**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB/A**





(Mark
      One)





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





**For
      the quarterly period ended March 31, 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: 62,571,955 shares of Common Stock par value
      of $0.00004 as of May 1, 2006.





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














AIRBEE
      WIRELESS, INC.





FORM
      10-QSB





INDEX





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


2





**PART
      I FINANCIAL INFORMATION**





**Item
      1. Financial Statements**




**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2006 AND 2005**


**(UNAUDITED)**




3


**AIRBEE
                  WIRELESS, INC.****CONDENSED
                  CONSOLIDATED BALANCE SHEET****MARCH
                  31, 2006****(UNAUDITED)**




**Restated****2006****ASSETS**Current
                  Assets:Cash
                  and cash equivalents
              
              $
              15,845Accounts
                  receivable
              
              
              27,110Prepaid
                  expenses and other current assets
              
              
              5,538Total
                  Current Assets
              
              
              48,493Fixed
                  assets, net of depreciation
              
              
              63,919Intangible
                  assets
              
              
              718,000Deferred
                  financing costs
              
              
              27,051Other
                  assets
              
              
              28,097773,148**TOTAL
                  ASSETS**
              
              $
              885,560**LIABILITIES
                  AND STOCKHOLDERS' (DEFICIT)****LIABILITIES**Current
                  Liabilities:Notes
                  payable - related party
              
              $
              97,394Notes
                  payable - other
              
              
              140,000Montgomery
                  settlement liability
              
              
              516,287Fair
                  value of derivatives
              
              
              611,514Warrants
                  liability
              
              
              617,871Accounts
                  payable and accrued expenses
              
              
              1,198,121Total
                  Current Liabilities
              
              
              3,181,187Long-term
                  Liabilities:Convertible
                  debentures, net of discount of $310,817
              
              
              39,183Total
                  Long-term Liabilities
              
              
              39,183**Total
                  Liabilities**
              
              
              3,220,370**COMMITMENTS
                  AND CONTINGENCIES**
              
              
              —**STOCKHOLDERS'
                  DEFICIT**Common
                  stock, $.00004 Par Value; 200,000,000 shares authorized;77,155,956
                  shares issued, 13,586,956 shares held in escrow;62,571,955
                  outstanding
              
              
              2,503Additional
                  paid-in capital
              
              
              5,791,125Unearned
                  compensation
              
              
              (34,530
              )Other
                  accumulated comprehensive loss
              
              
              728Accumulated
                  deficit
              
              
              (7,886,805
              )(2,126,979
              )Less:
                  stock subscription receivable
              
              
              (5,000
              )Less:
                  treasury stock, 997,045 shares at cost
              
              
              (202,831
              )**Total
                  Stockholders' Deficit**
              
              
              (2,334,810
              )**TOTAL
                  LIABILITIES AND STOCKHOLDERS' DEFICIT**
              
              $
              885,560The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.


4





**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005**


**(UNAUDITED)**





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





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


5





**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE
      INCOME**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2006**


**(UNAUDITED)**





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





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


6





**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005**


**(UNAUDITED)**





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





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


7


**AIRBEE
      WIRELESS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005**


**(UNAUDITED)**





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





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


8





**AIRBEE
      WIRELESS, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2006 AND 2005**


**(UNAUDITED)**





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





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





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





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





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





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





**Liquidity**





The
      condensed consolidated interim financial statements have been presented on
      the
      basis that the Company is a going concern, which contemplates, among other
      things, the realization of assets, continued success in accessing supplemental
      external financing, and the satisfaction of liabilities in the normal course
      of
      business. The Company has incurred losses since its inception, and has an
      accumulated deficit of approximately $7.9 million as of March 31, 2006. The
      Company’s operations have been financed primarily through a combination of
      issued equity and debt. For the three months ended March 31, 2006, the Company
      had a net loss of approximately $1,290,200 and cash used in operations of
      approximately $233,000.





