Ariel Way 10QSB 2007 Q1 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended December 31, 2006

Commission File Number 0-50051

ARIEL WAY, INC.

(Exact name of registrant as specified in charter)

FLORIDA		65-0983277
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
-		-
8000 TOWERS CRESCENT DRIVE
SUITE 1220, VIENNA, VA		22182
(Address of principal executive offices)		(Zip Code)
-		-
Registrant’s telephone number, including area code		(703) 918-2430

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of February 15, 2006, the Company had outstanding 44,879,760 shares of its common stock, $0.001 par value share.

TABLE OF CONTENTS

ITEM NUMBER AND CAPTION		PAGE

PART I

ITEM 1.	FINANCIAL STATEMENTS	F-1
	NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	F-5
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS	2
ITEM 3	CONTROLS AND PROCEDURES	18

PART II

ITEM 1.	LEGAL PROCEEDINGS	19
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	19
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	19
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	19
ITEM 5.	OTHER INFORMATION	19
ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K	20

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

ARIEL WAY, INC. AND SUBSIDIARIES

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

(UNAUDITED)

Condensed Consolidated Financial Statements:

Balance Sheet as of December 31, 2006 (Unaudited)	F-2

Statements of Operations for the Three Months
Ended December 31, 2006 and 2005 (Unaudited)	F-3

Statements of Cash Flow for the Three Months
Ended December 31, 2006 and 2005 (Unaudited)	F-4

Notes to Condensed Consolidated Financial Statements
(Unaudited)	F-5

F-1

ARIEL WAY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2006

(UNAUDITED)

	December 31, 2006
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	35,569
Account receivable, net		4,379
Prepaid expenses and other current assets		7,204

Total current assets		47,152

PROPERTY AND EQUIPMENT - NET		36,729

Total other assets		150,000

TOTAL ASSETS	$	233,881

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
Accounts payable and accrued expenses	$	3,244,467
Deferred revenue		307,767
Promissory notes		-

Total current liabilities		3,552,234

Total liabilities		3,552,234

STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
159 ¾ shares issued and outstanding		-
Series A Convertible Preferred stock, $0.001 par value
165 shares authorized, 159 ¾ issued and outstanding		-
Common stock, $.001 par value; 595,000,000 shares authorized;
40,036,785 shares issued and outstanding		40,037
Additional paid-in capital		2,469,268
Accumulated deficit		(5,827,658	)

Total stockholders' equity (deficit)		(3,318,353	)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$	233,881

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

F-2

ARIEL WAY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005

(UNAUDITED)

	THREE MONTHS ENDED
	December 31,			December 31,
	2006			2005

REVENUES		410,391		$	606,075

COST OF REVENUES		328,853			582,715

GROSS PROFIT		81,538			23,360

OPERATING EXPENSES
Professional fees		190,735			162,710
Salaries		34,086			173,051
Bank service charges and other		806			525
Travel and entertainment		2,093			15,832
Marketing		-			5,983
Insurance		2,769			8,179
Payroll taxes and expenses		1,158			19,090
Telephone		2,442			7,003
Office equipment		-			10,463
Depreciation and Amortization		4,233			41,941
Office supplies		325			2,379
Rent		14,437			44,107
Miscellaneous		2			12,497
Automobile		-			130
Dues and subscriptions		1,917			145
Postage and delivery		615			2,003
Printing		2,086			1,695
Bad debt expense		(21,461	)		-
Other		7,223			1,554
Total Operating Expenses		243,468			509,287

NET INCOME (LOSS) BEFORE OTHER EXPENSE		(161,930	)		(485,926	)

OTHER INCOME (EXPENSE)
Interest income		137			144
Interest expense		(1,935	)		(6,436	)
Minority interest		-			110,058
Total Other (Expense)		(1,798	)		100,766

NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		(163,728	)		(385,160	)
Provision for income taxes		-			-

NET INCOME (LOSS) PER APPLICABLE TO COMMON SHARES	$	(163,728	)	$	(385,160	)

NET INCOME (LOSS) PER BASIC AND DILUTED SHARES	$	(0.00	)	$	(0.01	)

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING		38,881,298			38,336,943

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

F-3

ARIEL WAY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005

(UNAUDITED)

	THREE MONTHS ENDED
	December 31,			December 31,
	2006			2005

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(163,728	)	$	(385,160	)

Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization		4,233			41,941
Minority interest		-			(110,058	)
Changes in assets and liabilities:
(Increase) in accounts receivable		26,528			(107,882	)
Decrease (increase) in prepaid expenses		(136,856	)		(17,632	)
Increase in accounts payable and accrued expenses		355,207			539,813
Increase in deferred revenue		(16,401	)		-
Total adjustments		232,711			346,182

Net cash provided by (used in) operating activities		68,983			(38,978	)

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment		-			(40,475	)

Net cash provided by (used in) investing activities		-			(40,475	)

CASH FLOWS FROM FINANCING ACTIVITIES
(Advances) to related party		-			3,999
Issuance of common stock for settlement of liabilities		-			3,000
Proceeds from long-term debt, net		(77,560	)		-

Net cash provided by (used in) financing activities		(77,560	)		6,999

DECREASE IN CASH AND CASH EQUIVALENTS		(8,577	)		(72,454	)

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		46,050			122,640

CASH AND CASH EQUIVALENTS - END OF PERIOD	$	37,473		$	50,186

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

F-4

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION

Ariel Way, Inc., a Florida corporation (“Ariel Way” or the “Company”), is a technology and services company for highly secure global communications, multimedia and digital signage solutions and technologies. The Company is focused on developing innovative and secure technologies, acquiring and growing profitable advanced technology companies and global communications service providers and creating strategic alliances with companies in complementary product lines and service industries.

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

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

The Company does not maintain cash and cash equivalents with a financial institution that exceeds the limit of insurability under the Federal Deposit Insurance Corporation.

Revenue Recognition

The Company records its transactions under the accrual method of accounting where income is recognized when the services are rendered.

Fixed Assets

Furniture and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The costs associated with normal maintenance, repair, and refurbishment of equipment are charged to expense as incurred. The capitalized cost of equipment under capital leases is amortized over the lesser of the lease term or the asset’s estimated useful life, and is included in depreciation and amortization expense in the consolidated statements of operations.

When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized as income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. Deductions are made for retirements resulting from renewals or betterments.

F-5

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Asset Impairment

Under SFAS 121 need to measure the impairment loss by the difference between the fair value of the assets and its carry value. The Company performs an impairment test on an asset group to be discontinued, or otherwise disposed of when management has committed to the action and the action is expected to be completed within one year. We estimate fair value to approximate the expected proceeds to be received, less transaction costs and compare it to the carrying value of the asset group. An impairment charge is recognized when the carrying value exceeds the estimated fair market value. When the estimated fair market value exceeds the carrying value of the asset group, gain is recognized upon disposal.

Foreclosed Assets

On June 21, 2006, the Company filed with the Securities and Exchange Commission its quarterly report for the three-month period ending March 31, 2006. In this filing, the Company disclosed that on May 8, 2006, the Company’s subsidiary dbsXmedia, Inc. (“dbsXmedia or “Debtor”) received a letter from Loral Skynet Network Services, Inc. (“Loral Skynet”), with the text of the letter included in the disclosure. The disclosed letter stated that Debtor was in default under that certain Security Agreement, dated as of April 21, 2005 (the "Security Agreement"), by and among Debtor, Loral Skynet, CyberStar, L.P. and CyberStar, LLC, granting a security interest in the Collateral there under (which includes all business television-related assets and receivables of dbsXmedia). dbsXmedia carried the fixed assets with a book value of $90,000 as of the date of this notice. In the letter, Loral Skynet requested that dbsXmedia send to Loral Skynet a signed, written statement of dbsXmedia’s objection to certain of its actions, to include foreclosure of the Collateral, within twenty (20) days of the date of the letter. If Loral Skynet had not received a signed, written objection from dbsXmedia within the prescribed time period, dbsXmedia would be deemed to have consented to the proposed actions by Loral Skynet and would have no further right to object thereto, and Loral Skynet would retain the Collateral in partial satisfaction of the Balance, as described in the letter. The Company’s subsidiary dbsXmedia did not send a written statement of objection to Loral Skynet by May 28, 2006 and, as a result, dbsXmedia was deemed to have consented to the actions proposed by Loral Skynet in its May 8, 2006 letter, has no further right to object thereto, and Loral Skynet was entitled to retain the Collateral in partial satisfaction of the Balance, as described in the letter. As of September 30, 2006 the Company has written off all of the assets attributed to this transaction.

F-6

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

Property and Equipment

Property and equipment are stated at cost and depreciated using straight-line and accelerated methods over the following estimated useful lives of the assets:

	Computer equipment	3 - 5 years
	Automobile	3 - 5 years
	Equipment	5 - 7 years

Differences between the straight-line method of depreciation and the tax-accelerated method of depreciation are immaterial.

Goodwill and Other Intangible Assets

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

F-7

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes

The Company has adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. The Statement requires an asset and liability approach for financial accounting and reporting of income taxes, and the recognition of deferred tax assets and liabilities for the temporary differences between the financial reporting bases and tax bases of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled.

Use of Estimates

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

Reclassification

Certain amounts in the December 31, 2005 financial statements were reclassified to conform to the December 31, 2006 presentation.

F-8

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections , which replaces APB Opinion No. 20, Accounting Changes , and FASB Statement No.3, Reporting Accounting Changes in Interim Financial Statements . This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows.

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments.

Marketing and Advertising Costs

The Company expenses the costs associated with marketing and advertising as incurred. Marketing, advertising and promotional expenses were approximately $0 and $5,983 for the three-month period ended December 31, 2006 and 2005, respectively.

Accounts Receivable

The Company conducts business and extends credit based on an evaluation of the customers’ financial condition, generally without requiring collateral. Exposure to losses on receivables is expected to vary by customer due to the financial condition of each customer. The Company monitors exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances.

Accounts receivable are generally due within 30 days and collateral is not required. The Company has made allowance of $81,411 for doubtful accounts as of December 31, 2006.

Deferred Revenue

The Company’s balance sheet as of December 31, 2006 includes deferred revenue at $307,767. This relates to a pre-payment from a UK customer for services to be performed by the Company during calendar year 2006.

