UNITED
      STATES SECURITIES AND EXCHANGE COMMISSIONWashington,
      D.C. 20549FORM
      10-Q[X]
      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE
      ACT OF 1934For
      the quarterly period ended June 30, 2008OR[  ]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES
      EXCHANGE ACT OF 1934
 
 ERF WIRELESS,
      INC.(Exact
      name of registrant as specified in its
charter)
  
 Nevada
              
              000-27467
              
              76-0196431(State
      or other jurisdiction of incorporation)
              
              (Commission
      File Number)
              
              (IRS
      Employer Identification No.)
   2911 SOUTH SHORE BOULEVARD, SUITE 100, LEAGUE
      CITY, TEXAS 77573(Address
      of principal executive offices) (Zip
Code)
  Registrant's
telephone number, including area code:  (281)
538-2101
  Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to filing requirements for the
past 90 days.   Yes [ X ] No [  ]
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.)   Yes [  ] No [ X
]











Indicated
by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent tp the distribution of securities
under a plan confirmed by a court. YES  o     NO  o Not Applicable x
     
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer  o
              Accelerated
      filer                 
          oNon-accelerated
      filer    o
              Smaller
      reporting company   x


PART
I – FINANCIAL INFORMATION
 
 ITEM
1.  CONSOLIDATED FINANCIAL STATEMENTS
  ERF
WIRELESS, INC.
 CONSOLIDATED
BALANCE SHEETS
 JUNE 30,
2008, AND DECEMBER 31, 2007
 ($ in
thousands except share data)
 June
      30,
              
              
              
              
              
              December
      31,2008
              
              
              
              
              
              2007(unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
              
              
              
              
              $
              90
              
              
              
              
              
              $
              2,211Accounts
      receivable, net
              
              
              
              
              
              575
              
              
              
              
              
              
              365Accounts
      receivable other
              
              
              
              
              
              108
              
              
              
              
              
              
              114Inventories
              
              
              
              
              
              230
              
              
              
              
              
              
              118Cost
      and profit in excess of billings
              
              
              
              
              
              143
              
              
              
              
              
              
              410Prepaid
      expenses and other current assets
              
              
              
              430
              
              
              
              
              
              
              523Total
      current assets
              
              
              
              
              
              1,576
              
              
              
              
              
              
              3,741Property
      and equipmentProperty
      and equipment
              
              
              
              
              
              4,746
              
              
              
              
              
              
              3,246Less
      accumulated depreciation
              
              
              
              
              
              (1,059
              )
              
              
              
              
              
              (564
              )Net
      property and equipment
              
              
              
              
              
              3,687
              
              
              
              
              
              
              2,682Goodwill
              
              
              
              
              
              436
              
              
              
              
              
              
              260Intangible
      assets, net
              
              
              
              
              
              1,368
              
              
              
              
              
              
              1,541Other
      assets
              
              
              
              
              
              198
              
              
              
              
              
              
              142Total
      assets
              
              
              
              
              
              $
              7,265
              
              
              
              
              
              
              $
              8,366LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Notes
      payable and current portion of long-term debt
              
              
              $
              475
              
              
              
              
              
              
              $
              513Current
      portion of long-term capital lease payable
              
              
              
              607
              
              
              
              
              
              
              
              403Accounts
      payable
              
              
              
              
              
              
              700
              
              
              
              
              
              
              
              1,089Deferred
      revenue
              
              
              
              
              
              
              7
              
              
              
              
              
              
              
              16Accrued
      expenses
              
              
              
              
              
              
              916
              
              
              
              
              
              
              
              929Derivative
      liabilities
              
              
              
              
              
              
              101
              
              
              
              
              
              
              
              403Deferred
      liability lease
              
              
              
              
              
              
              163
              
              
              
              
              
              
              
              164Total
      current liabilities
              
              
              
              
              
              
              2,969
              
              
              
              
              
              
              
              3,517Long-term
      debt, net of current portion
              
              
              
              
              
              
              3,470
              
              
              
              
              
              
              
              2,885Capital
      leases, net of current portion
              
              
              
              
              
              
              1,365
              
              
              
              
              
              
              
              1,009Deferred
      liability lease
              
              
              
              
              
              
              394
              
              
              
              
              
              
              
              476Deferred
      revenue
              
              
              
              
              
              
              15
              
              
              
              
              
              
              
              10Total
      long-term  liabilities
              
              
              
              
              
              
              5,244
              
              
              
              
              
              
              
              4,380Commitments
      and contingenciesShareholders’
      (deficit) equity:Preferred
      stock  -  $.001 par valueAuthorized  25,000,000
      sharesIssued
      and outstanding at June 30, 2008 andDecember
      31, 2007, 2,650,550 and 3,311,534, respectively
              
              
              
              3
              
              
              
              
              
              
              
              3Common
      stock  -  $.001 par valueAuthorized
      475,000,000 sharesIssued
      and outstanding at June 30, 2008, andDecember
      31, 2007, 77,391,183 and 61,541,358, respectively
              
              
              
              77
              
              
              
              
              
              
              
              62Additional
      paid in capital
              
              
              
              
              
              
              21,167
              
              
              
              
              
              
              
              19,098Accumulated
      deficit
              
              
              
              
              
              
              (22,195
              )
              
              
              
              
              
              
              (18,694
              )Total
      shareholders’ equity (deficit)
              
              
              
              
              
              
              (948
              )
              
              
              
              
              
              
              469Total
      liabilities and shareholders' equity (deficit)
              
              
              
              
              
              $
              7,265
              
              
              
              
              
              
              $
              8,366
 See
accompanying notes to consolidated financial statements.
  2


ERF
WIRELESS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007


(Unaudited)


($ in
thousands except share data and loss per share)





For
      the Three Months
            
            
            For
      the Six MonthsEnded
      June 30,
            
            
            Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Sales:Products
            
            $
            3
            
            
            $
            933
            
            
            $
            440
            
            
            $
            996Services
            
            
            995
            
            
            
            1,506
            
            
            
            2,214
            
            
            
            1,940Other
            
            
            7
            
            
            
            (15
            )
            
            
            26
            
            
            
            (7
            )Total
      sales
            
            
            1,005
            
            
            
            2,424
            
            
            
            2,680
            
            
            
            2,929Costs
      of goods sold:Products
      and integration services
            
            
            156
            
            
            
            1,279
            
            
            
            516
            
            
            
            1,445Rent,
      repairs and maintenance
            
            
            105
            
            
            
            51
            
            
            
            196
            
            
            
            92Salary
      and related cost
            
            
            7
            
            
            
            129
            
            
            
            56
            
            
            
            148Depreciation
            
            
            211
            
            
            
            45
            
            
            
            407
            
            
            
            87Other
      cost
            
            
            105
            
            
            
            17
            
            
            
            244
            
            
            
            31Total
      costs of goods sold
            
            
            584
            
            
            
            1,521
            
            
            
            1,419
            
            
            
            1,803Gross
      profit
            
            
            421
            
            
            
            903
            
            
            
            1,261
            
            
            
            1,126Operating
      expenses:Selling,
      general and administrative
            
            
            2,125
            
            
            
            1,587
            
            
            
            4,229
            
            
            
            2,871Depreciation
      and amortization
            
            
            237
            
            
            
            67
            
            
            
            466
            
            
            
            134Total
      operating expenses
            
            
            2,362
            
            
            
            1,654
            
            
            
            4,695
            
            
            
            3,005Loss
      from operations
            
            
            (1,941
            )
            
            
            (751
            )
            
            
            (3,434
            )
            
            
            (1,879
            )Other
      income/(expenses):Interest
      expense, net
            
            
            (170
            )
            
            
            (418
            )
            
            
            (354
            )
            
            
            (662
            )Gain
      (loss) on sale of assets
            
            
            -
            
            
            
            1
            
            
            
            -
            
            
            
            (10
            )Other
      income (expense)
            
            
            2
            
            
            
            -
            
            
            
            8
            
            
            
            -Derivative
      income
            
            
            149
            
            
            
            (131
            )
            
            
            279
            
            
            
            (117
            )Total
      other income (expense)
            
            
            (19
            )
            
            
            (548
            )
            
            
            (67
            )
            
            
            (789
            )Net
      loss
            
            $
            (1,960
            )
            
            $
            (1,299
            )
            
            $
            (3,501
            )
            
            $
            (2,668
            )Net
      loss per common share:Basic
            
            $
            (0.03
            )
            
            $
            (0.04
            )
            
            $
            (0.05
            )
            
            $
            (0.09
            )Diluted
            
            $
            (0.03
            )
            
            $
            (0.04
            )
            
            $
            (0.05
            )
            
            $
            (0.09
            )See
      accompanying notes to consolidated financial statements.














3





ERF
WIRELESS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
SIX MONTHS ENDED JUNE 30, 2008 AND 2007


(Unaudited)


($ in
thousands)




2008
              
              
              2007Cash
      flows from operating activitiesNet
      loss
              
              $
              (3,501
              )
              
              $
              (2,668
              )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Loss
      on sale of assets
              
              
              -
              
              
              
              10Amortization
      of debt discount
              
              
              15
              
              
              
              401Depreciation
      and amortization
              
              
              874
              
              
              
              221Stock
      issued for services rendered
              
              
              1,246
              
              
              
              1,111Warrant
      expense
              
              
              23
              
              
              
              36Derivative
      (income)
              
              
              (302
              )
              
              
              81Stock
      based compensation and stock option expense
              
              
              -
              
              
              
              85Bad
      debt expense
              
              
              102
              
              
              
              9(Increase)
      in accounts receivable, net
              
              
              (310
              )
              
              
              (63
              )Decrease
      (increase) in accounts receivable other
              
              
              6
              
              
              
              (14
              )(Increase)
      in inventories
              
              
              (112
              )
              
              
              (13
              )Decrease
      (increase) in prepaid expenses
              
              
              93
              
              
              
              (296
              )Decrease
      in cost and profit in excess of billings
              
              
              267
              
              
              
              409(Decrease)
      in accounts payable
              
              
              (389
              )
              
              
              (130
              )(Decrease)
      increase in accrued expenses
              
              
              (16
              )
              
              
              680(Decrease)
      in deferred liability lease
              
              
              (83
              )
              
              
              (92
              )(Decrease)
      in deferred revenue
              
              
              (4
              )
              
              
              (1
              )Total
      Adjustment
              
              
              1,410
              
              
              
              2,434Net
      cash used by operating activities
              
              
              (2,091
              )
              
              
              (234
              )Cash
      flows from investing activitiesProceeds
      from sale of assets
              
              
              -
              
              
              
              6Purchase
      of property and equipment
              
              
              (351
              )
              
              
              (220
              )Business
      acquisitions, net of cash acquired
              
              
              (171
              )
              
              
              -(Increase)
      in other assets
              
              
              (56
              )
              
              
              (6
              )Net
      cash used by investing activities
              
              
              (578
              )
              
              
              (220
              )Cash
      flows from financing activitiesNet
      proceeds from line of credit
              
              
              635
              
              
              
              403Proceeds
      from financing agreements
              
              
              25
              
              
              
              75Payment
      of debt obligations
              
              
              (135
              )
              
              
              (43
              )Payment
      on capital lease obligations
              
              
              (249
              )
              
              
              (2
              )Proceeds
      from sale of common stock, net
              
              
              272
              
              
              
              -Net
      cash provided by financing activities
              
              
              548
              
              
              
              433Net
      (decrease) in cash
              
              
              (2,121
              )
              
              
              (21
              )Cash
      and cash equivalents at the beginning of the period
              
              
              2,211
              
              
              
              393Cash
      and cash equivalents at the end of the period
              
              $
              90
              
              
              $
              372Supplemental
      disclosure of cash flow information:Net
      cash paid during the year for:Interest
              
              $
              156
              
              
              $
              1Income
      taxes
              
              $
              -
              
              
              $
              -Supplemental
      non-cash investing and financing activities:Conversion
      of debt through issuance of common stock
              
              $
              143
              
              
              $
              287Issuance
      of shares for asset acquisition
              
              $
              400
              
              
              $
              -Property
      acquired under capital lease
              
              $
              809
              
              
              $
              58Note payable for acquisition
              
              $
              150
              
              
              $
              -See
      accompanying notes to consolidated financial statements.