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


9





**Principles
      of Consolidation**





The
      condensed consolidated financial statements include the accounts of Airbee
      Wireless, Inc. and its wholly owned subsidiaries (“ *Airbee* ”
or
      the
“ *Company* ”)
      Airbee
      Wireless (Pte.) Ltd., located in Singapore, and Airbee Wireless (India) Pvt.
      Ltd., located in India, for the three months ended March 31, 2006 and 2005
      respectively. All significant inter-company accounts and transactions have
      been
      eliminated in consolidation. Accounts denominated in non-U.S. currencies have
      been re-measured using the U.S. Dollar as the functional currency.





**Use
      of Estimates**





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





**Cash
      and Cash Equivalents**





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





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





**Accounts
      Receivable**





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





**Fixed
      Assets**





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





**Intangible
      Assets**





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


10





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





**Intellectual
      Property**





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





In
      accordance with SFAS No. 2, “Accounting *for
      Research and Development Costs* ”,
      SFAS
      No. 68, “ *Research
      and Development Arrangements* ”,
      and
      SFAS No. 86, “ *Accounting
      for the Costs of Computer Software to be Sold, Leased, or
      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, has determined that this specific intellectual property should
      be amortized beginning with the current financial period in accordance with
      SFAS
      No. 86. The status of that intellectual property is reviewed for impairment
      annually or more frequently if events and circumstances indicate that the asset
      may be impaired. The Company believes that at this point in time, impairment
      is
      impractical because (a) the IEEE 802.15 global standard was only finalized
      in
      October 2003; (b) the ZigBee global standard was only finalized on December
      14,
      2004; and (c) the Company’s software written in conformity with both global
      standards is vital to making the rest of its software function and therefore
      be
      in compliance with these global standards.





**Revenue
      and Cost Recognition**





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





Licensing
      revenues (e.g., Airbee-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 three months ended
      March 31, 2006, the Company recognized $3,864 in deferred financing
      costs.





**Research
      and Development**





Research
      and development costs are related primarily to the Company developing its
      intellectual property. Research and development costs were expensed as incurred
      prior to the Company’s demonstration of technical feasibility of its
      ZigBee-based products in April 2005. Research and development costs incurred
      to
      produce a product master have been capitalized in accordance with Statement
      No.
      86, “ *Accounting
      for the Costs of Computer Software to be Sold, Leased, 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 March 31, 2006
      and 2005.





**Advertising**





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





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





Historical
      net income (loss) per common share is computed using the weighted average number
      of common shares outstanding. Diluted earnings per share (EPS) includes
      additional dilution from common stock equivalents, such as stock issuable
      pursuant to the exercise of stock options and warrants. Common stock equivalents
      were not included in the computation of diluted earnings per share at March
      31,
      2006 and 2005 when the Company reported a loss because to do so would be
      anti-dilutive for periods presented. The Company has incurred losses since
      inception as a result of funding its research and development, including the
      development of its intellectual property portfolio which is key to its core
      products.





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





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





**Fair
      Value of Financial Instruments**





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




13


**Limitations**





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





**Derivative
      Instruments**





The
      Company has an outstanding convertible debt instrument that contains
      free-standing and embedded derivatives. The Company accounts for these
      derivatives in accordance with SFAS No. 133, “ *Accounting
      for 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 March 31, 2006, the fair value
      of
      the derivatives was $611,514, a decrease of $427,532 from December 31, 2005.
      The
      Company has recorded a net gain on derivatives in the Other Income (Expense)
      section of its Condensed Consolidated Statements of Operations.