Policy for Charging Bad Debt

The allowance for doubtful accounts is our estimate of the credit losses related to impaired receivables at the date of the financial statements. This allowance is based on factors including the credit quality of our customers and general economic measures. Additions to the allowance for doubtful accounts are made by recording charges to the bad debt expense account on our statement of income. Accounts receivable balances are charged to the allowance for doubtful accounts when an account is deemed to be uncollectible, taking into consideration the financial condition of the borrower, and other factors. Recoveries on accounts receivable balances previously charged off as uncollectible are credited to the allowance for doubtful accounts.

F-9

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Deferred Financing Fees

On September 30, 2004, the Company entered into a 2004 Standby Equity Distribution Agreement with Cornell Capital Partners, LP (“Cornell Capital”). This agreement was terminated on July 20, 2005 and the Company entered into a new 2005 Standby Equity Distribution Agreement with Cornell Capital on July 21, 2005. In connection with the 2004 Standby Equity Distribution Agreement, Cornell Capital received a commitment fee in the form of 1,980,000 shares of Ariel Way, Inc., prior to our acquisition of the company (“Old Ariel Way”), that on February 2, 2005 were converted into an aggregate of 3,318,876 shares of our common stock as a result of our acquisition of Old Ariel Way on February 2, 2005. These shares were issued as payment for financing fees to Cornell Capital for issuing the 2004 Standby Equity Distribution Agreement and was valued at $1,128,600. The 2005 Standby Equity Distribution Agreement runs for a period of 24 months. The 2005 Standby Equity Distribution Agreement was terminated on February 28, 2006 pursuant to an Investment Agreement by and between the Company and Cornell Capital and Montgomery Equity Partners, Ltd. (“Montgomery Equity”) for the purchase of one hundred sixty (160) Series A Preferred Shares. The prior agreement was terminated and the financing fee was written off against Additional Paid-In Capital. All deferred financing fees were expensed in the fiscal year ended September 30, 2006.

Stock-Based Compensation

Prior to the January 1, 2006 adoption of the Financial Accounting Standards Board ("FASB") Statement No. 123(R), "Share-Based Payment" ("SFAS 123R"), the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), stock-based compensation was included as a pro forma disclosure.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified-prospective transition method. Under this transition method, stock-based compensation expense is recognized in the consolidated financial statements for granted, modified, or settled stock options. Compensation expense recognized included the estimated expense for stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R, and the estimated expense for the portion vesting in the period for options granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Results for prior periods have not been restated, as provided for under the modified-prospective method.

The Company measures compensation expense for its non-employee stock-based compensation under the FASB Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services”. The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital.

F-10

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Earnings (Loss) Per Share of Common Stock

Historical net income (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents were not included in the computation of diluted earnings per share when the Company reported a loss because to do so would be antidilutive for periods presented.

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

	December 31,
	2006			2005

Net loss	$	(163,728	)	$	(385,160	)

Weighted-average common shares
Outstanding (Basic)		38,881,298			38,336,943

Weighted-average common stock
Equivalents
Stock options		-			-
Warrants		-			-

Weighted-average common shares
Outstanding (Diluted)		38,881,298			38,336,943

Options and warrants outstanding to purchase stock were not included in the computation of diluted EPS for December 31, 2006 and 2005 because inclusion would have been antidilutive.

Currency Risk and Foreign Currency Translation

The Company transacts business in currencies other than the U.S. Dollar, primarily the British Sterling Pound and the Euro Dollar. All currency transactions are undertaken in the spot foreign exchange market and the Company does not use currency forward contracts, currency options, currency borrowings interest rate swaps or any other derivative hedging strategy at this point in time. Foreign currency translation losses were immaterial during the three-month period ended December 31, 2006 and 2005.

NOTE 3- EQUIPMENT

Property and equipment at December 31, 2006 is as follows:

	2006
Equipment	$	65,823
Computers		8,116

Less: accumulated depreciation		(37,210	)

Net equipment	$	36,729

Depreciation expense for the three-month period ended December 31, 2006 and 2005 was $4,233 and $1,941, respectively.

F-11

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 4- DEBENTURE PAYABLE

The Company on September 30, 2004, issued a secured debenture to Cornell Capital, whereas the Company would receive $500,000, with a promise to pay to Cornell Capital the principal sum of $500,000 together with interest on the unpaid principal of this debenture at the rate of 5% per year from the date of the debenture until paid. The secured debenture was due on September 29, 2006 and was secured by the Company’s stock. The $500,000 secured debenture was on February 28, 2006 converted pursuant to an Investment Agreement by and between the Company and Cornell Capital and Montgomery Equity to part of one hundred sixty (160) Series A Convertible Preferred Shares.

NOTE 5- PROMISSORY NOTES

The Company on February 2, 2005, borrowed $400,000 from Cornell Capital whereas the Company received the $400,000, with a promise to pay to Cornell Capital principal sum of $400,000 together with interest on the unpaid principal at the rate of 12% per annum and was due and payable on May 31, 2005 with an extension to February 28, 2006 and was secured by the Company’s stock. The $400,000 loan was on February 28, 2006 converted pursuant to an Investment Agreement by and between the Company and Cornell Capital and Montgomery Equity to part of one hundred sixty (160) Series A Convertible Preferred Shares.

The Company on July 28, 2005, borrowed $600,000 from Montgomery Equity whereas the Company received the $600,000, with a promise to pay to Montgomery Equity the principal sum of $600,000 together with interest on the unpaid principal at the rate of 12% per annum and was due and payable on February 28, 2006 and was secured by the Company’s stock. The $600,000 loan was on February 28, 2006 converted pursuant to an Investment Agreement by and between the Company and Cornell Capital and Montgomery Equity to part of one hundred sixty (160) Series A Convertible Preferred Shares.

In May 2005 the Company executed a promissory note in favor of a shareholder and employee in the amount of $70,000 with interest at 12% due on May 17, 2006. The loan was not paid when due and is in technical default. The Company has received a waiver from the shareholder regarding the default interest rate of the loan. The balance of the note as of December 31, 2006 is $56,068 consisting of principal and unpaid interest.

In September, 2005 the Company executed a promissory note in favor of the Company’s Chief Executive Officer in the amount of $42,450 with 5% interest due and payable monthly in arrears, commencing on September 26, 2006 and shall continue on the first day of each calendar month thereafter that any amounts under this Debenture are due and payable. Principal shall be due and payable in 6 equal installments of $7,041 each. The installments of principal shall be due and payable commencing on October 1, 2006 and subsequent installments shall be due and payable on the first day of each calendar month thereafter until the outstanding principal balance is paid in full. The loan was not paid when due and is in technical default. The balance of the note as of December 31, 2006 is $10,511 consisting of principal and unpaid interest.

F-12

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 6- COMMITMENTS AND CONTINGENCIES

Commitments

On September 30, 2004, the Company entered into a $50 million 2004 Standby Equity Distribution Agreement with Cornell Capital. This agreement was terminated on July 20, 2005 and the Company entered into a new 2005 Standby Equity Distribution Agreement with Cornell Capital on July 21, 2005. The 2005 Standby Equity Distribution Agreement provides, generally, that Cornell Capital will purchase up to $50 million of common stock over a two-year period, with the time and amount of such purchases, if any, at the Company’s discretion. Cornell Capital will purchase the shares at a 4% discount to the prevailing market price of the common stock. There are certain conditions applicable to the Company’s ability to draw down on the 2005 Standby Equity Distribution Agreement including the filing and effectiveness of a registration statement covering the resale of all shares of common stock that may be issued to Cornell Capital under the 2005 Standby Equity Distribution Agreement and the Company’s adherence with certain covenants. The registration statement has not yet become effective. The 2005 Standby Equity Distribution Agreement was terminated on February 28, 2006 pursuant to an Investment Agreement by and between the Company and Cornell Capital and Montgomery Equity for the purchase of one hundred sixty (160) Series A Preferred Shares.

Operating Lease

The Company maintains an office in McLean Virginia, under a month to month lease obligation. As referenced in Note 9 Litigation/Legal proceedings, dbsXmedia was obligated under an operating lease for the Frederick premises for a period of 5 years. The leased premises were vacated and the entire amount of the obligation was recorded as the payment was accelerated under the lease term.

Total rent expense during the three-month period ended December 31, 2006 and 2005 was approximately $14,437 and $44,107, respectively.

Contingencies

At December 31, 2006, the following guarantees and indemnifications were issued and outstanding:

On April 21, 2005 the Company’s subsidiary dbsXmedia completed a transaction with Loral Skynet in which the Company provided a $3,000,000 parental guarantee on behalf of dbsXmedia. The Company’s commitment was reduced on April 21, 2006 to $1,500,000 and the guarantee will reduce to $0 on April 21, 2007. The Company is currently in default of this parental guarantee and is in the process of negotiating a settlement with Loral Skynet.

On April 21, 2006, the Company’s subsidiary dbsXmedia, Inc. received a letter with a Notice of Default pursuant to Teleport Service Agreement dated 21 April, 2005 between dbsXmedia. Inc. ("dbsXmedia”) and Loral Skynet Network Services, Inc. ("Loral Skynet") stating that dbsXmedia is currently in arrears with regard to payment for services rendered pursuant to the Agreement with Loral Skynet in the amount of $540,112 (the "Current Outstanding Debt"). dbsXmedia’s failure to pay the Current Outstanding Debt constitutes a material default under Section 3(b) of the Agreement. The letter shall serve as written notice of payment past due and notice of a material default of the Agreement. Loral Skynet demands that dbsXmedia effect immediate payment of the full mount of the Current Outstanding Debt. If dbsXmedia fails to pay the Current Outstanding Debt within three (3) business days of the date hereof, i.e., 5:00 P.M., EDT, Wednesday, 26 April, 2006, Loral Skynet shall have the right to terminate the Agreement upon delivery of written notice. In such event, Loral Skynet shall avail itself of all remedies to which it is entitled, including, but not limited to, the assessment and collection of termination charges pursuant to Section 3 (Term and Termination) of the Agreement. Moreover, by delivery of the notice and any action taken in connection herewith, Loral Skynet does not waive its rights and remedies under the Agreement and any other agreements to which dbsXmedia and Loral Skynet are parties, including without limitation the right to collect amounts owed by dbsXmedia to Loral Skynet in addition to the amount set forth above.