4


ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


NOTE
1 - BASIS OF PRESENTATION




NATURE
OF THE COMPANY




ERF
Wireless, Inc. (the Company), provides wireless communications products and
services including the Company's core focus of providing enterprise-class
wireless broadband services. The Company has formed four operating divisions to
provide solutions and services to different segments of the wireless industry.
The Company's Enterprise Network Services Division was formed to serve
enterprise customers, private entities, cities, unincorporated municipalities
and the general public. The Company's Wireless Bundled Services Division was
formed to provide wireless broadband products and services, including Internet,
voice, data, security, and is in the early stages of building or acquiring
wireless broadband networks to serve private entities, cities, municipalities
and the general public. The Company's Wireless Messaging Services Division
manufactures and supplies high-power infrastructure equipment for the wireless
messaging industry and owns and operates a wide-area wireless messaging service
(paging retail). The Company's Network Operations Services Division provides the
overall day-to-day 24/7 monitoring of all wireless broadband networks that the
Company constructs, acquires, maintains and administers. Please refer to segment
footnote 12 for additional information regarding Company operating
divisions.




BASIS
OF ACCOUNTING




The
accompanying unaudited interim financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States of America and the rules of the Securities and Exchange Commission
("SEC") and should be read in conjunction with the audited financial statements
and notes thereto contained in the Company's annual report filed with the SEC on
Form 10-KSB dated December 31, 2007. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim
periods presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year.




PRINCIPLES
OF CONSOLIDATION




The
consolidated financial statements include the accounts of the company and its
subsidiaries. All significant inter-company transactions and balances have been
eliminated in consolidation. The consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America.




INVENTORIES




Inventories
are valued at the lower of cost or market. The cost is determined by using the
average cost method. Inventories consist of the following items, in
thousands:







June
      30,
            
            
            December
      31,2008
            
            
            2007Raw
      material
            
            $
            129
            
            
            $
            49Finished
      goods
            
            
            101
            
            
            
            69$
            230
            
            
            $
            118




The
Company has pledged substantially all the inventory of WBS of $75,000 and
$39,000 as collateral against outstanding notes as of June 30, 2008, and
December 31, 2007, respectively.







INCOME
TAXES




Income
taxes are computed using the asset and liability method. Under the asset and
liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and are measured using the currently enacted tax rates and laws.
A valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized.




BASIC
LOSS PER SHARE




The
Company is required to provide basic and dilutive earnings (loss) per common
share information.





5


ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)







The basic
net loss per common share is computed by dividing the net loss applicable to
common stockholders by the weighted average number of common shares
outstanding.




Diluted
net loss per common share is computed by dividing the net loss applicable to
common stockholders, adjusted on an "as if converted" basis, by the weighted
average number of common shares outstanding plus potential dilutive securities.
For the periods ended June 30, 2008, and December 31, 2007, potential dilutive
securities had an anti-dilutive effect and were not included in the calculation
of diluted net loss per common share.




RECENT
ACCOUNTING PRONOUNCEMENTS




In
December 2007, the FASB issued SFAS No. 141R, Business Combinations.
SFAS 141R establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. SFAS No. 141R also provides guidance for recognizing and measuring
the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statement to evaluate
the nature and financial effects of the business combination. SFAS 141R is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. We expect SFAS No. 141R will have an impact on
our consolidated financial statements when effective, but the nature and
magnitude of the specific effects will depend upon the nature, terms and size of
the acquisitions we consummate after the effective date.




NOTE
2 - ACCOUNTS RECEIVABLE




Accounts
receivable net consists of the following (in thousands):





June
      30,
            
            
            December
      31,2008
            
            
            2007Accounts
      receivable
            
            $
            722
            
            
            $
            412Allowance
      for doubtful accounts
            
            
            (147
            )
            
            
            (47
            )Accounts
      receivable, net
            
            $
            575
            
            
            $
            365




The
Company has pledged substantially all the accounts receivables of WBS as
collateral against outstanding notes and capital leases.




NOTE
3 - PROPERTY AND EQUIPMENT




Components
of property and equipment consist of the following items (in
thousands):





June
      30,
            
            
            December
      31,2008
            
            
            2007Automobiles
            
            $
            175
            
            
            $
            157Operating
      equipment
            
            
            2,958
            
            
            
            2,123Office
      furniture and equipment
            
            
            172
            
            
            
            137Leasehold
      improvements
            
            
            49
            
            
            
            47Computer
      equipment
            
            
            277
            
            
            
            214Building
            
            
            8
            
            
            
            8Land
            
            
            28
            
            
            
            28Other
            
            
            1,079
            
            
            
            532Total
      property and equipment
            
            
            4,746
            
            
            
            3,246Less
      accumulated depreciation
            
            
            (1,059
            )
            
            
            (564
            )Net
      property and equipment
            
            $
            3,687
            
            
            $
            2,682







Depreciation
expense was approximately $495,000 and $131,000 for the periods ended June 30,
2008, and June 30, 2007, respectively.




The
Company has pledged substantially all the operating equipment and some furniture
and vehicles as collateral against outstanding notes and capital
leases.





6


ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)







NOTE
4 - GOODWILL




On
January 11, 2008, ERF Wireless ("ERFW") completed the purchase of assets
from Crosswind, Inc., and as part of the acquisition the Company acquired
goodwill which was valued at $176,000, which is not subject to
amortization.




NOTE
5 - INTANGIBLE ASSETS




Intangible
assets consist of the following (in thousands):





June
      30, 2008Weighted
      Average Useful Life (in years)
              
              Gross
      Carrying Amount
              
              
              Accumulated
      Amortization
              
              
              Net
      Carrying AmountCustomer
      relationships
              3.0
              $
              2,028
              
              $
              667
              
              $
              1,361Workforce
      in place
              3.0
              
              125
              
              
              122
              
              
              3Non-compete
      agreement
              3.0
              
              100
              
              
              97
              
              
              3Developed
      technology
              3.0
              
              20
              
              
              19
              
              
              1$
              2,273
              
              $
              905
              
              $
              1,368December
      31, 2007Weighted
      Average Useful Life (in years)
              
              Gross
      Carrying Amount
              
              
              Accumulated
      Amortization
              
              
              Net
      Carrying AmountCustomer
      relationships
              3.0
              $
              1,822
              
              $
              329
              
              $
              1,493Workforce
      in place
              3.0
              
              125
              
              
              101
              
              
              24Non-compete
      agreement
              3.0
              
              100
              
              
              80
              
              
              20Developed
      technology
              3.0
              
              20
              
              
              16
              
              
              4$
              2,067
              
              $
              526
              
              $
              1,541




Intangible
assets are amortized using methods that approximate the benefit provided by the
utilization of the assets. Customer relationships, workforce in place,
non-compete agreements and developed technology is amortized on a straight-line
basis. We continually evaluate the amortization period and carrying basis of
intangible assets to determine whether subsequent events and circumstances
warrant a revised estimated useful life or reduction in value.




On
January 11, 2008, ERFW completed the purchase of assets from Crosswind, Inc.,
and as part of the acquisition the Company acquired a customer list which was
valued at $206,000 and is being amortized over three years. Please see note 16
for additional details.




Total
amortization of intangibles was approximately $379,000 and $90,000 for the six
months ended June 30, 2008 and 2007, respectively. The estimated amortization
expense for the next three years will be $309,000 for the remaining 2008,
$586,000 for 2009 and $482,000 in 2010.




NOTE
6 - COMMON STOCK, PREFERRED STOCK AND WARRANTS




The total
number of shares of stock of all classes which the Company shall have the
authority to issue is five hundred million (500,000,000), of which twenty five
million (25,000,000) shall be shares of Preferred Stock with a par value of
$.001 per share ("Preferred Stock"), and four hundred seventy five million
(475,000,000) shall be shares of Common Stock with a par value of $.001 per
share ("Common Stock").




COMMON
STOCK




As of
June 30, 2008, the Company had 77,391,183 shares of its $.001 par value common
stock issued and outstanding.





7


ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)







During
the six months ended June 30, 2008, the Company issued a total of 2,885,703
shares of common stock in lieu of cash for professional services of $432,000,
settlement expense of $167,000, other services of $94,000, conversion of notes
payable of $143,000, salary and compensation of $554,000 and acquisition of
assets of $400,000. The Company valued the 2,885,703 shares at the closing
market price on the date of issuance of such shares.




PREFERRED
STOCK




The
Company has 25,000,000 shares of Series A Preferred Stock authorized of which
2,650,550 shares were issued and outstanding as of June 30, 2008. The Series A
Preferred Stock is convertible at holder's option at one preferred share for
18.676347 shares Common Stock and has a 2:1 liquidation preference. The holder
of Series A Preferred Stock is required to give a 65-day notice of conversion to
the company. With respect to the Series A Preferred Stock outstanding at June
30, 2008, the Company would be required to issue 49,502,591 shares of its Common
Stock, subject to certain contractually imposed conversion restrictions as
described herein. During the 4th quarter 2005, all of the Series A holders
entered into a Series A Conversion Restriction Agreement whereby all Series A
holders, as a group, are prohibited from converting more than 5% of the total
outstanding (as of September 30, 2005) Series A holdings in any one calendar
quarter.




WARRANTS




The
Company had warrants outstanding to third parties purchase 4,084,443 common
shares as of June 30, 2008.




Warrants
for 880,000 shares were issued by the Company in June 2003. Specifically, the
Company sold 120,000 shares of Common Stock for $25,000 to an accredited
investor of the Securities Act and issued such a warrant to purchase 880,000
shares of Common Stock at an exercise price of $0.20 per share expiring December
31, 2007. The Investor has exercised all warrants as of December 31,
2007.




Warrants
for 3,694,444 shares of common stock at $5.00 per share were issued by the
Company during 2006 thru 2008. Specifically, the Company sold $1,025,000 of
E-series bonds to accredited investors under the Securities Act. According to
the agreement, if the Bondholder converts within one year from investment; the
conversion includes a warrant to purchase one additional share of common stock
at a price of $5.00 for every share of common stock that has been received from
the conversion of the Bond principal, expiring at various dates from October
2011 thru March 2013. The Company has had thirty four units converted and has
attributed $255,000 to warrant expense using the Black Scholes option price
model in the quarter in which the unit was converted. As of June 30, 2008, the
Company has attributed $23,000 in warrant expense. See Note 9 for valuation and
marked-to-market activity.