**Stock-Based
      Compensation**





Employee
      stock awards prior to periods beginning January 1, 2006 under the Company’s
      compensation plans are accounted for in accordance with Accounting Principles
      Board Opinion No. 25 (“APB 25”), “ *Accounting
      for Stock Issued to Employees* ”,
      and
      related interpretations. The Company provides the disclosure requirements of
      SFAS No. 123, “ *Accounting
      for Stock-Based Compensation”* (“SFAS
      123”), and related interpretations. Stock-based awards to non-employees are
      accounted for under the provisions of SFAS 123 and the Company adopted the
      enhanced disclosure provisions of SFAS No. 148 “ *Accounting
      for Stock-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 three months ended March 31, 2006 and 2005 was $3,992 and $3,437,
      respectively.





The
      Company measures compensation expense for its non-employee stock-based
      compensation under the Financial Accounting Standards Board (FASB) Emerging
      Issues Task Force (EITF) Issue No. 96-18, “ *Accounting
      for Equity 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.





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





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





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





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





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





**Product
      Warranty**





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





**Goodwill
      and Other Intangible Assets**





In
      June
      2001, the Financial Accounting Standards Board issued Statement No. 142,
“ *Goodwill
      and Other Intangible Assets* .”
This
      statement addresses financial accounting and reporting for acquired goodwill
      and
      other intangible assets and supersedes Accounting Principles Board (“APB”)
      Opinion No. 17, “ *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.





15




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





The
      main
      components of intangible assets are as follows:





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





**Currency
      Risk and Foreign Currency Translation**





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





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





**Recent
      Accounting Pronouncements**





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





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





In
      May
      2005, the FASB issued SFAS No. 154, “ *Accounting
      Changes and 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.





16


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.





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





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





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





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





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





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





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





**Note
      Payable - Other**





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





17


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




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





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





**Convertible
      Debentures**





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





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





In
      accordance with SFAS 133, *“Accounting
      for Derivative Instruments and Hedging*  *Activities”* and
      EITF
      00-19, *“Accounting
      for* Derivative *Financial 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 $383,737 as a liability in the accompanying condensed consolidated
      balance sheet and has measured it at its estimated fair value. The estimated
      fair value of the embedded derivative has been calculated based on a
      Black-Scholes pricing model using the following assumptions:





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





18


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





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





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





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





**NOTE
      6-** **PROMISSORY
      NOTES - RELATED PARTY**





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





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





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





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





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





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





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





19


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





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





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





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





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





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





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





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





The
      following stock transactions occurred in 2006:





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





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





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





20


On
      January 5, 2006, the Company issued 257,159 restricted shares to an executive
      officer in partial payment of accrued salary valued at $63,452 at the time
      of
      issuance. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The executive officer received information concerning the Company
      and
      had the ability to ask questions about the Company.





On
      January 10 and 11, 2006, the Company issued 200,000 restricted shares to two
      organizations for services valued at $79,000 at the time of issuance. The shares
      were issued to the organizations in return for providing investment banking
      services. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The organizations received information concerning the Company and
      had
      the ability to ask questions about the Company.





On
      January 11, 2006, the Company issued 271,939 restricted shares to a former
      employee in payment of promissory notes and accrued interest totaling $122,373
      at the time of issuance. The Company also issued another 19,767 restricted
      shares to the same individual in payment of $8,895 in advances made to the
      Company plus accrued interest. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The executive officer received information
      concerning the Company and had the ability to ask questions about the
      Company.





On
      January 12, 2006, the Company issued 6,498,527 restricted shares to current
      officers in payment of promissory notes, accrued salaries and accrued interest
      totaling $1,603,456 at the time of issuance. The securities were issued pursuant
      to the exemption from registration provided by Section 4(2) of the Securities
      Act and contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The executive officers received
      information concerning the Company and had the ability to ask questions about
      the Company.





On
      January 12, 2006, the Company issued 182,714 restricted shares to an
      organization to settle a note payable and accrued interest totaling $73,085
      on
      the date of issuance. The securities were issued pursuant to the exemption
      from
      registration provided by Section 4(2) of the Securities Act and contain the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The organization received information concerning the
      Company and had the ability to ask questions about the Company.





