##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
  þ
    
    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
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission file number 0-50918
 AIRBEE WIRELESS, INC.
  DELAWARE
    
    46-0500345(State or other jurisdiction
    
    (IRS Employerof incorporation or organization)
    
    Identification No.)9400 Key West Avenue, Suite 100Rockville, MD
    
    20850-3322(Address of principal executive offices)
    
    (Zip Code)
 (301) 517-1860
 þ o
 o þ
   o þ




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PAGEPART I FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Condensed Consolidated Balance Sheet as of March 31, 2006 (Unaudited)
    
    
    2Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2006 and 2005 (Unaudited)
    
    
    3Condensed Consolidated Statement of Accumulated Other Comprehensive
Income for the Three Months Ended March 31, 2006 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2006 and 2005 (Unaudited)
    
    
    5Notes to the Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2. Managements Discussion and Analysis or Plan of Operations
    
    
    30Item 3. Controls and Procedures
    
    
    41PART II OTHER INFORMATION
    
    
    43Item 1. Legal Proceedings
    
    
    43Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 3. Defaults Upon Senior Securities
    
    
    44Item 4. Submission of Matters to a Vote of Security Holders
    
    
    45Item 5. Other Information
    
    
    45Item 6. Exhibits
    
    
    45SIGNATURES
    
    
    46




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PART I FINANCIAL INFORMATION
 Item 1. Financial Statements
 AIRBEE WIRELESS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006 AND 2005
 (UNAUDITED)
 1




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##### 



AIRBEE WIRELESS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2006
(UNAUDITED)
 2006ASSETSCurrent 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
    
    
    63,900Intangible assets
    
    
    799,655Deferred financing costs
    
    
    27,051Other assets
    
    
    28,097854,803TOTAL ASSETS
    
    $
    967,196LIABILITIES AND STOCKHOLDERS (DEFICIT)LIABILITIESCurrent Liabilities:Notes payable  related party
    
    $
    97,394Notes payable  other
    
    
    140,000Fair value of derivatives
    
    
    611,514Accounts payable and accrued expenses
    
    
    1,198,121Total Current Liabilities
    
    
    2,047,029Long-term Liabilities:Convertible debentures, net of discount of $310,817
    
    
    39,183Total Long-term Liabilities
    
    
    39,183Total Liabilities
    
    
    2,086,212COMMITMENTS AND CONTINGENCIES
    
    
    STOCKHOLDERS DEFICITCommon 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
    
    
    6,925,283Unearned compensation
    
    
    (34,530
    )Accumulated
other comprehensive income
    
    
    728Accumulated deficit
    
    
    (7,805,169
    )(911,185
    )Less: stock subscription receivable
    
    
    (5,000
    )Less: treasury stock, 997,045 shares at cost
    
    
    (202,831
    )Total Stockholders Deficit
    
    
    (1,119,016
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    967,196
  2




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AIRBEE WIRELESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
 Restated2006
    
    2005OPERATING REVENUESSales
    
    $
    51,600
    
    
    $
    COST OF SALES
    
    
    
    
    
    
    GROSS PROFIT
    
    
    51,600
    
    
    
    OPERATING EXPENSESCompensation and professional fees
    
    
    1,562,361
    
    
    
    246,426Research and development
    
    
    
    
    
    
    212,070Selling, general and administrative expenses
    
    
    130,155
    
    
    
    62,129Depreciation and amortization
    
    
    7,025
    
    
    
    3,082Total Operating Expenses
    
    
    1,699,541
    
    
    
    523,707LOSS BEFORE OTHER INCOME (EXPENSE)
    
    
    (1,647,941
    )
    
    
    (523,707
    )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
    
    
    (1,285,149
    )
    
    
    (552,281
    )Provision for Income Taxes
    
    
    
    
    
    
    NET LOSS APPLICABLE TO COMMON SHARES
    
    $
    (1,285,149
    )
    
    $
    (552,281
    )NET LOSS PER BASIC AND DILUTED SHARES
    
    $
    (0.02
    )
    