8


ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


The
following table summarizes warrants that are issued, outstanding and
exercisable.





Options/WarrantsIssued
      & OutstandingExercise
      Price
              
              Expiration
      Date
              
              June
      30,
              
              June
      30,2008
              
              20070.20
              
              Dec-07
              
              -
              
              780,0005.00
              
              Jun-08
              
              -
              
              141,6707.50
              
              Jun-08
              
              -
              
              141,6703.57
              
              Sep-10
              
              389,999
              
              389,9995.00
              
              Oct-11
      thru Mar-13
              
              3,694,444
              
              2,105,3374,084,443
              
              3,558,676




NOTE
7 - EARNINGS PER SHARE:




The
following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amount):





For
      the three months ended June 30, 2008Income
            
            
            Shares
            
            
            Per-Share(Numerator)
            
            
            (Denominator)
            
            
            AmountNet
      loss
            
            $
            (1,960
            )
            
            -
            
            
            $
            -Basic
      EPS:Income
      available to common stockholders
            
            
            (1,960
            )
            
            
            76,018
            
            
            
            (0.03
            )Effect
      of dilutive securities
            
            
            -
            
            
            
            
            
            
            
            -Diluted
      EPS:Income
      available to common stockholders and
      assumed conversions
            
            $
            (1,960
            )
            
            
            76,018
            
            
            $
            (0.03
            )For
      the three months ended June 30, 2007Income
            
            
            Shares
            
            
            Per-Share(Numerator)
            
            
            (Denominator)
            
            
            AmountNet
      loss
            
            $
            (1,299
            )
            
            
            -
            
            
            $
            -Basic
      EPS:Income
      available to common stockholders
            
            
            (1,299
            )
            
            
            35,350
            
            
            
            (0.04
            )Effect
      of dilutive securities
            
            
            -
            
            
            
            
            
            
            
            -Diluted
      EPS:Income
      available to common stockholders and
      assumed conversions
            
            $
            (1,299
            )
            
            
            35,350
            
            
            $
            (0.04
            )


For
      the six months ended June 30, 2008Income
              
              
              Shares
              
              Per-Share(Numerator)
              
              
              (Denominator)
              
              AmountNet
      loss
              
              $
              (3,501
              )
              
              
              70,834
              
              
              $
              (0.05
              )Basic
      EPS:Loss available
      to common stockholders
              
              
              (3,501
              )
              
              
              70,834
              
              
              
              (0.05
              )Effect
      of dilutive securities
              
              
              -
              
              
              
              
              
              
              
              -Diluted
      EPS:Loss
      available to common stockholders and
      assumed conversions
              
              $
              (3,501
              )
              
              
              70,834
              
              
              $
              (0.05
              )For
      the six months ended June 30, 2007Income
              
              
              Shares
              
              Per-Share(Numerator)
              
              
              (Denominator)
              
              AmountNet
      loss
              
              $
              (2,668
              )
              
              
              26,922
              
              
              $
              (0.10
              )Basic
      EPS:Loss
      available to common stockholders
              
              
              (2,668
              )
              
              
              31,136
              
              
              
              (0.09
              )Effect
      of dilutive securities
              
              
              -
              
              
              
              
              
              
              
              -Diluted
      EPS:Loss
      available to common stockholders and assumed conversions
              
              $
              (2,668
              )
              
              
              31,136
              
              
              $
              (0.09
              )




9


ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)




For the
year to date ended June 30, 2008 and 2007, dilutive securities existed. The
effect of the dilutive securities for the year to date ended June 30, 2008,
would have been 87,680,415 shares of common stock issued assuming all debt
instruments were converted, all Series A preferred stock converted and all
options and warrants were exercised.




NOTE
8 - MAJOR CUSTOMERS




The
Company had gross sales of approximately $2,680,000 and $2,929,000 for the six
months ended June 30, 2008 and 2007, respectively. The Company had one customer
that represented approximately 17% of the gross sales in the six months ended
June 30, 2008, and had one customer that represented 57% of gross sales for the
six months ended June 30, 2007.




NOTE
9 – NOTES PAYABLE AND LONG-TERM DEBT




Notes
payable and long-term debts consist of the following as of June 30, 2008 (in
thousands):





Terms
            
            Maturity
      Date
            
            Interest
      Rate
            
            
            Gross
      Balance
            
            
            Debt
      Discount
            
            
            Net
      BalanceBancleasing,
      Inc.
            $10,660
      / Month including interest
            
            October-14
            
            
            11.62%
            
            
            $
            587
            
            
            $
            -
            
            
            $
            587Agility
      Capital Lease
            $52,151
      / Month including interest
            
            Various
            
            
            18.82%
            
            
            
            1,381
            
            
            
            -
            
            
            
            1,381Balboa
      Lease
            $225
      / Month including interest
            
            June-10
            
            
            27.74%
            
            
            
            4
            
            
            
            -
            
            
            
            4Shane
      Griffths, Crosswind
            $13,911
      / Month including interest
            
            December-10
            
            
            7.50%
            
            
            
            139
            
            
            
            -
            
            
            
            139Vangard
      Wireless, Inc.
            $200
      / Month including interest
            
            December-10
            
            
            6.00%
            
            
            
            6
            
            
            
            -
            
            
            
            6Liberty
      Finance
            $517
      / Month including interest
            
            September-09
            
            
            13.97%
            
            
            
            7
            
            
            
            -
            
            
            
            7Chase
      Bank
            $449
      / Month including interest
            
            November-09
            
            
            5.89%
            
            
            
            7
            
            
            
            -
            
            
            
            7Blanco
      National Bank
            $3,913
      / Month including interest
            
            August-10
            
            
            9.50%
            
            
            
            85
            
            
            
            -
            
            
            
            85Robert
      McClung, Momentum
            $23,476
      / Quarterly including interest
            
            October-10
            
            
            7.50%
            
            
            
            212
            
            
            
            -
            
            
            
            212George
      Kemper, TSTAR
            $38,254
      / Quarterly including interest
            
            April-10
            
            
            7.50%
            
            
            
            286
            
            
            
            -
            
            
            
            286Premium
      Assignment, Insurance notes
            $421
      / Month including interest
            
            September-08
            
            
            9.48%
            
            
            
            3
            
            
            
            -
            
            
            
            3Line
      of credit
            2
      years/ Quarterly interest (See below)
            
            December-09
            
            
            6.00%
            
            
            
            3,044
            
            
            
            -
            
            
            
            3,044E-bond
      investor notes
            3
      years/ Semiannual interest (See below)
            
            Various
            
            
            10.00%
            
            
            
            175
            
            
            
            19
            
            
            
            156Total
      debt
            
            
            
            
            
            
            
            
            $
            5,936
            
            
            $
            19
            
            
            
            5,917Less
      current maturities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,082Less
      debt discount current maturities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (19
            )Long-term
      debt
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            4,854





The gross
maturities of these debts are $616,000, $4,011,000, $815,000, $145,000, $94,000
and $236,000 for the years ended December 31, 2008, 2009, 2010, 2011 and 2012,
and thereafter, respectively.







10


ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)




INVESTOR
NOTES




The
following table summarizes the convertible debt activity for the period
September 6, 2005, to June 30, 2008:





Description
              
              Investor
      Notes
              
              
              Warrant
                Liabilities
              
              
              Compound
      Derivative Liability
              
              
              TotalFair
      value issuance at inception
              
              $
              508,018
              
              
              $
              470,702
              
              
              $
              521,281
              
              
              $
              1,500,00109-06-05
      to 09-30-05 change in fair value
              
              
              18,373
              
              
              
              2,389,132
              
              
              
              1,012,547
              
              
              
              3,420,05210-01-05
      to 12-31-05 change in fair value
              
              
              78,258
              
              
              
              (2,160,313
              )
              
              
              (1,090,630
              )
              
              
              (3,172,685
              )01-01-06
      to 03-31-06 change in fair value
              
              
              90,258
              
              
              
              (466,128
              )
              
              
              (276,615
              )
              
              
              (652,485
              )04-01-06
      to 06-30-06 change in fair value
              
              
              104,943
              
              
              
              (149,288
              )
              
              
              32,006
              
              
              
              (12,339
              )07-01-06
      to 09-30-06 change in fair value
              
              
              122,182
              
              
              
              73,005
              
              
              
              32,395
              
              
              
              227,58210-01-06
      to 12-31-06 change in fair value
              
              
              140,846
              
              
              
              (118,744
              )
              
              
              (26,162
              )
              
              
              (4,060
              )01-01-07
      to 03-31-07 change in fair value
              
              
              158,659
              
              
              
              (20,503
              )
              
              
              (2,478
              )
              
              
              135,67804-01-07
      to 06-30-07 change in fair value
              
              
              184,473
              
              
              
              113,377
              
              
              
              (4,843
              )
              
              
              293,00707-01-07
      to 09-30-07 change in fair value
              
              
              93,990
              
              
              
              116,109
              
              
              
              (197,501
              )
              
              
              12,59810-01-07
      to 12-31-07 change in fair value
              
              
              -
              
              
              
              52,413
              
              
              
              -
              
              
              
              52,41301-01-08
      to 03-31-08 change in fair value
              
              
              -
              
              
              
              (113,802
              )
              
              
              -
              
              
              
              (113,802
              )04-01-08
      to 06-30-08 change in fair value
              
              
              -
              
              
              
              (128,524
              )
              
              
              -
              
              
              
              (128,524
              )Conversions
      from inception to date
              
              
              (1,500,000
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,500,000
              )Fair
      value at June 30, 2008
              
              $
              -
              
              
              $
              57,436
              
              
              $
              -
              
              
              $
              57,436


From
inception to date through June 30, 2008, the Company recorded a net derivative
income of $737,000 and for the six months ended June 30, 2008, a net derivative
income of $242,000.




The
following assumptions were used in the fair value determination of warrants
liabilities at June 30, 2008:





WarrantsAssumptions
              
              3/31/2007
              6/30/2007
              9/30/2007
              12/31/2007
              3/31/2008
              6/30/2008Dividend
      yield
              
              0.00%
              0.00%
              0.00%
              0.00%
              0.00%
              0.00%Risk-free
      rate for term
              
              4.51%
              4.89%
              4.03%
              3.07%
              1.62%
              2.91%Volatility
              
              140.00%
              200.00%
              177.00%
              180.00%
              180.00%
              170.00%Maturity
      date
              
              3.44
      years
              3.39
      years
              2.93
      years
              2.68
      years
              2.43
      years
              2.18
      years




A
Black-Scholes methodology was used to value the warrants.




LINE
OF CREDIT




During
2007, the Company amended its two-year unsecured revolving credit facility with
certain private investors that provides a $3 million dollar line of credit. The
terms of the secured revolving credit facility allow ERF Wireless to draw upon
the facility as financing requirements dictate and provide for quarterly
interest payments at a 12% rate. The loan has been extended from February 28,
2009 to now due December 31, 2009 and may be prepaid without penalty or repaid
at maturity. At June 30, 2008, the balance of the credit line was $3,043,879.
The lender has agreed to fund up to an additional $1 million during 2008 under
the same terms and conditions. See subsequent event footnote for repayment and
extension of line of credit.







