The breakdown of product sales by geographic region is as follows (in thousands):

		Three Months ended						Six Months ended
		June 30			June 30			June 30			June 30
		2006			2005			2006			2005
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
North America		$	1,814		$	276		$	2,493		$	475
United Kingdom			622			1,619			1,409			2,637
Europe			64			467			160			887
Asia			67			227			87			460
Latin America and other regions			199			1,672			495			2,299
		$	2,766		$	4,261		$	4,644		$	6,758

During the three-month period ended June 30, 2006 and 2005, one and five customers accounted for a total of 22% and 87% of our total sales, respectively. As a result of the WaveRider Merger, distribution of product sales have shifted to North America, relative to other geographic regions, and customer concentration has decreased.

10.	COMMITMENTS AND CONTINGENCIES

Contract Manufacturer

The Company provides its primary contract manufacturer with ongoing production forecasts to enable them to forecast and procure required parts. Under the terms of the Agreements with the contract manufacturer, the Company has committed to assume liability for all parts required to manufacture the Company’s forecast products for the next 13 weeks and all final assembly costs for the forecast products for the next 4 weeks, on a rolling basis. Management believes that, should it be necessary, they could find alternative contract manufacturers without significant disruption to the business.

Default under Registration Rights Agreement

The Company is in default under a registration rights agreement that it entered into with the owners of the Series J and J-1 preferred shares. Under the agreement the Company was required to file a registration statement on or before June 2, 2006. Failure to file the registration statement results in a penalty equal to 2% of the value of the securities for the first 30 days, or part thereof, and 1% for each subsequent 30 day period until the registration statement is filed. The Company expects to file the registration statement on or before the end of October and, as such, has estimated the potential penalty as $615,000.

Settlement Agreements

The Company is currently in default under a Settlement Agreement and Release (“Settlement Agreement”) it entered into on September 15, 2004 with Seimans Aktiengesellchaft ("Siemens") with respect to certain claims between Siemens and the Company arising under a Joint Development and License Agreement and Original Equipment Manufacturer Agreement entered into between the parties. Under the terms of the Settlement Agreement, the Company agreed to pay Siemens $500,000, of which it paid $100,000 on October 1, 2004. The Company was obligated to pay an additional $100,000 upon the earlier of the receipt of financing by the Company equal to at least $100,000 or December 31, 2004, and $300,000 in twelve monthly installments of $25,000 per month beginning January 1, 2005. The Company did not make the December 31, 2004 $100,000 payment but did make the first two monthly payments of $25,000 each in January and February 2005. The Company has made no other payments to Siemens and, as a result of the default, the remaining amount of $350,000, plus accrued interest at 7% per annum, is immediately due and payable.

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WAVE WIRELESS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006

 

Contingencies

In June 2000, two former consultants to P-Com Italia S.p.A. filed a complaint against P-Com Italia in the Civil Court of Rome, Italy seeking payment of certain consulting fees allegedly due the consultants totaling approximately $615,000. The Civil Court of Rome has appointed a technical consultant in order to determine the merit of certain claims made by the consultants. On April 20, 2005, the Civil Court of Rome issued judgment dismissing the case, and ordered the consultants to pay P-Com Italia's legal fees. The Court's order has been appealed by the consultants to the Court of Appeal of Rome.

In July 2006, a former distributor to the Company filed a complaint against the Company in the Superior Court of the State of California, Count of Santa Clara, for breach of contract and fraud. The Complaint seeks damages totaling approximately $627,000, relating to sales commissions allegedly owed, and for allegedly defective products. While no assurances can be given, the Company has asserted counterclaims in excess of $1.0 million, and intends to vigorously defend the allegations contained in the Complaint. No liability related to this matter has been recorded in the financial statements.