    $
    (0.01
    )WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
    
    
    60,230,066
    
    
    
    41,849,373
  3




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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
  4




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##### 



AIRBEE WIRELESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
 Restated2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (1,285,149
    )
    
    $
    (552,281
    )Adjustments to reconcile net loss to net cash
(used in) operating activitiesDepreciation and amortization
    
    
    7,025
    
    
    
    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
    
    
    
    3,437Changes 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
    
    
    1,052,416
    
    
    
    145,300Net cash (used in) operating activities
    
    
    (232,733
    )
    
    
    (406,981
    )CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of intangible assets
    
    
    (36,298
    )
    
    
    Acquisitions of fixed assets
    
    
    (1,878
    )
    
    
    (14,321
    )Net cash (used in) investing activities
    
    
    (38,176
    )
    
    
    (14,321
    )
  5




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AIRBEE WIRELESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
 Restated2006
    
    
    2005CASH FLOWS FROM FINANCING ACTIVITIESProceeds 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
    
    
    
    425,590NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
    
    
    (12,009
    )
    
    
    4,288CASH AND
CASH EQUIVALENTS 
BEGINNING OF PERIOD
    
    
    27,854
    
    
    
    87,362CASH AND CASH EQUIVALENTS  END OF PERIOD
    
    $
    15,845
    
    
    $
    91,650SUPPLEMENTAL 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
    
    
    $
    Common stock issued for subscription receivable
    
    $
    5,000
    
    
    $
    
  6




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##### 



AIRBEE WIRELESS, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006 AND 2005
(UNAUDITED)
 NOTE 1 
    
    ORGANIZATION AND BASIS OF PRESENTATION
   Airbee Company
  NOTE 2 
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Liquidity
  7




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##### 



Principles of Consolidation
 Airbee Company
 Use of Estimates
  Cash and Cash Equivalents
   8




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##### 



Accounts Receivable
  Fixed Assets
  Intangible Assets
   Intellectual Property
  9




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##### 



Accounting for Research and Development Costs Research and Development Arrangements Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed 
    10




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##### 



Revenue and Cost Recognition
    
 Software Revenue Recognition
     11




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##### 



Revenue
Recognition When Right of Return Exists
 Accounting for
Contingencies
    Deferred Financing Costs
  12




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Research and Development
 Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed
 Income Taxes
  Advertising
  Earnings (Loss) Per Share of Common Stock
   March 31, 2006
    
    
    March 31, 2005Net Loss
    
    ($
    1,285,149
    )
    
    ($
    552,281
    )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
 13




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Fair Value of Financial Instruments
  Limitations
  Derivative Instruments
 Accounting for Derivative Instruments and Hedging
Activities Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock
 Stock-Based Compensation
 Accounting for Stock Issued to
 14




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Employees Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation- Transition and Disclosure
  Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services
   15




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##### 



Three Months Ended03/31/06
    
    03/31/05Net loss, as reported
    
    $
    (1,285,149
    )
    
    $
    (552,281
    )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
    
    $
    (1,285,149
    )
    
    $
    (1,169,120
    )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
    )
  Three Months EndedMarch 31, 2006
    
    March 31, 2005Dividend 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
  16




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March 31, 2006WeightedWeighted
    
    AverageAverage
    
    ContractualShares
    
    Exercise Price
    
    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
  Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets Intangible Assets
 Goodwill
and Other Intangible Assets Accounting for the Impairment or
Disposal of Long-Lived Assets
 17




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Three Months Ended March 31, 2006Gross Carrying
    
    
    AccumulatedAmount
    
    
    AmortizationIntellectual Property
    
    $
    152,058
    
    
    $
    10,000Capitalized Research & Development
    
    
    657,597
    
    
    
    Total Intangible Assets
    
    $
    809,655
    
    
    $
    10,000
 Currency Risk and Foreign Currency Translation
  Foreign Currency Translation
 Recent Accounting Pronouncements
 Share-Based Payment
 18




