
                    debt
                
                
                -
                
                
                536,495
                
                
                -
                
                
                536,495Depreciation
                    and amortization
                
                
                24,154
                
                
                26,896
                
                
                12,098
                
                
                23,814**Total
                    Operating Expenses**
                
                
                2,443,082
                
                
                1,880,681
                
                
                738,510
                
                
                1,356,974**LOSS
                    BEFORE OTHER INCOME (EXPENSE)**
                
                
                (2,316,013
                )
                
                (1,879,660
                )
                
                (663,041
                )
                
                (1,355,953
                )**OTHER
                    INCOME (EXPENSE)**Gain
                    on derivatives
                
                
                508,628
                
                
                -
                
                
                81,096
                
                
                -Interest
                    income
                
                
                119
                
                
                
                
                
                119
                
                
                -Interest
                    expense
                
                
                (164,703
                )
                
                (110,176
                )
                
                (99,963
                )
                
                (81,602
                )**Total
                    Other Income (Expense)**
                
                
                344,044
                
                
                (110,176
                )
                
                (18,748
                )
                
                (81,602
                )**NET
                    LOSS BEFORE PROVISION FOR INCOME TAXES**
                
                
                (1,971,969
                )
                
                (1,989,836
                )
                
                (681,789
                )
                
                (1,437,555
                )**Provision
                    for Income Taxes**
                
                
                -
                
                
                -
                
                
                -
                
                
                -**NET
                    LOSS APPLICABLE TO COMMON SHARES**
                
                $
                (1,971,969
                )
                $
                (1,989,836
                )
                $
                (681,789
                )
                $
                (1,437,555
                )**NET
                    LOSS PER BASIC AND DILUTED SHARES**
                
                $
                (0.03
                )
                $
                (0.05
                )
                $
                (0.01
                )
                $
                (0.03
                )**WEIGHTED
                    AVERAGE NUMBER OF COMMON****SHARES
                    OUTSTANDING**
                
                
                64,845,540
                
                
                42,803,263
                
                
                68,019,442
                
                
                43,746,671
  The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.




5




**AIRBEE
                  WIRELESS, INC.****CONDENSED
                  CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE
                  INCOME****FOR
                  THE SIX MONTHS ENDED JUNE 30, 2006****(UNAUDITED)**
  Balance,
                  December 31, 2005
              
              $
              734Loss
                  on foreign currency translations
              
              
              (9
              )Balance,
                  June 30, 2006
              
              $
              725
  The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.




6




**AIRBEE
                  WIRELESS, INC.****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS****FOR
                  THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005****(UNAUDITED)**
  **Restated**
                
                **Restated****2006**
                
                **2005****CASH
                    FLOWS FROM OPERATING ACTIVITIES**Net
                    loss
                
                $
                (1,971,969
                )
                $
                (1,989,836
                )Adjustments
                    to reconcile net loss to net cash(used
                    in) operating activitiesDepreciation
                    and amortization
                
                
                24,154
                
                
                26,896Provision
                    for bad debts
                
                
                -
                
                
                536,495Common
                    stock issued for services
                
                
                159,600
                
                
                296,053Common
                    stock issued for compensation
                
                
                55,000
                
                
                13,000Gain
                    on valuation of derivatives
                
                
                (508,628
                )
                
                -Amortization
                    of derivative discounts
                
                
                31,564
                
                
                -Stock
                    options vested during period
                
                
                1,227,630
                
                
                -Amortization
                    of financing fees
                
                
                7,728
                
                
                -Gain
                    (loss) on foreign currency translations
                
                
                (9
                )
                
                6Amortization
                    of unearned compensation
                
                
                7,984
                
                
                6,874Excess
                    tax benefits from share-based payment arrangement
                
                
                (430,000
                )
                
                -**Changes
                    in assets and liabilities**Decrease
                    in accounts receivable
                
                
                (55,820
                )
                
                -(Increase)
                    decrease in prepaid expenses and other assets
                
                
                38,989
                
                
                (619,765
                )(Increase)
                    in other assets
                
                
                (11,154
                )
                
                -Increase
                    in accounts payable andand
                    accrued expenses
                
                
                265,586
                
                
                566,512Total
                    adjustments
                
                
                812,624
                
                
                826,071**Net
                    cash (used in) operating activities**
                
                
                (1,159,345
                )
                
                (1,163,765
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES**Acquisition
                    of intangible assets
                
                
                (35,618
                )
                
                (100,329
                )Acquisitions
                    of fixed assets
                
                
                (17,561
                )
                
                (24,620
                )**Net
                    cash (used in) investing activities**
                
                
                (53,179
                )
                
                (124,949
                )
    The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.




7




**AIRBEE
                  WIRELESS, INC.****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS,
                  CONTINUED****FOR
                  THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005****(UNAUDITED)**
  **Restated**
              
              **Restated****2006**
              
              **2005**
 **CASH
                    FLOWS FROM FINANCING ACTIVITES**Proceeds
                    from common stock issuances
                
                $
                156,400
                
                $
                503,559Proceeds
                    from stock subscriptions receivable
                
                
                127,500
                
                
                -Proceeds
                    from notes payable - other
                
                
                425,000
                
                
                750,000Proceeds
                    from derivative notes payable
                
                
                115,000
                
                
                -Proceeds
                    from stock option exercise
                
                
                400
                
                
                -Payment
                    on notes payable - related party, net
                
                
                -
                
                
                (16,215
                )Payments
                    for issuance costs
                
                
                -
                
                
                (25,000
                )Excess
                    tax benefits from share-based payment arrangement
                
                
                430,000
                
                
                -**Net
                    cash provided by financing activities**
                
                
                1,254,300
                
                
                1,212,344**NET
                    INCREASE (DECREASE) IN****CASH
                    AND CASH EQUIVALENTS**
                
                
                41,776
                
                
                (76,370
                )**CASH
                    AND CASH EQUIVALENTS -****BEGINNING
                    OF PERIOD**
                
                
                27,854
                
                
                87,362**CASH
                    AND CASH EQUIVALENTS - END OF PERIOD**
                
                $
                69,630
                
                $
                10,992**SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOW****INFORMATION:****CASH
                    PAID DURING THE YEAR FOR:**Interest
                    expense
                
                $
                17,500
                
                $
                30,270Income
                    taxes
                
                $
                -
                
                $
                -**SUPPLEMENTAL
                    DISCLOSURE OF NONCASH****ACTIVITIES:**Common
                    stock issued for compensation
                
                $
                55,000
                
                $
                13,000Common
                    stock issued for services
                
                $
                159,600
                
                $
                296,053Common
                    stock issued for issuance costs
                
                $
                -
                
                $
                740,000Stock
                    options vested during period
                
                $
                1,227,630
                
                $
                -Conversion
                    of note payable - other and accrued interest to common
                    stock
                
                $
                113,085
                
                $
                -Conversion
                    of related party notes payable, accrued salaries payable
                  and
                    accrued interest to common stock
                
                $
                1,870,972
                
                $
                -
   The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.




8




**AIRBEE
      WIRELESS, INC.**


**NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
        30, 2006 AND 2005**
 **(UNAUDITED)**




**NOTE
      1 —** **ORGANIZATION
      AND BASIS OF PRESENTATION**





The
      condensed unaudited interim consolidated financial statements included herein
      have been prepared, without audit, pursuant to the rules and regulations of
      the
      Securities and Exchange Commission. The condensed consolidated financial
      statements and notes are presented as permitted on Form 10-QSB and do not
      contain information included in the Company’s annual statements and notes.
      Certain information and footnote disclosures normally included in financial
      statements prepared in accordance with accounting principles generally accepted
      in the United States of America have been condensed or omitted pursuant to
      such
      rules and regulations, although the Company believes that the disclosures are
      adequate to make the information presented not misleading. It is suggested
      that
      these condensed consolidated financial statements be read in conjunction with
      the December 31, 2005 audited consolidated financial statements and the
      accompanying notes thereto. While management believes the procedures followed
      in
      preparing these condensed consolidated financial statements are reasonable,
      the
      accuracy of the amounts are in some respects dependent upon the facts that
      will
      exist, and procedures that will be accomplished by the Company later in the
      year.





These
      condensed unaudited consolidated financial statements reflect all adjustments,
      including normal recurring adjustments, which, in the opinion of management,
      are
      necessary to present fairly the operations and cash flows for the period
      presented.





Airbee
      Wireless, Inc. (“ *Airbee* ”
or
      the
“ *Company* ”),
      was
      incorporated in Delaware in 2002 to develop and supply cutting edge intelligent
      software that is generally embedded into microprocessors thereby allowing
      manufacturers (OEM’s) of various products to create advanced wireless
      communications systems. Focusing on its core competencies in the design and
      engineering of advanced, embedded short-range wireless data and voice
      communications software, the Company believes that it is positioned to play
      a
      pivotal role in the convergence of various wireless communications applications
      through software embedded on silicon and in niche applications for its
      software.





**NOTE
      2 —** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





**Liquidity**





The
      condensed consolidated interim financial statements have been presented on
      the
      basis that the Company is a going concern, which contemplates, among other
      things, the realization of assets, continued success in accessing supplemental
      external financing, and the satisfaction of liabilities in the normal course
      of
      business. The Company has incurred losses since its inception, and has an
      accumulated deficit of approximately $8.6 million as of June 30, 2006. The
      Company’s operations have been financed primarily through a combination of
      issued equity and debt. For the six months ended June 30, 2006, the Company
      had
      a net loss of approximately $1,971,969 and cash used in operations of
      approximately $1,159,345, which included a $430,000 non-cash
      item.




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





9




**Principles
      of Consolidation**





The
      condensed consolidated financial statements include the accounts of the Company
      and its wholly owned subsidiaries Airbee Wireless (Pte.) Ltd., located in
      Singapore, and Airbee Wireless (India) Pvt. Ltd., located in India, for the
      six
      months ended June 30, 2006 and 2005 respectively. All significant inter-company
      accounts and transactions have been eliminated in consolidation. Accounts
      denominated in non-U.S. currencies have been re-measured using the U.S. Dollar
      as the functional currency.





**Use
      of Estimates**





The
      preparation of the condensed consolidated financial statements in conformity
      with accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosures of contingent assets and
      liabilities at the date of the consolidated financial statements and the
      reported amounts of revenues and expenses during the reporting period. Actual
      results could differ from those estimates.