11


ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)







E-SERIES INVESTOR
NOTE




The
E-Series Bonds were determined to include various embedded derivative
liabilities. The derivative liabilities are the conversion feature and the
redemption option (compound embedded derivative liability). At the date of
issuance the E-Series Bond, compound embedded derivative liabilities were
measured at fair value using either quoted market prices of financial
instruments with similar characteristics or other valuation techniques. These
derivative liabilities will be marked-to-market each quarter with the change in
fair value recorded in the income statement. The Company uses the effective
interest method to record interest expense and related debt accretion which was
$15,256 for the six months ended June 30, 2008, and the estimated debt accretion
for 2008 is $18,643.




The
following table summarizes the convertible debt activity for the period May 31,
2006, to June 30, 2008:





Description
              
              E-Series
      Bonds
              
              
              Compound
      Derivative Liability
              
              
              TotalFair
      value issuance at inception
              
              $
              891,174
              
              
              $
              133,826
              
              
              $
              1,025,00005-31-06
      to 06-30-06 change in fair value
              
              
              763
              
              
              
              (11,750
              )
              
              
              (10,987
              )07-01-06
      to 09-30-06 change in fair value
              
              
              5,847
              
              
              
              (3,971
              )
              
              
              1,87610-01-06
      to 12-31-06 change in fair value
              
              
              6,648
              
              
              
              (13,213
              )
              
              
              (6,565
              )01-01-07
      to 03-31-07 change in fair value
              
              
              9,065
              
              
              
              5,956
              
              
              
              15,02104-01-07
      to 06-30-07 change in fair value
              
              
              49,060
              
              
              
              (10,668
              )
              
              
              38,39207-01-07
      to 09-30-07 change in fair value
              
              
              2,965
              
              
              
              4,536
              
              
              
              7,50110-01-07
      to 12-31-07 change in fair value
              
              
              25,580
              
              
              
              (1,274
              )
              
              
              24,30601-01-08
      to 03-31-08 change in fair value
              
              
              9,146
              
              
              
              (39,397
              )
              
              
              (30,251
              )04-01-08
      to 06-30-08 change in fair value
              
              
              6,110
              
              
              
              (20,468
              )
              
              
              (14,358
              )Conversions
      from inception to date
              
              
              (850,000
              )
              
              
              -
              
              
              
              (850,000
              )Fair
      value at June 30, 2008
              
              $
              156,358
              
              
              $
              43,577
              
              
              $
              199,935




From
inception to date through June 30, 2008, the Company recorded a net derivative
income of $90,248 and for the six months ended June 30, 2008, a net derivative
income of $59,864.




SHAYNE
GRIFFTHS, CROSSWIND, INC.




On
January 11, 2008, the Company issued a note to Crosswind, Inc., totaling
$150,000 bearing interest at 7.5% and are secured by the equipment acquired,
payable in twelve quarterly payments of $13,911 plus interest.




CAPITAL
LEASES




Agility Lease Fund, LLCIncluded in property and equipment at June 30, 2008, is $1,317,681
capitalized equipment, net of amortization. The equipment and one of the
Company's bank accounts are the primary collateral securing the financing with a
guarantee of repayment by ERF Wireless, Inc.




Banc Leasing Inc.,Included in
property and equipment at June 30, 2008, is $610,900 capitalized equipment, net
of amortization. The equipment is the primary collateral securing the
financing.





12


ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





The
following is a schedule by years of future minimum lease payments under capital
leases together with the present value of the net minimum lease payments as of
June 30, 2008 (in thousands):




Year
      Ending  December 31,2008
            
            $
            4442009
            
            
            8652010
            
            
            6762011
            
            
            1912012
            
            
            128Thereafter
            
            
            266Total
      minimum lease payments
            
            
            2,570Less
      amount representing interest
            
            
            (598
            )Present
      value of net minimum lease payments
            
            
            1,972Current
      maturities of capital lease obligations
            
            
            (607
            )Long-term
      portion of capital lease obligations
            
            $
            1,365




NOTE
10 – UNCOMPLETED CONTRACTS




Costs,
estimated earnings and billings on uncompleted contracts for the six months
ended June 30, 2008, and December 31, 2007, are summarized as follows (in
thousands):





June
      30,
            
            
            December
      31,2008
            
            
            2007Costs
      incurred on uncompleted contracts
            
            $
            2,614
            
            
            $
            2,284Estimated
      profit
            
            
            511
            
            
            
            429Gross
      revenue
            
            
            3,125
            
            
            
            2,713Less:
      billings to date
            
            
            2,982
            
            
            
            2,303Costs
      and profit in excess of billings
            
            $
            143
            
            
            $
            410




Such
amounts are included in the accompanying balance sheets at June 30, 2008, and
December 31, 2007, and are summarized as follows (in thousands):





June
      30,
            
            
            December
      31,2008
            
            
            2007Cost
      and estimated earnings in excess of billings on uncompleted
      contracts
            
            $
            143
            
            
            $
            410Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
            
            
            -
            
            
            
            -$
            143
            
            
            $
            410




NOTE
11 - COMMITMENTS AND CONTINGENCIES




LEASES
AND LICENSE AGREEMENTS




For the
six months ended June 30, 2008 and 2007, rental expenses of approximately
$302,000 and $200,000, respectively, were incurred. The Company accounts for
rent expense under leases that provide for escalating rentals over the related
lease term on a straight-line method. The Company occupies office and tower
facilities under several non-cancelable operating lease agreements expiring at
various dates through September 2013, and requiring payment of property taxes,
insurance, maintenance and utilities.




13


ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)




Future
minimum lease payments under non-cancelable operating leases at June 30, 2008,
were as follows:





Period
      Ending
              December
      31,
            
            Amount
      ($000)2008
            
            $
            2422009
            
            
            4262010
            
            
            3162011
            
            
            2252012
            
            
            52Thereafter
            
            
            12Total
            
            $
            1,273




NOTE
12 - INDUSTRY SEGMENTS




This
summary reflects the Company's current segments, as described
below.




WIRELESS
BUNDLED SERVICES DIVISION (WBS)




WBS
provides wireless broadband products and services to commercial and individual
customers throughout the wireless industry. The company is in the early stages
of building and acquiring a seamless wireless broadband network throughout North
America to serve private entities, cities, municipalities and the general
public. All sales from external customers are located within the United
States.




WIRELESS
MESSAGING SERVICES DIVISION (WMS)




WMS
principally provides wireless broadband system design and implementation,
manufactures paging equipment, repair and maintain paging infrastructure
equipment and supplies high-power infrastructure equipment to the wireless
messaging industry and owns and operates a wide-area messaging service. All
sales from external customers are located within the United States as well as
certain international locations.




NETWORK
OPERATING SERVICES DIVISION (NOS)




NOS
provide the overall day-to-day 24/7 monitoring of all wireless broadband
networks that the Company constructs, acquires, maintains and administers. The
transactions in the NOS segment for the six months ended June 30, 2008 and 2007
were not material.




ENTERPRISE
NETWORK SERVICES (ENS)




ENS
provides product and service to operate an enterprise-class encrypted wireless
banking network business. ENS provides the CryptoVue System consisting of
software, site-based hardware devices and servers to perform network encryption;
contracts for the construction, operation, monitoring and maintenance of fixed
wireless networks for banking customers; trade names, equipment and software,
including the software architecture and design.





For
      the six months ended June 30, 2008 (in thousands)WMS
            
            
            WBS
            
            
            ENS
            
            
            TotalRevenue
            
            $
            568
            
            
            $
            1,984
            
            
            $
            128
            
            
            $
            2,680Segment
      (loss) income
            
            
            190
            
            
            
            (929
            )
            
            
            (836
            )
            
            
            (1,575
            )Segment
      assets
            
            
            484
            
            
            
            5,150
            
            
            
            1,434
            
            
            
            7,068Capital
      expenditures
            
            
            14
            
            
            
            773
            
            
            
            651
            
            
            
            1,438Depreciation
      and amortization
            
            
            7
            
            
            
            742
            
            
            
            92
            
            
            
            841For
      the six months ended June 30, 2007 (in thousands)WMS
            
            
            WBS
            
            
            ENS
            
            
            TotalRevenue
            
            $
            1,838
            
            
            $
            677
            
            
            $
            414
            
            
            $
            2,929Segment
      loss
            
            
            359
            
            
            
            (51
            )
            
            
            (542
            )
            
            
            (234
            )Segment
      assets
            
            
            505
            
            
            
            1,119
            
            
            
            562
            
            
            
            2,186Capital
      expenditures
            
            
            1
            
            
            
            168
            
            
            
            104
            
            
            
            273Depreciation
      and amortization
            
            
            7
            
            
            
            87
            
            
            
            7
            
            
            
            101





Six
      Months EndedReconciliation
      of Segment Loss from Operations to Net Loss
            
            June
      30, 2008
            
            
            June
      30, 2007Total
      segment loss from operations
            
            $
            (1,575
            )
            
            $
            (234
            )Total
      corporate overhead
            
            
            (1,926
            )
            
            
            (2,434
            )Net
      loss
            
            $
            (3,501
            )
            
            $
            (2,668
            )




14


ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





Reconciliation
      of Segment Assets to Total Assets
            
            June
      30, 2008
            
            
            December
      31, 2007Total
      segment assets
            
            $
            7,068
            
            
            $
            6,076Total
      corporate assets
            
            
            197
            
            
            
            2,290Consolidated  assets
            
            $
            7,265
            
            
            $
            8,366




The
accounting policies of the reportable segments are the same as those described
in the section titled Basis of Accounting. The Company evaluates the performance
of its operating segments based on income before net interest expense, income
taxes, depreciation and amortization expense, accounting changes and
non-recurring items.




For the
quarter ended June 30, 2008, one customer accounts for $457,000 of Wireless
Messaging Services Division revenues. At June 30, 2007, one customer accounts
for $146,000 of Enterprise Network Services Division revenues and one customer
accounts for $1,628,000 of Wireless Messaging Services Division
revenues.




NOTE
13 - SUPPLEMENTAL NON-CASH DISCLOSURES:




During
2008, the Company issued stock in lieu of cash as payment for the following (in
thousands):





June
      30, 2008
              
              Supplemental
      Non-Cash DisclosureProfessional
      fees
              
              $
              432Settlements
              
              
              167Salary
      and compensation
              
              
              554Other
      services rendered
              
              
              94Total
      for services, interest, liabilities and compensation
              
              $
              1,247Notes
      payable
              
              $
              143Acquisition
              
              $
              400


SUPPLEMENTAL
SCHEDULE OF ASSETS ACQUIRED RECONCILING CASH PAID:





On
January 11, 2008, ERF Wireless, Inc (ERFW) completed the purchase of assets from
Crosswind Enterprises Inc. The schedule below reflects the fair value of assets
acquired, liabilities assumed, common stock issued and note payable
issued.