11.  SUBSEQUENT EVENTS

a)

On July 1, 2006, the Company sold all of its interest in WaveRider Communications (Canada) Inc. and its wholly owned subsidiary, JetStream Internet Services Inc., WaveRider Communications (USA) Inc. and Avendo Wireless Corporation for approximately $1,773,000, of which $1,388,000 was received on that date, and approximately $385,000 remains to be paid, subject to certain conditions.

b)

On July 28, 2006, the Company’s President and Chief Executive Officer, Mr. Charles Brown resigned. Mr. Brown's resignation materially impacted the Company's ability to continue to address the ongoing poor operating results in the Company’s principal business units and the Company’s continuing deteriorating working capital position. Subsequently, the Board of Directors directed management to review the Company’s product lines, which will likely result in the sale of certain or all of the Company’s product lines.

c)

On July 5, 2006, Mr. Fred Fromm and on August 22, 2006, Messrs. Chastelet, Milligan and Sinclair resigned from the Company’s Board of Directors. None of them expressed any disagreement with the Company.

d)

On September 25, 2006, the Company entered into a non-binding Letter of Intent with VCom Inc. for the sale of WaveRider’s 900 MHz product line.

e)

On September 30, 2006, the Company did not make the required installment payment for its debenture liability, discussed in Note 5. As a result, the Company is in default of the obligation.

 

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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-QSB contains forward-looking statements, which involve numerous risks and uncertainties. The statements contained in this Quarterly Report on Form 10-QSB that are not purely historical may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including without limitation, statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Certain Factors Affecting the Company" contained in our Annual Report on Form 10-KSB, and other documents filed by us with the Securities and Exchange Commission.

The Company is currently reviewing its remaining product lines, in light of the current softness in telecommunications equipment markets, disappointing results in its principal business units, the unexpected resignation of its President and Chief Executive Officer and its current working capital deficit. Management’s review will likely result in the decision to sell certain or all product lines and business units. As a result, future results will differ materially from historical results. Even if the Company is able to immediately sell one or more of its product lines, or business units, it is unlikely the proceeds from such transactions will be sufficient to satisfy its current and long-term liabilities. As such, the Company will likely be required to seek the protection of the bankruptcy court.

 

OVERVIEW. We are a developer of wireless broadband solutions, offering a comprehensive portfolio of wireless mesh routers, and fixed and mobile non-line-of-sight (NLOS) products that can be deployed rapidly and cost-effectively in all types of environments. Our products are used for applications ranging from mission critical public safety communications, video surveillance, municipal networks, and private enterprise networks to last mile broadband access. First responders, telecom carriers, municipalities, wireless Internet service providers, utilities, security companies and the military have deployed Wave Wireless solutions. We also provide repair, maintenance and other services to our licensed and other customers worldwide.

Wave Wireless originally acquired the Wave Wireless networking product line (“SPEEDLAN”) from SPEEDCOM Wireless Corporation in December 2003 as a means to complement its legacy business focused on licensed wireless backhaul products, and to gain entry into the rapidly growing market for enterprise-class license-exempt wireless solutions. In April 2005, Wave Wireless announced a formal restructuring plan designed to dramatically reduce costs, refocus its strategic direction, and ultimately achieve profitability (“Restructuring Plan”). Key elements of the Restructuring Plan involved both (i) divesting Wave Wireless’ legacy product lines for the licensed market that were expected to result in continued substantial operating losses, and (ii) refocusing Wave Wireless’ product strategy around its SPEEDLAN product line and the market for robust license-exempt and licensed public safety band wireless applications. Wave Wireless would also continue to provide repair and maintenance support services in connection with its RMA Business to its installed base of legacy products for the licensed wireless backhaul market.

The Restructuring Plan was caused by the substantial operating losses incurred by Wave Wireless, and management's assessment that substantial operating losses would continue in the absence of a plan to restructure the business, and substantially reduce its cost structure. In addition, absent such a plan, Wave Wireless would likely be unable to attract financing on reasonable terms, if at all.

In connection with the Restructuring Plan, Wave Wireless changed its corporate name from “P-Com, Inc.” to “Wave Wireless Corporation”, and effected a re-capitalization whereby all outstanding shares of its Series C Preferred Stock were automatically converted into shares of its Series G Preferred Stock and common stock. Both the name change and the re-capitalization were approved at Wave Wireless’ 2005 Annual Meeting of Stockholders, which was held on August 12, 2005.