On
      January 31, February 28 and March 31, 2006, the Company issued 20,000, 37,411
      and 47,619 restricted shares, respectively, to an officer for accrued
      compensation of $5,000, $10,000 and $10,000, respectively, on the dates of
      issuance. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The executive officer received information concerning the Company
      and
      had the ability to ask questions about the Company.





On
      March
      30, 2006, the Company issued 50,000 restricted shares to an accredited investor
      in return for his assistance in raising capital and providing short-term loans
      to the Company. The
      investor provided the Company with comments regarding the financial structure
      of
      the Company as such issues related to the Company’s equity securities and made
      limited introductions of the Company to potential accredited
      investors. His
      services were isolated services which were not solicited by the Company. The
      investor did not negotiate for the sale of any the Company's securities; discuss
      details of the nature of the securities sold or whether recommendations were
      made concerning the sale of the securities; engage in due diligence activities;
      provide advice relating to the valuation of or the financial advisability of
      any
      investments in the Company; or handle any funds or securities on behalf of
      the
      Company.  The
      value
      of these services and consideration for providing the short term loans was
      an
      aggregate of **** $11,500
      at the time of issuance. The securities were issued pursuant to the exemption
      from registration provided by Section 4(2) of the Securities Act and contain
      the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The accredited investor received information concerning
      the Company and had the ability to ask questions about the Company.





Throughout
      the quarter ended March 31, 2006, the Company issued 352,065 restricted shares
      of common stock to 10 accredited investors for cash totaling $96,400. In
      addition, the Company issued 147,202 warrants to these investors at strike
      prices ranging between $0.24 and $0.53 per share. The warrants will expire
      at
      varying dates from July 24, 2007 through September 29, 2007. The securities
      were
      issued pursuant to the exemption from registration provided by Section 4(2)
      of
      the Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investors received information concerning the Company and had the ability to
      ask
      questions about the Company.





21




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





**Employment
      Agreements**





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





**Lease
      Agreements**





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





**Repayment
      Agreement**





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





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





**PFK
      Electronics and the Identity Supply Contract**





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





**Litigation**





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





22


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





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





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





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





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





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





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





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





**NOTE
      12-** **RESTATEMENT**





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




23


**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. These statements are based on current expectations, estimates,
      forecasts, and projections about the industries in which we operate and the
      beliefs and assumptions of our management. Words such as “expects,”
“anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,”
“seeks,” “estimates,” “continues,” “may,” variations of such words, and similar
      expressions are intended to identify such forward-looking statements. In
      addition, any statements that refer to projections of our future financial
      performance, our anticipated growth and trends in our businesses including
      the
      potential growth of advanced technologies and other characterizations of future
      events or circumstances are forward-looking statements. Readers are cautioned
      that these forward-looking statements are only predictions and are subject
      to
      risks, uncertainties, and assumptions that are difficult to predict. Therefore,
      actual results may differ materially and adversely from those expressed in
      any
      forward-looking statements. We undertake no obligation to revise or update
      any
      forward-looking statements for any reason.





**Executive
      Summary**


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




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




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




·
            Risk
                  factors include –




·
            Royalties
                  from the license agreements are dependent on our customers’ ability to
                  create demand and market acceptance for their
                  product.




·
              Our
                    international operations involve inherent
                    risks that include currency controls and fluctuations, tariff
                    and import
                    regulations, and regulatory requirements that may limit our or
                    our
                    customers’ ability to manufacture, assemble and test, design, develop or
                    sell products in particular
                    countries.




·
            Our ability to continue as
                  a going concern
                  is dependent upon our obtaining adequate capital to fund losses
                  until we
                  become
                  profitable.