**Cash
      and Cash Equivalents**





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





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





**Accounts
      Receivable**





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





**Fixed
      Assets**





Fixed
      assets are stated at cost. Depreciation is computed using the straight-line
      method over the estimated useful lives of the assets; two to four years for
      machinery and equipment and four to forty years for buildings. Reviews are
      regularly performed to determine whether facts and circumstances exist that
      indicate carrying amount of assets may not be recoverable or the useful life
      is
      shorter than originally estimated. The Company assesses the recoverability
      of
      its fixed assets by comparing the projected undiscounted net cash flows
      associated with the related asset or group of assets over their remaining lives
      against their respective carrying amounts. Impairment, if any, is based on
      the
      excess of the carrying amount over the fair value of those assets. If assets
      are
      determined to be recoverable, but the useful lives are shorter than originally
      estimated, the net book value of the assets is depreciated over the newly
      determined remaining useful lives. When fixed assets are retired or otherwise
      disposed of, the cost and related accumulated depreciation are removed from
      the
      accounts and the resulting gain or loss is included in operations.





**Intangible
      Assets**





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





10




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





**Intellectual
      Property**





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





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





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





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




The
      software serves as the core code (i.e., one of the key building blocks) for
      current and future products that must comply with both of these international
      standards. Hence, core software based upon the global standards of IEEE and
      ZigBee to enable the rest of our software to function has an undefined, but
      not
      necessarily infinite, useful life. Management, with the assistance of its
      technical staff, determined that this specific intellectual property relating
      to
      Airbee UltraLite tm should
      be amortized beginning with the second quarter of 2005 in accordance with SFAS
      No. 86. The Company plans to begin amortizing the capitalized R&D costs
      related to our ZigBee stack (the MAC, Network and Security layers) when the
      software is available for general release, which is currently projected to
      occur
      in the third quarter of 2006. The status of that intellectual property is
      reviewed for impairment annually or more frequently if events and circumstances
      indicate that the asset may be impaired. The Company believes that at this
      point
      in time, impairment is impractical because (a) the IEEE 802.15 global standard
      was only finalized in October 2003; (b) the ZigBee global standard was only
      finalized on December 14, 2004; and (c) the Company’s software written in
      conformity with both global standards is vital to making the rest of its
      software function and therefore be in compliance with these global
      standards.


**Revenue
      and Cost Recognition**





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





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





11




The
      Company accounts for the time-based licensing of software in accordance with
      the
      American Institute of Certified Public Accountants Statement of Position (SOP)
      97-2, *“Software
      Revenue Recognition.”* The
      Company recognizes revenue when (i) persuasive evidence of an arrangement
      exists; (ii) delivery has occurred or services have been rendered; (iii) the
      sales price is fixed or determinable; and (iv) the ability to collect is
      reasonably assured. For software arrangements with multiple elements, revenue
      is
      recognized dependent upon whether vendor-specific objective evidence (VSOE)
      of
      fair value exists for each of the elements. When VSOE does not exist for all
      the
      elements of a software arrangement and the only undelivered element is
      post-contract customer support (PCS), the entire licensing fee is recognized
      ratably over the contract period.





Revenue
      attributable to undelivered elements, including technical support, is based
      on
      the sales price of those elements and is recognized ratably on a straight-line
      basis over the term of the time-based license. Post-contract customer support
      revenue is recognized ratably over the contract period. Shipping charges billed
      to customers are included in revenue and the related shipping costs are included
      in cost of sales.





Time-based
      product licensing fees are collected in advance. Revenues from licenses are
      recognized on a prorated-basis over the life of the license. Airbee’s customary
      practice is to have non-cancelable time-based licenses and a customer purchase
      order prior to recognizing revenue.





Enterprise
      license model arrangements require the delivery of unspecified future updates
      and upgrades within the same product family during the time-based license.
      Accordingly, Airbee will recognize fees from its enterprise license model
      agreements ratably over the term of the license agreement.





Time-based
      royalties are charged on a unit basis. Royalties are not fixed dollar amounts,
      but are instead a percentage of the customer’s finished product and the
      percentage varies on a tiered basis with the number of units shipped by
      customer.





Revenue
      attributed to undelivered elements is based on the sales price rather than
      on
      the renewal rate for the following reasons:





Because
      of (i) the newness of the ZigBee standard for this short-range wireless
      technology, (ii) the newness of the Company’s product introductions into the
      marketplace for a range of applications being developed by its customers, and
      (iii) the lack of historical data for potentially defective software, which
      may
      be a function of the application into which it is installed, a reasonable
      reserve for returns cannot yet be established. In accordance with SFAS No.
      48 *“Revenue
      Recognition When Right of Return Exists,”* in the
      absence of historical data, the Company is unable to make a reasonable and
      reliable estimate of product returns at this time.





The
      Company expects to enter into software maintenance contracts with its customers.
      Maintenance fees are not a fixed dollar amount, but rather a percentage fee
      based upon the value of the license and/or royalties billed/received.
      Maintenance contracts are paid for and collected at the beginning of the
      contract period. If the Company provides bug fixes (under warranty obligations)
      free-of-charge that are necessary to maintain compliance with published
      specifications, it accounts for the estimated costs to provide bug fixes in
      accordance with SFAS No. 5 *“Accounting
      for Contingencies.”*





Revenue
      from products licensed to original equipment manufacturers (OEM’s) is based on
      the time-based licensing agreement with an OEM and recognized when the OEM
      ships
      licensed products to its customers.





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





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





12




**Deferred
      Financing Costs**




Deferred
        financing costs were incurred in connection with the convertible debenture
        with
        Montgomery (see discussion in Note 5). These costs will be amortized over
        the
        life of the convertible debenture (24 months). During the six months ended
        June
        30, 2006, the Company amortized $7,728 in deferred financing
        costs.





**Research
      and Development**





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





**Income
      Taxes**





Income
      tax benefit is computed on the pretax loss based on current tax law. Deferred
      income taxes are recognized for the tax consequences in future years of
      differences between the tax basis of assets and liabilities and its financial
      reporting amounts at each year-end based on enacted tax laws and statutory
      tax
      rates. No benefit is reflected for the three month period ended June 30, 2006
      and 2005.





**Advertising**





The
      Company’s policy is to expense the costs of advertising as incurred. The Company
      had no such cost for the six month period ended June 30, 2006 and 2005
      respectively.





**Earnings
      (Loss) Per Share of Common Stock**





Historical
      net income (loss) per common share is computed using the weighted average number
      of common shares outstanding. Diluted earnings per share (EPS) includes
      additional dilution from common stock equivalents, such as stock issuable
      pursuant to the exercise of stock options and warrants. Common stock equivalents
      were not included in the computation of diluted earnings per share at June
      30,
      2006 and 2005 when the Company reported a loss because to do so would be
      anti-dilutive for periods presented. The Company has incurred losses since
      inception as a result of funding its research and development, including the
      development of its intellectual property portfolio which is key to its core
      products.





The
      following is a reconciliation of the computation for basic and diluted EPS:





**June
                30, 2006**
            
            **June
                30, 2005**Net
                Loss
            
            
            (1,971,969
            )
            
            (1,989,836
            )Weighted-average
                common shares outstanding (Basic)
            
            
            64,845,540
            
            
            42,803,263Weighted-average
                common stock Equivalents:Stock
                options
            
            
            —
            
            
            —Warrants
            
            
            —
            
            
            —Weighted-average
                common shares outstanding (Diluted)
            
            
            64,845,540
            
            
            42,803,263





**Fair
      Value of Financial Instruments**





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





13




**Limitations**





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





**Derivative
      Instruments**


The
        Company has an outstanding convertible debt instrument that contains
        free-standing and embedded derivatives. The Company accounts for these
        derivatives in accordance with SFAS No. 133, “ *Accounting
        for Derivative*  *Instruments
        and Hedging Activities* ”,
        and
        EITF Issue No. 00-19, “ *Accounting
        for*  *Derivative
        Financial Instruments Indexed to, and Potentially Settled in, a*  *Company’s
        Own Stock* .”
In
        accordance with the provisions of SFAS No. 133 and EITF Issue No. 00-19,
        the
        embedded derivatives are required to be bifurcated from the debt instrument
        and
        recorded as a liability at fair value on the condensed consolidated balance
        sheet. Changes in the fair value of the derivatives are recorded at each
        reporting period and recorded in net gain (loss) on derivative, a separate
        component of the other income (expense). As of June 30, 2006, the fair value
        of
        the derivatives was $834,716, a decrease of $204,330 from December 31, 2005.
        The
        Company has recorded a net gain on derivatives in the Other Income (Expense)
        section of its Condensed Consolidated Statements of
        Operations.





**Stock-Based
      Compensation**





Employee
      stock awards prior to periods beginning January 1, 2006 under the Company’s
      compensation plans are accounted for in accordance with Accounting Principles
      Board Opinion No. 25 (“APB 25”), “ *Accounting
      for Stock Issued to Employees* ”,
      and
      related interpretations. The Company provides the disclosure requirements of
      SFAS No. 123, “ *Accounting
      for Stock-Based Compensation”* (“SFAS
      123”), and related interpretations. Stock-based awards to non-employees are
      accounted for under the provisions of SFAS 123 and the Company adopted the
      enhanced disclosure provisions of SFAS No. 148 “ *Accounting
      for Stock-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 six months ended June 30, 2006 and 2005 was $7,984 and $6,874,
      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.





Effective
      December 31, 2005, the Company adopted the provisions of Financial Accounting
      Standards Board Statement of Financial Accounting Standard (“SFAS”) No. 123(R),
“Share-Based Payments,” which establishes the accounting for employee
      stock-based awards. Under the provisions of SFAS No.123(R), stock-based
      compensation is measured at the grant date, based on the calculated fair value
      of the award, and is recognized as an expense over the requisite employee
      service period (generally the vesting period of the grant). The Company adopted
      SFAS No. 123(R) using the modified prospective method and, as a result, periods
      prior to December 31, 2005 have not been restated. The Company recognized
      stock-based compensation for awards issued under the Company’s stock option
      plans in the Compensation and professional fees line item of the Condensed
      Consolidated Statement of Operations. Additionally, no modifications were made
      to outstanding stock options prior to the adoption of SFAS No. 123(R), and
      no
      cumulative adjustments were recorded in the Company’s financial
      statements.