Fair
      value of assets acquired
              
              
              724Liabilities
      assumed
              
              
              (3
              )Common
      stock issued for acquisition
              
              
              (400
              )Note
      payable issued for acquisition
              
              
              (150
              )Cash
      paid for acquisition
              
              $
              171




NOTE
14 - EMPLOYEE STOCK OPTIONS




In 2004,
the Board of Directors adopted a Non-Qualified Stock Option Plan under which
5,000,000 shares of the Company's common stock were reserved for issuance. In
March 2007, the Board of Directors adopted a Non-Qualified Stock Option Plan
under which an additional 10,000,000 shares were reserved for issuance. In April
2008, the Board of directors adopted a Non-Qualified Stock Option Plan whereby
an additional 15,000,000 shares were reserved for issuance. There were 95,742
Series A preferred stock convertible to 1,788,111 common stock shares granted to
certain Officers and employees under employment agreements. As of June 30, 2008,
270,135 common stock shares remain to be converted from Series A preferred
stock. Also the Company has granted to certain officers and employees 375,000
stock options which are currently exercisable. As of June 30, 2008, under all
Non-Qualified Stock Option Plans, 14,689,502 shares were issued and exercised by
certain employees and consultants for services rendered.






15


ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)




Option
activity was as follows for the six months ended June 30, 2008:





2008Shares
              
              
              Weighted-Average
      Exercise PriceOutstanding
      at beginning of year
              
              3,302,000
              
              $
              2.98Granted
              
              -
              
              
              -Assumed
      through acquisitions
              
              -
              
              
              -Exercised
              
              -
              
              
              -Forfeited/cancelled
              
              (1,570,000)
              
              
              3.72Outstanding
      throughout the period
              
              1,732,000
              
              $
              2.98Exercisable
      at June 30, 2008
              
              375,000
              
              $
              0.61




The
weighted average fair value of the individual options granted during the six
months ended June 30, 2008, is estimated at $2.98 on the date of grant.
Information about options outstanding was as follows at June 30,
2008:




Class
              
              
              Number
              
              
              Remaining
                Average
      Contractual
              
              
              Average
                Exercise
              
              
              Number
              
              
              Average
                ExerciseExercise
      Price
              
              
              Outstanding
              
              
              Life
      in Years
              
              
              Price
              
              
              Exercisable
              
              
              Price$
              0.10
              
              
              
              225,000
              
              
              
              1.08
              
              
              $
              0.10
              
              
              
              225,000
              
              
              $
              0.10$
              1.38
              
              
              
              150,000
              
              
              
              1.08
              
              
              $
              1.38
              
              
              
              150,000
              
              
              $
              1.38$
              2.88
              
              
              
              750,000
              
              
              
              1.08
              
              
              $
              2.88
              
              
              
              -
              
              
              
              -$
              2.88
              
              
              
              375,000
              
              
              
              1.08
              
              
              $
              2.88
              
              
              
              -
              
              
              
              -$
              2.27
              
              
              
              232,000
              
              
              
              0.08
              
              
              $
              2.27
              
              
              
              -
              
              
              
              -1,732,000
              
              
              
              0.73
              
              
              $
              2.31
              
              
              
              375,000
              
              
              $
              0.61


NOTE
15 – BUSINESS COMBINATIONS





CROSSWIND
ENTERPRISES, INC., ACQUISITION




PURCHASE
PRICE




On
January 11, 2008, ERF Wireless, Inc (ERFW) completed the purchase of assets from
Crosswind Enterprises Inc. under the Asset Purchase Agreement dated January 11,
2008. Under the Asset Purchase Agreement, ERFW acquired the wireless internet
service provider ("WISP"), which includes all of the current customers,
equipment and network infrastructure equipment. The acquisition will also
increase the Company's footprint in west Texas and into eastern New Mexico and
may lead to additional synergy with expansion of the WiNet and US-BankNet
System. At the time of the transaction, there were no material relationships
between the seller and ERFW or any of its affiliates, or any director or officer
of ERFW, or any associate of any such officer or director. ERFW paid $650,000 in
cash, notes and securities and assumed $2,880 in current liabilities and assume
$71,498 in note payables.




The
purchase price allocation is as follows (in thousands):




Accounts
      receivable
              
              
              2Property
      and equipment
              
              
              340Goodwill
              
              
              176Identifiable
      intangible assets
              
              
              206Accounts
      payable and accrued expenses
              
              
              (3
              )Note
      payable
              
              
              (71
              )Total
      adjusted purchase price
              
              $
              650







16


ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


NOTE
16 - SUBSEQUENT EVENTS




During
the 3rd quarter 2008, through August 14, 2008, the Company issued shares in the
amount of 1,323,318 for services and liabilities and issued shares in the amount
of 1,828,188 for conversion of preferred stock to common stock.




As of
August 04, 2008, the Company entered into an agreement with Angus Capital to
exchange Series B Preferred in payment of a significant portion of the
line of credit and the accompanying accrued interest. The Company issued
3,620,573 Series B Preferred stock for total principal and interest of
$3,620,573 leaving a remaining balance of the credit line of $500,000. The
Series B Preferred stock includes various provisions that relate to dividends,
liquidating preferences, voting rights and the Company options to repurchase the
preferred stock after five years at their option. Additionally Angus Capital
extended the Company an additional $2,500,000 line of credit due December
2010.








17







ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS




This
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with the other sections of
this quarterly report on Form 10-Q, including the financial
statements.




OUR
MARKETS AND BUSINESS STRATEGY




The
Company has four operating divisions to provide solutions and services to
different segments of the wireless industry. The Company's Enterprise Networks
Services Division serves enterprise customers, private entities, cities,
unincorporated municipalities and the general public. The Company's Wireless
Bundled Services Division provides wireless broadband products and services,
including Internet, voice, data and security services, and is in the early
stages of building or acquiring a seamless wireless broadband network throughout
much of North America to serve private entities, cities, municipalities and the
general public. The Company's Wireless Messaging Services Division provides
wireless broadband system design and implementation, manufactures and supplies
high-power infrastructure equipment to the wireless messaging industry and owns
and operates a wide-area messaging service (one- and two-way paging retail). In
addition, WMS provides a turn-key implementation of a triple play voice, video,
and data to residential developments internationally as well as in the U.S. The
Company's Network Operation Services Division provides the overall day-to-day
24/7 monitoring of all wireless broadband networks that the Company constructs,
acquires, maintains and administers. Hereinafter, all references to the Company
include the operations and financial condition of the Company and its operating
divisions. Subsequent to the quarter ended June 30, 2008, the company announced
the formation of a new Oil and Gas Services Division to address growing customer
demand in the oil and gas industry for the company’s wireless products and
services.  Utilizing the resources of its rapidly expanding wireless
broadband networks in Texas, New Mexico and Louisiana, the company is now
actively supplying specialized products and services to oil and gas customers
through this new division.




The
Company continues to focus its initial marketing efforts at certain Louisiana,
Mississippi, Alabama, New Mexico, Georgia, Texas and Florida banks due to the
likelihood of hurricanes and wide-scale disasters in those states. The Company's
business strategy is to design, construct, secure, maintain and monitor
enterprise-class encrypted microwave broadband networks for the regional banking
industry.




The
Company's fault-tolerant network solutions for individual banks ("BranchNetTM
systems") is currently providing 20 to 30 Mbps of encrypted microwave data
communications bandwidth to six banks in three states. BranchNet provides high
speed communications among a financial institution's branches spread across
hundreds of miles.  The BranchNet systems address the banking industry
demands for secure, fault-tolerant broadband networks, while significantly
reducing the cost of the required fault-tolerant bandwidth versus traditional
wireline communications options provided by the incumbent telephone
carriers.




In
addition, the Company is currently building its own nationwide fiber, satellite
and encrypted wireless network for the banking industry called US BankNet. The
Company leases fiber for long-haul data transmissions, builds encrypted wireless
infrastructure for the "last mile", and incorporates satellite failover for
redundancy.




The
Company's strategic plan is to develop US BankNet in a series of steps. First,
it sells an individual financial institution ("FI") a private encrypted wireless
network ("BranchNet") to replace the FI's wireline data communications wide area
network (WAN) to its branches. Six such networks have already been completed for
FIs in Texas, Louisiana and Missouri. The Company is interconnecting individual
FI networks into Company-owned statewide networks to provide them with
high-speed access to banking service providers, disaster recovery centers,
correspondent banks, the Internet and the Federal Reserve. All of the Company's
Louisiana-based FI customers and the Louisiana State Police are participating in
the Company's first statewide network, Louisiana BankNet. As statewide networks
are completed, the Company plans to aggregate them into regional networks (i.e.
"Southern BankNet") and finally aggregate the regional networks into its
nationwide network, US BankNet.




In the
U.S. there are 2,426 community banks and 431 credit unions that meet the size
criteria of the Company's wireless broadband T1 replacement model. This market
segment of banks and credit unions have between 5 and 19 branches with the
primary target group averaging 12 branches. This represents a large potential
market. There are an additional 492 large banks with 20 or more branches with an
average of 135 branches representing an additional large market potential. To
penetrate this market, the Company is negotiating with a Fortune 50 company to
sell and support the Company's products in this segment of the market. The
Company is also in negotiations with selected large core banking service
providers to market and sell the Company's products to their respective customer
bases.








18





The
Company also plans to expand its offering to provide wireless broadband product
and service solutions to other large vertical markets where high bandwidth and
secure communications are needed (such as the digital oil field, hospitals,
schools, law enforcement, etc.), especially in areas where it can leverage the
excess capacity in network infrastructure already constructed and paid for by
its bank customers.




The
Company has recently acquired twelve wireless broadband networks (“WISPs”) in
key underserved regions to both provide local maintenance service for its
BranchNet bank customers as well as to produce long term recurring revenue. The
Company anticipates that it will expand its WISP footprint by both organic
growth and acquisition in areas where its banking network subsidiary has sold
BranchNet networks so that the Company can capitalize on the wireless network
infrastructure it constructs for its bank customers. For example, the Company
continues to negotiate multi-bank agreements to use the bank's network backbone
on a revenue sharing basis to sell wireless broadband services to schools,
hospitals, businesses, municipal entities and residential customers in the
region covered by that bank's BranchNet network with little or no additional
infrastructure cost to the Company.




RECENT
EVENTS




During
the quarter ended June 30, 2008 , the Company has continued to execute its
expansion plans of construction and operation of the nationwide wireless BankNet
network, acquisition of strategic WISP networks with customers, expansion of the
sales staff and continued construction of various bank wireless networks. A
summary of the major milestones during and subsequent to the quarter ended June
30, 2008 is as follows:




●
            The Company announced the
      formation of a new Oil and Gas Services Division to address growing
      customer demand in the oil and gas industry for the company’s wireless
      products and services.  Utilizing the resources of its rapidly
      expanding wireless broadband networks in Texas, New Mexico and Louisiana,
      the Company is now actively supplying specialized products and services to
      oil and gas customers through this new
  division.




●
            The
      Company announced the appointment of John Nagel to the position of CEO of
      the newly formed Oil and Gas Services Division.  John is an
      experienced ERF executive and has been leading the development of this new
      business initiative and overseeing the delivery of cost-effective
      solutions to our oil and gas
customers.




●
            The
      Company announced BranchNet and US-Bank Net contract with Fidelity
      Homestead Savings Bank, a leading Louisiana financial institution since
      1908.  The Company expects to recognize the one-time revenues
      for this project during the 3rd
      and 4th
      quarters of 2008 and the recurring revenues from such customer agreements
      over their respective 7 and 10 year
contracts.