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




24


**Overview**





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





Our
      goal
      remains being a preeminent provider of intelligent software for short range
      wireless communications embedded into silicon chips and platform solutions.
      As
      part of our strategy to compete in each target market segment, we focus our
      core
      competencies in the design and engineering of intelligent wireless
      communications software that is platform agnostic, ultra-low in energy
      consumption with complete portability across all controllers, radios, and
      operating system platforms. Our software is licensed to various global
      manufacturers of radio chips, radio frequency modules, and microprocessors
      used
      in an increasing number of wireless communications applications and devices.
      We
      believe that with our software embedded inside and our advanced network
      management tools, our intelligent software will make our customers’ products
      perform better.





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





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





We
      expect
      to begin training programs for our licensees such as Infineon to train their
      field application engineers. We expect this will result in increased
      opportunities with our partners’ customers. In addition, we will be
      participating in the ZigBee Developers program this June where we will be
      teaching new developers how to use our stack to develop applications. We have
      also established a world class RF laboratory at our development center in
      Chennai, India, which has already produced real world knowledge about RF
      interference issues in the ZigBee environment.





**Results
      of Operations**





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





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





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





25


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





Our
      overall increase in compensation and professional fees for the quarter ended
      March 31, 2006 compared to the quarter ended March 31, 2005 was $1,315,935,
      to
      $1,562,361 from $246,426. Compensation expense required by SFAS 123R accounted
      for $1,015,141 of this increase as the Company is now required to expense stock
      options granted and vesting in the period. This is a non-cash expense. The
      rest
      of the increase was due to increased professional services costs of $74,160
      of
      legal fees related to our financing from Montgomery Equity Partners Ltd. and
      legal defense costs for suits against the Company, $79,000 in financing costs,
      and legal and accounting fees in connection with our SEC reporting. Salaries
      rose due to the addition of new programming staff in India ($147,600) in
      accordance with the Company’s plan to improve the administrative function in
      India and to bring previously out-sourced software development work back
      in-house. We believe that general and administrative expenses will not increase
      significantly in the short-term. However, we do expect an increase in absolute
      dollars in the long-term, as we continue to invest in staff and infrastructure
      in the areas of information systems and sales and marketing.





Selling,
      general and administrative expenses increased to $130,155 in the first quarter
      of 2006, up $68,026 or 109% from 2005’s first quarter total of $62,129. This
      increase was due primarily from insurance costs and loan transaction fees.
      Our
      overall selling and marketing expenses consist primarily of marketing related
      expenses, compensation related expenses, sales commissions, facility costs
      and
      travel costs. Expenses, particularly certain marketing and compensation-related
      expenses, may vary going forward, depending in part on the level of revenue
      and
      profits.





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





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





**Liquidity
      and Capital Resources**





Since
      inception, we have principally funded our operations from private placements
      of
      securities and management and shareholder loans and contributions of $3,210,364.
      As of March 31, 2006, we have $467,024 outstanding under notes payable - related
      parties, reimbursements due officers and accrued payroll. During the first
      quarter of 2006, we received an aggregate of $96,400 in cash from accredited
      investors in consideration of 352,065 shares of our common stock and 147,202
      common stock purchase warrants. Proceeds were used to pay down current payables.
      We will require approximately $5 million to continue operations for the next
      12
      months. Most of the funding will be allocated principally for sales, marketing
      and working capital. It is not anticipated that any lack of funding will impact
      upon the existing license and development agreements with our customers since
      our software development has been completed for three of our
      products.





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





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





26




On
      December 29, 2005, we entered into a Securities Purchase Agreement with
      Montgomery pursuant to which we agreed to issue Montgomery secured convertible
      debentures in the principle amount of $500,000. Of these secured convertible
      debentures, $350,000 was funded on December 29, 2005. The remaining $150,000
      has
      not yet been funded as of July 26, 2006. The secured convertible debentures
      are
      convertible, in whole or in part, at any time and from time to time before
      maturity at the option of the holder at the lesser of (a) eighty percent (80%)
      of the lowest closing bid price of the common stock for the ten (10) trading
      days immediately preceding the closing date or (b) eighty percent (80%) of
      the
      lowest closing bid price of common stock for ten (10) trading days immediately
      preceding the conversion date. The secured convertible debentures have a term
      of
      two (2) years, piggy-back registration rights and accrue interest monthly at
      the
      rate of fifteen percent (15%) per year. We are current with our interest
      payments.