14




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


**Six
                    Months Ended****6/30/2006**
                
                **6/30/2005**Net
                    loss, as reported
                
                $
                (1,971,969
                )
                $
                (1,989,836
                )Add:
                    Stock-based employee compensation expense included in reported
                    net income,
                    net of related tax effects
                
                
                1,227,630
                
                
                0Deduct:
                    Total stock-based employee compensation expense determined under
                    fair
                    value based method for all awards, net of related tax
                    effects
                
                
                (1,227,630
                )
                
                (1,564,200
                )Net
                    income, pro forma
                
                $
                (1,971,969
                )
                $
                (3,554,036
                )Earning
                    per share:Basic,
                    as reported
                
                $
                (0.03
                )
                $
                (0.08
                )Basic,
                    pro forma
                
                $
                (0.03
                )
                $
                (0.08
                )Diluted,
                    as reported
                
                $
                (0.03
                )
                $
                (0.08
                )Diluted,
                    pro forma
                
                $
                (0.03
                )
                $
                (0.08
                )




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




**Three
                  Months Ended****June
                    30, 2006**
              
              **June
                    30, 2005**Dividend
                  yield
              
              
              0.00
              %
              
              0.00
              %Expected
                  volatility
              
              
              149.07
              %
              
              80.14
              %Risk-free
                  interest rate
              
              
              4.00
              %
              
              4.00
              %Expected
                  life in years
              
              
              3.
                  5 - 4.75
              
              
              4.0
                  -4.92




The
      following table summarizes the stock option activity for the six months ended
      June 30, 2006:




**Shares**
              
              **June
                    30, 2006**
                  **Weighted
                    Average Exercise Price**
              
              **Weighted
                  Average Contractual Term (Years)**Outstanding,
                  December 31, 2005
              
              
              40,490,010
              
              
              0.2050Options
                  granted
              
              
              3,465,000
              
              
              0.3200Options
                  reinstated
              
              
              —
              
              
              —Options
                  exercised
              
              
              10,000,000
              
              $
              0.00004
              
              
              1.12603Options
                  forfeited or expired
              
              
              —
              
              
              —
              
              
              —Outstanding
                  June 30, 2006
              
              
              33,955,010
              
              
              0.2771
              
              
              4.2202Options
                  exercisable, June 30, 2006
              
              
              16,797,510
              
              
              0.2769
              
              
              4.2362




15




**Product
      Warranty**





The
      Company’s product warranty accrual includes specific accruals for known product
      issues and an accrual for an estimate of incurred but unidentified product
      issues based on historical activity. Due to effective product testing and the
      short time between product shipment and the detection and correction of product
      failures, the warranty accrual based on historical activity and the related
      expense were not significant as of and for the six months ended June 30, 2006
      and 2005, respectively.





**Goodwill
      and Other Intangible Assets**





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





The
      identifiable intangible assets presented on the condensed consolidated balance
      sheet represent the intellectual property that was capitalized
      post-technological feasibility. Management will continue to monitor and assess
      any impairment charges against those assets in accordance with the provisions
      of
      SFAS No. 142, “ *Goodwill
      and Other Intangible Assets* ”
and
      SFAS No. 144, “ *Accounting
      for the Impairment or Disposal of Long-Lived Assets* .”
      Beginning with the second quarter of 2005, the Company began amortizing its
      intellectual property costs over a five year period. The amount amortized for
      the six months ended June 30, 2006 is $15,100.





The
      main
      components of intangible assets are as follows:


**Six
                  Months Ended June 30, 2006****Gross
                  Carrying**
              
              **Accumulated****Amount**
              
              **Amortization**Intellectual
                  Property
              
              $
              152,569
              
              $
              37,750Capitalized
                  Research & Development
              
              
              594,951
              
              
              —Total
                  Intangible Assets
              
              $
              747,520
              
              $
              37,750




**Currency
      Risk and Foreign Currency Translation**





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


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


16




**Recent
      Accounting Pronouncements**





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





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





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





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




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




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




Additionally,
      FAS No. 156 requires all separately recognized servicing assets and servicing
      liabilities to be initially measured at fair value, permits an entity to choose
      either the use of an amortization or fair value method for subsequent
      measurements, permits at initial adoption a one-time reclassification of
      available-for-sale securities to trading securities by entities with recognized
      servicing rights and requires separate presentation of servicing assets and
      liabilities subsequently measured at fair value and additional disclosures
      for
      all separately recognized servicing assets and liabilities. FAS No. 156 is
      effective for transactions entered into after the beginning of the first fiscal
      year that begins after September 15, 2006. The
      Company is currently evaluating the effect the adoption of FAS No. 156 but
      believes it will not have a material impact on its financial position or results
      of operations.





**NOTE
      3-** **CONCENTRATION
      OF CREDIT RISK**





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





17




**NOTE
      4-** **FIXED
      ASSETS**





Fixed
      assets as of June 30, 2006 consist of the following:




Computer
                  and office equipment
              
              $
              94,665Leasehold
                  improvements
              
              
              13,083Less:
                  accumulated depreciation and amortization
              
              
              (32,714
              )Net
                  book value
              
              $
              75,034




Depreciation
      expense for the six months ended June 30, 2006 and 2005 was $9,054 and $9,346,
      respectively.





**NOTE
      5-** **DEBT**





**Note
      Payable - Other**





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





In
      March
      2006, a shareholder loaned the Company $40,000 in return for an unsecured
      promissory note due on or before July 31, 2006. The note was payable in cash
      or
      Company restricted common stock; if paid in stock the price would be the
      five-day average closing bid price on the days preceding payment. The note
      is
      nominally non-interest bearing; however, the Company issued 50,000 shares of
      its
      restricted common stock as a financing fee valued at approximately $11,500.
      On
      June 5, 2006, the note was converted to 172,414 restricted shares of common
      stock (see Note 9).




On
      May
      18, 2006, a shareholder accepted the Company’s term sheet for senior secured
      bridge loan by providing a total of $385,000 in cash to the Company. The terms
      of this bridge loan are: interest at 12% per annum, compounded monthly;
      repayable in ninety (90) days but the Company has the option of extending for
      another 30 days for a fee of 8% of the amount provided the Company. The
      shareholder also received 577,500 warrants to purchase common stock exercisable
      over three years at $0.50 per share. The Company valued these warrants using
      the
      Black-Scholes option pricing model resulting in a discount on debt of $84,626
      which is amortized over the life of the bridge loan (90 days). Amortization
      of
      discount on debt at June 30, 2006 was $28,209.


**Convertible
      Debenture**





On
      December 29, 2005, the Company executed a convertible debenture for $500,000
      to
      Montgomery Equity Partners, Ltd. Pursuant to the terms of the convertible
      debenture, Montgomery disbursed $350,000 upon the date the debenture was
      executed with an additional $150,000 to be disbursed two days before the Company
      files a Form SB-2 with the U.S. Securities and Exchange Commission. The
      debenture is convertible at the option of the holder into common shares of
      the
      Company at a price per share equal to 80% of the lowest closing value 10 days
      prior to the closing date or 10 days prior to the conversion date. In addition,
      the Company issued 2,000,000 freestanding warrants exercisable over three years
      as follows: 1,000,000 warrants at a strike price of the lesser of 80% of the
      average closing bid price for the 5 trading days preceding exercise or $0.20
      per
      share; 500,000 warrants at a strike price of the lesser of 80% of the average
      closing bid price for the 5 trading days preceding exercise or $0.30 per share;
      and 500,000 warrants at a fixed strike price of $0.001.





The
      convertible debenture is secured by substantially all of the assets of the
      Company, pledged shares of stock of three affiliates of the Company, and 13.5
      million pledged shares of stock. The pledged shares are held by an escrow agent
      pursuant to a written escrow agreement. The convertible debenture has a two-year
      term and accrues interest monthly at 15% per year. In connection with this
      transaction, the Company executed an Investor Registration Rights Agreement
      by
      which it agreed to file a registration statement with the SEC for at least
      the
      pledged shares held by the escrow agent and the 2 million warrants. The
      registration statement was to be filed within 30 days of the execution of the
      convertible debenture and declared effective within 90 days of filing. Failure
      to file or be declared effective within the agreed timeframe subjected the
      Company to liquidated damages equal to two percent (2%) of the liquidated value
      of the convertible debenture for each thirty (30) day period after the scheduled
      filing or effective date deadline. By written agreement, these deadlines have
      been extended. The Company has until August 31, 2006 to file the registration
      statement which must be declared effective no later than November 30,
      2006.





18




In
      accordance with SFAS 133, *“Accounting
      for Derivative Instruments and Hedging*  *Activities”* and
      EITF
      00-19, “Accounting
      forDerivativeFinancial Instruments  *Indexed
      to, and Potentially Settled in, a Company’s Own Stock”* ,
      the
      conversion feature associated with the $500,000 convertible debenture represents
      an embedded derivative. The Company has recognized the embedded derivative
      in
      the amount of $451,969 as a liability in the accompanying condensed consolidated
      balance sheet and has measured it at its estimated fair value. The estimated
      fair value of the embedded derivative has been calculated based on a
      Black-Scholes pricing model using the following assumptions:


Fair
                  market value of stock
              
              $
              0.245Exercise
                  price
              
              $
              0.13Dividend
                  yield
              
              
              0.00
              %Risk
                  free interest rate
              
              
              4.00
              %Expected
                  volatility
              
              
              119
              %Expected
                  life
              
              
              1.5
                  Years




As
      of
      June 30, 2006, the freestanding warrants with a variable exercise price
      (derivatives) and fixed warrants issued in connection with the $500,000
      convertible debenture have been valued at $267,747 and $122,051, respectively
      based on a Black-Scholes pricing model using the following
      assumptions:


Fair
                  market value of stock
              
              $
              0.245Exercise
                  price
              
              $
              0.17Dividend
                  yield
              
              
              0.00
              %Risk
                  free interest rate
              
              
              4.00
              %Expected
                  volatility
              
              
              119
              %Expected
                  life
              
              
              2.5
                  Years




Changes
      in the fair value of the embedded and freestanding warrants with a variable
      price (derivatives) are calculated at each reporting period and recorded in
      net
      gain (loss) on derivative, a separate component of other income (expense).
      As of
      June 30, 2006, the fair value of the embedded and freestanding derivatives
      had
      decreased by $319,330 from its fair value at December 31, 2005 of
      $1,039,046.




The
      allocation of the proceeds of the convertible debenture to the warrants with
      a
      fixed exercise price and the recognition of the embedded derivative resulted
      in
      discounts to the convertible debenture of $109,597 and $240,403, respectively.
      The discount on debt of $350,000 is being amortized to interest through December
      31, 2007 using the effective interest method. Interest expense recognized in
      the
      six months ended June 30, 2006 is $87,500. The unamortized discount on debt
      at
      June 30, 2006 is $262,500.