F-13

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

On May 1, 2006, the Company’s subsidiary dbsXmedia, Inc. received a letter from Loral Skynet stating: “Reference is hereby made to that certain Notice of Default Letter, dated 21 April, 2006 (the "Notice of Default"), sent by Loral Skynet to dbsXmedia declaring a material default by dbsXrnedia under Section 3.B. of the Agreement (i.e. failure to pay amounts due for services rendered pursuant to the Agreement). Be advised that dbsXmedia has not cured this material default within the prescribed period of time set forth in the Notice of Default. As a result, this letter hereby serves as a written notice of termination of the Agreement and that such termination shall be effective at 12 Noon, Eastern Standard Time, 15 May, 2006 (the "Termination Date"). Be further advised that Loral Skynet intends to exercise any and all rights and remedies in respect of such default and termination available to Loral Skynet under the Agreement, at law and/or in equity, all of which rights and remedies are hereby reserved by Loral Skynet, including, without limitation, the right to: (a) assess and collect termination charges pursuant to Section 3 (Term and Termination) of the Agreement; and (b) collect amounts owed by dbsXmedia to Loral Skynet in addition to the amount set forth in the Notice of Default.”

On May 8, 2006, the Company’s subsidiary dbsXmedia, Inc. received a letter from Loral Skynet stating: “Debtor is in default under that certain Security Agreement, dated as of April 21, 2005 (the "Agreement"), by and among Debtor, Secured Party, CyberStar, L.P. and CyberStar, ELC, granting a security interest in, among other things, the Collateral. The outstanding balance due from Debtor to Secured Party, as of the date hereof, is $2,620,842 (the "Balance").”

“Secured Party hereby agrees to accept the Collateral in partial satisfaction of the Balance. Specifically, Secured Party shall accept the Equipment in satisfaction of $40,000 of the Balance and shall further reduce the Balance by $1 for each dollar that Secured Party recovers from your account debtors in connection with the AR. In addition, pursuant to Section 12 of the Agreement, Secured Party hereby requests that you send written notice to all account debtors and other persons obligated on any of the Customer Contracts (as defined in the Security Agreement) instructing that all future payments are to be made directly to Secured Party (to an account or financial institution named by Secured Party). If you fail to send such notices within thirty (30) days of the data hereof, the Secured Party shall prepare and send such notice on Debtor's behalf. If you have any objection to Secured Party's foregoing proposal, you must send Secured Party a signed, written statement of your objection within twenty (20) days of the date hereof. If Secured Party has not received a signed, written objection from you within the prescribed time period, you will be deemed to have consented to this proposal and will have no further right to object, and Secured Party will retain the Collateral in partial, satisfaction of the Balance, as described in this letter.”

“Finally, by delivery of this letter and any action taken in connection therewith, Secured Party does not waive any of its rights or remedies under the Agreement and other agreements to which Debtor and Secured Party are parties, including, without limitation, the right to foreclose on additional collateral to satisfy a portion of the Balance.”

As of February 15, 2007, the Company was not able to satisfy the funding of the settlement agreement to Loral Skynet. As a result, the Company is in default of the agreement and does not have the ability to fulfill the payment of $200,000 to Loral Skynet. Loral Skynet has not advised the Company of its intentions regarding this default. Loral Skynet may enforce its full rights and the Company may be forced into liquidation in the event the settlement is not satisfied.

F-14

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 7- STOCKHOLDERS’ EQUITY (DEFICIT)

Preferred Stock

The Company has 5,000,000 shares of preferred stock authorized, at $0.001 par value per share, of which 159 3/4 shares of Ariel Way Series A Convertible Preferred Stock (“Series A Preferred Shares”) were outstanding as of December 31, 2006.

The Company filed on March 6, 2006 with the Florida Secretary of State a Certificate of Designation providing the terms and conditions of the authorization of 165 shares of Ariel Way Series A Convertible Preferred Stock (“Series A Preferred Shares”).

The Holders of Series A Preferred Shares shall be entitled to receive dividends or distributions on a pro rata basis according to their holdings of shares of Series A Preferred Shares when and if declared by the Board of Directors of the Company in the amount of five (5.0%) percent per year. Dividends shall be paid in cash. Dividends shall be cumulative. No cash dividends or distributions shall be declared or paid or set apart for payment on the Common Stock in any calendar year unless cash dividends or distributions on the Series A Preferred Stock for such calendar year are likewise declared and paid or set apart for payment. No declared and unpaid dividends shall bear or accrue interest.

Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary (collectively, a “Liquidation”), before any distribution or payment shall be made to any of the holders of Common Stock or any series of Preferred Shares, the holders of Series A Preferred Shares shall be entitled to receive out of the assets of the Company, whether such assets are capital, surplus or earnings, an amount equal to $10,031 per share of Series A Preferred Shares (the “Liquidation Amount”) plus all declared and unpaid dividends thereon, for each share of Series A Preferred Shares held by them.

If, upon any Liquidation, the assets of the Company shall be insufficient to pay the Liquidation Amount, together with declared and unpaid dividends thereon, in full to all holders of Series A Preferred Shares, then the entire net assets of the Corporation shall be distributed among the holders of the Series A Preferred Shares, ratably in proportion to the full amounts to which they would otherwise be respectively entitled and such distributions may be made in cash or in property taken at its fair value (as determined in good faith by the Company’s Board of Directors), or both, at the election of the Company’s Board of Directors.

The Series A Preferred Shares shall have registration rights pursuant to a certain Investor’s Registration Rights Agreement dated the February 28, 2006.

In lieu of payment on the Maturity Date as outlined herein the Holders of Series A Preferred Shares shall have sole right and in their discretion to elect conversion pursuant to the conversion rights, at any time and from time to time at their sole discretion, as follow (the "Conversion Rights"):

(a) Each share of Series A Preferred Shares shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Company’s transfer agent, pursuant to the Irrevocable Transfer Agent Instructions dated the date hereof, for the Series A Preferred Stock into such number of fully paid and non-assessable shares of Common Stock equal to the quotient of the Liquidation Amount divided by the Conversion Price. The Conversion Price shall be equal to, the lesser of at the option of the Buyers either: i) Ten Cents ($0.10) or ii) ninety five percent (95%) of the lowest volume weighted average price of the Common Stock for the twenty (20) trading days immediately preceding the date of conversion, as quoted Bloomberg LP.

(b) At the Option of the Holders, if there are outstanding Series A Preferred Shares on February 28, 2008, each share of Series A Preferred Stock shall convert into shares of Common Stock at the Conversion Price then in effect on February 28, 2008.

(c) Each share of Series A Preferred Shares automatically shall convert into shares of Common Stock at the Conversion Price then in effect immediately upon the consummation of the occurrence of a stock acquisition, merger, consolidation or reorganization of the Company into or with another entity through one or a series of related transactions, or the sale, transfer or lease (but not including a transfer by pledge or mortgage to a bona fide lender) of all or substantially all of the assets of the Company.

F-15

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

The Conversion Price of the Series A Preferred Shares as described above shall be adjusted from time to time pursuant to the terms and conditions of the Ariel Way Series A Convertible Preferred Stock.

No holder of the shares of Series A Preferred Shares shall be entitled to convert the Series A Preferred Shares to the extent, but only to the extent, that such conversion would, upon giving effect to such conversion, cause the aggregate number of shares of Common Stock beneficially owned by such holder to exceed 4.99% of the outstanding shares of Common Stock following such conversion (which provision may be waived by such Holder by written notice from such holder to the Company, which notice shall be effective sixty one (61) days after the date of such notice).

On February 28, 2006, the Company pursuant to an Investment Agreement by and between Ariel Way, Inc. and Cornell Capital and Montgomery Equity (collectively referred to as the “Buyers”), Ariel Way sold and issued to the Buyers one hundred sixty (160) Series A Preferred Shares for a consideration consisting solely of the surrender of certain Prior Securities.

On December 27, 2006, the Company received a conversion notice from Cornell Capital requesting the conversion of a quarter (1/4) of a Series A Convertible Preferred Share, or the sum of $2,508, representing the conversion under the terms of the Certificate of Designation dated February 28, 2006, into 1,649,842 shares of its common stock at a conversion price of $0.00152 per share. Since these share were result of a September 30, 2004 funding by Cornell Capital, they were deemed to be 144k eligible for conversion to free trading shares.

On January 23, 2007, the Company received a conversion notice from Cornell Capital requesting the conversion of a quarter (1/4) of a Series A Convertible Preferred Share, or the sum of $2,508, representing the conversion under the terms of the Certificate of Designation dated February 28, 2006, into 975,782 shares of its restricted common stock at a conversion price of $0.00257 per share. Since these share were result of a September 30, 2004 funding by Cornell Capital, they were deemed to be 144k eligible for conversion to free trading shares.

On January 29, 2007, the Company received a conversion notice from Cornell Capital requesting the conversion of a half (1/2) of a Series A Convertible Preferred Share, or the sum of $5,016, representing the conversion under the terms of the Certificate of Designation dated February 28, 2006, into 1,759,832 shares of its restricted common stock at a conversion price of $0.00285 per share. Since these share were result of a September 30, 2004 funding by Cornell Capital, they were deemed to be 144k eligible for conversion to free trading shares.

On February 7, 2007, the Company received a conversion notice from Cornell Capital requesting the conversion of a quarter (1/4) of a Series A Convertible Preferred Share, or the sum of $2,508, representing the conversion under the terms of the Certificate of Designation dated February 28, 2006, into 1,053,681 shares of its restricted common stock at a conversion price of $0.00238 per share. Since these share were result of a September 30, 2004 funding by Cornell Capital, they were deemed to be 144k eligible for conversion to free trading shares.

On February 12, 2007, the Company received a conversion notice from Cornell Capital requesting the conversion of a quarter (1/4) of a Series A Convertible Preferred Share, or the sum of $2,508, representing the conversion under the terms of the Certificate of Designation dated February 28, 2006, into 1,053,681 shares of its restricted common stock at a conversion price of $0.00238 per share. Since these share were result of a September 30, 2004 funding by Cornell Capital, they were deemed to be 144k eligible for conversion to free trading shares.

Common Stock

As of December 31, 2006, the Company had 595,000,000 shares of common stock authorized at $0.001 par value per share, and 40,036,785 issued and outstanding.