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





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





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





Our
      capital requirements depend on numerous factors including our research and
      development expenditures, expenses related to selling, general and
      administrative operations and working capital to support business growth. We
      anticipate that our operating and capital expenditures will constitute a
      material use of our cash resources. As a result, our net cash flows will depend
      heavily on (a) the level of our future sales (which depend, to a large extent,
      on general economic conditions affecting us and our customers, as well as the
      timing of our products’ sales cycles (especially for the newly introduced ZigBee
      global standard) and other competitive factors) and (b) our ability to control
      expenses.





With
      regard to our current liabilities at March 31, 2006, $57,391 is payable to
      a
      related note holder who has deferred repayment as well as interest. During
      January 2006, the Company converted $1,870,972 in related party notes payable,
      accrued salaries, accounts payable and interest payable and another note payable
      to equity, issuing 7,230,106 restricted shares of common stock. Trade payables
      at March 31, 2006 of $755,860 are outstanding and will be paid as they come
      due
      or as payment may be extended by agreement of the parties. One vendor, MindTree
      Consulting Pvt. Ltd. (“MindTree”), accounted for 53% of the Company’s accounts
      payable. MindTree provided services to the Company under a Time and Materials
      Contract dated March 30, 2005 (the T&M Contract”). On a monthly basis,
      MindTree invoiced the Company for work it performed. Payment terms were net
      30
      days. The Company was unable to pay the invoices as they became due and, by
      informal agreement, extended the repayment terms monthly. On December 15, 2005,
      the Company entered into a written agreement with MindTree by which it agreed
      to
      pay MindTree $200,000 on or before December 23, 2005 and $100,000 per month
      on
      the last business day of each succeeding month until the outstanding
      indebtedness of approximately $580,000 was fully paid. The Company’s performance
      was secured by the software code (the “Intellectual Property”) MindTree
      developed under the T&M Contract. If the Company defaulted in making any
      payment when due and such default was not cured within five business days after
      receipt of a notice of default, MindTree would be entitled to co-own the
      Intellectual Property, with any revenue the Company realized from the
      Intellectual Property during the co-ownership period to be split 50-50 with
      MindTree. If full payment is made on or before April 30, 2006, full ownership
      of
      the Intellectual Property reverts to the Company.





To
      date,
      the Company has paid MindTree $200,000 pursuant to this agreement. As of July
      26, 2006, the Company is behind in making the scheduled payments. MindTree
      has
      not yet issued any notice of default and has extended the deadline to
      substantially complete the repayment until October 31, 2006.





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





27




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





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





The
      Company expects to be able to satisfy its past-due accounts payable when
      additional financing is obtained and intends to negotiate lump-sum payment
      reductions with the larger vendors (MindTree excepted). The bulk of the
      Contractual Obligations in the table below are employment contracts with current
      management. Given management’s commitment to the success of the Company, it is
      not anticipated these contracts will be an impediment. The long-term debt listed
      in the table is the secured convertible debenture, which the Company expects
      will be paid off or converted when substitute financing is
      arranged.





If
      circumstances require, the Company will renegotiate employment contracts with
      management to defer (but not eliminate) its obligations under these contracts.
      It will also consider overhead reductions at its headquarters and at its India
      subsidiary. This would be as a last resort as (a) the Company is leanly staffed
      at the administrative level and (b) staff cuts in India would adversely impact
      our ability to complete product development, deliver product and provide
      support.