**Bridge
      Loan Derivatives**




Between
      April 16, 2006 and May 5, 2006, five accredited investors accepted the Company’s
      term sheet for convertible senior secured bridge loans by providing a total
      of
      $115,000 cash to the Company. The terms of these bridge loans are: interest
      at
      12% per annum, compounded monthly; repayable in ninety (90) days but the Company
      has the option of extending for another 30 days for a fee of 8% of the amount
      provided the Company; these five accredited investors have the option to convert
      their bridge loans to restricted shares of common stock at an exercise price
      of
      the lower of the average closing bid price of the Company’s stock for the five
      trading days preceding the date of the conversion or the market price of the
      stock on the trading day preceding the conversion. The Company exercised its
      option to extend the term for an additional thirty (30) days for these five
      loans. If the bridge loans are not repaid or converted by the end of their
      terms
      plus the optional extension, the Company will pay a penalty of 10% of the dollar
      value of the amount outstanding; the Company will pay an additional 10% penalty
      for each quarter thereafter that the bridge loans remain unpaid. These five
      accredited investors also received warrants to purchase common stock at the
      ratio of 1 common share for each $2.00 loaned. All 57,500 warrants have a three
      year term and an exercise price of $0.50 per share. The warrants and any shares
      converted have piggyback registration rights. As a result of the conversion
      rights, the Company recorded these bridge loans as a derivative liability valued
      at $115,000. The warrants have been valued using the Black-Scholes option
      pricing model and $13,186 are included in warrants
      liability.








19






**NOTE
        6-** **NOTES
        PAYABLE - RELATED PARTY**
 
 On
        March
        12, 2003 and April 30, 2003, Sundaresan Raja advanced approximately $22,412
        and
        $17,591, respectfully, to Airbee Wireless (India) Pvt. Ltd. (“Airbee India”),
        the Company’s wholly-owned subsidiary in India. Airbee India has issued Mr. Raja
        a promissory note due on demand. The note accrues interest at 11.25% per
        year,
        which is below the local Indian market rates of 14% to 16%. On June 20, 2005,
        Mr. Raja advanced approximately $11,100 to Airbee India, which has issued
        Mr.
        Raja another demand promissory note. This note accrues interest at 12.0%
        per
        year, which is below the local Indian market rates of 14% to 16%. At June
        30,
        2006, $34,772 was due under the notes together with $18,153 of accrued interest,
        which is included under accounts payable and accrued expenses. The Company
        has
        guaranteed repayment of the advances.


Airbee
      India has also issued demand promissory notes to Ram Satagopan in exchange
      for
      funds advanced to the Airbee India. This note accrues interest at 12.0% per
      year, which is below the local Indian market rates of 14% to 16%. At June 30,
      2006, approximately $51,131 was due under the notes. The Company is current
      with
      its interest payments to Mr. Satagopan.





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





**NOTE
      7-** **PROVISION
      FOR INCOME TAXES**





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





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


**June
                    30, 2006**
              
              **June
                    30, 2005**Deferred
                  tax asset
              
              $
              2,999,008
              
              $
              1,681,471Less:
                  valuation allowance
              
              
              (2,999,008
              )
              
              (1,681,471
              )$
              —
              
              $
              —


At
        June
        30, 2006 and 2005, the Company had accumulated deficits in the approximate
        amount of $8,568,594 and $4,804,202, respectively, available to offset future
        taxable income through 2025. The Company established valuation allowances
        equal
        to the full amount of the deferred tax assets due to the uncertainty of the
        utilization of the operating losses in future periods.




20
 
  **NOTE 8- ACCOUNTS PAYABLE AND ACCRUED
        EXPENSES**


Accounts
      payable and accrued expenses at June 30, 2006 consist of the
      following:




**June
                  30, 2006**Accounts
                  payable
              
              $
              753,664Accrued
                  salaries payable
              
              
              344,000Reimbursements
                  owed officers
              
              
              12,509Withholding
                  taxes payable
              
              
              56,748Accrued
                  interest payable
              
              
              35,298Other
              
              
              345Total
              
              $
              1,202,564


Trade
      payables are paid as they become due or as payment terms are extended with
      the
      consent of the vendor. At June 30, 2006, one vendor, MindTree Consulting Pvt.
      Ltd. (“MindTree”) accounted for 53% of the Company’s accounts payable. The
      Company and MindTree have entered into a repayment agreement more fully
      described in Note 10. The Company classifies 7% of its trade payables as current
      (under 30 days), 8% are between 31-90 days, 10% are between 91-150 days, and
      75%
      are over 150 days.





**NOTE
      9-** **STOCKHOLDERS’
      EQUITY**





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





At
      June
      30, 2006, the Company has 88,098,631 common shares issued, 13,586,956 common
      shares held in escrow, 997,045 common shares in treasury and 73,514,630 common
      shares outstanding.





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





On
      April
      30, May 31 and June 30, 2006, the Company issued 40,000, 40,000 and 40,816
      restricted shares, respectively, to an officer for accrued compensation of
      $10,000, $10,000 and $10,000, respectively, on the dates of issuance. The
      securities were issued pursuant to the exemption from registration provided
      by
      Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The executive officer received information concerning the Company and had the
      ability to ask questions about the Company.





Between
      April 16, 2006 and May 18, 2006, the Company issued 635,000 warrants with a
      strike price of $0.50 per share to six accredited investors who provided the
      bridge loans more fully described in Note 5. The warrants will expire at varying
      dates from April 16, 2009 through May 18, 2009. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investors received information concerning the Company and had the ability to
      ask
      questions about the Company.





On
      May
      23, 2006, the Company issued 10,000,000 restricted shares of stock from the
      exercise of stock options from one of its officers. The exercise price was
      $0.00004. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The executive officer received information concerning the Company
      and
      had the ability to ask questions about the Company.





On
      June
      5, 2006, the Company issued 172,414 restricted shares of stock to an accredited
      investor to settle a note payable totaling $40,000. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investor received information concerning the Company and had the ability to
      ask
      questions about the Company.





21




On
      June
      5, 2006, the Company issued 98,182 restricted shares to an accredited investor
      in return for his assistance in providing short-term loans to the Company. The
      investor provided the Company with comments regarding the financial structure
      of
      the Company as such issues related to the Company’s equity securities and made
      limited introductions of the Company to potential accredited investors to
      provide the bridge loans more fully described in Note 5. His
      services were isolated services which were not solicited by the Company. The
      investor did not negotiate for the sale of any the Company's securities; discuss
      details of the nature of the securities sold or whether recommendations were
      made concerning the sale of the securities; engage in due diligence activities;
      provide advice relating to the valuation of or the financial advisability of
      any
      investments in the Company; or handle any funds or securities on behalf of
      the
      Company. The value of these services was of **** $21,600
      at the time of issuance. The securities were issued pursuant to the exemption
      from registration provided by Section 4(2) of the Securities Act and contain
      the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The accredited investor received information concerning
      the Company and had the ability to ask questions about the
      Company.


On
      June
      22, 2006, the Company issued 250,000 restricted shares of stock to the three
      principals (each of whom is an accredited investor) of an organization for
      services valued at $47,500 at the time of issuance. The shares were issued
      in
      return for providing investment banking services. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investors received information concerning the Company and had the ability to
      ask
      questions about the Company.





Throughout
      the quarter ended June 30, 2006, the Company issued 301,263 restricted shares
      of
      common stock to 3 accredited investors for cash totaling $60,000. In addition,
      the Company issued 120,504 warrants to these investors at a strike prices of
      $0.45 per share. The warrants will expire at varying dates from December 7,
      2007
      through December 22, 2007. The securities were issued pursuant to the exemption
      from registration provided by Section 4(2) of the Securities Act and contain
      the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The accredited investors received information concerning
      the Company and had the ability to ask questions about the Company.





**NOTE
      10-** **COMMITMENTS
      AND CONTINGENCIES**





**Employment
      Agreements**





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





**Lease
      Agreements**





A
      subsidiary, Airbee Wireless (India) Pvt. Ltd., has entered into a three-year
      lease agreement for office space in Chennai, India. Monthly rent in the US
      Dollar equivalent is $1,505. The building owner gave notice in March 2006 that
      it was exercising its option to sell the property to a developer who intends
      to
      build a new building on the site. Accordingly, the Company has found new office
      space to occupy by July 31, 2006. Under the terms of this new lease agreement
      the Company has leased 6,000 sq. ft. of office space for three years. The rent
      will be $4,266 per month for the first year, increasing 10% each succeeding
      year.





**Repayment
      Agreement**





MindTree
      Consulting Pvt. Ltd. (“MindTree”), an India corporation, provided services to
      the Company under a Time and Materials Contract dated March 30, 2005 (the
      T&M Contract”). On a monthly basis, MindTree invoiced the Company for work
      it performed. Payment terms were net 30 days. The Company was unable to pay
      the
      invoices as they became due and, by informal agreement, extended the repayment
      terms monthly. On December 15, 2005, the Company entered into a written
      agreement with MindTree by which it agreed to pay MindTree $200,000 on or before
      December 23, 2005 and $100,000 per month on the last business day of each
      succeeding month until the outstanding indebtedness of approximately $580,000
      was fully paid. The Company’s performance was secured by the software code (the
“Intellectual Property”) MindTree developed under the T&M Contract. If the
      Company defaulted in making any payment when due and such default was not cured
      within five business days after receipt of a notice of default, MindTree would
      be entitled to co-own the Intellectual Property, with any revenue the Company
      realized from the Intellectual Property during the co-ownership period to be
      split 50-50 with MindTree. If full payment is made on or before April 30, 2006,
      full ownership of the Intellectual Property reverts to the Company. This
      deadline has been extended to October 31, 2006.





22




To
      date,
      the Company has paid MindTree $200,000 pursuant to this agreement. MindTree
      has
      not yet issued any notice of default. The amount due MindTree as of June 30,
      2006 is $400,091.





**PFK
      Electronics and the Identity Supply Contract**





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





**Litigation**





On
      October 3, 2005, Richard P. Sommerfeld, Jr., the Company’s former chief
      financial officer (“Sommerfeld”) filed suit against the Company. On December 9,
      2005, the Company filed an Answer to the Complaint, Affirmative Defenses and
      Counterclaims. On January 6, 2006, Sommerfeld amended his claims by filing
      an
      Amended Complaint and at the same time joining the Company’s two inside
      directors, E. Eugene Sharer (President and Chief Operating Officer) and
      Sundaresan Raja (Chief Executive Officer), and its outside director, Mal Gurian,
      as individual defendants. On February 7, 2006, the Company denied the primary
      allegations in the amended complaint by filing its Answer to Amended Complaint,
      Affirmative Defenses and Counterclaims. The individual defendants moved to
      dismiss Sommerfeld’s claims. The motion was the subject of a hearing on June 7,
      2006. On June 9, 2006, the court granted the individual defendants’ motion to
      dismiss Sommerfeld’s complaint against them. On June 15, 2006, Sommerfeld filed
      a motion for partial reconsideration of the court’s order, which has been denied
      by the court.