●
            The
      Company announced its second BranchNet contract in Texas following the
      completion of an agreement with West Texas State Bank to interconnect the
      bank’s six branches located in the greater Odessa, Texas area, including
      Midland, Kermit and Monahans.  The Company expects to recognize
      the one-time revenues for this project during the 3rd
      and 4th
      quarters of 2008 and the recurring revenues from such customer agreements
      over their respective 10 year
contracts.




●
            The
      Company announced WiNet contracts with banks in Texas and
      Louisiana.  These 10-year contracts with Louisiana-based
      Fidelity Homestead Savings Bank and Texas-based Classic Bank will bring
      wireless broadband and wireless infrastructure to certain rural
      communities in both Texas and Louisiana via the utilization of the bank’s
      excess bandwidth and wireless infrastructure to provide Wireless Internet
      Service Provider (WISP) products and services to the bank’s commercial and
      retail customers.






19




RESULTS
OF OPERATIONS




THREE AND SIX MONTHS ENDED
JUNE 30, 2008, COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30,
2007




The
following table sets forth summarized consolidated financial information for the
three and six months ended June 30, 2008 and 2007:





Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,($
      in thousands)
              
              2008
              
              
              2007
              
              
              $
      Change
              
              
              %
      Change
              
              
              2008
              
              
              2007
              
              
              $
      Change
              
              
              %
      ChangeTotal
      sales
              
              $
              1,005
              
              
              $
              2,424
              
              
              $
              (1,419
              )
              
              
              -59%
              
              
              $
              2,680
              
              
              $
              2,929
              
              
              $
              (249
              )
              
              
              -9%Cost
      of goods sold
              
              
              584
              
              
              
              1,521
              
              
              
              (937
              )
              
              
              -62%
              
              
              
              1,419
              
              
              
              1,803
              
              
              
              (384
              )
              
              
              -21%Gross
      profit
              
              
              421
              
              
              
              903
              
              
              
              (482
              )
              
              
              -53%
              
              
              
              1,261
              
              
              
              1,126
              
              
              
              135
              
              
              
              12%Percent
      of total sales
              
              
              42%
              
              
              
              37%
              
              
              
              
              
              
              
              
              
              
              
              47%
              
              
              
              38%Operating
      expenses
              
              
              2,362
              
              
              
              1,654
              
              
              
              708
              
              
              
              43%
              
              
              
              4,695
              
              
              
              3,005
              
              
              
              1,690
              
              
              
              56%Loss
      from operations
              
              
              (1,941
              )
              
              
              (751
              )
              
              
              (1,190
              )
              
              
              158%
              
              
              
              (3,434
              )
              
              
              (1,879
              )
              
              
              (1,555
              )
              
              
              83%Other
      income/(expense)
              
              
              (19
              )
              
              
              (548
              )
              
              
              529
              
              
              
              -97%
              
              
              
              (67
              )
              
              
              (789
              )
              
              
              722
              
              
              
              -92%Net
      loss
              
              
              (1,960
              )
              
              
              (1,299
              )
              
              
              (661
              )
              
              
              51%
              
              
              
              (3,501
              )
              
              
              (2,668
              )
              
              
              (833
              )
              
              
              31%




For the
three months ended June 30, 2008, the Company's business operations reflected an
increase in sales for Wireless Bundled Services with an offset of decreased
sales for Wireless Messaging Services and Enterprise Network Services. For the
three months ended June 30, 2008, the Company's consolidated operations
generated net sales of $1,005,000 compared to prior year net sales of
$2,424,000. The $1,419,000 decrease in net sales is primarily attributable to
$1,693,000 decrease in Wireless Messaging Services attributable to prior year
sales with the El Dorado Golf and Beach Club of San Jose del Cabo, Mexico
project, with no comparable sales in the same quarter 2008, a $299,000 decrease
in banking network installation and services and offset with an increase of
$573,000 in recurring wireless WISP services with the increased growth
attributed to recent WISP acquisitions. Product sales decrease $930,000 and
service sales decrease $511,000 primarily due to prior year sales in the
Wireless Messaging Services associated with El Dorado Golf and Beach Club of San
Jose del Cabo, Mexico project and decrease sales in Enterprise Network Services
in product and services to banks. For the three months ended June 30, 2008, the
Company had a gross profit margin of 42%, compared to a gross profit margin of
37% for the prior year. The increased in gross profit margin is primarily
attributable to several factors: (i) Increased WISP customer base in recurring
revenue with strong consistent margins on wireless broadband services and (ii)
consistent margins in our Wireless Messaging Services change orders in
completing the El Dorado Golf and Beach Club of San Jose del Cabo, Mexico
project.




For the
six months ended June 30, 2008, the Company's consolidated operations generated
net sales of $2,680,000 compared to prior-year net sales of $2,929,000 for the
six months ended June 30, 2007. The $249,000 decrease in net sales is primarily
attributable to $1,270,000 decrease in Wireless Messaging Services prior year
sales associated with the El Dorado Golf and Beach Club of San Jose del Cabo,
Mexico, a $286,000 decrease in banking network installation and services
resulting in reduced network construction revenues in 2008 and offset with an
increase of $1,307,000 in recurring wireless WISP services with the increased
growth attributed to recent WISP acquisitions. For the six months ended June 30,
2008, the Company had a gross profit margin of 47%, compared to a gross profit
margin of 38% for the prior-year six-month period ended June 30, 2007. The
increased in gross profit margin is primarily attributable to several factors:
(i) Increased WISP customer base growth through acquisition in recurring revenue
with strong consistent margins on wireless broadband services and (ii)
consistent margins in our Wireless Messaging Services change orders in
completing the El Dorado Golf and Beach Club of San Jose del Cabo, Mexico
project.




The
Company incurred a net loss of $1,960,000 for the three months ended June 30,
2008. The Company's principal components of the net loss for the three months
ended June 30, 2008, included approximately $237,000 in depreciation and
amortization expenses, $170,000 of interest expense, and $397,000 of other
general and administrative expense, $1,139,000 in employment expenses and
$477,000 in professional services expense, offset by $149,000 of derivative
income.






20




SALES
INFORMATION




Set forth
below is a table presenting summarized sales information for our business
segments for the three and six months ended June 30, 2008 and 2007:





($
      in thousands)
              
              Three
      Months Ended June 30,Business
      Segment
              
              
              2008
              
              %
      of Total
              
              
              2007
              
              %
      of Total
              
              
              $
      Change
              
              %
      ChangeWireless
      Messaging Services
              
              $
              72
              
              7%
              
              $
              1,765
              
              72%
              
              $
              (1,693)
              
              -96%Wireless
      Bundled Services
              
              
              903
              
              90%
              
              
              330
              
              14%
              
              
              573
              
              174%Enterprise
      Network Services
              
              
              30
              
              3%
              
              
              329
              
              14%
              
              
              (299)
              
              -91%Total
      Sales
              
              $
              1,005
              
              100%
              
              $
              2,424
              
              100%
              
              $
              (1,419)
              
              -59%($
      in thousands)
              
              Six
      Months Ended June 30,Business
      Segment
              
              
              2008
              
              %
      of Total
              
              
              2007
              
              %
      of Total
              
              
              $
      Change
              
              %
      ChangeWireless
      Messaging Services
              
              $
              568
              
              21%
              
              $
              1,838
              
              63%
              
              $
              (1,270)
              
              -69%Wireless
      Bundled Services
              
              
              1,984
              
              74%
              
              
              677
              
              23%
              
              
              1,307
              
              193%Enterprise
      Network Services
              
              
              128
              
              5%
              
              
              414
              
              14%
              
              
              (286)
              
              -69%Total
      Sales
              
              $
              2,680
              
              100%
              
              $
              2,929
              
              100%
              
              $
              (249)
              
              -9%




For the
three months ended June 30, 2008, net sales decreased to $1,005,000 from
$2,424,000 for the three months ended June 30, 2007. The overall decrease of 59%
was attributable to a decrease of $1,693,000 of Wireless Messaging Services, a
decrease in Enterprise Network Services of $299,000 and an increase in Wireless
Bundled Services of $573,000. The $1,693,000 decrease in Wireless Messaging
Services was primarily attributable to prior year sales with the El Dorado Golf
and Beach Club of San Jose del Cabo, Mexico project, with no comparable sales in
the same quarter 2008. The $299,000 decrease in banking network installation and
services was primarily attributable to Banks opting to construct networks in
subsequent quarter. The $573,000 increase was primarily attributable to
recurring wireless WISP services with recent WISP asset acquisitions including
approximately 5,000 customers.




For the
six months ended June 30, 2008, net sales decreased to $2,680,000 from
$2,929,000 for the six months ended June 30, 2007. The overall decrease of 9%
was primarily attributable to $1,270,000 decrease in Wireless Messaging Services
prior year sales associated with the El Dorado Golf and Beach Club of San Jose
del Cabo, Mexico. The $286,000 decrease is primarily attributable to banking
network installation and services resulting in reduced network construction
revenues in 2008. The $1,307,000 increase is primarily attributable to recurring
wireless WISP services with the increased sales growth attributed to recent WISP
acquisitions.




COST
OF GOODS SOLD




The
following tables set forth summarized cost of goods sold information for the
three ended June 30, 2008 and 2007:





($
      in thousands)
              
              Three
      Months Ended June 30,Business
      Segment
              
              
              2008
              
              %
      of Total
              
              
              2007
              
              %
      of Total
              
              
              $
      Change
              
              %
      ChangeWireless
      Messaging Services
              
              $
              51
              
              9%
              
              $
              1,140
              
              75%
              
              $
              (1,089)
              
              -96%Wireless
      Bundled Services
              
              
              524
              
              90%
              
              
              131
              
              9%
              
              
              393
              
              300%Enterprise
      Network Services
              
              
              9
              
              1%
              
              
              250
              
              16%
              
              
              (241)
              
              -96%Total
      cost of sales
              
              $
              584
              
              100%
              
              $
              1,521
              
              100%
              
              $
              (937)
              
              -62%


($
      in thousands)
              
              Three
      Months Ended June 30,2008
              
              
              2007
              
              
              $
      Change
              
              
              %
      ChangeProducts
      and integration service
              
              $
              156
              
              
              $
              1,279
              
              
              $
              (1,123
              )
              
              
              -88
              %Rent
      and maintenance
              
              
              105
              
              
              
              51
              
              
              
              54
              
              
              
              106
              %Salary
      and related cost
              
              
              7
              
              
              
              129
              
              
              
              (122
              )
              
              
              -95
              %Depreciation
              
              
              211
              
              
              
              45
              
              
              
              166
              
              
              
              369
              %Other
      costs
              
              
              105
              
              
              
              17
              
              
              
              88
              
              
              
              518
              %Total
      cost of sales
              
              $
              584
              
              
              $
              1,521
              
              
              $
              (937
              )
              
              
              -62
              %




21




The
following tables set forth summarized cost of goods sold information for the six
months ended June 30, 2008 and 2007:





($
      in thousands)
              
              Six
      Months Ended June 30,2008
              
              %
      of Total
              
              
              2007
              
              %
      of Total
              
              
              $
      Change
              
              %
      ChangeWireless
      Messaging Services
              
              $
              235
              
              60%
              
              $
              1,193
              
              66%
              
              $
              (958)
              