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





**Critical
      Accounting Estimates**





***General***





Management’s
      discussion and analysis of our financial condition and results of operations
      is
      based upon our Consolidated Financial Statements, which were prepared in
      accordance with accounting principles generally accepted in the United States,
      or GAAP. GAAP requires us to make estimates and assumptions that affect the
      reported amounts of assets, liabilities, revenues and expenses, as well as
      the
      disclosure of contingent assets and liabilities. Note 2, “ *Summary*  *of
      Significant Accounting Policies* ”
of
      Notes to the Consolidated Financial Statements describes our significant
      accounting policies which are reviewed by us on a regular basis and which are
      also reviewed by senior management with our Board of Directors.





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.





28




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





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





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





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





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





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





**Factors
      That May Affect Future Results**





*Our
      business faces significant risks. The risks described below may not
      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.





29




**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;




·
            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.





30


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





**Off-Balance
      Sheet Arrangements**





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





**Contractual
      Obligations**





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





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





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





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





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





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







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





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





**Item
      3. Controls and Procedures**





Evaluation
      of Disclosure Controls and Procedures





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





31




During
      the period covered by this report the Company continued to remediate previously
      disclosed internal control deficiencies (improper amortization of capitalized
      intellectual property costs and accounting for unearned compensation arising
      from the issuance of stock options below market value) first identified during
      the third quarter 2005. Prior to going public the Company amortized capitalized
      intellectual property costs and accounted for unearned compensation arising
      from
      the issuance of stock options below market value contrary to the requirements
      of
      SFAS 86 and SFAS 123, respectively, as such accounting methods were not required
      by a private entity. Subsequent to going public, the Company’s controller
      recognized the necessity to account for these items in accordance with SFAS
      86
      and SFAS 123. In addition, an internal control deficiency was discovered during
      the first quarter 2006 by the Company’s controller as a result of the Company’s
      failure to account for convertible instruments and derivatives under SFAS 133,
      SFAS 150 and EITF 00-19.





The
      Company’s interim chief financial officer and controller have worked diligently
      to properly account for convertible instruments and derivatives and will consult
      with outside consultants on an as-needed basis to enable the Company to make
      the
      proper disclosures. As disclosed above, the Company’s controller identified the
      internal control deficiencies during the third quarter 2005. As previously
      disclosed, the Company hired a controller in May 2005 to identify, remediate
      and
      eliminate prior internal control and disclosure control deficiencies. The
      controller is a CPA and has experience in accounting and disclosure procedures
      for public companies. The Company’s India subsidiary also hired a chartered
      accountant (equivalent to US CPA) who was also a certified corporate secretary
      as its finance manager in August 2005. The Company has implemented an accounting
      analysis procedure that requires all transactions, including but not limited
      to
      transactions similar to the deficiencies above, be analyzed by an employee
      of
      the Company in accordance with SEC public reporting standards. While the Company
      has implemented an account analysis procedure and hired additional personnel,
      the aforementioned material weaknesses will not be considered remediated until
      the new internal controls operate for a sufficient period of time, are tested,
      and management concludes that these controls are operating effectively. The
      Company expects to complete its analysis by the end of the fiscal year ending
      December 31, 2006. Costs of the controller and finance manager and the practices
      implemented thus far are approximately $120,000 per year, consisting mainly
      of
      the controller’s and finance manager’s salaries and the public reporting costs
      of additional disclosure.




Changes
      in Internal Controls





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





**PART
      II OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





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





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





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





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





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





32




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





On
      January 5, 2006, the Company issued 257,159 restricted shares to an executive
      officer in partial payment of accrued salary valued at $63,452 at the time
      of
      issuance. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The executive officer received information concerning the Company
      and
      had the ability to ask questions about the Company.





On
      January 10 and 11, 2006, the Company issued 200,000 restricted shares to two
      organizations for services valued at $79,000 at the time of issuance. The shares
      were issued to the organizations in return for providing investment banking
      services. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The organizations received information concerning the Company and
      had
      the ability to ask questions about the Company.