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





The
      Company, while admitting it owes Sommerfeld back wages totaling less than
      $70,000, has asserted counterclaims against him for declaratory judgment and
      injunctive relief, breach of contract of his employment agreement, breach of
      fiduciary duties, tortious interference with contractual and economic relations,
      replevin and injunction, and breach of contract of his stock option agreement.
      The Company does not believe it breached the terms of the promissory notes
      as it
      has tendered payment of the promissory notes in shares of the Company’s common
      stock as permitted under the terms of the promissory notes. The Company
      therefore believes that its damage claims against Sommerfeld exceed the actual
      monetary value of his claims against the Company.





The
      discovery phase of this case will begin in August of 2006.





**NOTE
      11-** **GOING
      CONCERN**





As
      shown
      in the accompanying condensed consolidated financial statements, as is typical
      of companies going through early-stage development of intellectual property,
      and
      products and services, the Company incurred net losses for the years ended
      December 31, 2005 and 2004 and for the six month period ended June 30, 2006.
      There is no guarantee whether the Company will be able to generate enough
      revenue and/or raise capital to satisfy past due obligations, support current
      operations and expand sales. This raises substantial doubt about the Company’s
      ability to continue as a going concern.





23




Management
      believes that the Company’s capital requirements will depend on many factors
      including the success of the Company’s sales efforts. The Company has been
      successful in recent months in raising capital to fund its operating
      costs.





The
      Company has also been enhancing its business processes to account for the
      significant development that has occurred in the past year, and believes that
      with the bridge financing and potential permanent financing they anticipate,
      the
      viability of the Company remains very positive in excess of one
      year.





The
      condensed consolidated financial statements do not include any adjustments
      relating to the recoverability or classification of recorded assets and
      liabilities that might result should the Company be unable to continue as a
      going concern.





**NOTE
      12-** **RESTATEMENT
      OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS**





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





The
      Company intends to amend its previously issued consolidated financial statements
      for the year ended December 31, 2005 on its report dated July 26, 2006. The
      Company will amend these consolidated financial statements to recognize an
      additional $61,455 in research and development costs that was improperly
      capitalized in 2005. In addition, $520,851 was reclassified from Additional
      Paid-in Capital to Warrants Liability as a result of the secured convertible
      debenture executed by the Company on December 29, 2005. Finally, an additional
      $15,150 in amortization expense was recognized as the result of a change in
      accounting estimate reducing the amortization period of the Company’s
      intellectual property from sixteen years (the life of a patent) to five years
      (the estimated life of software). These changes have increased the loss for
      the
      year ended December 31, 2005 to $3,782,259 as restated and the accumulated
      deficit during the development stage to $6,596,625.




The
      Company intends to amend its previously issued condensed consolidated financial
      statements for the three months ended March 31, 2006 for amortization of
      intangible assets of $5,050 and certain balance sheet reclassifications to
      conform with the intended December 31, 2005 restatement. The effect of these
      changes will result in an increase of the loss for the three month period ended
      March 31, 2006 of $5,050 to a net loss of $1,290,180 and an increase in the
      accumulated deficit to $7,886,805. The financial statements for the period
      ended
      June 30, 2006 reflect these intended amendments.





24




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





**Forward
      Looking Statements**





This
      Form
      10-QSB, including “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations,” contains forward-looking statements regarding future
      events 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. Therefore,
      actual results may differ materially and adversely from those expressed in
      any
      forward-looking statements. We undertake no obligation to revise or update
      any
      forward-looking statements for any reason.





**Executive
      Summary**





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





**•**
            We
                  had a $1,971,969 net loss before provision for income taxes in
                  the first
                  six months of 2006. Accounting rules drove much of this loss, most
                  of
                  which was non-cash. We recorded $1,227,630 as stock option compensation
                  expense due to the operation of SFAS 123R which required us to
                  expense
                  stock options granted and vesting to date this year. We also recorded
                  a
                  $508,628 gain in other income (expense) from the re-valuation of
                  derivatives required under SFAS 133. We raised $60,000 from the
                  sale of
                  stock to accredited
                  investors.





**•**
            Liquidity
                and capital resources issues continue to constrain growth but given
                signs
                of an emerging marketplace for our software and our track record
                of
                raising capital, we believe we will be able to obtain sufficient
                funds to
                continue operations until we can generate increased revenues from
                our
                license agreements.





**•**
            Risk
                factors include -




o
            Royalties
              from the license agreements are dependent on our customers’ ability to
              create demand and market acceptance for their product.o
            Our
              international operations involve inherent risks that include currency
              controls and fluctuations, tariff and import regulations, and regulatory
              requirements that may limit our or our customers’ ability to manufacture,
              assemble and test, design, develop or sell products in particular
              countries.o
            Our
              ability to continue as a going concern is dependent upon our obtaining
              adequate capital to fund losses until we become
              profitable.




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





25




**Overview**





Airbee
      Wireless, Inc. (hereinafter called “Airbee” or “Company”) reported $76,200 of
      revenue from planned operations in the second quarter of 2006 and a total of
      $127,800 for the six months ended June 30, 2006. As a result, it is no longer
      a
      development stage company. We have continued our go-to-market strategy of
      licensing the major microcontroller and IEEE 802.15.4 radio companies, having
      previously announced agreements with several microchip manufacturers. We believe
      this will lead to two types of revenues - service revenue from customized stack
      work, integration support and application development and royalty revenue from
      the licensing of our stack. We also announced a new product that facilitates
      low-power radio frequency (“RF”)application development for mesh networks
      including ZigBee.





Our
      goal
      remains being a preeminent provider of intelligent software for short range
      wireless communications embedded into silicon chips and platform solutions.
      We
      focus our core competencies in the design and engineering of intelligent
      wireless communications software that is platform agnostic, ultra-low in energy
      consumption with complete portability across all controllers, radios, and
      operating system platforms. Our software is licensed to various global
      manufacturers of radio chips, radio frequency modules, and microprocessors
      used
      in an increasing number of wireless communications applications and devices.





We
      operate in highly innovative environments characterized by a continuing and
      rapid introduction of new products that offer improved performance at lower
      prices. With the trend toward convergence in wireless communications products,
      our software will likely cross over multiple categories, offering us new
      opportunities, but may also result in more businesses that compete with us.
      Competition tends to increase pricing pressure on our products, which may mean
      that we must offer our products at lower prices than we had anticipated,
      resulting in lower profits This is a two-step approach: (a) become an approved
      third-party vendor and achieve recognition in the manufacturer’s documentation,
      website and sales force (i.e. distributors for Texas Instruments and Radiocrafts
      as examples); and (b) the overriding objective is to be embedded directly into
      the controller by the manufacturer and shipped directly with each
      controller.





As
      validation of our strategy, our engagement with Texas Instruments (“TI”) has
      picked up activity this quarter and we believe TI will become a significant
      customer. Since the announcement of our agreement with TI, we have downloaded
      nearly 500 copies of our limited network size stack to TI customers for
      evaluation. We operate an online help desk to support these prospective
      customers as they evaluate the product for their application and use, and we
      are
      working with ZMD and Infineon to set up a similar process. We note similar
      progress with our ZigBee module partner Radiocrafts, which now has more than
      35
      OEMs using our ZNS stack and ZAPP (SPPIO) application. We anticipate many of
      these will go into production in the coming quarters.


We
        began
        training programs for Infineon to train their field application engineers.
        We
        expect this will result in increased opportunities with our partners’ customers.
        In addition, we participated in the ZigBee Developers program this June where
        we
        taught new developers how to use our stack to develop applications. We have
        also
        established a RF laboratory at our development center in Chennai, India,
        which
        has already produced data about RF interference issues in the ZigBee
        environment.
 
 **Results
        of Operations**
 
 ***Six
        Months Ended June 30, 2006 Compared to the Six Months Ended June 30,
        2005***
 
 During
        the first half of 2006 we had operating revenues of $127,800, resulting in
        a net
        loss applicable to common shares of $1,971,969, or $0.03 net loss per share,
        compared to a net loss of $1,989,836 or $0.05 net loss per share for the
        same
        period in 2005. The net loss during the first six months of 2006 was
        substantially reduced by the realization of $508,628 as gain from the
        re-valuation of derivatives in accordance with accounting rules. However,
        we
        also recorded a $1,227,630 expense from the granting and vesting of stock
        options during this six-month period. Cumulative net loss since inception
        totals
        $8,568,594.
 
 Our
        net
        revenue for the six months ended June 30, 2006 significantly increased to
        $127,800 as compared to $1,021 for the six months ended June 30, 2005. The
        application development agreements we signed with Infineon during 2005 and
        with
        SensiTool in 2006 accounted for the revenue we reported for the six months
        ended
        June 30, 2006. These agreements require us to embed our software in the
        customer’s application for a fixed fee, generally paid in stages as benchmarks
        specified in the contracts are met.
 
 Operating
        expenses for the six months ended June 30, 2006 were $2,443,082 as compared
        to
        $1,880,681 for the six months ended June 30, 2005, an increase of 30% or
        $562,401. This increase, as further explained below, is principally due to
        increases in compensation and professional fees. Operating expenses increased
        as
        the Company developed and implemented its business plan.


26


Our
        overall increase in compensation and professional fees for the six months
        ended
        June 30, 2006 compared to the six months ended June 30, 2005 was $140,389,
        to
        $904,741 from $764,352. This was due to increased professional services costs
        of
        approximately $176,000 of legal fees related to our financing from Montgomery
        Equity Partners Ltd., legal defense costs for suits against the Company,
        and
        legal and accounting fees in connection with our SEC reporting. Salaries
        decreased by $35,600 because a vacant position remains unfilled in spite
        of the
        addition of new programming staff in India in accordance with the Company’s plan
        to improve the administrative function in India and to bring previously
        out-sourced software development work back in-house. We believe that general
        and
        administrative expenses will not increase significantly in the short-term.
        However, we do expect an increase in absolute dollars in the long-term, as
        we
        continue to invest in staff and infrastructure in the areas of information
        systems and sales and marketing.
 
 Stock
        option compensation expense required by SFAS 123R was $1,227,630 as the Company
        is now required to expense stock options granted and vesting in the period.
        This
        is a non-cash expense. There was no comparable expense in 2005.
 
 Selling,
        general and administrative expenses decreased to $286,557 in the first half
        of
        2006, down $44,421 or 13% from the first half of 2005 of $330,978. This decrease
        was due primarily from loan transaction fees in connection with the
        now-terminated Standby Equity Distribution Agreement with Cornell Capital
        Partners LP entered into in April 2005. Our overall selling and marketing
        expenses consist primarily of marketing related expenses, compensation related
        expenses, sales commissions, facility costs and travel costs. Expenses,
        particularly certain marketing and compensation-related expenses, may vary
        going
        forward, depending in part on the level of revenue and profits.
 