              -80%Wireless
      Bundled Services
              
              
              1,009
              
              18%
              
              
              264
              
              15%
              
              
              745
              
              282%Enterprise
      Network Services
              
              
              175
              
              12%
              
              
              346
              
              19%
              
              
              (171)
              
              -49%Total
      cost of sales
              
              $
              1,419
              
              90%
              
              $
              1,803
              
              100%
              
              $
              (384)
              
              -21%





($
      in thousands)
              
              Six
      Months Ended June 30,2008
              
              
              2007
              
              
              $
      Change
              
              %
      ChangeProducts
      and integration service
              $
              516
              
              $
              1,445
              
              $
              (929)
              
              -64%Rent
      and maintenance
              
              196
              
              
              92
              
              
              104
              
              113%Salary
      and related cost
              
              56
              
              
              148
              
              
              (92)
              
              -62%Depreciation
              
              407
              
              
              87
              
              
              320
              
              368%Other
      costs
              
              244
              
              
              31
              
              
              213
              
              687%Total
      cost of sales
              $
              1,419
              
              $
              1,803
              
              $
              (384)
              
              -21%




For the
three months ended June 30, 2008, cost of goods sold decrease by $937,000, or
62%, to $584,000 from $1,521,000 as compared to the three months ended June 30,
2008. The decrease of $937,000 in cost of goods sold is primarily attributable
to product and service cost of $1,123,000 associated with prior year cost with
El Dorado Golf and Beach Club project in Mexico and wireless banking
installations with no comparable cost in the same quarter 2008; a $122,000
decrease in salary and related cost is due to prior year El Dorado Golf and
Beach Club project in Mexico and wireless banking installations; an increase of
$88,000 of other cost is primarily attributable to travel cost due to El Dorado
Golf and Beach Club project in Mexico and broadband utility cost due to growth
of our WISP customer base; $166,000 primarily attributable to depreciation
expense associated with recent acquisitions and growth of our wireless network
area to increase our WISP customer base and $54,000 is primarily attributable to
rent and maintenance cost associated with acquisitions and growth
of  our wireless network area to increase our WISP customer
base.




For the
six months ended June 30, 2008, cost of goods sold decreased by $384,000, or
21%, to $1,419,000 from $1,803,000 as compared to the six months ended June 30,
2007. The decrease of $384,000 in cost of goods sold is primarily attributable
to product and service cost of $929,000 associated with prior year cost with El
Dorado Golf and Beach Club project in Mexico and wireless banking installations;
a $92,000 decrease in salary and related cost is due to prior year El Dorado
Golf and Beach Club project in Mexico and wireless banking installations; an
increase of $213,000 of other cost is primarily attributable to travel cost due
to El Dorado Golf and Beach Club project in Mexico and broadband utility cost
due to growth of our WISP customer base; $320,000 primarily attributable to
depreciation expense associated with recent acquisitions and growth of our
wireless network area to increase our WISP customer base and $104,000 is
primarily attributable to rent and maintenance cost associated with acquisitions
and growth of  our wireless network area to increase our WISP customer
base.




OPERATIONS
EXPENSES




The
following table sets forth summarized operating expense information for the
three and six months ended June 30, 2008 and 2007:





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $
      Change
            
            
            %
      Change
            
            
            2008
            
            
            2007
            
            
            $
      Change
            
            
            %
      ChangeEmployment
      expenses
            
            $
            1,139
            
            
            $
            910
            
            
            $
            229
            
            
            
            25%
            
            
            $
            2,240
            
            
            $
            1,600
            
            
            $
            640
            
            
            
            40%Professional
      services
            
            
            477
            
            
            
            398
            
            
            
            79
            
            
            
            20%
            
            
            
            971
            
            
            
            746
            
            
            
            225
            
            
            
            30%Rent
      and maintenance
            
            
            94
            
            
            
            65
            
            
            
            29
            
            
            
            45%
            
            
            
            184
            
            
            
            134
            
            
            
            50
            
            
            
            37%Research
      and development
            
            
            18
            
            
            
            -
            
            
            
            18
            
            
            
            100%
            
            
            
            18
            
            
            
            -
            
            
            
            18
            
            
            
            100%Depreciation
      and amortization
            
            
            237
            
            
            
            67
            
            
            
            170
            
            
            
            254%
            
            
            
            466
            
            
            
            134
            
            
            
            332
            
            
            
            248%Other
      general and administrative
            
            
            397
            
            
            
            214
            
            
            
            183
            
            
            
            86%
            
            
            
            816
            
            
            
            391
            
            
            
            425
            
            
            
            109%Total
      operating expenses
            
            $
            2,362
            
            
            
            1,654
            
            
            $
            708
            
            
            
            43%
            
            
            $
            4,695
            
            
            $
            3,005
            
            
            $
            1,690
            
            
            
            56%






22




For the
three months ended June 30, 2008, operating expenses increased by 43% to
$2,362,000, as compared to $1,654,000 for the three months ended June 30, 2007.
The increases that occurred, as evidenced by the immediately preceding table,
are discussed below:




●
            A $229,000 increase in employment
      expense. The increase is primarily attributable to growth of the company
      through recent acquisitions;




●
            A $79,000 increase in
      professional services. The increase is primarily related to accounting
      expenses related to recent acquisitions and
  audits;




●
            A $29,000 increase in rent and
      maintenance. The increase is primarily attributable to growth of the
      company through recent
acquisitions;




●
            A $18,000 increase in research
      and development expense. The increase is primarily attributable to expense
      in improving efficiencies of VOIP data
  encryption;




●
            A $170,000 increase in
      depreciation and amortization; The increase is primarily attributable to
      growth of the company through recent acquisitions;
    and




●
            A
      $183,000 increase in other general and administrative
    expense.




For the six months ended June 30, 2008,
operating expenses increase by 56% to $4,695,000, as compared to $3,005,000 for
the six months ended June 30, 2007. The increases that occurred, as evidenced by
the immediately preceding table, are discussed below:




●
            A $640,000 increase in employment
      expense. The increase is primarily attributable to growth of the company
      through recent acquisitions;




●
            A $225,000 increase in
      professional services. The increase is primarily related to accounting
      expenses related to recent acquisitions and
  audits;




●
            A $50,000 increase in rent and
      maintenance. The increase is primarily attributable to growth of the
      company through recent
acquisitions;




●
            A $18,000 increase in research
      and development expense. The increase is primarily attributable to expense
      in improving efficiencies of VOIP data
  encryption;




●
            A $332,000 increase in
      depreciation and amortization; The increase is primarily attributable to
      growth of the company through recent acquisitions;
    and




●
            A $425,000 increase in other
      general and administrative
expense.




OTHER
(INCOME) EXPENSE, NET




For the
six months ended June 30, 2008, the decrease in other (income) expense is
primarily attributable to derivative income of $279,000 and interest expense of
$354,000 as compared to $117,000 derivative expense and $662,000, respectively
for the six months ended June 30, 2007. The derivative income represents the net
unrealized (non-cash) charge during the six months ended June 30, 2008, in the
fair value of our derivative instrument liabilities related to warrants and
embedded derivatives in our debt instruments that have been bifurcated and
accounted for separately.




NET
LOSS




For the
six months ended June 30, 2008, our net loss was $3,501,000 compared to a loss
of $2,668,000 for the six months ended June 30, 2007. The increase in the loss
for the six months ended June 30, 2008, as compared to the six months ended June
30, 2007, is primarily attributable to increase in employment, professional
services, depreciation and amortization and general and
administrative.




CASH
FLOWS




The
Company's operating activities increased net cash used by operating activities
to $2,091,000 in the six months ended June 30, 2008, compared to net cash used
of $234,000 in the six months ended June 30, 2007. The increase in net cash used
by operating activities was primarily attributable to fund an increase in the
company's net operating loss $3,501,000, net of $2,260,000 non-cash charges
combined with derivative income $279,000 to equal net non-cash charge of
$1,958,000, combined together with $548,000 of cash used by fluctuations in
working capital requirements consisting of the combination of accounts
receivable, inventory, prepaid expenses, accounts payable, accrued expenses,
cost and profit in excess of billings, deferred liability lease and deferred
revenue.






23




The
Company's investing activities used net cash of $578,000 in the six months ended
June 30, 2008, compared to use of net cash of $220,000 in the six months ended
June 30, 2007. The increase in investing activities is primarily growing WISP
capabilities through asset acquisition and expansion of our infrastructure in
Texas, New Mexico and Louisiana.




The
Company's financing activities provided net cash of $548,000 in the six months
ended June 30, 2008, compared to $433,000 of cash provided in the six months
ended June 30, 2007. The cash provided in the six months ended June 30, 2008,
was primarily associated with the proceeds from equity financings and the line
of credit, net.




LIQUIDITY
AND CAPITAL RESOURCES




At June
30, 2008, the Company's current assets totaled $1,576,000 (including cash and
cash equivalents of $90,000). Total current liabilities were $2,969,000,
resulting in negative working capital of $1,393,000. The Company has funded
operations to date through a combination of utilizing cash on hand, issuing
common stock to settle certain current liabilities, borrowings and raising
additional capital through the sale of its securities. The Company operations
for the six months ended June 30, 2008, was primarily funded by proceeds from
the Company's line of credit totaling $635,000, sale of restricted common stock,
net to accredited investors of $272,000, and convertible debt financing of
$25,000.




CURRENT
DEBT FACILITY




At June
30, 2008, the Company had approximately $956,000 available on a $4 million
unsecured revolving credit facility with Angus Capital Partners, which matures
in December 2009. The terms of the two-year unsecured revolving credit facility
will allow us to draw upon the facility as financing requirements dictate and
provides for quarterly interest payments at an annual 12% rate. The loan may be
prepaid without penalty or repaid at maturity. See subsequent event footnote for
repayment and extension of line of credit.




ISSUANCE
OF COMMON STOCK




During
the six months ended June 30, 2008, we issued to various accredited investors an
aggregate of 621,000 shares of restricted common stock for net consideration of
$272,000. We relied on Section 4(2) of the Act in effecting this
transaction.




During
the six months ended June 30, 2008, we issued 1,980,923 shares of common stock
to employees and business consultants, for aggregate consideration of $1,088,115
of services rendered, pursuant to a registration statement on form
S-8.




DUTCHESS
FACILITY




On June
14, 2007, we entered into an Investment Agreement with Dutchess whereby Dutchess
agreed to purchase up to $10,000,000 of our common stock over the course of
thirty-six (36) months.  The Company filed a Registration Statement
with the SEC covering an issuance of 10,000,000 of common stock under the equity
line agreement. The Company has received comments from the SEC and intends to
refile a pre-effective amendment to the registration with updated audited
financial statements during 2008.




USE
OF WORKING CAPITAL




We
believe our cash, anticipated cash flow from operations and available credit
facilities afford us adequate liquidity for the balance of fiscal 2008, although
we expect to raise additional capital during this period to fund our anticipated
growth for our banking and WISP network businesses if acceptable terms are
available. Furthermore, we anticipate that we will need additional capital in
the future to continue to expand our business operations, which expenditures may
include the following:




●
            Acquisitions
      of one or more companies, networks or other
  assets:




●
            Investment
      in towers, radios, customer premise equipment and other related equipment
      associated with wireless broadband expansion
  plans:




●
            Investment
      in back office systems and related infrastructure to support the Company's
      wireless broadband expansion plans:




●
            Investment
      in laboratory facilities including test and simulation
      equipment:




●
            Investment
      or licensing of certain intellectual property related to the Company's
      wireless broadband expansion plans:




●
            General
      working capital purposes.