On
      January 11, 2006, the Company issued 271,939 restricted shares to a former
      employee in payment of promissory notes and accrued interest totaling $122,373
      at the time of issuance. The Company also issued another 19,767 restricted
      shares to the same individual in payment of $8,895 in advances made to the
      Company plus accrued interest. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The executive officer received information
      concerning the Company and had the ability to ask questions about the
      Company.





On
      January 12, 2006, the Company issued 6,498,527 restricted shares to current
      officers in payment of promissory notes, accrued salaries and accrued interest
      totaling $1,603,456 at the time of issuance. The securities were issued pursuant
      to the exemption from registration provided by Section 4(2) of the Securities
      Act and contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The executive officers received
      information concerning the Company and had the ability to ask questions about
      the Company.





On
      January 12, 2006, the Company issued 182,714 restricted shares to an
      organization to settle a note payable and accrued interest totaling $73,085
      on
      the date of issuance. The securities were issued pursuant to the exemption
      from
      registration provided by Section 4(2) of the Securities Act and contain the
      appropriate legends restricting their transferability absent registration or
      applicable exemption. The organization received information concerning the
      Company and had the ability to ask questions about the Company.





On
      January 31, February 28 and March 31, 2006, the Company issued 20,000, 37,411
      and 47,619 restricted shares, respectively, to an officer for accrued
      compensation of $5,000, $10,000 and $10,000, respectively, on the dates of
      issuance. The securities were issued pursuant to the exemption from registration
      provided by Section 4(2) of the Securities Act and contain the appropriate
      legends restricting their transferability absent registration or applicable
      exemption. The executive officer received information concerning the Company
      and
      had the ability to ask questions about the Company.





On
      March
      30, 2006, the Company issued 50,000 restricted shares to an accredited investor
      in return for his assistance in raising capital and providing short-term loans
      to the Company. The
      investor provided the Company with comments regarding the financial structure
      of
      the Company as such issues related to the Company’s equity securities and made
      limited introductions of the Company to potential accredited
      investors. His
      services were isolated services which were not solicited by the Company. The
      investor did not negotiate for the sale of any the Company's securities; discuss
      details of the nature of the securities sold or whether recommendations were
      made concerning the sale of the securities; engage in due diligence activities;
      provide advice relating to the valuation of or the financial advisability of
      any
      investments in the Company; or handle any funds or securities on behalf of
      the
      Company.  The
      value
      of these services and consideration for providing the short term loans was
      an
      aggregate of $11,500 at the time of issuance. The securities were issued
      pursuant to the exemption from registration provided by Section 4(2) of the
      Securities Act and contain the appropriate legends restricting their
      transferability absent registration or applicable exemption. The accredited
      investor received information concerning the Company and had the ability to
      ask
      questions about the Company.





Throughout
      the quarter ended March 31, 2006, the Company issued 352,065 restricted shares
      of common stock to 10 accredited investors for $96,400. In addition, the Company
      issued 147,202 warrants to these investors at strike prices ranging between
      $0.24 and $0.53 per share. The warrants will expire at varying dates from July
      24 through September 29, 2007. The securities were issued pursuant to the
      exemption from registration provided by Section 4(2) of the Securities Act
      and
      contain the appropriate legends restricting their transferability absent
      registration or applicable exemption. The accredited investors received
      information concerning the Company and had the ability to ask questions about
      the Company.





33




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





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





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





None.





**Item
      5. Other Information.**





None.





**Item
      6. Exhibits.**





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





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





32.1  Section
      1350 Certification of Principal Executive Officer





32.2  Section
      1350 Certification of Principal Financial Officer


34


**SIGNATURES**





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




Dated:
      September 22, 2006





AIRBEE
      WIRELESS, INC.





By:  /s/
      Sundaresan Raja





Sundaresan
      Raja


Chief
      Executive Officer


(Principal
      Executive Officer)






By:  /s/
        E.
        Eugene Sharer
 
 E.
        Eugene
        Sharer


Interim
      Principal Financial Officer


35