 The
        decrease in research and development expense for the six months ended June
        30,
        2006 compared to the six months ended June 30, 2005 was $221,960. With the
        demonstration of technological feasibility in April 2005, we were permitted
        to
        capitalize research and development costs and amortize them going forward.
        Our
        intangible assets (primarily capitalized R&D) increased by $448,516, net of
        amortization, from June 30, 2005 to June 30, 2006 to $709,770 as we increased
        our overall expenditures in research and development programs to ensure that
        our
        products continue to meet our customer demands.
 
 Depreciation
        and amortization expense for the six months ended June 30, 2006 decreased
        $2,742. Amortization of intellectual property was $15,100 for the six months.
        Interest expense for the six months ended June 30, 2006 increased $54,527,
        almost entirely due to the amortization of the convertible debenture and
        convertible debt discounts to interest.


***Three
        Months Ended June 30, 2006 Compared to the Three Months Ended June 30,
        2005***
 
 During
        the second quarter of 2006 we had operating revenues of $76,200, resulting
        in a
        net loss applicable to common shares of $681,789, or $0.01 net loss per share,
        compared to a net loss of $1,437,555 or $0.03 net loss per share for the
        same
        period in 2005. This quarter’s net loss was substantially reduced by the
        realization of $81,096 as gain from the re-valuation of derivatives in
        accordance with accounting rules. However, we also recorded a $212,489 expense
        from the granting and vesting of stock options this quarter. Cumulative net
        loss
        since inception totals $8,568,594.
 
 Our
        net
        revenue for the three months ended June 30, 2006 significantly increased
        to
        $76,200 as compared to $1,021 for the three months ended June 30, 2005. Revenues
        from the application development agreements we signed with Infineon during
        2005
        and with SensiTool in 2006 accounted for the revenue we reported this quarter.
        These agreements require us to embed our software in the customer’s application
        for a fixed fee, generally paid in stages as benchmarks specified in the
        contracts are met.
 
 Operating
        expenses for the three months ended June 30, 2006 were $738,510 as compared
        to
        $1,356,974 for the three months ended June 30, 2005, a decrease of 46% or
        $618,464. This decrease, as further explained below, is principally due to
        decreases in bad debt expense, research and development costs, selling, general
        and administrative expenses, and depreciation and amortization which more
        than
        offset an increase in compensation and professional fees.
 
 Our
        overall decrease in compensation and professional fees for the quarter ended
        June 30, 2006 compared to the quarter ended June 30, 2005 was $160,405, to
        $357,521 from $517,926. This decrease was caused by the reductions in
        compensation and professional fees attributable to an unfilled position and
        a
        reduction in legal fees associated with our financing arrangements. We believe
        that general and administrative expenses will not increase significantly
        in the
        short-term. However, we do expect an increase in absolute dollars in the
        long-term, as we continue to invest in staff and infrastructure in the areas
        of
        information systems and sales and marketing.
 
 Stock
        option compensation expense required by SFAS 123R was $212,489 for the quarter
        ended June 30, 2006 as the Company is now required to expense stock options
        granted and vesting in the period. This is a non-cash expense. There was
        no
        comparable expense in the second quarter of 2005.


27




Selling,
        general and administrative expenses decreased to $156,402 in the second quarter
        of 2006, down $112,447 or 42% from $268,849 in the second quarter of 2005.
        This
        decrease was due primarily from loan transaction fees in connection with
        the
        now-terminated Standby Equity Distribution Agreement with Cornell Capital
        Partners LP entered into in April 2005. Our overall selling and marketing
        expenses consist primarily of marketing related expenses, compensation related
        expenses, sales commissions, facility costs and travel costs. Expenses,
        particularly certain marketing and compensation-related expenses, may vary
        going
        forward, depending in part on the level of revenue and profits.
 
 The
        decrease in research and development expense for the three months ended June
        30,
        2006 compared to the three months ended June 30, 2005 was $9,890. With the
        demonstration of technological feasibility in April 2005, we were permitted
        to
        capitalize research and development costs and amortize them going forward.
        Our
        intangible assets (primarily capitalized R&D) increased by $448,516, net of
        amortization, from June 30, 2005 to June 30, 2006 to $709,770 as we increased
        our overall expenditures in research and development programs to ensure that
        our
        products continue to meet our customer demands.
 
 Depreciation
        and amortization expense for the quarter ended June 30, 2006 decreased $11,607.
        We amortized $12,500 of financing costs during the second quarter of 2005
        which
        we did not have in 2006. Interest expense for the three months ended June
        30,
        2006 decreased $18,937, almost entirely due to the replacement of the Montgomery
        $750,000 note payable at 24% interest per annum with the Montgomery convertible
        debenture for $350,000 with interest at 15% per annum.
 
 **Liquidity
        and Capital Resources**
 
 Since
        inception, we have principally funded our operations from private placements
        of
        securities and management and shareholder loans and contributions of $3,770,364.
        This amount includes $500,000 in bridge loans from accredited investors made
        during the second quarter of 2006. As of June 30, 2006, we have $442,412
        outstanding under notes payable - related parties, reimbursements due officers
        and accrued payroll. During the second quarter of 2006, we received an aggregate
        of $60,000 in cash from accredited investors in consideration of 301,263
        shares
        of our common stock and 120,504 common stock purchase warrants. Proceeds
        were
        used to pay down current payables. We will require approximately $5 million
        to
        continue operations for the next 12 months. Most of the funding will be
        allocated principally for payment of outstanding obligations, sales, marketing
        and working capital. It is not anticipated that any lack of funding will
        impact
        upon the existing license and development agreements with our customers since
        our software development has been completed for three of our
        products.
 
 We
        have
        incurred an accumulated deficit at June 30, 2006 of $8,568,594 compared to
        $4,737,697 at June 30, 2005. We had negative working capital at June 30,
        2006 of
        $2,947,636 compared to negative working capital of $2,689,332 at June 30,
        2005.
        Our ability to continue as a going concern is dependent upon our obtaining
        adequate capital to fund losses until we become profitable.
 
 On
        December 29, 2005, we entered into a Securities Purchase Agreement with
        Montgomery pursuant to which we agreed to issue Montgomery secured convertible
        debentures in the principle amount of $500,000. Of these secured convertible
        debentures, $350,000 was funded on December 29, 2005. The remaining $150,000
        has
        not yet been funded as of August 11, 2006. The secured convertible debentures
        are convertible, in whole or in part, at any time and from time to time before
        maturity at the option of the holder at the lesser of (a) eighty percent
        (80%)
        of the lowest closing bid price of the common stock for the ten (10) trading
        days immediately preceding the closing date or (b) eighty percent (80%) of
        the
        lowest closing bid price of common stock for ten (10) trading days immediately
        preceding the conversion date. The secured convertible debentures have a
        term of
        two (2) years, piggy-back registration rights and accrue interest monthly
        at the
        rate of fifteen percent (15%) per year. We are current with our interest
        payments.
 
 In
        connection with the Securities Purchase Agreement we issued Montgomery three
        warrants to purchase a total of 2,000,000 shares of our common stock. The
        warrants are exercisable for a period of three years. The exercise price
        for the
        first warrant for 1,000,000 shares is the lesser of 80% of the lowest closing
        bid price for the five trading days immediately preceding the exercise date
        or
        $0.20 per share. The exercise price for the second warrant for 500,000 shares
        is
        the lesser of 80% of the lowest closing bid price for the five trading days
        immediately preceding the exercise date or $0.30 per share. The exercise
        price
        for the third warrant for 500,000 shares is $0.001 per share.
 
 Our
        principal sources of liquidity have been private placements of our securities
        and loans from management and shareholders. There will continue to be an
        operating cash flow deficit from the licensing of embedded software in the
        near
        term.
 
 Cash
        at
        June 30, 2006 and 2005, respectively, was $69,630 and $10,992. At June 30,
        2006
        and 2005, respectively, we had total stockholders’ deficit of $2,188,277and
        $2,334,305.


28




Our
        capital requirements depend on numerous factors including our research and
        development expenditures, expenses related to selling, general and
        administrative operations and working capital to support business growth.
        We
        anticipate that our operating and capital expenditures will constitute a
        material use of our cash resources. As a result, our net cash flows will
        depend
        heavily on (a) the level of our future sales (which depend, to a large extent,
        on general economic conditions affecting us and our customers, as well as
        the
        timing of our products’ sales cycles (especially for the newly introduced ZigBee
        global standard version 1.1) and other competitive factors) and (b) our ability
        to control expenses.
 
 With
        regard to our current liabilities at June 30, 2006, $104,056 is payable to
        related note holders who have deferred repayment (one has deferred interest
        of
        $18,153 as well). Trade payables at June 30, 2006 of $753,664 are outstanding
        and will be paid as they come due or as payment may be extended by agreement
        of
        the parties. One vendor, MindTree Consulting Pvt. Ltd. (“MindTree”), accounted
        for 53% of the Company’s accounts payable. MindTree provided services to the
        Company under a Time and Materials Contract dated March 30, 2005 (the T&M
        Contract”). On a monthly basis, MindTree invoiced the Company for work it
        performed. Payment terms were net 30 days. The Company was unable to pay
        the
        invoices as they became due and, by informal agreement, extended the repayment
        terms monthly. On December 15, 2005, the Company entered into a written
        agreement with MindTree by which it agreed to pay MindTree $200,000 on or
        before
        December 23, 2005 and $100,000 per month on the last business day of each
        succeeding month until the outstanding indebtedness of approximately $580,000
        was fully paid. The Company’s performance was secured by the software code (the
“Intellectual Property”) MindTree developed under the T&M Contract. If the
        Company defaulted in making any payment when due and such default was not
        cured
        within five business days after receipt of a notice of default, MindTree
        would
        be entitled to co-own the Intellectual Property, with any revenue the Company
        realized from the Intellectual Property during the co-ownership period to
        be
        split 50-50 with MindTree. To date, the Company has paid MindTree $200,000
        pursuant to this agreement. As of August 7, 2006, the Company is behind in
        making the scheduled payments. MindTree has not yet issued any notice of
        default
        and has extended the deadline to substantially complete the repayment until
        October 31, 2006.
 
 We
        believe that revenues will increase during the last half of 2006 from our
        licensing and other agreements. However, we shall be dependent upon financing
        to
        accelerate our marketing activities and continue product enhancement. We
        anticipate monthly expenses of approximately $165,000 to $185,000 over the
        next
        several months. This amount includes costs of our SEC reporting obligations,
        which were approximately $190,000 for the year ending December 31, 2005.
        Cost of
        SEC reporting obligations includes all filing costs and professional
        fees.
 