On March 28, 2006, a wholly owned subsidiary of the Company was merged with and into WaveRider Communications Inc. (the “WaveRider Merger”). The WaveRider Merger brought together complementary business lines, engineering, sales and marketing compatibilities and innovative technology. The combination of Wave Wireless’ SPEEDLAN family of mesh networking products and WaveRider’s Last Mile Solutionâ non-line-of-sight, fixed and mobile wireless 900 MHz products provided customers with a wide range of line-of-sight fixed and non-line-of-sight products and services.

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The product, personnel and other synergies resulting from the WaveRider Merger were intended to lower operating and other costs, and increase revenue in each company’s respective product lines. Following consummation of the WaveRider Merger, the Company experienced far longer sales cycles for new products than were expected, certain product availability issues in connection with its 900 MHz non-line-of-sight products, and continuing delays in commercializing new Mesh products, resulting in substantially lower revenue in each of these product lines than previously expected. Due to the recognition of lower than anticipated revenue during the quarter ended June 30, 2006, the Company was required to use a significant amount of its cash resources to satisfy certain legacy obligations, and the costs incurred in connection with consummation of the WaveRider Merger. As a result of these factors, and the Company’s deteriorating cash position, management entered into discussions to sell certain non-core assets in order to satisfy its working capital requirements.

Management of WaveRider’s Australian subsidiary had approached it on a number of occasions about the possibility of a management buy-out of the Company. On June 19, 2006, the Company’s board of directors met and agreed that, as a non-core asset, the sale of the Australian subsidiary should be considered and directed management to enter into formal negotiations. On June 30, 2006, the Company sold WaveRider Communications (Australia) Pty Ltd., for cash consideration of $370,000 plus contingent consideration calculated at 15% of revenue for the following 12 months, payable quarterly in arrears.

On June 1, 2006, following informal discussions between the two companies, representatives of VCom Inc. approached the Company about the possibility of acquiring the Canadian operations of WaveRider. Upon receipt of a tentative Letter of Offer, the Company’s Board of Directors, at their June 19 meeting, directed management to enter into formal negotiations. On July 1, 2006, the Company sold WaveRider Communications (USA) Inc., Avendo Wireless Corporation and WaveRider Communications (Canada) Inc., including its wholly owned subsidiary, JetStream Internet Services Inc. to VCom Inc.

The sale of the former WaveRider subsidiaries, while generating much needed short-term working capital, resulted in the disposition of substantially all of WaveRider’s international revenue. The Company retained WaveRider’s intellectual property and its North American operations.

As a result, the operations which will not be ongoing for the Company have been shown as loss from discontinued operations in the condensed consolidated statements of operations, and any assets and liabilities held at June 30, 2006 have been shown as assets and liabilities, respectively, from discontinued operations on the condensed consolidated balance sheet.

Subsequent to the quarter ended June 30, 2006, Charles Brown, the Company’s President and Chief Executive Officer, unexpectedly tendered his resignation. Mr. Brown's resignation materially impacted the Company's ability to continue to address the ongoing poor operating results in the Company’s principal business units and the Company’s continuing deteriorating working capital position. Following Mr. Brown’s resignation, the Company’s Board of Directors met to consider alternatives available to the Company in order to continue as a going concern.

In order to provide for its immediate working capital needs, and in light of the Board’s determination that additional equity or debt financing would likely be unavailable to the Company, the Board of Directors directed management to explore the sale of certain or all remaining product lines and business units. This process is currently proceeding. No assurances can be given that management will be successful in its efforts, or that any proceeds derived from such sales will be sufficient to allow the Company to continue as a going concern. Even if the Company is able to immediately sell one or more of its product lines, or business units, it is unlikely the proceeds derived from any such sales will be sufficient to satisfy the Company’s current and long-term liabilities. As such, the Company will likely be required to seek the protection of the bankruptcy court. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

Critical Accounting Policies

MANAGEMENT'S USE OF ESTIMATES AND ASSUMPTIONS. The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material and affect the results of operations reported in future periods.

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REVENUE RECOGNITION. Revenue from product sales is recognized upon transfer of title and risk of loss, which is upon shipment of the product, provided no significant obligations remain and collection is probable. Provisions for estimated warranty repairs, returns and other allowances are recorded at the time revenue is recognized.

ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments. We evaluate our allowance for doubtful accounts based on the aging of our accounts receivable, the financial condition of our customers and their payment history, our historical write-off experience and other assumptions. In order to limit our credit exposure, we require irrevocable letters of credit and even prepayment from certain of our customers before commencing production.