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##### 



accounts for its share-based payment transactions under the provisions of APB
25, which does not necessarily require the recognition of compensation cost in the
financial statements (note 3(e)). FASB 123R had a material impact on its results or
financial statements.In November 2004, the FASB issued Financial Accounting Standards No. 151 (FAS 151),
Inventory Costs  an amendment of ARB No. 43, Chapter 4. FASB 151 clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling costs
and spoilage. In addition, FASB 151 requires companies to base the allocation of
fixed production overhead to the costs of conversion on the normal capacity of
production facilities. FASB 151 is effective for the Company in 2006. FASB 151 did
not have a material impact on its results or financial statements.In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. SFAS No. 154 replaces Accounting Principles Board (APB) Opinion No.
20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS No. 154 requires retrospective application to prior
periods financial statements of a voluntary change in accounting principle unless
it is impracticable. APB No. 20 previously required that most voluntary changes in
accounting principle be recognized by including the cumulative effect of changing to
the new accounting principle in net income in the period of the change. SFAS No. 154
is effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of SFAS No. 154 did not have a
material impact on the Companys financial position or results of operations.In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140. SFAS No.
155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1,
Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets, and permits fair value remeasurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation,
clarifies which interest-only strips and principal-only strips are not subject to
the requirements of SFAS No. 133, establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding derivatives
or that are hybrid financial instruments that contain an embedded derivative
requiring bifurcation, clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives and amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of the first fiscal year that
begins after September 15, 2006. The Company is currently evaluating the effect the
adoption of SFAS No. 155 will have on its financial position or results of
operations.
 19




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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 RISKThe Companys trade receivables are derived from sales to original equipment
manufacturers and manufacturers of microprocessors. The Company endeavors to keep
pace with the evolving computer and communications industries, and has adopted
credit policies and standards intended to accommodate industry growth and inherent
risk. Management believes that credit risks are moderated by the diversity of the
Companys end customers and geographic sales areas. The Company performs ongoing
credit evaluations of its customers financial condition and requires collateral as
deemed necessary.NOTE 4-
    
    FIXED ASSETSFixed assets as of March 31, 2006 consist of the following:
 Computer and office equipment
    
    $
    91,395Leasehold improvements
    
    
    1,321Less: accumulated depreciation and amortization
    
    
    (28,816
    )Net book value
    
    $
    63,900
 Depreciation expense for the three months ended March 31, 2006 and 2005 was $4,525
and $3,082, respectively.NOTE 5-
    
    DEBTNote Payable  OtherIn 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
 20




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##### 



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.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 DebenturesOn 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 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
 21




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##### 



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
 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
 22




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##### 



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 TAXESDeferred 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, 2005Deferred tax asset
    
    $
    2,731,809
    
    
    $
    1,009,994Less: valuation allowance
    
    
    (2,731,809
    )
    
    
    (1,009,994
    )$
    
    
    
    $
    
 At March 31, 2006 and 2005, the Company had deficits accumulated during the
development stage in the approximate amount of $7,805,169 and $3,366,647,
 23




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##### 



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 EXPENSESAccounts payable and accrued expenses at March 31, 2006 consist of the following:
 March 31, 2006Accounts 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EQUITYThe 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
 24




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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.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
 25




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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 value of these services was $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.NOTE 10-
    
    COMMITMENTS AND CONTINGENCIESEmployment AgreementsThe Company has entered into employment agreements with key members of management
and some officers. Most of these employment agreements are for a
 26




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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 AgreementsA 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 is searching for new office space to
occupy by June 30, 2006.Repayment AgreementMindTree 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 May 15, 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. The Company expects to complete or substantially
complete the repayment by the May 15th deadline. MindTree has indicated
that if repayment of the indebtedness is substantially complete it will again extend
the agreement for another thirty (30) days.GuaranteesOn 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
 27