 During
        the second quarter of 2006, we received an aggregate of $60,000 from accredited
        investors in consideration of 301,263 shares of our common stock and 120,504
        common stock purchase warrants. The proceeds were used to pay down current
        payables. We also received $500,000 in 90-day bridge loans ($115,000 of which
        are convertible and considered a derivative liability) and issued 635,000
        common
        stock purchase warrants.
 
 As
        shown
        in the accompanying condensed consolidated financial statements, as is typical
        of companies going through early-stage development of intellectual property,
        and
        products and services, the Company incurred net losses for the years ended
        December 31, 2005 and 2004 and for the six month period ended June 30, 2006.
        There is no guarantee whether the Company will be able to generate enough
        revenue and/or raise capital to satisfy past due obligations, support current
        operations and expand sales. This raises substantial doubt about the Company’s
        ability to continue as a going concern.
 
 The
        Company’s current financing and related security agreements contain numerous
        covenants that restrict our ability to raise needed funds. It is possible
        that
        needed funds may not be available, in which case the Company may be forced
        to
        temporarily suspend operations. Our existing financing contains a right of
        first
        refusal for our lender. Numerous discussions with investment bankers throughout
        the country lead us to conclude that additional financing will be
        available.
 
 The
        Company expects to be able to satisfy its past-due accounts payable when
        additional financing is obtained and intends to negotiate lump-sum payment
        reductions with the larger vendors (MindTree excepted). The bulk of the
        Contractual Obligations in the table below are employment contracts with
        current
        management. Given management’s commitment to the success of the Company, it is
        not anticipated these contracts will be an impediment. The long-term debt
        listed
        in the table is the secured convertible debenture, which the Company expects
        will be paid off or converted when substitute financing is
        arranged.
 
 If
        circumstances require, the Company will renegotiate employment contracts
        with
        management to defer (but not eliminate) its obligations under these contracts.
        It will also consider overhead reductions at its headquarters and at its
        India
        subsidiary. This would be as a last resort as (a) the Company is leanly staffed
        at the administrative level and (b) staff cuts in India would adversely impact
        our ability to complete product development, deliver product and provide
        support.


29




We
        are
        planning the process by which our stack will be certified to the new standard
        on
        a customer’s new hardware platform. The hope is to have the certification
        completed within two months after the new specification is released in the
        third
        quarter of 2006, as several customers have expressed an interest in moving
        forward after the release.
 
 **Critical
        Accounting Estimates**
 
 ***General***
 
 Management’s
        discussion and analysis of our financial condition and results of operations
        is
        based upon our Consolidated Financial Statements, which were prepared in
        accordance with accounting principles generally accepted in the United States,
        or GAAP. GAAP requires us to make estimates and assumptions that affect the
        reported amounts of assets, liabilities, revenues and expenses, as well as
        the
        disclosure of contingent assets and liabilities. Note 2, “ *Summary*  *of
        Significant Accounting Policies* ”
of
        Notes to the Condensed Consolidated Financial Statements describes our
        significant accounting policies which are reviewed by us on a regular basis
        and
        which are also reviewed by senior management with our Board of
        Directors.
 
 An
        accounting policy is deemed by us to be critical if it requires an accounting
        estimate to be made based on assumptions about matters that are highly uncertain
        at the time the estimate is made, and if different estimates that reasonably
        could have been used, or changes in the accounting estimates that are reasonably
        likely to occur periodically, could materially impact the financial statements.
        The policy and estimate that we believe is most critical to an understanding
        of
        our financial results and condition and that requires a higher degree of
        judgment and complexity is revenue recognition.
 
 ***Revenue
        Recognition***
 
 We
        account for the time-based licensing of software in accordance with the American
        Institute of Certified Public Accountants Statement of Position (SOP) 97-2,
        “Software Revenue Recognition.” We recognize revenue when (i) persuasive
        evidence of an arrangement exists; (ii) delivery has occurred or services
        have
        been rendered; (iii) the sales price is fixed or determinable; and (iv) the
        ability to collect is reasonably assured. For software arrangements with
        multiple elements, revenue is recognized dependent upon whether vendor-specific
        objective evidence (VSOE) of fair value exists for each of the elements.
        When
        VSOE does not exist for all the elements of a software arrangement and the
        only
        undelivered element is post-contract customer support (PCS), the entire
        licensing fee is recognized ratably over the contract period.
 
 Revenue
        attributable to undelivered elements, including technical support, is based
        on
        the sales price of those elements, and is recognized ratably on a straight-line
        basis over the term of the time-based license. Post-contract customer support
        revenue is recognized ratably over the contract period. Shipping charges
        billed
        to customers are included in revenue and the related shipping costs are included
        in cost of sales.
 
 Time-based
        product licensing fees are collected in advance. Revenues from licenses are
        recognized on a prorated-basis over the life of the license. Airbee’s customary
        practice is to have non-cancelable time-based licenses and a customer purchase
        order prior to recognizing revenue.
 
 Enterprise
        license model arrangements require the delivery of unspecified future updates
        and upgrades within the same product family during the time-based license.
        Accordingly, Airbee will recognize fees from its enterprise license model
        agreements ratably over the term of the license agreement.
 
 Time-based
        royalties are charged on a unit basis. Royalties are not fixed dollar amounts,
        but are instead a percentage of the customer’s finished product and the
        percentage varies on a tiered basis with the number of units shipped by
        customer.
 
 Revenue
        attributed to undelivered elements is based on the sales price rather than
        on
        the renewal rate because of (i) the newness of the ZigBee standard for this
        short-range wireless technology, (ii) the newness of the Company’s product
        introductions into the marketplace for a range of applications being developed
        by its customers, and (iii) the lack of historical data for potentially
        defective software, which may be a function of the application into which
        it is
        installed, a reasonable reserve for returns cannot yet be established. In
        accordance with SFAS No. 48 “Revenue Recognition When Right of Return Exists,”
in the absence of historical data, the Company is unable to make a reasonable
        and reliable estimate of product returns at this time.
 
 We
        expect
        to enter into maintenance contracts with its customers. Maintenance fees
        are not
        a fixed dollar amount, but rather a percentage fee based upon the value of
        the
        license and/or royalties billed/received. Maintenance contracts are paid
        for and
        collected at the beginning of the contract period. We provide bug fixes (under
        warranty obligations) free-of-charge that are necessary to maintain compliance
        with published specifications, it accounts for the estimated costs to provide
        bug fixes in accordance with SFAS No. 5 “ *Accounting
        for Contingencies* .”


30




Revenue
        from products licensed to original equipment manufacturers (OEMs) is based
        on
        the time-based licensing agreement with an OEM and recognized when the OEM
        ships
        licensed products to its customers.





**Factors
      That May Affect Future Results**





*Our
      business faces significant risks. The risks described below may not
      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*  *occurs,
      our business, financial condition or results of operations
      could*  *suffer,
      and the trading price of our common stock could decline.*





Our
      future results of operations and the other forward-looking statements contained
      in this filing, including this MD&A, involve a number of risks and
      uncertainties—in particular, the statements regarding our goals and strategies,
      new product introductions, plans to cultivate new businesses, future economic
      conditions, revenue, pricing, gross margin and costs, capital spending,
      depreciation and amortization, research and development expenses and the tax
      rate. In addition to the various important factors discussed above, a number
      of
      other factors could cause actual results to differ materially from our
      expectations.





**Because
      a significant portion of our revenue will be derived from
      software**  **licenses,
      we are dependent upon the ability of our customers to develop
      and**  **penetrate
      new markets successfully.**





Our
      software license revenues depend not only upon our ability to successfully
      negotiate license agreements with our customers but also upon our customers’
ability to commercialize their products using our embedded software. We cannot
      control our customers’ product development or commercialization or predict their
      success. Demand for our products, which impacts our revenue and gross margin
      percentage, is affected by business and economic conditions, as well as
      communications industry trends, and the development and timing of introduction
      of compelling software applications and operating systems that take advantage
      of
      the features of our products. Demand for our products is also affected by
      changes in customer order patterns, such as changes in the levels of inventory
      maintained by our customers and the timing of customer purchases. Airbee
      operates in a highly competitive industry (i.e., embedded communications
      software), and our revenue and gross profits could be affected by factors such
      as competing software technologies and standards, pricing pressures, actions
      taken by our competitors and other competitive factors, as well as market
      acceptance of our new ZigBee-compliant products in specific market segments.
      Future revenue is also dependent on continuing technological advancement,
      including the timing of new product introductions, sustaining and growing new
      businesses, and integrating and operating any acquired businesses. Results
      could
      also be affected by adverse effects associated with product defects and
      deviations from published specifications, and by litigation or regulatory
      matters involving intellectual property or other issues.





**Numerous
      factors may cause out total revenues and operating results
      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 and may
      result in unanticipated decreases in our available cash, which could negatively
      impact our operations and increase the volatility of our stock price. Factors
      that may cause or contribute to fluctuations in our operating results and
      revenues include:




**•**
            Acceptance
              by our customers of our Airbee embedded software platforms and/or the
              slow
              acceptance by the market of the ZigBee global standard for short-range
              wireless voice and data communications;**•**
            The
              number and timing of orders we receive, including disproportionately
              higher receipt and shipment of orders in the last month of a
              quarter;**•**
            Changes
              in the length of our products sales cycles, which increases as our
              customers’ purchase decisions become more strategic and are made at higher
              management levels;**•**
            The
              success of our customers’ products from which we derive our production
              license revenue;**•**
            The
              mix of our revenues between sales of products and lower-margin sales
              of
              services;




31




**•**
            Our
              ability to control our operating expenses and fully realize the impact
              of
              the restructuring plans we have implemented;**•**
            Our
              ability to continue to develop, introduce and ship competitive new
              products and product enhancements quickly;**•**
            Possible
              deferrals of orders by customers in anticipation of new product
              introductions;**•**
            Announcements,
              product introductions and price reductions by competitors;**•**
            The
              impact of, and our ability to react to, natural disasters and/or terrorist
              actions;**•**
            Changes
              in business cycles that affect the markets in which we sell our products
              and services;**•**
            Economic,
              political and other conditions in the United States and
              internationally;**•**
            Foreign
              currency exchange rates; and**•**
            The
              impact of any stock-based compensation charges arising from the issuance
              of stock options, stock appreciation rights or any other stock-based
              awards.




One
      or
      more of the foregoing factors may cause our operating expenses to be
      disproportionately high or may cause our net revenue and operating results
      to
      fluctuate significantly. Results from prior periods are thus not necessarily
      indicative of the results of future periods.