INVENTORY. Inventory is stated at the lower of cost or market, cost being determined on a first-in, first-out basis. We assess our inventory carrying value and reduce it if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using management's best estimate given the information currently available. Our customers' demand is highly unpredictable, and can fluctuate significantly, caused by factors beyond the control of the Company. Our inventories include parts and components that are specialized in nature or subject to rapid technological obsolescence. We maintain an allowance for inventories for potentially excess and obsolete inventories and gross inventory levels that are carried at costs that are higher than their market values. If we determine that market conditions are less favorable that those projected by management, such as an unanticipated decline in demand not meeting our expectations, additional inventory write-downs may be required.

PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and include tooling and test equipment, computer equipment, furniture, land and buildings, and construction-in-progress. Depreciation is computed using the straight-line method based upon the useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized using the straight-line method based upon the shorter of the estimated useful lives or the lease term of the respective assets.

IMPAIRMENT OF LONG-LIVED ASSETS. In the event that facts and circumstances indicate that the long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down is required.

CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents and trade accounts receivable. The Company places its cash equivalents in a variety of financial instruments such as market rate accounts and U.S. Government agency debt securities. The Company, by policy, limits the amount of credit exposure to any one financial institution or commercial issuer.

The Company performs on-going credit evaluations of its customers' financial condition to determine the customer's credit worthiness. Sales are then generally made either on 30 to 60 day payment terms, COD or letters of credit. The Company extends credit terms to international customers for up to 90 days, which is consistent with prevailing business practices.

At June 30, 2006, there was no significant concentration of trade accounts receivable. At June 30, 2005, approximately 81% of trade accounts receivable represented amounts due from four customers.

RESULTS OF OPERATIONS

SALES. For the three months ended June 30, 2006, sales were approximately $2.8 million as compared to $4.3 million in the comparable period in the prior year. For the six months ended June 30, 2006, sales were approximately $4.6 million, as compared to $6.8 million in the comparable period in the prior year. The decrease in revenue as compared to the comparable period last year is attributable to substantially lower revenue in certain end-of-life licensed and unlicensed product lines and lower refurbished licensed product revenue associated with our RMA Business, offset by the recognition of $1.6 million and $1.9 million in sales, for the three and six months ended June 30, 2006 respectively, attributable to the sale of non-line-of-sight and other WaveRider products following the consummation of the WaveRider Merger.

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The lower revenue attributable to our licensed and certain unlicensed product lines principally reflects the decision made, as part of the Restructuring Plan in April 2005, to divest of certain unprofitable licensed product lines and to exit from certain licensed product lines.

The decrease in sales attributable to our RMA Business in the three and six month period ending June 30, 2006 is principally caused by lower sales volume attributable to the loss of a single customer in Europe, as well as by the decommissioning of certain of our licensed radio products from another customer's network. Our RMA Business is currently substantially dependent on sales to a single customer. Our agreement with that customer expires on December 31, 2006. While no assurances can be given, management has begun the process of negotiating a renewal of that agreement for 2007. In addition, management anticipates that, as our customers' networks age, and the cost to replace these networks decrease, our remaining customers may elect to decommission our licensed radio products installed in their networks. In addition, competition from other repair and maintenance service providers may negatively affect sales attributable to our RMA Business. As a result, it is anticipated that our RMA Business will continue to decline over time.

Despite its focus on the unlicensed product market, the Company was unable to commercialize new mesh products, during the quarter, limiting the market opportunities for this product category, which had been anticipated to provide strong growth.

The Company had, also, anticipated stronger growth in the 900 MHz product line, acquired in the WaveRider Merger. However, the sales cycles for the Company’s mobile products have proven to be much longer than anticipated. In order to effectively enter this market, the Company has determined that it requires significantly more sales and marketing resources to attract and sell to the large system integrators and value added resellers that dominate this market. At the same time, the Company did not experience the expected growth in the core Wireless Internet Service Provider (WISP) market, partly due to product availability issues.