24







We have
historically financed our operations through private equity and debt financings.
We do not have any commitments for equity funding at this time, and additional
funding may not be available to us on favorable terms, if at all. As such there
is no assurance that we can raise additional capital from external sources, the
failure of which could cause us to sell assets or curtail
operations.




CONTRACTUAL
OBLIGATIONS




The
following table sets forth contractual obligations as of June 30,
2008:





Payments
      Due by PeriodTotal
              
              
              Less
      than 1 Year
              
              
              1-3
      Years
              
              
              3-5
      Years
              
              
              More
      than 5 YearsContractual
      obligations:
              $Long-term
      debt obligations
              
              4,524
              
              $
              695
              
              $
              3,829
              
              $
              -
              
              $
              -Capital
      lease obligations
              
              2,570
              
              
              444
              
              
              1,731
              
              
              384
              
              
              11Operating
      lease obligations
              
              1,273
              
              
              242
              
              
              967
              
              
              64
              
              
              -Total
      contractual obligations
              $
              8,367
              
              $
              1,381
              
              $
              6,527
              
              $
              448
              
              $
              11




The
Company's contractual obligations consist of long-term debt of $4,524,000,
derivative liabilities of $101,000 unamortized debt discount of $19,000 and
interest expense of $459,000 as set forth in Note 9 to the company's financial
statements, Notes Payable and Long-Term Debt, and certain obligations for
operating leases requiring future minimal commitments under non-cancelable
leases set forth in Note 11 - Commitments and Contingencies.




OFF-BALANCE
SHEET ARRANGEMENTS




As of
June 30, 2008, the Company did not have any significant off-balance-sheet
arrangements other than certain office and tower facility operating leases
requiring minimal commitments under non-cancelable leases disclosed in the table
above.




CRITICAL
ACCOUNTING POLICIES AND ESTIMATES




GENERAL




We have
adopted various accounting policies to prepare our consolidated financial
statements in accordance with U.S. GAAP. Our most significant accounting
policies are described in Note 1 to our consolidated financial statements
included elsewhere in this report. The preparation of our consolidated financial
statements in conformity with U.S. GAAP requires us to make estimates and
assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. Our estimates and assumptions, including
those related to bad debts, inventories, intangible assets, sales returns and
discounts, and income taxes are updated as appropriate.




Certain of our more critical accounting
policies require the application of significant judgment by management in
selecting the appropriate assumptions for calculating financial estimates. By
their nature, these judgments are subject to an inherent degree of uncertainty.
These judgments are based on our historical experience, terms of existing
contracts, and our observance of trends in the industry, information provided by
our customers, and information available from other outside sources, as
appropriate. Different, reasonable estimates could have been used in the current
period. Additionally, changes in accounting estimates are reasonably likely to
occur from period to period. Both of these factors could have a material impact
on the presentation of our financial condition, changes in financial condition
or results of operations.




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.




USE
OF ESTIMATES




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






25




DEFERRED
SYNDICATION COSTS




Deferred
syndication costs consist of those expenditures incurred that are directly
attributable to fundraising and the collection thereto. Upon successful
collection of the funds, all expenses incurred will be reclassified to
additional paid in capital and treated as syndication costs; netted against the
funds raised.




REVENUE
RECOGNITION




The
Company's revenue is generated primarily from the sale of wireless
communications products and services, including providing reliable
enterprise-class wireless broadband services. The Company recognizes revenue
when persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable, and collectibility is
probable.




The
Company records revenues from its fixed-price, long-term contracts using the
percentage-of-completion method. Revenues are recorded based on construction
costs incurred to date as a percentage of estimated total cost at completion.
The percentage-of-completion, determined by using total costs incurred to date
as a percentage of estimated total costs at completion, reflects the actual
physical completion of the project. This method of revenue recognition is used
because management considers total cost to be the best available measure of
progress on the contracts.




The
Company recognizes product sales generally at the time the product is shipped.
Concurrent with the recognition of revenue, the Company provides for the
estimated cost of product warranties and reduces revenue for estimated product
returns. Sales incentives are generally classified as a reduction of revenue and
are recognized at the later of when revenue is recognized or when the incentive
is offered. Shipping and handling costs are included in cost of goods
sold.




Service
revenue is principally derived from wireless broadband services, including
internet, voice, and data and monitoring service. Subscriber fees are recorded
as revenues in the period during which the service is provided.




WARRANTY




The
Company's suppliers generally warrant the products distributed by the Company
and allow returns of defective products, including those that have been returned
to the Company by its customers. The Company does not independently warrant the
products that it distributes, but it does provide warranty services on behalf of
the supplier.




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 and vehicles
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.




GOODWILL





Goodwill
represents the excess of the cost of companies acquired over the fair value of
their net assets at the dates of acquisition. Under current accounting
pronouncement, the company is required to annually assess the carrying value of
goodwill associated with each of its distinct business units that comprise its
business segments of the company to determine if impairment in value has
occurred.





26







LONG-LIVED
ASSETS




We review
our long-lived assets, to include intangible assets subject to amortization, for
recoverability whenever events or changes in circumstances indicate that the
carrying amount of such long-lived asset or group of long-lived assets
(collectively referred to as "the asset") may not be recoverable. Such
circumstances include, but are not limited to:




●
            a
      significant decrease in the market price of the
  asset;




●
            a
      significant change in the extent or manner in which the asset is being
      used;




●
            a
      significant change in the business climate that could affect the value of
      the asset;




●
            a
      current period loss combined with projection of continuing loss associated
      with use of the asset;




●
            a
      current expectation that, more likely than not, the asset will be sold or
      otherwise disposed of before the end of its previously estimated useful
      life;




We
continually evaluate whether such events and circumstances have occurred. When
such events or circumstances exist, the recoverability of the asset's carrying
value shall be determined by estimating the undiscounted future cash flows (cash
inflows less associated cash outflows) that are directly associated with and
that are expected to arise as a direct result of the use and eventual
disposition of the asset. To date, no such impairment has occurred. To the
extent such events or circumstances occur that could affect the recoverability
of our long-lived assets, we may incur charges for impairment in the
future.




CONCENTRATIONS
OF CREDIT RISK




Trade
accounts receivable are concentrated with companies or entities in the regional
banking and Internet services industry. Accordingly, the credit risk associated
with the trade accounts receivable will fluctuate with the overall condition of
the regional banking and Internet services industries. The primary component of
accounts receivable relates to the Company's sales of banking wireless broadband
networks and Internet service revenues. As a result, such estimates are based on
the Company's historical collection experience and accounts receivable does
reflect a general or specific provision for an allowance for doubtful accounts.
During all periods presented, credit losses, to the extent identifiable, were
within management's overall expectations.




DERIVATIVE
INSTRUMENTS




In
connection with the sale of debt or equity instruments, we may sell options or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument
liability.




The
identification of, and accounting for, derivative instruments is complex. Our
derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated embedded derivative features that are accounted
for as derivative instrument liabilities, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques. The valuation techniques require assumptions related
to the remaining term of the instruments and risk-free rates of return, our
current common stock price and expected dividend yield, and the expected
volatility of our common stock price over the life of the option.




Because
of the limited trading history for our common stock, we have estimated the
future volatility of our common stock price based on not only the history of our
stock price but also the experience of other entities considered comparable to
us. The identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.






27




RECENT
ACCOUNTING PRONOUNCEMENTS




In December 2007, the FASB issued
SFAS No. 141R,Business
Combinations.
SFAS 141R establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. SFAS No. 141R also provides guidance for recognizing and measuring
the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statement to evaluate
the nature and financial effects of the business combination. SFAS 141R is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. We expect SFAS No. 141R will have an impact on
our consolidated financial statements when effective, but the nature and
magnitude of the specific effects will depend upon the nature, terms and size of
the acquisitions we consummate after the effective date. We are still assessing
the impact of this standard on our future consolidated financial
statements.




INFLATION




The
Company's results of operations have not been affected by inflation and
management does not expect inflation to have a significant effect on its
operations in the future.




ITEM
3.   CONTROLS AND PROCEDURES




We
maintain controls and procedures designed to ensure that information required to
be disclosed in the reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and procedures
performed as of the end of the period covered by this report, our chief
executive officer and principal financial officer concluded that our disclosure
controls and procedures were adequate.




There
were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.





28










PART
      II - OTHER INFORMATION




ITEM
1.   LEGAL PROCEEDINGS




None.




ITEM
2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




The
following transactions were completed pursuant to either Section 4(2) of the
Securities Act or Regulation D of the Securities Act. With respect to issuances
made pursuant to Section 4(2) of the Securities Act, the transactions did not
involve any public offering and were sold to a limited group of persons. Each
recipient either received adequate information about ERF Wireless or had access,
through employment or other relationships, to such information, and ERF Wireless
determined that each recipient had such knowledge and experience in financial
and business matters that they were able to evaluate the merits and risks of an
investment in the Company.




With
respect to issuances made pursuant to Regulation D of the Securities Act, ERF
Wireless determined that each purchaser was an "accredited investor" as defined
in Rule 501(a) under the Securities Act, or if such investor was not an
accredited investor, that such investor received the information required by
Regulation D.




Except as
otherwise noted, all sales of the Company's securities were made by officers of
the Company who received no commission or other remuneration for the
solicitation of any person in connection with the respective sales of securities
described above. The recipients of securities represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such
transactions.




On
January 7, 2008, an accredited investor acquired 50,000 shares of common stock
at $1.06 per share.




On
February 6, 2008, accredited investors acquired 52,615 shares of common stock at
$0.65 per share.




On March
14, 2008, accredited investors acquired 518,987 shares of common stock at $0.40
per share.




On March
31, 2008, accredited investors acquired 196,850 shares of common stock at $0.38
per share pursuant to a conversion of E-series bonds.




On March
31, 2008, accredited investors acquired 191,571 shares of common stock at $0.13
per share pursuant to a conversion of E-series bonds.




On March
31, 2008, accredited investors acquired 40,783 shares of common stock at $0.61
per share pursuant to a conversion of E-series bonds.




On
January 10, 2008, an accredited investor acquired 2,457,716 shares of common
stock pursuant to Preferred A Conversions.




On March
14, 2008, an accredited investor acquired 28,803 shares of common stock pursuant
to Preferred A Conversions.




On March
25, 2008, an accredited investor acquired 6,217,131 shares of common stock
pursuant to Preferred A Conversions.




ITEM
3.   DEFAULT IN SENIOR SECURITIES




None.




ITEM
4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




None.






29




ITEM
5.   OTHER INFORMATION




None.







ITEM
6.   EXHIBITS





Exhibit
      31
            Certification
      of Chief Executive officer and Chief Financial officer pursuant to Rules
      13a-14 (a) and 15d-14 (a), as adopted pursuant to section 302 of the
      Sarbanes-Oxley Act of 2002





Exhibit
      32
            Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002

















30





SIGNATURES




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




ERF
Wireless, Inc.


By:
            /s/H. Dean
      CubleyH.
      Dean CubleyChief
      Executive OfficerDate:
            August
      14, 2008