We
      operate internationally, with sales, marketing and research and development
      activities. We are, therefore, subject to risks and factors associated with
      doing business outside the U.S. International operations involve inherent risks
      that include currency controls and fluctuations, tariff and import regulations,
      and regulatory requirements that may limit our or our customers’ ability to
      manufacture, assemble and test, design, develop or sell products in particular
      countries. If terrorist activity, armed conflict, civil or military unrest,
      or
      political instability occurs in the U.S., or other locations, such events may
      disrupt our customers’ manufacturing, assembly and test, logistics, security and
      communications, and could also result in reduced demand for our products.
      Business continuity could also be affected if labor issues disrupt our
      transportation arrangements or those of our customers or suppliers. In addition,
      we may rely on a single or limited number of suppliers, or upon suppliers in
      a
      single country. On an international basis, we regularly review our key
      infrastructure, systems, services and suppliers, both internally and externally,
      to seek to identify potentially significant vulnerabilities as well as areas
      of
      potential business impact if a disruptive event were to occur. Once identified,
      we assess the risks, and as we consider it to be appropriate, we initiate
      actions intended to mitigate the risks and their potential impact. There can,
      however, be no assurance that we have identified all significant risks or that
      we can mitigate all identified risks with reasonable effort.





We
      are
      continuing to assemble the personnel and financial resources required to achieve
      the objectives of our business plan. Future revenue, costs and profits are
      all
      influenced by a number of factors, including those discussed above, all of
      which
      are inherently difficult to forecast.





As
      shown
      in the accompanying condensed consolidated financial statements, as is typical
      of companies going through early-stage development of intellectual property,
      and
      products and services, the Company incurred net losses for the years ended
      December 31, 2005 and 2004 and for the six month period ended June 30, 2006.
      There is no guarantee whether the Company will be able to generate enough
      revenue and/or raise capital to satisfy past due obligations, support current
      operations and expand sales. This raises substantial doubt about the Company’s
      ability to continue as a going concern.





**Off-Balance
      Sheet Arrangements**





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





**Contractual
      Obligations**





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





Our
      long-term debt obligation consists of $350,000 of a $500,000 convertible
      debenture ($150,000 not funded as of August 7, 2006), plus interest payable
      monthly at 15% per annum. We are current in our interest payments through July
      2006.





32




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





The
      operating leases reported here are limited to three leases for office space
      in
      Chennai, India for our India subsidiary. Each lease was for three years with
      expiration dates from April 30, 2008 through July 31, 2008. However, our
      landlord has sold the building and given notice pursuant to the lease agreements
      that we must vacate the premises by July 31, 2006. We have signed a three-year
      lease for 6,000 sq. ft. of new office space expiring on June 30, 2009. The
      rent
      is approximately $4,266 per month with 10% increases in the second and third
      years of the lease.





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




**Payments
                  due by period****Contractual
                  Obligations**
              
              **Total**
              
              **Less
                    **than
                    1 **year******
              
              **1-3
                    **years****
              
              **3-5
                  years**
              
              **More
                    **than
                    5******years**Purchase
                  Obligations (employment contracts)*
              
              $
              1,246,667
              
              
              897,500
              
              
              349,167
              
              
              —
              
              
              —Long-Term
                  Debt Obligations
              
              $
              350,000
              
              
              —
              
              
              350,000
              
              
              —
              
              
              —Operating
                  Lease Obligations **
              
              $
              169,451
              
              
              51,192
              
              
              118,259
              
              
              —
              
              
              —Capital
                  Lease Obligations
              
              $
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Other
                  Long-Term Liabilities Reflected on Balance Sheet under
                  GAAP
              
              $
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
 
 *
              Employment
                  contracts with senior executives ranging in length from 1 year
                  to 3 years,
                  expiring on various dates from December 31, 2006 through May 15,
                  2008.





**
            Lease
                of 6,000 sq. ft. of office space in Chennai, India expiring June
                30, 2009.
                The lease at our Rockville, MD office is month-to-month and therefore
                not
                included. Our Rockville rent is $2,730 per
                month.





**Item
      3. Controls and Procedures**





Evaluation
      of Disclosure Controls and Procedures





The
      Company’s management, with the participation of the Company’s chief executive
      officer and interim chief financial officer, evaluated the effectiveness of
      the
      Company’s disclosure controls and procedures as of the end of the period covered
      by this report. The term “disclosure controls and procedures,” as defined in
      Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other
      procedures of a company that are designed to ensure that information required
      to
      be disclosed by a company in the reports that it files or submits under the
      Exchange Act is recorded, processed, summarized and reported, within the time
      periods specified in the Securities and Exchange Commission’s rules and forms.
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure that information required to be disclosed by
      a
      company in the reports that it files or submits under the Exchange Act is
      accumulated and communicated to the company’s management, including its
      principal executive and principal financial officers, as appropriate to allow
      timely decisions regarding required disclosure. Management recognizes that
      any
      controls and procedures, no matter how well designed and operated, can provide
      only reasonable assurance of achieving their objectives and management
      necessarily applies its judgment in evaluating the cost-benefit relationship
      of
      possible controls and procedures. Based on the evaluation of the Company’s
      disclosure controls and procedures as of the end of the period covered by this
      report, the Company’s chief executive officer and interim chief financial
      officer concluded that, as of such date, the Company’s disclosure controls and
      procedures were not effective for the reasons disclosed below.





The
      Company has identified certain internal control deficiencies that we consider
      to
      be material weaknesses. These consist of resolution of certain accounting
      matters and have principally arisen in connection with various rule and other
      GAAP compliance matters concerning the Company’s accounting for convertible
      instruments and derivatives under SFAS 133 and SFAS 150.





33




The
      Company’s executive officers and its controller have worked diligently to
      correct the disclosures required in this highly complex and technical area
      and
      will consult with outside consultants on an as-needed basis to enable the
      Company to make the proper disclosures.




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.





**PART
      II OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





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





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





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





On
      April
      30, May 31 and June 30, 2006, the Company issued 40,000, 40,000 and 40,816
      restricted shares, respectively, to an officer for accrued compensation of
      $10,000, $10,000 and $10,000, respectively, on the dates of issuance. The
      securities were issued pursuant to the exemption from registration provided
      by
      Section 4(2) of the Securities Act and contain the appropriate legends
      restricting their transferability absent registration or applicable exemption.
      The executive officer received information concerning the Company and had the
      ability to ask questions about the Company.





Between
      April 16, 2006 and May 18, 2006, the Company issued 635,000 warrants with a
      strike price of $0.50 per share to six accredited investors who provided the
      bridge loans more fully described in Note 5. The warrants will expire at varying
      dates from April 16, 2009 through May 18, 2009. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investors received information concerning the Company and had the ability to
      ask
      questions about the Company.





On
      May
      23, 2006, the Company issued 10,000,000 restricted shares of stock from the
      exercise of stock options from one of its officers. The exercise price was
      $0.00004. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The executive officer received information concerning the Company
      and
      had the ability to ask questions about the Company.





On
      June
      5, 2006, the Company issued 172,414 restricted shares of stock to an accredited
      investor to settle a note payable totaling $40,000. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investor received information concerning the Company and had the ability to
      ask
      questions about the Company.


On
        June
        5, 2006, the Company issued 98,182 restricted shares to an accredited investor
        in return for his assistance in providing short-term loans to the Company. The
        investor provided the Company with comments regarding the financial structure
        of
        the Company as such issues related to the Company’s equity securities and made
        limited introductions of the Company to potential accredited investors to
        provide the bridge loans more fully described in Note 5. His
        services were isolated services which were not solicited by the Company.
        The
        investor did not negotiate for the sale of any the Company's securities;
        discuss
        details of the nature of the securities sold or whether recommendations were
        made concerning the sale of the securities; engage in due diligence activities;
        provide advice relating to the valuation of or the financial advisability
        of any
        investments in the Company; or handle any funds or securities on behalf of
        the
        Company. The value of these services was **** $21,600
        at the time of issuance. The securities were issued pursuant to the exemption
        from registration provided by Section 4(2) of the Securities Act and contain
        the
        appropriate legends restricting their transferability absent registration
        or
        applicable exemption. The accredited investor received information concerning
        the Company and had the ability to ask questions about the
        Company.





On
      June
      22, 2006, the Company issued 250,000 restricted shares of stock to the three
      principals (each of whom is an accredited investor) of an organization for
      services valued at $47,500 at the time of issuance. The shares were issued
      in
      return for providing investment banking services. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investors received information concerning the Company and had the ability to
      ask
      questions about the Company.





34




Throughout
      the quarter ended June 30, 2006, the Company issued 301,263 restricted shares
      of
      common stock to 3 accredited investors for cash totaling $60,000. In addition,
      the Company issued 120,504 warrants to these investors at a strike prices of
      $0.45 per share. The warrants will expire at varying dates from December 7,
      2007
      through December 22, 2007. The securities were issued pursuant to the exemption
      from registration provided by Section 4(2) of the Securities Act and contain
      the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The accredited investors received information concerning
      the Company and had the ability to ask questions about the Company.





**Item
      3. Defaults upon Senior Securities.**





None





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





On
      June
      26, 2006, the annual meeting of shareholders was held at the Fairfield Inn
      in
      San Jose, California at which time the election of three directors was held
      and
      the selection of Bagell, Josephs, Levine & Company LLC as our independent
      auditor for 2006 was ratified. Proxies for the meeting were solicited pursuant
      to Regulation 14A of the Exchange Act. There was no solicitation in opposition
      to the management’s nominees as listed in the proxy statement and all nominees
      were elected. The vote tabulation for the individual nominees is as
      follows:





Name
            
            For
            
            Against
            
            Withheld
            
            Abstentions/Non
                VotesSundaresan
                Raja
            
            55,807,391
            
            -
            
            101,220
            
            -E.
                Eugene Sharer
            
            55,806,391
            
            -
            
            102,220
            
            -Mal
                Gurian
            
            55,823,891
            
            -
            
            84,720
            
            -





The
      ratification of Bagell, Josephs, Levine & Company LLC as independent
      auditors was as follows:





For
            
            Against
            
            Abstain
            
            Broker
                Non Votes55,900,611
            
            100
            
            7,900
            
            -








**Item
      5. Other Information.**





None.





**Item
      6. Exhibits.**




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




35




**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the Registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




AIRBEE
              WIRELESS,
              INC.Dated:
              August 14, 2006
            By:
            /s/
              Sundaresan RajaSundaresan
              RajaChief
                Executive Officer
              (Principal
                Executive Officer)


By:
            /s/
              E.
              Eugene SharerE.
              Eugene SharerInterim
              Principal Financial Officer




36