The following describes the common stock transactions for the three-month period ended December 31, 2006:

F-16

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 9- LITIGATION/ LEGAL PROCEEDINGS

During the three-month period ended June 30, 2006, dbsXmedia, Inc. was notified that as a result of its vacating of the premises in its Frederick, MD office and the ceasing of operations at that site, the landlord had filed suit to collect the rent for three months under the default provisions of the lease. The lease term expires in April 2010, with a remaining balance of approximately $264,000, which may be accelerated due to the default of the lease agreement. The ultimate conclusion of this assessment is not determinable at this time and the entire balance has been accrued in the financial statements for the three-month period ending December 31, 2006. The lease is personally guaranteed by the former President of dbsXmedia, Inc.

NOTE 10- PROVISION FOR INCOME TAXES

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due. Deferred taxes related to differences between the basis of assets and liabilities for financial and income tax reporting will either be taxable or deductible when the assets or liabilities are recovered or settled. The difference between the basis of assets and liabilities for financial and income tax reporting are not material therefore, the provision for income taxes from operations consist of income taxes currently payable.

There were no provisions for income taxes for the three-month period ended December 31, 2006.

Due to substantial financial constraints, the Company has not completed the filing of its corporate income tax returns for the years ended September 30, 2006, 2005 and 2004. The Company intends to complete the filing of these returns upon receipt of funding. Management believes there is no tax liability due to the losses incurred for the period of non-filing.

At September 30, 2006, deferred tax assets approximated the following:

Deferred tax assets	$	2,446,303
Valuation for deferred asset		(2,446,303	)
Net deferred tax assets	$	-

At December 31, 2006, the Company had accumulated deficits of $5,827,658, available to offset future taxable income through 2026. 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 the future period.

NOTE 11- GOING CONCERN

The Company and its Subsidiaries’ consolidated financial statements have been prepared on the basis that it will continue as a going concern, which contemplates the realization of asset values and the satisfaction of liabilities in the normal course of business. Certain conditions indicate that the Company may be unable to continue as a going concern:

· The Company reported net losses of $163,728 and $385,160 for the three-month period ended December 31, 2006 and 2005, respectively.

· Net cash provided by (used in) the Company's operating activities was $68,983 and ($38,978) for the three-month period ended December 31, 2006 and 2005, respectively.

· At December 31, 2006, stockholder's equity (deficit) was ($3,318,353) and included an accumulated deficit of ($5,827,658).

· At December 31, 2006 there was working capital deficit of $3,505,082. The Company is unable to satisfy its current debt obligations and is in default on its notes payable.

F-17

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

· The Company had gross margins of $81,538 and $23,360 for the three-month period ended December 31, 2006 and 2005, respectively.

The Company will require additional funding to cover expected negative cash flows until end fiscal year 2007.

The Company's ability to continue as a going concern is dependent upon increasing its revenues and gross profit margins to cover cost of services and other operating expenses, generating positive cash flows from operations, obtaining debt or equity capital to fund expected negative operating cash flows and returning the Company to profitable operations. In this connection, the Company has adopted the following operating and management plans to in order to provide positive cash flow from operations:

· Raise additional capital.

· Expand and develop its Business TV business with existing customer base and additional contract for new services.

· Develop and expand its digital signage business through targeted marketing initiatives in both the US and Europe.

· Continue overall cost and expense control and adoption of efficient service and equipment roll-out approaches resulting in improved gross profits and reduced operating expenses.

· Expand operation and revenue base through an aggressive acquisition program of profitable companies with operation and services with synergy to its current operation.

F-18

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

· Develop strategic partnerships with major companies in the area of secure wireless communications supporting the Company’s strategy. This strategic initiative is believed to provide increased revenues and result in reduced operating expenses.

· Develop strategic partnerships with major companies providing content and advertising services for the Company’s digital signage operation roll-out.

Although the results of these actions cannot be predicted with certainty, management believes that if the Company can continue to increase its revenues and gross profit margins, reduce expenses, and can obtain additional debt or equity financing to fund the negative cash flow from operations in 2006, the Company has the ability ultimately to return to profitability.

F-19

ARIEL WAY, INC., AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 13- SUBSEQUENT EVENTS

In January, 2007, dbsXmedia, Ltd, the UK subsidiary, was in the process of filing a liquidation of its operations with the United Kingdom Courts. This would conclude the operations of the subsidiary in the UK.

In January, 2007, Ariel Way Media, Ltd, a new UK subsidiary was formed to provide services in the United Kingdom and Europe for multimedia and digital signage solutions and technologies.

F-20

Item 2. Management’s Discussion and Analysis or Plan of Operation

The following is a discussion and analysis of the results of operations and financial position as of and for the three-month period ended December 31, 2006 and 2005 and the factors that could affect our future financial condition and results of operations. Historical results may not be indicative of future performance.

This discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this 10-QSB. Our consolidated financial statements are prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”). All references to dollar amounts in this section are in United States dollars.

Forward Looking Statements

This Quarterly Report on Form 10-QSB contains forward-looking statements that involve risks and uncertainties. The statements contained in this document that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding our expectations, beliefs, intentions or strategies regarding our business. This Quarterly Report on Form 10-QSB includes forward-looking statements about our business including, but not limited to, the level of our expenditures and savings for various expense items and our liquidity in future periods. We may identify these statements by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and other similar expressions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, except as may otherwise be required by law. Our actual results could differ materially from those anticipated in these forward-looking statements.

Overview of the Company

Ariel Way, Inc. is a technology and services company for highly secure global communications, multimedia and digital signage solutions and technologies. We are focused on developing innovative and secure technologies, acquiring and growing profitable advanced technology companies and global communications service providers and creating strategic alliances with companies in complementary product lines and service industries. We were initially named Netfran Development Corp., and we provided franchise Internet web site design and consulting services until, on February 2, 2005, when we acquired Old Ariel Way in a share exchange transaction. Old Ariel Way was engaged in the development of highly secure global communications technologies. After the acquisition of Old Ariel Way, we ceased to conduct the franchise business we had previously conducted in order to concentrate solely on the development of the highly secure global communications technology business.

As of December 31, 2006, we marketed and sold our multimedia communications solutions services to clients who are leading finance-oriented services companies primarily in United Kingdom. We also provided services to leading technology and manufacturing companies throughout the United States but in 2006 we closed this operation. As part of our multimedia communications solutions services, we are focused on growing our current customer bases, developing and deploying solutions for Business Television (BTV), digital signage and interactive media delivered over a combination of satellite, terrestrial and wireless local networks. Our wholly-owned subsidiary Ariel Way Media, Inc. (“Ariel Way Media”) provides a select set of services previously provided by dbsXmedia to include services for leading finance-oriented services companies, primarily in the United Kingdom.

We were incorporated under the laws of Florida in January, 2000. Our principal executive offices are located at 8000 Towers Crescent Drive, Suite 1220, Vienna, VA 22182 and our telephone number at that address is (703) 918-2430. We maintain a corporate web site at www.arielway.com . We make available free of charge through our web site our annual report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such material with or to the SEC. The contents of our web site are not a part of this report. The SEC also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding various companies including Ariel Way, Inc.

Recent Developments

In January, 2007, Ariel Way Media, Ltd, a new UK subsidiary was formed to provide services in the United Kingdom and Europe for multimedia and digital signage solutions and technologies.

Revenue and Expenses

Overall Operating Results:

Revenue was $410,391 and $606,075 for the three-month period ended December 31, 2006 and 2005 respectively. The reduced revenue resulted from the reduction of the service of dbsXmedia in 2006. Gross margin for the three-month period ended December 31, 2006 was $81,538, compared to a gross margin of $23,360 for the three-month period ended December 31, 2005. The low margin and loss for the three-month period ended December 31, 2006 was due to substantial costs incurred related to the satellite provider.

Total operating expenses were $243,468 and $509,287 for the three-month period ended December 31, 2006 and 2005. Operating expenses reduced from 2005 to 2006 due to several factors. Salaries were reduced over $140,000 due to the termination of the dbsXmedia management and the CFO while professional fees increased by approximately $28,000 as a result of utilization of outside service providers. Travel was reduced by approximately $14,000, marketing approximately $6,000, insurance approximately $5,000, payroll taxes approximately $18,000, office equipment $10,500 as a result of the terminations. Rent expense reduced by approximately $30,000 due to the vacating of the Frederick, MD office facilities.

As of December 31, 2006 cash and cash equivalents was $35,569 compared to $50,186 as of December 31, 2005. Cash balances decreased as the company worked to satisfy substantial outstanding debts. As of December 31, 2006, accounts payable and accrued expenses were $3,244,467, compared to December 31, 2005 balances of $1,930,192. This increase was due to substantial losses incurred during fiscal year 2006 and in the three-month period ended December 31, 2006 and the reduced cash flow from operations.

Operations and Net Losses

The net loss for the three-month period ended December 31, 2006 was $163,728 compared to a net loss of $385,160 for the three-month period ended December 31, 2005. The decrease in losses were primarily due to the ceasing of the dbsXmedia business in the United States and the the termination of the Frederick, MD office facilities.

As of December 31, 2006 the accumulated deficit was $5,827,658, that may, on a limited basis, be offset against future taxable income. There are limitations on the amount of net operating loss carryforwards that can be used due to the change in the control of the ownership as a result of our stock exchange transaction on February 2, 2005 of the now wholly-owned Old Ariel Way subsidiary. No tax benefit has been reported in the financial statements.

Application of Critical Accounting Policies

We prepare our consolidated financial statement in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Our significant accounting policies are discussed in Note 2 to the consolidated financial statements.

We consider the accounting policies related to revenue and related cost recognition, valuation of goodwill and other intangible assets and accounting for income taxes to be critical to the understanding of our results of operations. Critical accounting policies include the areas where we have made what we consider to be particularly subjective or complex judgments in making estimates and where these estimates can significantly impact our financial results under different assumptions and conditions. The preparation of financial statements in accordance with U.S. GAAP requires management to make certain estimates, judgments 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. Management bases its estimates on historical experience, where available, and on various other assumptions and information that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from estimates under different assumptions or conditions.

Management believes the following reflect its more significant accounting policies and estimates used in the preparation of its consolidated financial statements. Our senior management has discussed the development of each of the following accounting policies and estimates and the following disclosures with the audit committee of our board of directors.