GROSS PROFIT (LOSS). Gross profit for the three months ended June 30, 2006 and 2005, was $862 thousand and $1.325 million, respectively, or 31% and 31% of sales in each of the respective quarters. Gross profit for the six months ended June 30, 2006 and 2005 was $1.207 million and $1.277 million, respectively, or 26% and 19% of sales in each of the respective periods. Gross margins were impacted by significant inventory reserves resulting from the Company’s decision to exit the legacy licensed microwave products to concentrate on the Wave Wireless and WaveRider products.

RESEARCH AND DEVELOPMENT. For the three and six months ended June 30, 2006 and 2005, research and development ("R&D") expenses were approximately $642 thousand and $774 thousand, and $1.2 and $2.0 million, respectively. As a percentage of sales, research and development expenses were 23% and 25% for the three and six months ended June 30, 2006 and 18% and 29% for the same periods in 2005. The decrease in R&D expenses is principally the result of headcount reductions and other related expense reductions caused by the implementation of the Restructuring Plan, and the resulting focus on unlicensed product development. As a result of management’s determination to substantially reduce operating and other expenses in connection with its review of its product lines and business units, the Company has substantially reduced spending on research and development activity.

SELLING AND MARKETING. For the three and six months ended June 30, 2006 and 2005, sales and marketing expenses were approximately $613 thousand and $1.1 million, and $853 thousand and $2.1 million, respectively. The substantial decrease in sales and marketing expenses in the quarter and six-month period ended June 30, 2006 is due to headcount reductions and other related expense reductions, and lower commissions in light of decreased sales. As a percentage of sales, selling and marketing expenses were 22% and 24% for the three and six months ended June 30, 2006, respectively, and 20% and 31% for the same periods in 2005.

GENERAL AND ADMINISTRATIVE. For the three and six months ended June 30, 2006 and 2005, general and administrative expenses were approximately $604 thousand and $1.2 million, and $943 thousand and $1.9 million, respectively. As a percentage of sales, general and administrative expenses were 22% and 27% for the three and six months ended June 30, 2006, respectively, compared to 22% and 28% for the three and six months ended June 30, 2005. The decrease in general and administrative expenses in the first three and six months of 2006 as compared to the comparable periods in 2005 is principally attributable to a realization of savings from cost reduction efforts caused by implementation of the Restructuring Plan, including reduced consulting and legal expenses, and facilities consolidation.

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ASSET IMPAIRMENT AND RESTRUCTURING CHARGES. In the event that certain facts and circumstances indicate that the long-lived assets may be impaired, an evaluation of recoverability would be performed. When an evaluation occurs, management conducts a probability analysis based on the weighted future undiscounted cash flows associated with the asset. The results are then compared to the asset's carrying amount to determine if impairment is necessary. The cash flow analysis for the property and equipment is performed over the shorter of the expected useful lives of the assets, or the expected life cycles of our product line. An impairment charge is recorded if the net cash flows derived from the analysis are less than the asset's carrying value. We deem that the property and equipment is fairly stated if the future undiscounted cash flows exceed its carrying amount.

On August 3, 2006, Wave Wireless announced that it was reviewing its business operations with the intent to sell certain product lines and business units, or enter into strategic relationships for individual product lines and business units. An impairment charge and loss on discontinued operation of $24.497 million was taken as of June 30, 2006, related to the write-down of goodwill and disposal of other assets, partially offset by reductions in prior provisions.

In April 2005, Wave Wireless announced the adoption of the Restructuring Plan that significantly curtailed current spending, and substantially reduced liabilities and operating and other costs. The Restructuring Plan included the divestiture of certain unprofitable product lines, workforce reductions, write-down of certain inventory, and a loss associated with the divestiture of the Company's research and development operations in Italy.

DERIVATIVE INSTRUMENT INCOME (EXPENSE). Derivative instrument income amounted to $1.339 million and $1,217 for the three and six months ended June 30, 2006, respectively. Derivative instrument income (expense) arises from fair value adjustments for certain financial instruments, such as convertible preferred stock and warrants to acquire common stock and are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such derivative financial instruments are initially recorded at fair value with subsequent changes in the fair value charged (credited) to operations each reporting period.

INTEREST EXPENSE. For the three and six months ended June 30, 2006 and 2005, interest expense was $164 thousand and $555 thousand, and $169 thousand and $388 thousand, respectively.