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##### 



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. However, the Company was not a signatory to the contract
or to the specific surety addendum contained therein and therefore considers the
surety contract null and void. With the August 2005 rescission of the Companys
merger with Identity, any liability Airbee Automotive Group, Inc. may have had to
PFK reverted to Identity. 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.In accordance with FIN 45, the Company discloses the existence of a guarantee
contract between the Company and PFK which the Company views as unenforceable. The
Company is not required to assign a value to this guarantee and record it as a
liability on its balance sheet because it was intended by PFK to be the guarantee of
a debt of a subsidiary company. That subsidiary no longer exists as an operating
entity due to the rescission of the merger that created it.LitigationOn 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.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
 28




---



##### 



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 CONCERNAs 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 OF PREVIOUSLY ISSUED FINANCIAL STATEMENTSThe Company has amended its previously issued condensed consolidated financial
statement for the three months ended March 31, 2005 for amortization of unearned
compensation of $3,747 and the reclassification of various selling, general and
administrative expenses, and compensation to research and development expenses. The
effect of these changes resulted in an increase of the loss for the three month
period ended March 31, 2005 of $3,437 to a net loss of $552,281 and an increase in
the accumulated deficit to $3,366,647.
 29




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward Looking Statements
  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 $1,285,149 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 
 o
    
    Royalties from the license agreements are dependent on our customers
ability to create demand and market acceptance for their product.
 30




---



##### 



o
    
    Our international operations involve inherent risks that include
currency controls and fluctuations, tariff and import regulations, and regulatory
requirements that may limit our or our customers ability to manufacture, assemble
and test, design, develop or sell products in particular countries.o
    
    Our ability to continue as a going concern is dependent upon our
obtaining adequate capital to fund losses until we become profitable.
 
    
    We have created a new business unit in the fourth quarter of 2005 to take on development
contracts using our software products as a base and creating the application solution for
our customers. We delivered the first of our service projects to Sensormatics on April 17,
2006. There are several other such projects in the planning stage and which will further
the Companys objective of getting its software stack product into the end users operation
sooner than we would otherwise realize.
 Overview
    31




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##### 



Results of Operations
 Three Months Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005
    32




---



##### 



Liquidity and Capital Resources
  33




---



##### 



34




---



##### 



35




---



##### 



Critical Accounting Estimates
 General
 Summary of Significant Accounting
Policies
  36




---



##### 



Revenue Recognition
        37




---



##### 



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.
  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.
  38




---



##### 



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.
  
    
    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.
 39




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##### 



Off-Balance Sheet Arrangements
  Contractual Obligations
   40




---



##### 



Payments due by periodLess
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1 - 3
    
    
    3 - 5
    
    
    than 5Contractual Obligations
    
    Total
    
    
    year
    
    
    years
    
    
    years
    
    
    yearsPurchase Obligations
(employment contracts)*
    
    $
    1,682,917
    
    
    
    1,060,000
    
    
    
    622,917
    
    
    
    
    
    
    
    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.**
    
    $50,000 of payment due less than one year was converted to common stock with consent of the note
holder in January 2006.***
    
    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
   41




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##### 



42




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##### 



PART II OTHER INFORMATION
 Item 1. Legal Proceedings.
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
        43




---



##### 



Item 3. Defaults upon Senior Securities.
  44




---



##### 



Item 4. Submission of Matters to a Vote of Security Holders.
  Item 5. Other Information.
  Item 6. Exhibits.
 10.6
    
    Corrected Employment Agreement, dated January 1, 2006, between Sundaresan Raja and Airbee Wireless10.7
    
    Corrected Employment Agreement, dated January 1, 2006, between E. Eugene Sharer and Airbee Wireless31.1
    
    Rule 13a-14(a)/15d-4(a) Certification of Principal Executive Officer31.2
    
    Rule 13a-14(a)/15d-4(a) Certification of Principal Financial Officer32.1
    
    Section 1350 Certification of Principal Executive Officer32.2
    
    Section 1350 Certification of Principal Financial Officer
 45




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##### 



SIGNATURES
  Dated:
May 15, 2006AIRBEE WIRELESS, INC.By:
    
    /s/ Sundaresan RajaSundaresan RajaChief Executive Officer(Principal Executive Officer)By:
    
    /s/ E. Eugene Sharer

E. Eugene SharerInterim Principal Financial Officer
 46