Property, Plant and Equipment

Annually, property, plant and equipment lives are reviewed to ensure that the estimated useful lives are appropriate. The estimated useful lives of property, plant and equipment is a critical accounting estimate because changing the lives of assets can result in larger or smaller charges for depreciation expense. Factors used in determining useful lives include technology changes, regulatory requirements, obsolescence and type of use.We did not change the useful lives of any property, plant and equipment in the year ended December 31, 2006.

We review long-lived assets for impairment whenever events or circumstances indicate that the carrying amount may not be fully recoverable.

Liquidity and Capital Resources

As of December 31, 2006, the Company had cash and cash equivalents of $35,569. The Company was unable to satisfy current debts, and is in default in its loan obligations.

Net cash provided by (used in) operating activities was $68,983 for the three-month period ended December 31, 2006 compared with ($38,978) for the three-month period ended December 31, 2005.

As of December 31, 2006 the Stockholders’ Deficit was $3,318,353 compared with December 31, 2005, of $2,421,662. At December 31, 2006, we had a negative working capital (current assets minus current liabilities) of $3,505,082 compared with negative working capital of approximately $2,881,068 at December 31, 2005.

There is a significant working capital deficit. Additional funding is required in order to sustain our current operations. There is limited cash flow from current operations. We are attempting to secure debt and equity funding from external sources, including existing shareholders. We may not be able to obtain additional sources of financing. Funding is required to first satisfy existing debts and current operational expenses.

On February 28, 2006, in order to improve the liquidity and equity structure of the Company, $500,000 of Debentures payable and $1,000,000 of Promissory notes were converted to Convertible Preferred Stock, as referenced and detailed in Note 4 and Note 5 to the Notes to the Consolidated Financial Statements for the year ended December 31, 2006 and 2005.

If our revenue from operations and funds raised are not sufficient to implement our business plan, we will be required to raise money from other sources. Other sources of funds may not be available or may be available only on terms that are unfavorable to us. If we are unable to raise sufficient funds, the implementation of our Plan of Operation will be delayed and we may cease operations.

Going concern

The closing of the dbsXmedia US offices, notification to customers of the termination of services by Loral Skynet, the elimination of the revenue and costs from that operation, and the elimination of all staff at the site.

The inability of the company to fund current operations and satisfy its current debts when due.

The current default of its loans from shareholders.

The current default of the settlement agreement with Loral Skynet, and the potential foreclosure of corporate assets by the secured creditor.

The Company's ability to continue as a going concern is dependent upon increasing its revenues and gross profit margins to cover cost of services and other operating expenses, generating positive cash flows from operations, obtaining debt or equity capital to fund expected negative operating cash flows and returning the Company to profitable operations. In this connection, the Company has adopted the following operating and management plans in order to provide positive cash flow from operations and fiscal year 2007:

Raise additional capital or secure funding from credit sources.

Expand and develop its Business TV business with existing customer base and additional contracts for new services.

Continue to develop and expand its digital signage business through targeted marketing initiatives in both the US and Europe.

Continue overall cost and expense control and adoption of efficient service and equipment roll-out approaches resulting in improved gross profits and reduced operating expenses.

Expand operation and revenue base through an aggressive acquisition program of profitable companies with operation and services with synergy to its current operation.

Develop strategic partnerships with major companies in the area of secure wireless communications supporting the Company’s strategy. This strategic initiative is believed to provide increased revenues and result in reduced operating expenses.

Develop strategic partnerships with major companies providing content and advertising services for the Company’s digital signage operation roll-out.

Although the results of these actions cannot be predicted with any degree of certainty, management believes that if the Company can continue to increase its revenues and gross profit margins, reduce expenses, and can obtain additional debt or equity financing to fund the negative cash flow from operations in 2007, the Company has the ability ultimately to return to profitability.

Off-Balance Sheet Arrangements

At December 31, 2006, the following guarantees and indemnifications were issued and outstanding:

On April 21, 2005 the Company’s subsidiary completed a transaction with Loral Skynet in which the Company provided a $3,000,000 parental guarantee on behalf of dbsXmedia. The Company’s commitment was reduced on April 21, 2006 to $1,500,000. dbsXmedia is, and thereby also the Company, is currently in default of this parental guarantee and is in the process of negotiating a settlement with Loral Skynet.

On April 21, 2005, as part of a transaction pursuant to an asset Purchase Agreement with Loral Skynet, we delivered a commitment to the benefit of dbsXmedia in the form of a Conditional Guaranty for satellite services in favor of Loral Skynet, having a total value of $3,000,000 that was reduced to $1,500,000 on April 21, 2006 and fully expire on April 21, 2007.

On April 21, 2006, the Company’s subsidiary dbsXmedia, Inc. received a letter with a Notice of Default pursuant to Teleport Service Agreement dated 21 April 2005 between dbsXmedia. Inc. ("dbsXmedia”) and Loral Skynet Network Services, Inc. ("Loral Skynet") stating that dbsXmedia is currently in arrears with regard to payment for services rendered pursuant to the Agreement with Loral Skynet in the amount of $540,112.50 (the "Current Outstanding Debt"). dbsXmedia’s failure to pay the Current Outstanding Debt constitutes a material default under Section 3(b) of the Agreement. The letter shall serve as written notice of payment past due and notice of a material default of the Agreement. Loral Skynet demands that dbsXmedia effect immediate payment of the full mount of the Current Outstanding Debt. If dbsXmedia fails to pay the Current Outstanding Debt within three (3) business days of the date hereof, i.e., 5:00 P.M., EDT, Wednesday, 26 April, 2006, Loral Skynet shall have the right to terminate the Agreement upon delivery of written notice. In such event, Loral Skynet shall avail itself of all remedies to which it is entitled, including, but not limited to, the assessment and collection of termination charges pursuant to Section 3 (Term and Termination) of the Agreement. Moreover, by delivery of the notice and any action taken in connection herewith, Loral Skynet does not waive its rights and remedies under the Agreement and any other agreements to which dbsXmedia and Loral Skynet are parties, including without limitation the right to collect amounts owed by dbsXmedia to Loral Skynet in addition to the amount set forth above.

On May 1, 2006, the Company’s subsidiary dbsXmedia, Inc. received a letter from Loral Skynet stating: “Reference is hereby made to that certain Notice of Default Letter, dated 21 April 2006 (the "Notice of Default"), sent by Loral Skynet to dbsXmedia declaring a material default by dbsXrnedia under Section 3.B. of the Agreement (i.e. failure to pay amounts due for services rendered pursuant to the Agreement). Be advised that dbsXmedia has not cured this material default within the prescribed period of time set forth in the Notice of Default. As a result, this letter hereby serves as a written notice of termination of the Agreement and that such termination shall be effective at 12 Noon, Eastern Standard Time, 15 May 2006 (the "Termination Date"). Be further advised that Loral Skynet intends to exercise any and all rights and remedies in respect of such default and termination available to Loral Skynet under the Agreement, at law and/or in equity, all of which rights and remedies are hereby reserved by Loral Skynet, including, without limitation, the right to: (a) assess and collect termination charges pursuant to Section 3 (Term and Termination) of the Agreement; and (b) collect amounts owed by dbsXmedia to Loral Skynet in addition to the amount set forth in the Notice of Default.”

On May 8, 2006, the Company’s subsidiary dbsXmedia, Inc. received a letter from Loral Skynet stating: “ Debtor is in default under that certain Security Agreement, dated as of April 21,2005 (the "Agreement"), by and among Debtor, Secured Party, CyberStar, L.P. and CyberStar, ELC, granting a security interest in, among other things, the Collateral. The outstanding balance due from Debtor to Secured Party, as of the date hereof, is $2,620,842.50 (the "Balance").

Secured Party hereby agrees to accept the Collateral in partial satisfaction of the Balance. Specifically, Secured Party shall accept the Equipment in satisfaction of $40,000 of the Balance and shall further reduce the Balance by $1 for each dollar that Secured Party recovers from your account debtors in connection with the AR. In addition, pursuant to Section 12 of the Agreement, Secured Party hereby requests that you send written notice to all account debtors and other persons obligated on any of the Customer Contracts (as defined in the Security Agreement) instructing that all future payments are to be made directly to Secured Party (to an account or financial institution named by Secured Party). If you fail to send such notices within thirty (30) days of the data hereof, the Secured Party shall prepare and send such notice on Debtor's behalf. If you have any objection to Secured Party's foregoing proposal, you must send Secured Party a signed, written statement of your objection within twenty (20) days of the date hereof. If Secured Party has not received a signed, written objection from you within the prescribed time period, you will be deemed to have consented to this proposal and will have no further right to object, and Secured Party will retain the Collateral in partial, satisfaction of the Balance, as described in this letter.

Finally, by delivery of this letter and any action taken in connection therewith, Secured Party does not waive any of its rights or remedies under the Agreement and other agreements to which Debtor and Secured Party are parties, including, without limitation, the right to foreclose on additional collateral to satisfy a portion of the Balance.”

As of January, 2007, the company was not able to satisfy the funding of the settlement agreement to Loral Skynet. As a result, the Company is in default of the agreement and does not have the ability to fulfill the payment of $200,000 to Loral Skynet. Loral Skynet has not advised the Company of its intentions regarding this default. Loral Skynet may enforce its full rights and the Company may be forced into liquidation in the event the settlement is not satisfied.

Plan of Operation

In April 2005, the Company completed the acquisition of the start-up company dbsXmedia, Inc. and established satellite business TV services as a new line of business through this subsidiary. Through dbsXmedia, we provided communication infrastructure and integrated multimedia services to corporations throughout the United States and Europe. dbsXmedia operated from offices in Frederick, Maryland and Plymouth, United Kingdom, providing solutions for Business Television (BTV), digital signage and interactive media delivered over a combination of satellite, terrestrial and wireless networks. Digital signage includes technologies using LCD TV and plasma screens to deliver video based messaging directly to consumer audiences. We believe digital signage is an effective direct advertising method providing individually targeted marketing. Integrated multimedia services include music radio, video, and IP (Internet Protocol)-based file transfer for training/catalogs/point of sale integrated with other information to the clients. As previously noted, dbsXmedia ceased operations in the US in May, 2006.

Our wholly-owned subsidiary Ariel Way Media provides a select set of services previously provided by dbsXmedia to include services for leading finance-oriented services companies, primarily in the United Kingdom.