FINANCING EXPENSE - For the six months ended June 30, 2006 financing expense was $9.851 million. This expense was mainly due to non-cash charges, during the first quarter of 2006, related to the conversion of promissory notes and debt to Series J Convertible Preferred Stock, the issue of Series J Stock to consultants in connection with the Company’s promissory note financing, the accretion to face value of the promissory notes and amortization of deferred financing charges. During the second quarter, the Company failed to file a registration statement related to the sale of the Series J and J-1 preferred shares and related warrants. As a result, a penalty provision in the registration rights agreement was triggered and the Company has accrued an anticipated liability of $615 thousand.

LOSS FROM DISCONTINUED OPERATIONS. For the three and six months ended June 30, 2006, the loss from discontinued operations was $740 thousand and $703 thousand, respectively. The Company sold its operating subsidiary in Australia effective June 30, 2006 and the North American subsidiaries of WaveRider Communications Inc. on July 1, 2006.

LIQUIDITY AND CAPITAL RESOURCES

CASH PROVIDED (USED) IN OPERATIONS. During the three month period ended June 30, 2006, the Company used approximately $3.218 million in operating activities, primarily due to our net loss of $36.6 million, less non-cash items of $33.4 million, offset by decreases in accounts receivable of $883 thousand, inventory of $510 thousand and an increase in other accrued liabilities of $110 thousand less increases in prepaid and other assets of $98 thousand and net assets of discontinued operations of $1.051 million and decreases in accounts payable of $400 thousand.

CASH FROM INVESTING ACTIVITIES. During the six-month period ended June 30, 2006, we generated approximately $215 thousand in investing activities.

CASH FROM FINANCING ACTIVITIES. During the six month period ended June 30, 2006, we received approximately $2.872 million of cash from financing activities, primarily from $2.224 million from the sale of Series J and J-1 Convertible Preferred Stock and $989 thousand from the sale of promissory notes, offset by $341 thousand in repayment of advances under the Credit Facility.

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CURRENT LIQUIDITY. As of June 30, 2006, our principal sources of liquidity consisted of borrowing availability under the Credit Facility, and approximately $249,000 of cash and cash equivalents, compared to approximately $380,000 in cash and cash equivalents at December 31, 2005. As of June 30, 2006, we were not in compliance with the minimum tangible net worth covenant established in the Credit Facility. As a result of this, among other defaults, the Bank terminated the Credit Facility on August 4, 2006. The Company is currently dependent on existing cash resources and external sources of financing to satisfy its working capital needs, and our cash balance is deteriorating, as described below. Principal sources of external financing currently consist of cash generated from the sale of assets, as discussed below.

At June 30, 2006, our total liabilities were approximately $14.19 million, compared to $10.83 million at December 31, 2005. Our current assets of $3.4 million and our current liabilities of $13.3 million at June 30, 2006, resulted in negative working capital of approximately $9.9 million, compared to negative working capital of $7.1 million at December 31, 2005. The increase in negative working capital reflects the losses incurred during the period and the negative working capital acquired in connection with the WaveRider Merger.

The Company remains dependent on external sources of financing and the sale of assets to continue operations. As a result, in connection with and immediately following the WaveRider Merger, the Company privately placed equity securities to address its immediate liquidity needs. In addition, the Company sold its interest in WaveRider Communications Australia Pty Ltd. for $370,000 plus 15% of future gross revenues for the next 12 months. The payment of $370,000 was received in July 2006. As well, on July 1, 2006, the Company sold all of its interest in WaveRider Communications (Canada) Inc., including its wholly owned subsidiary, JetStream Internet Services Inc., WaveRider Communications (USA) Inc. and Avendo Wireless Corporation for approximately $1,773,000, of which $1,388,000 was received on that date, and approximately $385,000 remains to be paid, subject to certain conditions. While proceeds received from the foregoing transactions have provided necessary working capital during the quarter ended June 30, 2006, and allowed the Company to satisfy certain contractual and other obligations during such period, the Company’s cash flow from operations remains substantially below levels necessary to satisfy its working capital needs for the remainder of the quarter ending September 30, 2006. As a result, the Company is currently reviewing the potential sale of certain or all product lines and business units, as set forth above.

