(I) has been lawfully admitted or paroled into the United States,
(II) has filed a nonfrivolous application for a change or extension of status before the date of expiration of the period of stay authorized by the Attorney General, and
(III) has not been employed without authorization in the United States before or during the pendency of such application,
You have met the first two conditions. If you had not been employed illegally then you would have until 12/30/2006 to get your H1B extension.
what to do?
You could have asked your school to rush in a refiling of H1B extension with the correct fee. Get it ASAP.
Disclaimer: the above postion is for discussion only, not a legal advice.