Over the past year we had experienced significant growth in revenues and related expenses. Our increase in revenues was due primarily to our acquisition of dbsXmedia. However, due to dbsXmedia not achieving anticipated profitability and cash flow, failing its financial business plan, and mounting debt to Loral Skynet for satellite services, its management team departing dbsXmedia, we were obligated to wind-up a majority of the activities by and services provided by dbsXmedia. We have embarked on building on the experience gained from the dbsXmedia operation and expanding into the dynamic digital signage business through our subsidiary company Ariel Way Media. In addition, we are taking a number of measures designed to improve our financial condition such as looking into other potential acquisitions, cost reductions, expansion of the dbsXmedia multimedia experience and the integration of various new acquisitions. However, if revenue and cash provided by operations do not outpace our expenses, if economic conditions weaken or if competitive pressures increase, our ability to meet our debt obligations and our financial condition could be materially and adversely affected, thereby potentially adversely affecting our credit ratings, our ability to access the capital markets and our compliance with debt covenants.

We are pursuing both acquisitions and strategic alliances to leverage our strategy of creating a technology and services company for highly secure global communications solutions and technologies. Our objectives are to create high margin revenues and shareholder value, expand our reach in the global market for highly secure global communications solutions and technologies and position us to play a more visible role in providing next generation highly secure communications digital signage solutions, products, services and technologies.

In order to implement our overall business plan including both the full development of a digital signage business, we intend to attempt to raise at least $5,000,000 over the next 12 months in order to fund:

Expenses associated with acquisitions of companies;

Investment in laboratory facilities including test and simulation equipment;

Acquisition or licensing of certain intellectual property related to the development of highly secure communications technology and software development technology;

Compensation for employees and consultants;

Legal and accounting fees and other general administrative overhead;

General working capital purposes

In addition, we may need additional funds if we use a greater percentage of cash rather than stock in connection with future acquisitions.

New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. The scope of SFAS No. 123R includes a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in APB No. 25, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used. The impact of this SFAS is fully discussed in Note 2 to the Financial Statements as of December 31, 2006 and 2005.

Inflation

Our monetary assets, consisting primarily of cash and receivables, and our non-monetary assets, consisted primarily of intangible assets and goodwill, are not affected significantly by inflation. We believe that replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and costs of network services, which may not be readily recoverable in the price of services offered by us.

RISK FACTORS

Investing in our securities involves a high degree of risk. Before investing in our securities, you should consider the following discussion of risk factors, other information contained in this Quarterly Report on Form 10-QSB, and the extensive discussion of “Risks Related to Our Business” contained in our Annual Report on Form 10-KSB for the fiscal year ended September 30, 2006. Our future results may also be impacted by other risk factors listed from time to time in our future filings with the SEC, including, but not limited to, our Quarterly Reports on Form 10-QSB and our Annual Report on Form 10-KSB.

We are subject to various risks that may materially harm our business, financial condition and results of operations. You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties actually occur, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our common stock could decline and you could loose all or part of your investment.

Risks Related To Our Business

We are a technology company with a revised and new and unproven enterprise technology model and a short operating history, which makes it difficult to evaluate our current business and future prospects and may increase the risk of your investment.

We have only a limited operating history with our revised and new business model upon which to base an evaluation of our current business and future prospects. Our limited operating history with the new business model makes an evaluation of our business and prospects very difficult. You must consider our business and prospects in light of the risks and difficulties we may encounter as a developing company with a revised and new business model in the rapidly evolving market for technology and services supporting the business of highly secure global communications. These risks and difficulties include, but are not limited to, the following:

our revised and new and unproven business and technology model;

a limited number of service offerings and risks associated with developing new product and service offerings;

the difficulties we may face in managing rapid growth in personnel and operations;

a failure of our physical infrastructure or internal systems caused by a denial of service, third-party attack, employee error or malfeasance, or other causes;

a general failure of satellite services and the Internet that impairs our ability to deliver our service;

a loss or breach of confidentiality of customer data;

the negative impact on our brand, reputation or trustworthiness caused by any significant unavailability of our service;

the systematic failure of a core component of our service from which it would be difficult for us to recover;

the timing and success of new service introductions and new technologies by our competitors;

our ability to acquire and merge subsidiaries in a highly competitive market; and

drastic changes in the regulatory environment that could have an adverse impact in the Telecommunications industry.

We may not be able to successfully address any of these risks or others. Failure to adequately do so could force us to curtail or cease our business operations.

We have historically lost money and we expect losses will continue in the near term, which means that we may not be able to continue to operate as a going concern unless we obtain additional funding

We have historically lost money. In the three-month period ended December 31, 2006 we had a net loss of $163,728 and for the three-month period ended December 31, 2005 we had a net loss of $385,161. Future losses are likely to occur. Accordingly, we are experiencing liquidity and cash flow problems and we may not be able to raise additional capital as needed and on acceptable terms. No assurances can be given that we will be successful in reaching or maintaining profitable operations; or that we will be able to raise or borrow adequate funds to execute our business plan and consummate any future acquisitions.

There is substantial doubt about our ability to continue as a going concern.

As of December 31, 2006, the Company’s independent public accounting firm issued a “going concern opinion” wherein they stated that the accompanying financial statements were prepared assuming the Company will continue as a going concern. As discussed in Note 11 to the financial statements as of December 31, 2006, the Company did not generate sufficient cash flows from revenues during the fiscal year ended September 30, 2006, to fund its operations. Also at December 31, 2006, the Company had negative net working capital of $3,505,082. The Company’s net working capital position has continued to deteriorate. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to these matters is discussed in Note 11 to the accompanying financial statements as of December 31, 2006. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Unless the Company is successful in generating additional sources of revenue, or obtaining additional capital, or restructuring its business, the Company is at risk of ceasing operations or filing bankruptcy.

We have a material weakness in internal controls due to a limited segregation of duties, and if we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting which could harm the trading price of our stock.

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. Inferior internal controls could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. During the fiscal year ended September 30, 2006, we reduced our staffing in order to conserve cash, as our level of business activity declined. During the three-month period ended December 31, 2006, we maintained a minimum level of staffing in order to concerve cash. As a result, there is very limited segregation of duties, this is a material weakness in internal controls. However, we have implemented procedures to both limit access to bank accounts and to segregate the approval of invoices from disbursements of cash. However, with only two employees at the Company and the remaining being consultants, segregation of duties is not practicable.

We have historically generated revenue which has not been adequate to support our full operation and this may continue in the future, which means that we may not be able to continue operations unless we can increase our generated revenue. Further, we ceased the operations of two locations and future revenue is likely to be limited.

We have generated revenue from operations; however, if we do not begin generating more revenue we may have to cease operations. As of December 31, 2006, we had an accumulated deficit of $5,827,658. In order to become profitable, we will need to generate revenues to offset our cost of operations and general and administrative expenses. We may not achieve or sustain our revenue or profit objectives and our losses may increase in the future and ultimately, we may have to cease operations.

Our operating results are not possible to predict because we have limited operations. As a result, we cannot determine if we will be successful in our proposed plan of operation. Accordingly, we cannot determine what the future holds for our proposed plan of business. As such an investment in our business is extremely risky and could result in the entire loss of your investment.

We will need to raise additional capital to continue our operations and consummate any future acquisitions or we may be unable to fund our operations, promote our products or develop our technology

We have relied on external financing to fund our operations and acquisitions to date. Such financing has historically come from a combination of borrowings from, and sale of common stock to, third parties and funds provided by certain officers and directors. Over the next two years we need to raise additional capital to fund additional acquisitions and/or to fund operations. We anticipate that these additional funds will be in the range of $5 million to $10 million, depending on the pace and size of our acquisitions. We cannot assure you that financing, whether from external sources or related parties, will be available if needed or on favorable terms. The sale of our common stock to raise capital may cause dilution to our existing shareholders. If additional financing is not available when required or is not available on acceptable terms, we may be unable to fund our operations and expansion, successfully promote our brand name, products or services, develop or enhance our technology, take advantage of business opportunities or respond to competitive market pressures, any of which could make it more difficult for us to continue operations. Any reduction in our operations may result in a lower stock price.

A portion of our future revenue is dependent upon the success of long-term projects, which require significant up-front expense to us. We are dependent on external financing to fund our operations and the up-front costs. There can be no assurance that revenues will be realized until the projects are completed or certain significant milestones are met. Our failure, or any failure by a third-party with which we may contract, to perform services or deliver products on a timely basis could force us to curtail or cease our business operations.

We have a working capital deficit; we need to raise additional capital to finance operations

We have relied on significant external financing to fund our operations. As of December 31, 2006, we had $35,569 cash on hand and our total current assets were $47,152 as of December 31, 2006. We have a working capital deficit of $3,505,082.

We will need to raise additional capital to fund our working capital deficit, our anticipated operating expenses and our strategic business plan. Among other things, external financing will be required to cover our operating costs. Unless we obtain profitable operations, it is unlikely that we will be able to secure additional financing from external sources. If we are unable to secure additional financing, we may be forced to curtail or cease our business operations. We estimate that we will require $5,000,000 to fund our anticipated operating expenses for the next twelve months. The sale of our common stock to raise capital may cause dilution to our existing shareholders. Our inability to obtain adequate financing will result in the need to curtail business operations. Any of these events would be materially harmful to our business, may result in a lower stock price and you could lose your entire investment. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our common stock is deemed to be “penny stock,” which may make it more difficult for investors to resell their shares due to suitability requirements

Our common stock is deemed to be “penny stock” as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are stocks:

With a price of less than $5.00 per share;

That are not traded on a “recognized” national exchange;

Whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ listed stock must still have a price of not less than $5.00 per share); or

Of issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $5.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years.

Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline and you could lose your entire investment.

Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of, our common stock.

The National Association of Securities Dealers, or NASD, has adopted sales practice requirements which may also limit a stockholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, the NASD has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit investors’ ability to buy and sell our stock and have an adverse effect on the market for our shares.

Our common stock has a small public float and future sales of our common stock, may negatively affect the market price of our common stock.