 

There can be no assurance that the Company will be successful in selling certain of its product lines and business units. Even if the Company is successful it is unlikely that the proceeds from such transactions will be sufficient to satisfy the Company’s current and long-term liabilities. As a result, the Company will likely be required to seek protection under the bankruptcy laws; in which event the Company believes it is unlikely that its common stock will have any value. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to amounts and classification of liabilities that may be necessary if the Company is unable to continue as a going concern.

 

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (“FASB”) has recently announced a new interpretation, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which will be effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has not determined the impact of the adoption of FIN 48 on its consolidated financial statements.

 

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ITEM 3. CONTROLS AND PROCEDURES

Disclosure controls and procedures are controls and other procedures designed to ensure that we timely record, process, summarize and report the information that we are required to disclose in the reports that we file or submit with the SEC. These include controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As required under the Sarbanes-Oxley Act of 2002, our Chief Executive Officer and Chief Financial Officer conducted a review of our disclosure controls and procedures as of the end of the period covered by this report. They concluded, as of the evaluation date, that our disclosure controls and procedures are effective.

During the three months ended June 30, 2006, there were no changes in our internal control over financial reporting that have affected, or are reasonably likely to affect, materially our internal control over financial reporting.

 

 

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PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

A description is included in footnote 10 of our financial statements.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Issuance of Convertible Notes --During the quarter ended June 30, 2006, Wave Wireless issued 1,247.4867 shares of Series J and 120.6667 shares of Series J-1 Convertible Preferred Stock, respectively, resulting in net proceeds to the Company of approximately $2.224 million. In addition, investors were issued warrants (the “Preferred Stock Warrants”) to purchase a total of 39,248,221 shares of common stock of Wave Wireless at an exercise price of $0.12 per share.

No underwriters were involved in the foregoing transactions. Securities were issued in private transactions, in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, because each offering was a non-public offering to accredited investors.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

On September 30, 2006, the Company did make the required installment payment for its debenture liability and is in default of under the terms of the debenture.

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

 

ITEM 5.

OTHER INFORMATION.

None.

ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

3.1	Certificate of Incorporation, as amended and restated through August 22, 2005 incorporated by reference to exhibit 4.2 of the Registrant’s report on Form 8-K filed on August 16, 2005

3.2	Bylaws, as amended and restated through December 3, 2003, incorporated by reference to exhibit 3.2 of the Registrant’s registration statement on Form S-1 (file number 333-111405) declared effective by the Security and Exchange Commission on February 6, 2004.

31.1	Certification of Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a).

31.2	Certification of Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a).

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On April 3, 2006, we filed a Form 8-K to announce that we had consummated the merger of Wave Wireless and WaveRider Communications Inc. (“WaveRider Merger”). We also announced the resignation and appointment of certain directors in connection with the WaveRider Merger.

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On April 6, 2006, we filed a Form 8-K to announce (i) the filing of a Certificate of Designations amending our Articles of Incorporation creating Series J Preferred Stock; (ii) the exchange of certain convertible promissory notes for Series J Preferred Stock and warrants to purchase Common Stock of Wave Wireless (“Series J Warrants”); and (iii) the issuance of Series J Preferred Stock and Series J Warrants to our investment banker for services rendered in connection with the WaveRider Merger.

On April 21, we filed a Form 8-K to announce the sale of Series J Preferred Stock and Series J Warrants, and the exchange of our Series H Preferred Stock, Series I Preferred Stock and certain warrants for Series J Preferred Stock and Series J Warrants.

On May 3, 2006, we filed a Form 8-K to announce the sale of Series J Preferred Stock and Series J Warrants.

On June 2, 2006, we filed a Form 8-K to announce (i) the filing of a Certificate of Designations amending our Articles of Incorporation creating Series J-1 Preferred Stock; (ii) the sale of Series J Preferred Stock and Series J-1 Preferred Stock, and Series J Warrants and warrants to purchase shares of Common Stock of Wave Wireless (“Series J-1 Warrants”); and (iii) the issuance of Series J-1 Preferred Stock and Series J-1 Warrants to our investment banker for certain restructuring and investment banking services rendered in connection with certain financing activities.