As of February 15, 2007, there were 44,879,760 shares of our common stock outstanding, at a closing market price of $0.002 for a total market valuation of approximately $90,000. As a group, our officers, directors and all other persons who beneficially own more than 10% of our total outstanding shares, beneficially own 21,173,735 shares of our common stock, including vested options and vested warrants. Our common stock has a public float of approximately 15.5 million shares, which shares in the hands of public investors, and which, as the term "public float" is defined by NASDAQ, excludes shares that are held directly or indirectly by any of our officers or directors or any other person who is the beneficial owner of more than 10% of our total shares outstanding. These shares are held by a relatively small number of stockholders of record. We cannot predict the effect, if any, that future sales of shares of our common stock into the market will have on the market price of our common stock. However, sales of substantial amounts of common stock, including future shares issued upon the exercise of warrants, or stock options (of which 15,922,320 are presently outstanding; see Item 5 of this report) and/or conversion of preferred stock into common stock, or the perception that such transactions could occur, may materially and adversely affect prevailing market prices for our common stock.

We have and will continue to incur increased costs as a result of being a public company.

As a public company, we have and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. We will incur costs associated with our public company reporting requirements. We also anticipate that we will incur costs associated with recently adopted corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the Securities and Exchange Commission and the NYSE and NASDAQ. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that these new rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors or as executive officers. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. However, we believe that that it is important to provide a mechanism to grant stock options and other stock awards to employees, non-employee directors and consultants as an incentive, and to tie their interests closer to those of our stockholders.

We have a new executive team and may not be successful in integrating the management teams of companies acquired which could adversely affect the leadership of Ariel Way, divert management time and adversely affect the business and results of operations

As a result of completion of our acquisition of Old Ariel Way on February 2, 2005, Mr. Arne Dunhem became our new Chairman, President and Chief Executive Officer. Failure to successfully integrate the management teams of other acquired companies could divert management time and resources, which would adversely affect our operations. Our future success also depends on our ability to identify, attract, hire, retain and motivate other well-qualified managerial, technical, sales and marketing personnel.

Our business revenue generation model is unproven and could fail

Our revenue model is revised and new and evolving, and we cannot be certain that it will be successful. Our ability to generate revenue depends, among other things, on our ability to provide quality highly secure global communications and digital signage solutions and technologies to our customers and to develop and ultimately sell various security appliances products and digital signage services. We have limited experience with our highly secure global communications and digital signage solutions and technologies business and our success is largely dependent upon our ability to successfully integrate and manage any acquisitions we may consummate. If we are unable to sell our services and provide them efficiently, we will be forced to curtail or cease our business operations.

The winding-up of activities by and operations of dbsXmedia and its business and transfer our Company to a new business model based on dbsXmedia experience may not be successful and could fail

Over the past year we had experienced significant growth in revenues and related expenses. Our increase in revenues was due primarily to our acquisition of dbsXmedia. However, due to dbsXmedia not achieving anticipated profitability and cash flow, failing its financial business plan, and mounting debt to Loral Skynet for satellite services, its management team departing dbsXmedia, we were obligated to wind-up a majority of the activities by and services provided by dbsXmedia. We have embarked on building on the experience gained from the dbsXmedia operation and expanding into the dynamic digital signage business through our subsidiary company Ariel Way Media. In addition, we are taking a number of measures designed to improve our financial condition such as looking into other potential acquisitions, cost reductions, expansion of the dbsXmedia multimedia experience and the integration of various new acquisitions. However, if revenue and cash provided by operations do not exceed expenses, if economic conditions weaken or if competitive pressures increase, our ability to meet our debt obligations and our financial condition could be materially and adversely affected, and the company could be forced to cease operations.

If we are not able to compete effectively in the highly competitive highly secure global communications and digital signage solutions and technologies industries we may be forced to curtail or cease operations

Our ability to compete effectively with our competitors depends on the following factors, among others:

the performance of our products, services and technology in a manner that meets customer expectations;

the success of our efforts to develop effective channels of distribution for our products and services;

our ability to price our products and services that are of a quality and at a price point that is competitive with similar or comparable products and services offered by our competitors;

general conditions in the highly secure global communications and digital signage solutions and technologies industries;

the success of our efforts to develop, improve and satisfactorily address any issues relating to our technology;


	·	our ability to effectively compete with companies that have substantially greater market presence and financial, technical, marketing and other resources than we have; and

our ability to adapt to the consolidation of providers of highly secure global communications and digital signage solutions and technologies with or into larger entities, or entry of new entities into the highly secure global communications and digital signage solutions and technologies market, would likely result in greater competition for us.

If we are unable to successfully compete in our industry, we may be forced to curtail or cease our business operations.

Consolidations in the industry in which we compete could adversely affect our businesses to include a reduction or elimination of our proportionate share of those markets

The highly secure global communications and digital signage solutions and technologies industry has experienced consolidation of participants, and this trend may continue. If highly secure global communications and digital signage solutions and technologies providers consolidate with companies that utilize technologies that are similar to or compete with our secure technology, our proportionate share of the emerging market for highly secure global communications and digital signage solutions and technologies may be reduced or eliminated. This reduction or elimination of our market share could reduce our ability to obtain profitable operations and could cause us to curtail or cease our business operations.

We believe that our ability to compete successfully in the highly secure global communications and digital signage solutions and technologies market depends on a number of factors, including market presence; the adequacy of its member and technical support services; the capacity, reliability and security of its network infrastructure; the ease of access to and navigation of the capabilities provided by our solutions and technologies; our pricing policies, our competitors and suppliers; the timing of introductions of new services by us and our competitors; our ability to support existing and emerging industry standards; and industry and general economic trends. If any of these factors negatively impact us, we may be forced to curtail or cease our business operations.

Management and directors of Ariel Way have a significant percentage of the fully diluted number of common shares and such concentration of ownership may have the effect of delaying or preventing a change of control of Ariel Way.

Our management and directors beneficially own a significant percentage of our outstanding common stock, on a fully diluted basis. As a result, these management and director equity holders will have significant influence in matters requiring stockholder approval, including the election and removal of directors, the approval of significant corporate transactions, such as any merger, consolidation or sale of all or substantially all of our assets, and the control of our management and affairs. Accordingly, such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of us, impeding a merger, consolidation, takeover or other business combination involving us or discouraging a potential acquirer from attempting to obtain control of us.

We may not be able to effectively protect our intellectual property rights, the foundation of our business, which could harm our business by making it easier for our competitors to duplicate our services

We regard certain aspects of our products, processes, services and technology as proprietary. We intend to take steps to protect them with patents, copyrights, trademarks, restrictions on disclosure and other methods. Despite these precautions, we cannot be certain that third parties will not infringe or misappropriate our proprietary rights or that third parties will not independently develop similar products, services and technology. Any infringement, misappropriation or independent development could cause us to cease operations.

Enfotec has filed with the US Patent Office for protection of technologies related to highly secure telecommunication: Chain Packet Processing, CPP and Packet Signature Recognition, PSR, but patents may not be issued, and if issued, may not protect the intellectual property from competition which could seek to design around or invalidate these patents. Our failure to adequately protect our proprietary rights in our products, services and technology could harm the business by making it easier for competitors to duplicate our services.

We own several Internet domain names, including www.arielway.com, www.dbsxmediainc.com and www.enfotec.net. The regulation of domain names in the United States and in foreign countries may change. Regulatory bodies could establish additional top-level domains or modify the requirements for holding domain names, any or all of which may dilute the strength of our name. We may not acquire or maintain our domain name or additional common names in all of the countries in which our marketplace may be accessed, or for any or all of the top-level domains that may be introduced. The relationship between regulations governing domain names and laws protecting proprietary rights is unclear. Therefore, we may not be able to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights.

We may have to resort to litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others, or defend ourselves from claims of infringement, invalidity or unenforceability. Litigation may be expensive and divert resources even if we win. This could adversely affect our business, financial condition and operating results such that it could cause us to reduce or cease operations.

Other parties may assert that our technology infringes on their intellectual property rights, which could divert management time and resources and possibly force us to redesign our technology

Technology-based industries, such as ours, are characterized by an increasing number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert patent, copyright and other intellectual property rights to technologies that are important to us. While there currently are no outstanding infringement claims pending by or against us, we cannot assure you that third parties will not assert infringement claims against us in the future, that assertions by such parties will not result in costly litigation, or that they will not prevail in any such litigation. In addition, we cannot assure you that we will be able to license any valid and infringed patents from third parties on commercially reasonable terms or, alternatively, be able to redesign products on a cost-effective basis to avoid infringement. Any infringement claim or other litigation against or by us could have a material adverse effect on us and could cause us to reduce or cease operations.

If we are unable to successfully develop the technology necessary for our solutions, products and processes, we will not be able to bring our products to market and may be forced to reduce or cease operations

Our ability to commercialize our solutions and products is dependent on the advancement of our existing technology. In order to obtain and maintain market share we will continually be required to make advances in technology. We cannot assure you that our research and development efforts will result in the development of such technology on a timely basis or at all. Any failures in such research and development efforts could result in significant delays in product development and cause us to reduce or cease operations. We cannot assure you that we will not encounter unanticipated technological obstacles, which either delay or prevent us from completing the development of our products and processes.

If we cannot deliver the features and functionality our customers demand, we will be unable to attract customers

Our future success depends upon our ability to determine the needs of our customers and to design and implement technology products and highly secure global communications solutions and technologies that meet their needs in a cost efficient manner. If we are unable to successfully determine customer requirements or if our current or future services do not adequately satisfy customer demands, we will be forced to curtail or cease our business operations.

Our limited operating history with the revised and new business model may impede acceptance of our technologies and service by medium-sized and large customers

Our ability to increase revenue and achieve profitability depends, in large part, on widespread acceptance of our technologies and services by various sized and type of businesses. Our efforts to sell to these customers may not be successful. In particular, because we are a relatively new company with a revised and new business model and a limited operating history, these target customers may have concerns regarding our viability and may prefer to purchase critical hardware and/or software applications or other services from one of our larger, more established competitors. Even if we are able to sell our service to these types of customers, they may insist on additional assurances from us that we will be able to provide adequate levels of service, which could harm our business and forced to curtail or cease our business operations.

Our future financial performance will depend on the introduction and widespread acceptance of new features to, and enhanced editions of, our technologies and services

Our future financial performance will depend on our ability to develop and introduce new features to, and new editions of, our technologies and services. The success of new features and editions depends on several factors, including the timely completion, introduction and market acceptance of the feature or edition. Failure in this regard may significantly impair our revenue growth. In addition, the market for our technologies and solutions may be limited if prospective customers, particularly medium and large customers, require customized features or functions that are incompatible with our application delivery model. If we are unable to develop new features or enhanced editions of our technologies and solutions that achieve widespread levels of market acceptance or if prospective customers require customized features or functions, we will be forced to curtail or cease our business operations.

We may be dependent on third parties to complete certain projects with the risk of failure of the project if the third party does not adequately perform

A potential difficulty in completing a project could have a material adverse effect on our reputation, business and results of operations. In certain instances, we may be dependent on the efforts of third parties to adequately complete our portion of a project and, even if our products and processes perform as required, a project may still fail due to other components of the project supplied by third parties. Any such project failure could force us to curtail a crease our business operations.

If we fail to develop our brand cost-effectively, our business may suffer

We believe that developing and maintaining awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our existing and future solutions and technologies and is an important element in attracting new customers. Furthermore, we believe that the importance of brand recognition will increase as competition in our markets develops. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful technologies and services at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and we could be forced to curtail or cease our business operations.

Any failure to adequately expand our direct sales force will impede our growth

We expect to be substantially dependent on a direct sales force to obtain new customers, particularly medium and large enterprise customers, and to manage our customer base. We believe that there is significant competition for direct sales personnel with the advanced sales skills and technical knowledge we need. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient direct sales personnel. New hires require significant training and may, in some cases, take more than a year before they achieve full productivity. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we do business. If we are unable to hire and develop sufficient numbers of productive sales personnel, sales of our services will suffer and we could be forced to curtail or cease our business operations.

Sales to customers outside the United States expose us to risks inherent in international sales

Our anticipated sales outside the United States represent, in addition to our anticipated sales in the Americas, a significant portion of our future total revenue. We intend to expand our domestic and international sales efforts. As a result, we will be subject to risks and challenges that we would otherwise not face if we conducted our business only in the United States. These risks and challenges include:

localization of our technologies and services, including translation into foreign languages and associated expenses;

laws and business practices favoring local competitors;

more established competitors with greater resources;

compliance with multiple, conflicting and changing governmental laws and regulations, including tax, privacy and data protection laws and regulations;

different employee/employer relationships and the existence of workers’ councils and labor unions;

different pricing environments;

difficulties in staffing and managing foreign operations;

longer accounts receivable payment cycles and other collection difficulties; and

regional economic and political conditions.

These factors could force us to curtail or cease our business operations.

We may not be able to keep up with rapid technological changes, which could render our solutions, technologies and processes obsolete

The highly secure global communications and digital signage solutions and technologies industry is characterized by rapid technological change, changes in customer requirements and preferences, frequent introduction of products and services embodying new technologies and the emergence of new industry standards and practices that could render our existing technology and systems obsolete. Our future success will depend on our ability to enhance and improve the responsiveness, functionality, accessibility and features of our products. We expect that our marketplace will require extensive technological upgrades and enhancements to accommodate many of the new products and services that we anticipate will be added to our marketplace. If we are unable to expand and upgrade our technology and systems, and successfully integrate new technologies or systems in the future, to accommodate such increases in a timely manner, we may be forced to curtail or cease our business operations.

We may not effectively manage the growth necessary to execute our business plan, which could adversely affect the quality of our operations and our costs

In order to achieve the critical mass of business activity that we believe is necessary to successfully execute our business plan; we must significantly increase the business operation through acquisitions in addition to increasing the number of strategic partners and customers that use our solutions, technologies and services. This growth will place significant strain on our personnel, systems and resources. We also expect that we will continue to hire employees, including technical, management-level employees, and sales staff for the foreseeable future. This growth will require us to improve management, technical, information and accounting systems, controls and procedures. We may not be able to maintain the quality of our operations, control our costs, continue complying with all applicable regulations and expand our internal management, technical information and accounting systems in order to support our desired growth. If we do not manage our growth effectively, we could be forced to curtail or cease our business operations.

We may not successfully execute or integrate acquisitions

Our business model is dependent upon growth through acquisition of other technology and communications solutions providers. We expect to attempt to complete acquisitions that we anticipate will enable us to build our highly secure global communications solutions and technologies business. Acquisitions involve numerous risks, including the following:

Difficulties in integrating the operations, technologies, products and personnel of the acquired companies;

Diversion of management’s attention from normal daily operations of the business;

Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;

Initial dependence on unfamiliar partners;

Insufficient revenues to offset increased expenses associated with acquisitions; and

The potential loss of key employees of the acquired companies.

Acquisitions may also cause us to:

Issue common stock that would dilute our current shareholders’ percentage ownership;

Assume liabilities;

Record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges;

Incur amortization expenses related to certain intangible assets;

Incur large and immediate write-offs, and restructuring and other related expenses; or

Become subject to litigation.

Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition. Failure to manage and successfully integrate acquisitions we make could force us to curtail or cease our business operations.

If we were to lose the services of members of our management team, we may not be able to execute our business strategy

Our future success depends in a large part upon the continued service of key members of our senior management team. In particular, our CEO Arne Dunhem is critical to the overall management of Ariel Way as well as the development and implementation of our business strategy. Although we do not have a formal employment agreement with Mr. Dunhem and other key personnel, we intend to design each of their employment agreements to provide incentives to our executives to fulfill the terms of their agreements with us, each executive or employee may terminate their employment with us at any time. We do not maintain any key-person life insurance policies. The loss of any of our management or key personnel could seriously harm our business.

Our business depends upon the growth and maintenance of the global satellite, telecommunications and internet infrastructure

Our success will depend on the continued growth and maintenance of the global satellite, telecommunications and Internet infrastructure. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security for providing reliable Internet services. Satellite, telecommunications and Internet infrastructures may be unable to support the demands placed on it if the number of users continues to increase, or if existing or future users access the Internet more often or increase their bandwidth requirements. In addition, viruses, worms and similar programs may harm the performance of the Internet. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of telecommunications and Internet usage as well as our ability to provide our solutions. Any failure of the Internet infrastructure could force us to curtail or cease our business operations.

Item 3. Controls And Procedures

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based upon their evaluation as of the end of the three-month period ended December 31, 2006, the Company’s Chief Executive Officer and Acting Chief Financial Officer concluded that, the Company’s disclosure controls and procedures were not effective to ensure that information required to be included in the Company’s periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.

The Company’s board of directors were advised by Bagell, Josephs, Levine & Company, L.L.C., the Company’s independent registered public accounting firm, that during their performance of audit procedures for the fiscal year 2006, Bagell, Josephs, Levine & Company, L.L.C. identified a material weakness as defined in Public Company Accounting Oversight Board Standard No. 2 in the Company’s internal control over financial reporting, primarily related to the dbsXmedia operation in both the US and the UK.

This deficiency consisted primarily of inadequate staffing and supervision that could lead to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely and effective reviews, primarily related to the dbsXmedia operation in both the US and the UK. However, the size of the Company prevents us from being able to employ sufficient resources to enable us to have adequate segregation of duties within our internal control system. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management intends to allocate additional resources in addition to reassigning tasks and duties within the Company such that the identified deficiencies will be mitigated with priority.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

During the three-month period ended June 30, 2006, dbsXmedia, Inc. was notified that as a result of its vacating of the premises in its Frederick, MD office and the ceasing of operations at that site, the landlord had filed suit to collect the rent for three months under the default provisions of the lease. The lease term expires in April 2010, with a remaining balance of approximately $264,000, which may be accelerated due to the default of the lease agreement. The ultimate conclusion of this assessment is not determinable at this time and the entire balance has been accrued in the financial statements for the period ending December 31, 2006. The lease is also personally guaranteed by the former President of dbsXmedia, Inc.

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

The following provides information concerning all sales of our securities during the three-month period ended December 31, 2006 that were not registered under the Securities Act of 1933.

On December 27, 2006, we received a conversion notice from Cornell Capital requesting the conversion of a quarter (1/4) of a Series A Convertible Preferred Share, or the sum of $2,508, representing the conversion under the terms of the Certificate of Designation dated February 28, 2006, into 1,649,842 shares of its common stock at a conversion price of $0.00152 per share. Since these share were result of a September 30, 2004 funding by Cornell Capital, they were deemed to be 144k eligible for conversion to free trading shares.

Except as otherwise noted, the securities described in this Item were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933. Each such issuance was made pursuant to individual contracts, which are discrete from one another and are made only with persons who were sophisticated in such transactions and who had knowledge of and access to sufficient information about us to make an informed investment decision. Among this information was the fact that the securities were restricted securities.

Item 3. Defaults upon Senior Securities

There were no defaults upon senior securities during the quarterly period ended December 31, 2006.

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

No matters were submitted to our stockholders for their approval during the quarterly period ended December 31, 2006.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

A. Exhibits:

21.1	Subsidiaries of Registrant.

31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.

31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.

32.1*

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.

* These certifications are not deemed filed by the SEC and are not to be incorporated by reference in any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings.

B. Report on Form 8-K:

During the three-month period ended December 31, 2006, we filed with the Securities and Exchange Commission the following reports on Form 8- K:

None.

Subsequent to the quarterly period ended December 31, 2006, we filed with the Securities and Exchange Commission the following reports on Form 8-K:

On January 23, 2007, we filed a Current Report on Form 8-K pursuant to Item Item 8.01 Other Events, announcing that On January 19, 2007, the Company completed the formation of a new wholly-owned subsidiary operation in the United Kingdom, named Ariel Way Media, Ltd.

On January 24, 2007, we filed a Current Report on Form 8-K pursuant to Item Item 8.01 Other Events, announcing that the Company issued a Letter to its Shareholders, a copy of which was attached to the Current Report.

On January 25, 2007, we filed a Current Report on Form 8-K pursuant to Item 1.01 Entry into a Material Definitive Agreement, announcing that on January 17, 2007, Ariel Way, Inc. through its wholly-owned subsidiary Ariel Way Media entered into a Strategic Channel Program Agreement (the “Agreement”) with Helius, Inc., a Utah corporation. The Agreement provides a framework for the relationship between Helius and the Company, who intends to actively utilize, promote, sell and support Helius products and solutions. The Agreement is non-exclusive and non-transferable.

SIGNATURE

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


	ARIEL WAY, INC.

Date: February 20, 2006	By:	/s/ Arne Dunhem
		Arne Dunhem, Chief Executive Officer, Acting Chief Financial Officer, Acting Chief Accounting Officer

Ariel Way (NFDV) Inactive 10QSB2007 Q1 Quarterly report (small business)